Policy Documentation Center

Kaca, Elzbieta et al.

Choosing our geography: 12 points to restore meaning to the Eastern Partnership

P\u142ociennik, Sebastian

  
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No. 2 (85), January 2014 © PISM 
Editors: Marcin Zaborowski (Editor-in-Chief) . Maya Rostowska (Managing Editor) 
Jarosław Ćwiek-Karpowicz . Artur Gradziuk . Piotr Kościński 
Roderick Parkes . Marcin Terlikowski  
 
Germany and the Future of the Eurozone 
Sebastian Płóciennik 
Although the euro has survived the most severe phase of the current crisis, its future is still uncertain. 
The fate of the common currency will depend not only on the condition of the European economy, but 
also the priorities of its biggest player—Germany. So far that country has been strong enough to 
enforce its own vision of integration based on neoliberal reforms and austerity measures. Since the side 
effects of this prescription have been rising costs and risks, Berlin’s new government will consider  
a range of different solutions, including in extremis a controlled and partial break-up of the Eurozone. 
For Poland, this volatility creates a challenging environment with risks, but also creates chances for 
Warsaw to increase its influence over the evolution of EU integration in this field. 
The European Monetary Union is entering an awkward year. Many of its member states are still plagued by 
high unemployment, economic stagnation, indebtedness and a rising Euro-scepticism at the popular level. 
Some economists see this as a long-term state for the EMU. Larry Summers, the former U.S. Secretary of 
State, recently predicted decades more of muddling through the crisis1 particularly in Europe. And yet even 
the most weakened economies of the Eurozone are displaying signs of stabilisation or even recovery. 
Under these circumstances it is not easy to predict the future of the common currency. Neither a “sudden 
death” through chaotic collapse nor an “easy ride” with a smooth rise to a political union are probable. 
Rather, there are three options worth considering.    
The first is a continuation of the neoliberal mode of integration, aimed at fiscal austerity, supply-side 
reforms and international competitiveness. This is supposed to lead to a convergence of economic models 
and smooth the path to deeper political integration. At present, such efforts are stuck at an inter-
governmental level of management. The second option is the achievement of a Keynesian economic union. 
The main feature of this scenario is the euro’s role as a springboard for supranational executive bodies that 
carry out interventionist economic policies, including various forms of financial transfers to the peripheries 
of the Eurozone and market regulation. The third possibility is a system of “diversified integration” with the 
Eurozone shrinking to a core of stronger economies or becoming a loose alliance of currencies with 
temporary exits possible. The painful convergence of EU economies would no longer be necessary, but the 
chances of a political union would fall to zero.  
 
 
                                                          
