The distance between them Hollande's France and Merkel's Germany are growing apart economically and politically
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Nein, Nein, Nein
It's not as if Merkel hasn't explained herself clearly. To those who urge Germany to do more to ease the plight of struggling countries on Europe's Southern perimeter, from Portugal to Greece, Germany's Chancellor gives three clear but frosty answers.
The first is that her nation has already contributed massively to the various rescue packages that have been thrown together by the E.U. over the past two years, and even Germany has its limits. (The total it has put up amounts to about $500 billion, or more than two months' wages before tax for every German.) The second is that if other Europeans get themselves into a mess through bad policy, they need to take responsibility and make some real changes, since anything else would amount to what Merkel terms a moral hazard. In other words, if countries like Greece could always count on Germany to bail them out, there would be no incentive to change their behavior. The third is that the root cause of the current crisis is an unsustainable level of debt, so the idea of borrowing more money to fund bailouts and artificial stimulus packages is fundamentally a bad one.
Shortly before flying off to Los Cabos, Merkel pointed to the U.S. housing-credit boom that preceded the 2008 financial crisis as an example not to follow. "We don't need economic models that just lead people to believe they are stronger than they really are," she said.
That stance may infuriate her critics abroad, but it plays strongly at home, where Merkel enjoys a popularity rating that hit a record 64% earlier this year. But she's not immune to voter discontent. Her Christian Democratic Union suffered a number of setbacks in state elections this year, and the next national elections, in 2013, are shaping up to be close. Merkel also has to deal with some important domestic constraints on her European policy, including a series of challenges to the legality of the bailouts filed in the German Federal Constitutional Court.
Merkel's prescription for Greece, Spain and other enfeebled countries plays well with voters who over the past decade have taken some strong doses of the same medicine, including sweeping welfare cuts and a sustained policy to hold down labor costs. The results are there for everyone to see. At a time when the rest of Europe is floundering, Germany is once again humming along quite nicely, thank you. Growth is back after a brief hiatus, the national budget deficit has shrunk to 1%, consumer spending is on the rise, and the unemployment rate of 6.7% is less of an issue than a growing shortage of qualified workers to fill the positions available.
But there are limits. Germany has been steadily reducing its dependence on the rest of Europe, but it would still be badly hurt by a collapse of the euro. And though Merkel believes that closer European integration is the way forward, many Europeans are cooling to the idea. Her compatriots have more reason than most to be suspicious.
The Making of a Lonely Powerhouse
Germany is strong today because of two key changes in the past decade. The first was a dose of harsh reality. Since the fall of the Berlin Wall, the nation has spent about $2 trillion to salvage the wrecked economy of the former East Germany. That sapped Germany's strength and led to the realization that simply throwing money at a failing economy doesn't work if reforms haven't first been put in place. It also spurred the tough course of action to restore competitiveness, which, among other things, kept wage increases to a minimum.
The cure worked. A decade ago, France was more price-competitive than Germany; today it's the other way around. That's evident in the macro-economic numbers as well as on the ground. France used to produce as much asparagus as Germany, but these days Germany cultivates more than four times as much. Labor is the biggest cost in the asparagus business, and German seasonal workers cost half as much as their French counterparts.
The second big change was the choice by corporate Germany over the past 10 years to seek out new customers. "The strategic thinking is 'Move away from Europe,' because it's satiated. It's not a growth market," says Tobias Andres, an economist at the German Food Industry Association, whose members' export share has doubled in the past decade as they have targeted China, Russia and the U.S.