Jay's Blogs

 According to DPA, the German press agency, the Franco-German proposal explained that “…the objective of this mechanism will not be to provide financing at average euro area interest rates…” — which is how Greece and its fellow “Club Med States” got into the problem in the first place — “…but to set incentives to return to market financing as soon as possible by risk-adequate pricing.” In other words, Germany is telling the entire Club Med — Greece, Italy and Spain — that the days of riding the German interest rates into an orgy of profligate spending are over. The problem is that Greece would not be asking for a bailout if market rates were not already too high.

 The likelihood that Greece would go along with the proposal — despite initially positive comments from Athens — at the moment of an eventual default is highly unlikely. The proposal may very well push Athens to pursue an International Monetary Fund package independent of the eurozone, which could be the intention of Berlin perhaps looking to wash its hands of the entire problem.

 The current crisis is providing Germany with one of the best opportunities to make its control over the eurozone explicit, before its own demographic problems catch up with it. Germany essentially has a limited window of opportunity in the next 10 years to make or break its leadership of the European Union and therefore its claim to global relevancy. Germany’s birth rate is lower than all of the major European powers that surround it (France, the United Kingdom, the Netherlands and Sweden), while its population is significantly older than that of Poland. Having a low birth rate means that fewer young people will enter the labor force and provide tax revenue. High life expectancy means more old people will burden the economy through social welfare and health care costs. Considering German resistance to allowing immigration to make up the difference, it is unclear how Germany will pull itself out of the rising social welfare and health care costs that will bury Europe’s economies to a varying degree in the foreseeable future. This is not to say that controlling Europe will help Berlin solve its or the continent’s demographic problems, just that if Berlin is ever going to take command of Europe, the time is now. If Germany ever had room for maneuver — room to bulldoze through domestic dissent over, say, bailing out Greece — then it needs to act before economic and social problems overtake its — and Europe’s — agenda.

 The crisis with Greece has offered Berlin the chance to use any potential financial aid package as a carrot with which to motivate the rest of the EU to accept strict rules and mechanisms by which the EU can enforce the rules of the European Monetary Union in the future. But Thursday’s agreement only calls for a meeting at the end of 2010, at which point some proposals on new enforcement and punishment mechanisms, that include turning EU summits into “the economic government of the EU,” would be discussed. The problem for Germany is that there is very little chance that the Club Med countries will agree at the end of 2010 to give up sovereignty over their fiscal policy when they have seen how Germany has handled the Greek call for aid, especially considering the harsh terms of the proposed “financial aid.”

 The ultimate problem for Germany is that the moment the rest of Europe perceives that Berlin is looking out solely for its own national interests — such as when it refuses to put up money to save a eurozone member state — it ceases to be a viable European leader. This is due to deeply entrenched fears — not unfounded considering Germany’s power and history — that Germany would completely dominate the continent. Berlin therefore needs a careful balance of sticks and carrots with which to cajole and entreat countries to follow its lead, the kind of balance that was the norm during the leadership of Chancellor Otto Von Bismarck in the late 19th century. This balance often means paying a high cost on the political or monetary front to get the rest of Europe to do what it wants on the geopolitical front.

Germany is of course just coming out of 60 years where domestic politics ruled supreme and foreign policy was outsourced to the United States through NATO, and to Paris through the EU. During those 60 years, Germany did pay for all sorts of European political adventures — starting with the EU project itself. It is therefore unsurprising that Germany today is uncomfortable with the concept of paying for yet another eurozone bailout. But this is only because Germany has yet to remember fully how to be… well, German.

 This is not to say that when Greece’s current crisis is over, that Germany will not be able to get what it wants on enforcement mechanisms via other means, or that Germany will not have more opportunities in the future to become the EU’s undisputed leader. But the clock is ticking, and Europe’s demographic challenges are right around the corner. At that point, all of Europe will be so embroiled in domestic political, economic and social concerns that settling issues of leadership and power will be impossible, and that is if the EU even survives the coming crisis.

 When the time comes, Europe will need Germany to be Bismarck and Germany will need Europe to want a Caesar. If they fail to accommodate each other before the crisis hits, all may very well slip into global irrelevancy.

 Wonder if Japan is ever going to show its true colors again as well... or has it been pacified to the point of no return?