Internationalising the euro is no longer the taboo it once was in Germany. Quietly, but indisputably, views in Berlin are starting to shift.
A geopolitical paradox has lain at the heart of Germany’s policy on the euro, and its own fiscal policy, for many years – and Berlin is now waking up to this tension.
Take fiscal policy first. Contrary to the assumptions of many commentators, especially at the height of the euro crisis, Germany’s approach to European financial and fiscal policy always had a strategic rationale behind it: the country’s hard line in the early years of this decade sought to make Europe economically competitive in the twenty-first century by forcing consolidation of out-of-control spending, and enabling quality growth rather than growth inflated by central bank money. Berlin’s goal was to ensure the euro would not become a “transfer union” and thereby cause political division in Europe between net contributors and net beneficiaries. ‘Fiscal prudence’ (or ‘austerity’, depending on whether you like it or not) also helped Angela Merkel’s governments domestically by allowing them to display their toughness on countries such as Greece.
But today, it is clear that Berlin’s strategy did not succeed. While the policies managed to rein in spending, they increased intra-eurozone divergence and divided the EU, instead of making Europe stronger and more competitive as a whole, as had been intended.
Importantly, the German approach was purely economic and geopolitics played no major role in Germany’s thinking during this period. This omission has become increasingly clear in recent years, as the consequences of this approach have come to clearly overlap with important international trends. It did so in ways not helpful for those who wish to see a stronger and more sovereign Europe: the ‘fiscal prudence first’ approach stymied European investments and forced the sale of state-owned assets for economic consolidation, inviting in non-European investments as replacements, especially from China.
Indeed, as Europe struggled with itself, the world around it changed greatly. Today, China is strategically buying up European companies like Germany’s Kuka robotics company; and it has launched an industrial strategy for technological and geo-economic supremacy in the twenty-first century. But the US has also labelled the European Union a competitor and is using its economic power to bully European companies. The world is no longer one of protocol and multilateralism but is instead caught up in bipolar geo-economic competition between great powers.
In this new era, many in Berlin are now starting to realise that they need to take geopolitics much more into account when it comes to their long-standing financial policy preferences.
The China case is especially instructive because in Beijing’s geopolitical race with Washington some of its greatest assets are economic dependencies, which grew larger in Europe this decade: as fiscal consolidation increased, many of these countries vied for outside money. Across Europe, and especially in southern EU member states, China now owns majority shares in ports, electricity grids, transport and health systems, and key companies like Pirelli. The geopolitical consequences have become ever more apparent, from cases of Hungary, Greece, and Slovenia blocking EU statements criticising China for human rights violations or its South China Sea aggression, to a group of 16 (now 17) eastern European countries forming to foster closer economic ties with China outside EU structures. The Chinese are now in possession of valuable strategic assets along Europe’s periphery that they can use for political purposes.
Increasingly at question are Germany’s infamous Schwarze Null (Black Zero, or ‘no debt’) policies.
As the world descends into this new great-power competition, these sorts of geopolitical ramifications are now much more on the minds of decision-makers and analysts in Berlin. Increasingly at question are Germany’s infamous Schwarze Null (Black Zero, or ‘no debt’) policies; at a time when these policies are under – slowly building, but real – domestic pressure. Merkel may only this month have called it “absurd” to even think about alternatives to this approach. But her Social Democratic coalition partner just this weekend decided to renounce Schwarze Null policies in favour of boosting investments, under a new political leadership immensely critical of the coalition with Merkel. And the Social Democrats are finding powerful allies in their fight: leading economists from across the political spectrum are alarmed at Germany’s growing investment gap, which a joint study of the conservative German Economic Institute and the left-leaning Macroeconomic Policy Institute estimates at €456 billion over the next ten years. Germany also barely avoided a technical recession in 2019 and its industrial production is in sharp decline.
In a very similar situation, the Dutch government – an important reference point for German fiscal policy and the German debate – has just announced an investment fund for annual budgets and a stimulus package for its stagnating economy. And all this is happening against a rapidly evolving domestic political scene: younger voters demanding greater investment in their country’s future; and the Green party’s popular call for “debt for climate action”.
Pressure to become fiscally more active at home will not translate into a reversal of the eurozone’s convergence criteria, of course. But it is becoming clear that Germany will ultimately have to invest a lot more in building its economic base for strategic sovereignty and economic success in the digital twenty-first century. As a result, even in ordo-liberal Germany the idea of boosting investment and reconsidering the state’s role in assuring a strong economic base is starting to win new favour. Berlin might end up playing a much greater role in strengthening Europe as a geo-economic actor.
As part of this, Germans may also find themselves reconsidering their stance on the international role of the euro. In the past, Germany’s position on the single currency was clear and consistent: the cost of depending on the US dollar for economic transactions was much lower than the cost of having to accept a stronger, and therefore appreciating, euro. In the new world, however, this cost-benefit calculation is starting to change. Washington is weaponising its currency dominance and trying to restrict German and European trade, not just with Iran, but also with Russia and other countries. As the United States has shown it can shut down significant shares of its trade with other countries, German companies are more and more worried about a significantly rising cost of dollar dependency.
While this cost has not become so large that the German government has yet considered altering course, some German businesses are starting to shift their view. There is certainly an acute sense of the danger of having to choose between American and Chinese markets because of sanctions that have extraterritorial reach. According to a recent poll by FAZ newspaper, 80 percent of German business and political leaders are afraid of such a development. And this is leading more of them to think about how to make the euro a stronger international currency, in order to give them more independence in their trade: the powerful Association of German Banks has now specifically called for the euro’s internationalisation. To achieve this, the eurozone would need an asset that global investors consider to be basically risk-free – and many in Berlin now acknowledge that even the difficult subject of eurobonds, which would provide for such an asset, might be back on the agenda soon.
These developments in Germany could open up opportunities for building the economic sovereignty and resilience to sanctions that Europeans badly need. It may still be too early to announce the awakening of geopolitical financial policy in Germany. But in Berlin its potential is growing.
The European Council on Foreign Relations does not take collective positions. This commentary, like all publications of the European Council on Foreign Relations, represents only the views of its authors.