Yanis Varoufakis: Germany’s Choice: Authoritarianism or Hegemony? (*)

By Yanis Varoufakis, professor of economics at the University of Athens. Originally published at his blog

For those of us who grew up under totalitarian regimes, it is noteworthy that Europeans are resorting to a time-honoured tradition: telling jokes as a form of defiance. Here is one: “Why did Europeans agree to form the euro?” “Because”, the joke goes, “the French feared the Germans, the Irish wanted to escape Britain, the Greeks were terrified of Turkey, the Finns wanted to prove they were more European than the other Scandinavians, the Spanish wanted to become more like the French, the Italians wanted to become German, the Dutch and the Austrians had all but become German, the Belgians sought to join both Holland and France, and, finally, the Germans feared… the Germans!”

The genuinely good news is that the Germans no longer fear the Germans. Germany’s elites today are confident in their capacity to fend off authoritarianism from within their nation. They have no qualms, any longer, to speak their minds on Europe but also beyond (e.g. the German refusal to join the US in Iraq or NATO in Libya). This renewed confidence has, thankfully, not been allowed to spill over into jingoism or to foster some ambition to rule over Europe. German elites cherish being thought of as good Europeans and have no interest in ordering the rest of the Europeans around.

Over the past four years, of the Eurozone crisis, the German authorities have made a habit of saying ‘Nein’ again, and again, often to the dismay of Paris, Rome, Madrid, Athens – not to mention Washington and Beijing. They have said no to Eurobonds, no to a proper banking union, no to a European Marshall Plan, no to a New Deal for Europe. Even when they agreed to intervene in the crisis, they did so reluctantly, maximizing in the process the cost of doing that to which they eventually agreed (e.g. setting up of the bailout finds, the Greek debt re-structuring).

However, from Germany’s perspective, the repeated ‘Nein’ with which Chancellor Merkel and finance minister Mr Schaüble came to be associated was not an attempt to push others around. German leaders, supported by the nation’s elites and a large majority of public opinion, kept saying ‘Nein’ because they did not feel ‘authorized’ to change the implicit contract they had signed up to with the rest of Europe. They thought there was a clear agreement, cast in stone and reflected in the relevant Treaties, which specified in no uncertain terms: that there shall be no bail-outs of governments; that national banks are the responsibility of the nation-state in which they are domiciled; that common debt issuance was simply not on; that the monetary union would explicitly come with no mechanism for fiscal transfers or for recycling surpluses and deficits across the Euro Area. All that German leaders did, in ECOFIN and Eurogroup meetings, was to remind the rest of these rules and to say ‘Nein’ to any proposal that violated them. Indeed, I have no doubt that, far from wanting to establish Germany’s hegemony over the continent, Berlin and Frankfurt were wishing that this crisis had never hit and that Germany could continue to operate as if a small, open economy minding its own business and making sparkling industrial products that foreigners craved.

The trouble is, however, that Germany’s attempt to preserve the rules that were the basis of the formation of the Eurozone is bound to fail. These were rules that could never hold once a financial crisis hit, and then mutated into a crisis of the real economy that put the burden of adjustment onto heavily-indebted deficit member-states. Austerity, coupled with some essential ‘bending’ of the rules by the European Central Bank, may have succeeded in keeping the lid on the boiling cauldron. But the crisis’ steam is bound to win the day, blowing the proverbial lid sky high. The principle of the greatest austerity for the nation gripped by the worst recession poisons debt dynamics in the nations that are most indebted and debases our democracies (via the machinations of mass unemployment).

So, in the end, either Germany will let the lid be blown off, and reluctantly create a Neue Deutsch Mark, from which France and the PIIGS shall be excluded (dealing a death blow to the European Union itself), or it will have to accept that the Maastricht rules are dead-in-the-water and in urgent need of a drastic revamp. But to design and implement these new rules, Germany needs to become hegemonic. And to become truly hegemonic, as the United States did after the end of WW2, German elites must grasp a simple, twofold, reality:

First, being hegemonic is diametrically opposed to being authoritarian. Secondly, at a time when a majority of Europeans are suffering from depression (economic and psychological) due to the insistence on old rules that have been overtaken by reality, the German commitment on the old rules is a de facto authoritarianism that not only damages Germany’s relationship with the rest of Europe but, worse still, undermines the viability of the Eurozone which the German elites seem keen to preserve.

In short, the Eurozone cannot survive without enlightened German leadership. An atavistic dedication to ill-conceived rules will confine the euro to history’s dustbin, leading to another German trauma involving the accusation of authoritarianism. Germany can save the euro, and claim its rightful place at Europe’s high table, only by espousing a hegemonic stance. A properly hegemonic Germany must forge new rules that reflect the abandonment of the project to turn the rest of the Eurozone into Bismarck-ian net exporting nation-states. It will understand that a deep cause of its success is that the rest of Europe is not like Germany. And that this is fine, as long as our existing institutions are reconfigured in a way that several realms are Europeanised (e.g. a degree of common debt, a proper banking union and a common aggregate investment strategy); without federalism; and without the authoritarianism that is pushing the Periphery into a 1930s-like nightmare – see here for our detailed proposal.

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(*) Regular readers will undoubtedly notice a recurring theme here. This is natural since the piece above was commissioned by Hungarian online daily vs.hu. Similar arguments were presented in Handelsblatt – before being updated for the purposes of the present post.