 
1 Larry Summers at IMF Economic Forum, 8 November 2013, Youtube. 
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Asymmetric Convergence 
The first scenario seems to have the strongest proponents in Berlin. The conservative parties—CDU 
(Christian-Democratic Union), CSU (Christian-Social Union), the Liberals from the FDP, but also many 
circles among the Social Democrats, support the view that before a deep political union, Member States 
must converge in terms of productivity and macroeconomic standards. To be more precise, however, 
convergence means getting closer to German standards. In future, therefore, Greece should cut budgetary 
spending, make the labour market more flexible, lower costs and become more competitive in the global 
economy—just like Germany in the last 10 years.  
Moreover, economic convergence should never be outstripped by political integration. Indeed, a tradition 
has emerged in Germany whereby any institutional progress at the European level excites angry 
memoranda signed by dozens of professors and experts2. The real stumbling block, however, is the 
Constitutional Court in Karlsruhe, which has the power to decide on the legal status of new integration 
measures. The threat of judicial activism has been very convenient for Berlin as a means of keeping political 
integration under inter-governmental control and enforcing concessions from other players. The last 
negotiations around the banking union were a case in point: even Germany’s Martin Schulz, President of the 
European Parliament, called them a “brutal power policy.”3  
Of course, this reform model, which can be labelled “asymmetric convergence,” is not really new. It was 
successfully applied in the 1970s, when European monetary integration began. At that time France wanted  
a common central bank as a starting point for economic convergence. Instead, Germany pushed through 
the thin and technocratic European Monetary System, which enabled the Bundesbank to bring the whole 
European Community onto an anti-inflationary course. The difference today is that asymmetric 
convergence should also encompass other crucial areas of the economy, including fiscal and labour market 
policies. 
Keynesian Union 
The most obvious alternative to asymmetric convergence—namely, moving ahead to a economic union 
with interventionist components and “symmetric” convergence—has fewer friends in Germany. It is mostly 
written off as a transfer union, a method of shifting wealth from the efficient core to the peripheries. This is 
why the social-democratic SPD, a party naturally prone to Keynesianism, puts more weight on domestic 
German measures, such as the minimum wage and higher pensions, which have the potential to trigger 
domestic consumption and some kind of EU-wide redistribution, rather than on Eurozone-level measures 
such as Eurobonds. The Greens are likely to follow suit.   
The only party that can be fully associated with relatively quick political integration and non-liberal 
economic policy is Die Linke (the Left Party). Sarah Wagenknecht, deputy chairwoman, focuses on the 
sovereign-debt/banking nexus and claims that the Eurozone needs a reduction in all government debt over 
the threshold of 60 per cent of GDP, which will also lead to a “downsizing” of the overblown investment 
banking sector. Governments should prop up only those banks that deliver loans to companies. Another 
revolutionary idea is that the European Central Bank should provide credit directly to states.4 Such views, 
however, have cemented Die Linke’s outsider status. 
And yet, the relative political isolation of Die Linke cannot hide the fact that a rising number of experts 
provide good arguments for more political union and a different economic policy. In July 2012 a group of 
renowned economists, including Lars Feld, Beatrice Weder die Mauro and Peter Bofinger, published  
                                                          
 
2 FAZ, Protestaufruf: Der offene Brief der Ökonomen im Wortlaut, 2013, www.faz.net/aktuell/wirtschaft/protestaufruf-der-offene-brief-
der-oekonomen-im-wortlaut-11810652.html, updated 27 December 2013. 
3 “Europa-Politik: EU kritisiert Kanzlerin wegen Bankenunion,” Spiegel Online, 2013, www.spiegel.de/politik/deutschland/eu-kritisiert-
merkel-wegen-bankenunion-a-939112.html, updated 28 December 2013. 
4 S. Wagenknecht, “Freiheit statt Kapitalismus: Über vergessene Ideale, die Eurokrise und unsere Zukunft,” dtv, 34783; 
Aktualisierte und erw. Neuausg., ungekürzte Ausg, Dt. Taschenbuch-Verl, München, 2013. 
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a paper supporting a full banking union and underlining the necessity of upgrading the European Stability 
Mechanism (ESM).5 Another example is the manifesto of the “Glienicker Gruppe”—a team of economists 
and political scientists who advocate joint measures regarding the financial sector, economic support for 
the crisis-ridden countries (e.g. common unemployment insurance) and production of substantial public 
goods on the European level. This requires a Eurozone economic government, acceptance of deeper 
Eurozone integration, a new treaty to keep the sophisticated construction together, and possibly the 
emergence of a two-speed Europe.6  
Maintaining the Eurozone as a Core  
An end to the Eurozone as it is today would be the least popular option in Germany. Too much is at the 
stake, ranging from the Eurozone as a market for German products to the political future of the continent. 
However, the idea of a partial break-up enjoys some support across the usual political divisions, in business 
and in academia.   
The strongest voice against the Eurozone in its current form comes from liberal-conservative circles. Their 
loudest representation is the Alternative for Germany (Alternative fuer Deutschland, AfD), a new party 
that only barely fell short of the threshold for entry into the Bundestag. Scepticism is also en vogue in the 
Bavarian CSU. It was one of the CSU leaders, Peter Gauweiler, who filed a constitutional complaint in 
Karlsruhe against the EMU. Another prominent member of the “anti-euro” lobby is Frank Schaeffler from 
the FDP. But even in Chancellor Merkel’s CDU this line of thinking is hardly a rarity. Criticism towards the 
euro from mainstream politicians is fuelled by the fears of voters, reflected in newspaper headlines and 
opinion polls, but also the opinions voiced by many renowned economists.   
This group uses quite a cohesive set of arguments: monetary union should never have been created, since it 
ignores the fact that the European states differ very much from each other. In the past this divergence was 
cushioned by monetary sovereignty and adjustable exchange rates. With such mechanisms no longer 
available, Member States should have extremely flexible labour markets or accept a fiscal union. And yet 
neither condition is either possible or acceptable, and thus the crisis is a structural one. AfD speaks for 
many when it comes to the conclusion that the euro is an “apple of discord”—inessential for Germany and 
harmful for other countries.7  
Their preferred way out of the crisis is the reduction of the Eurozone to a core of similar economies, 
without the “southerners.” Hardliners would go even further and return to the German Mark, while doves 
see a “breathing euro” with temporary exits for reforms as a more convenient option.8 Whatever the small 
print, nobody questions the necessity to defend the common market as a base for integration and the need 
to support countries leaving the Eurozone. But in this vision, such support would not entail transfers, but 
rather a massive debt cut, charging the financial sector: in effect making it a liberal solution to the crisis, in 
which investors are held responsible for their failed investments.     
Concepts for a regulated dissolution of the Eurozone also come from other political corners. A joint report 
by Heiner Flassbeck, former chief economist at the UN, and Costas Lapatitsas, of the left-wing Rosa-
Luxemburg-Foundation, garnered much publicity in May 2013 by claiming that since a managed recovery 
was too expensive to achieve, a regulated break-up of the Eurozone was the better option. In order to 
avoid a collapse on the part of the “exiting” economies it is necessary to introduce control over capital 
movements at their borders and prevent deep depreciations of their new national currencies. The 
European Monetary System could be a very useful stabilising instrument in this context.9 From this left-wing 
perspective, the disintegration of the Eurozone might also shrink the power of the financial sector and 
                                                          
 
5 “Breaking the Deadlock: A Path Out of the Crisis,” INET, 2012, accessed 27 December 2013. 
6 “Glienicker Gruppe,” 2013, www.glienickergruppe.de/english.html, updated 18 October 2013. 
7 “‘Der Euro ist ein Spaltpilz für Europa’, Das Interview mit Bernd Lucke,” Handelsblatt, 16 May 2013. 
8 H.-W. Sinn, Europa: Die offene Währungsunion, 2013, www.zeit.de/2013/45/waehrungsunion-konzept-glienicker-gruppe, updated  
14 November 2013. 
9 H. Flassbeck, C. Lapavitsas, The Systemic Crisis of the Euro—True Causes and Effective Therapies, 2013, accessed 28 December 2013. 
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restore the position of social organisations, trade unions and national parliaments. Broadly speaking, this is 
the thesis of Wolfgang Streeck, the influential director of the Max Planck Institute in Cologne, who 
combined a criticism of neoliberal capitalism with a proposal to return to national currencies in the 
European Union.10   
Future Prospects 
Currently, Germany still prefers the neoliberal and asymmetric solution for bringing the Eurozone out of 
the crisis. But the experiences of 2013 showed that this method has some clear limitations. First, the 
economies subjected to harsh fiscal contraction have stabilised in stagnation and high unemployment. It is 
doubtful that the continued application of austerity measures will bring recovery, while it is certain to bring 
political tension. Greece and Italy in particular face the danger of a political breakthrough of Euro-sceptic 
populism.  
Second, Germany is not, despite its economic power, strong enough politically to enforce supply-side 
reforms, in particular in the labour market, in crisis-ridden economies. A desperate German attempt to 
force through so called reform contractsw in the EU ended up putting Berlin in political isolation during the 
last EU summit in December 2013. The Finnish EU Commissioner, Olli Rehn, reprimanded Chancellor 
Merkel, pointing out that “Germany is, after all, one of 28 countries” and cannot dictate the reform 
agenda.11 This might be the moment that will be remembered as a return to more balanced relations within 
the EU. 
Third, the German method has left institutional chaos in its wake in terms of integration arrangements. The 
new instruments of economic governance introduced after 2009 do not create a coherent and logical 
system. Moreover, they are dramatically dependent on inter-governmental negotiations. It should not be 
surprising that under these circumstances the ECB, the only supranational body truly autonomous of 
governmental interference, has filled the power vacuum and taken over responsibility for dealing with the 
crisis. Interestingly, the actions taken by the ECB have clashed with German priorities—yet another sign of 
the weakening position of Berlin. 
Of course, such limitations do not suggest that asymmetric convergence is over as a method of integration. 
But it is a possibility if the crisis returns. What would Germany do in such a scenario? Would it move 
grudgingly towards a Keynesian union and greater symmetric integration, decide to dismantle the Eurozone, 
or indeed try to look for another way to break the deadlock?   
It can be assumed that the chances of a political union are very slim now and in the near future. German 
taxpayers fear a transfer union and some political players are ready to reclaim this area. Other 
“northerners” are even more radical. As Der Spiegel columnist Wolfgang Muenchau pointed out in this 
context, “the Dutch are more German than the Germans, but Finland is more Dutch than the 
Netherlands.”12 In this climate, Berlin will simply try to continue to push for asymmetric convergence by 
buying more time. One tactic for achieving this might be the provision of “domestic” Keynesianism, with 
measures such as the minimum wage or higher social spending—which can also be stylised as demand 
drivers for products from the south. Another step might be to trim public debt, or instigate joint 
programmes to revive the EU labour markets. However, the common feature of such measures is that they 
will be costly, and not necessarily effective. However, they can help to maintain the status quo and put  
a brake on any downgrading of integration.  
Yet it is hard to exclude the possibility that this policy could at some point lose support, and Germany will 
decide in favour of a partial dismantling of the current monetary union. But in that case, Angela Merkel and 
SPD leader Sigmar Gabriel would do everything possible to secure other areas of integration and smooth 
                                                          
 
10 S. Wolfgang, Gekaufte Zeit: Die vertagte Krise des demokratischen Kapitalismus, Suhrkamp, Berlin, 2013. 
11 “EU-Kommission: Oettinger und Rehn warnen vor deutscher Dominanz,” Spiegel Online, 29 December 2013, 
www.spiegel.de/politik/ausland/rehn-und-oettinger-warnen-vor-deutscher-dominanz-a-941109.html. 
12 W. Münchau, “Das Undenkbare durchdenken,” 2014, www.spiegel.de/wirtschaft/parallelen-zwischen-erstem-weltkrieg-und-Euro-
krise-a-941317.html, updated 3 Jan 2014. 
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the shift to another form of monetary co-existence. This means for example the creation of a fund designed 
to protect new currencies against entering into freefall, or even the introduction of temporary capital 
controls. The second important element could be a clear road map stressing the temporary character of 
the new ‘euro-outs’ and establishing conditions for a successful comeback. This arrangement as a whole has 
political appeal. It neutralises the enemies of the euro, whilst keeping the enterprise alive.   
Poland will not join the single currency until at least 2020. But it has definitive and clear interests in 
cautiously observing the evolution of the Eurozone. Two scenarios seem particularly important. The first is 
the possibility of the Eurozone quickly turning into a political union, which would cause Poland’s peripheral 
status to become deeper and its impact on crucial decisions less than it is today. But the opposite 
development—a collapse of the Eurozone—brings the danger of a domino effect and the incremental 
demise of the European Union.  
From this perspective, current German policy, which keeps political progress slow and tries to force 
economic convergence via supply-side reforms, is a good deal for Warsaw. It certainly does not endanger 
the competitive profile of Poland, which is based primarily on low labour costs. Indeed, compared to the 
Keynesian approach, even the controlled shrinking of the Eurozone would be a less daunting prospect than 
is widely perceived. This second best solution not only saves the overall structure of integration. It also 
introduces greater flexibility into the process of monetary integration and may help to structure the 
derogation status in a better way. Primarily, it also means a louder political voice, by changing rules within 
the core. Another advantage, as Hans-Werner Sinn pointed out, is the possibility of taking some steps 
towards the core without the danger of being involved in rescue transfers for richer but crisis-ridden 
members13. Last but not least, such an arrangement lowers the pressure in internal debates about EMU 
membership, since it is gradual and reversible.  
 
                                                          
 
13 H.-W. Sinn, op. cit. 


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