New directions in German politics

By Kristy Choi

On October 15th, former US Ambassador to Germany Philip Murphy came to speak at Dartmouth as part of the Walter Picard lecture series. During his lecture he discussed the results of the recent German national elections and the importance of the political and economic ties between the U.S. and Germany. He spoke fondly of his time working with Director of the Dickey Center, Daniel Benjamin, in the State Department and about his conversations with faculty of the German Department at Dartmouth the previous night.  He joked about feeling like he had just left the witness protection program because he felt out of touch with America after having been in Germany for so long.  He strongly urged students to travel and spoke highly of the foreign service as a career.

During the lecture which was entitled, “The New Shape of Germany,” Ambassador Murphy spoke about how in the 80s, “Berlin loomed large.”  He spoke about two myths that have permeated since the fall of the Berlin wall:

1. Because the wall is no longer there, the world is safe and uncomplicated.

2. America is not as close to Germany as it used to be.

In addressing these issues, he emphasized two key areas of interest:  the security sector and economic sector.   The security arc for Germany played out mostly as expected in that Germany eventually rebuilt its military power and later helped lead in the NATO mission to Kosovo and the invasion of Afghanistan.  However, the economic arc was not as predicted.  Germany “stumbled, it reformed, and then it soared.”   Much to the world’s surprise, Germany outpaced its European peers to become the central hub of European economic activity.

This new geo-strategic shape has made Germany instrumental in the global economic crisis and crucial as an ally of the United States. Ambassador Murphy felt strongly that Germany would continue to back the Euro, but not at any price. Germans would be willing to act, but only if they feel like everyone was playing by the same rules.  He felt this not only reflected the Greek bailout, but the approach they have taken to every decision in the wake of the global recession.  However, Ambassador Murphy also recognized that they are already deeply entrenched in the bailout process, likening it to being halfway across a river, “there’s no going back.”

Ambassador Murphy noted that the world was rife with challenges.  They may not have been the same challenges envisioned thirty years ago, but nevertheless they exist.   While the risks associated with these challenges are substantial and it may take longer than hoped to meet them, Ambassador Murphy is ultimately optimistic about the future and he is adamant in his convictions.

What’s all this about a euro crisis?

By Kristy Choi
Courtesy Sean Gallup (Getty Images)

Every few days, there seems to be a new headline in the news about how “the Eurozone is in crisis!” Yes, since 2008 Europe has been having financial problems like the rest of the developed world. Ok. But why are they the crisis spot when tons of other places are having a rough time of it too? Big newspapers aren’t saying the same thing about the US anymore, so why focus on Europe?

Fear not dear reader. I shall be sloughing it through those
Economist articles so you don’t have to. When the Federal Reserve thinks the US economy is in trouble, they generally flood the markets with a little extra cash (it’s more complicated than this, but this simplification will suffice). Why doesn’t Europe do this? Well, because the Eurozone is a system of several countries adopting the same currency — this lowers transaction and trade costs. While the economies were still doing well, everyone was convinced the system was working. However, after the crisis it became clear that the central monetary authority, the European Central Bank (ECB), was largely handicapped because individual countries still had to vote to approve measures. Greece, for example, is in huge trouble. Germany, on the other hand, is doing just fine. Central bank policies must be the same throughout. As a voting party in a loose union, (never mind the main source of funds) Germany can object — and object it does.


However, the problem became so severe and the Greeks so deeply in debt that even their government bonds were rated as ‘junk’ because nobody believed they could be repaid. Investors were essentially worried that Greece was going to collapse because Germany (and to a lesser extent France) were not willing to do what was necessary to save them, only barely creating bail outs — and never without a large number of strings attached.  This was not unfounded thinking — after all, why should they fund the poor decision-making of their peers?  They were the hard-workers and Greece the prodigal son, returned home from partying a little too hard.  However, their lack of action led to fears that the entire system of the euro was under threat — Greece’s woes were pulling the whole system down.


Over the summer, there were increasing calls for a “Grexit” or an exit of Greece from the euro. Greece could then devalue their currency to stave off collapse, and the rest of the EU could become more stable. However, even if Greece was the most toxic, there were fears about other economies as well. If Greece exited, what about Ireland, Portugal, Italy, and Spain? They too were all in deep straits. And Spain is the EU’s fourth-largest economy. If all these countries were forced to leave, many feared it would be a downward spiral the EU would not recover from. And the collapse of the euro?  According to the former head of the World Bank, that “runs the risk of sparking a Lehman-style global crisis that will have dire consequences.”


That changed a couple months ago.  Mario Draghi, head of the ECB, finally vowed “to do ‘whatever it takes’ to preserve the euro.” This helped bolster investor confidence. But was it going to be enough? The ECB and the important parties have dragged their feet at every turn.  Even now, there are quarrels from within. Notably, the head of the German Bundesbank, the only person to vote against Draghi’s plan, claimed that with this plan the “monetary system [could be] destroyed by rapid currency depreciation.” He was also quick to cite inflationary worries in a system he believed was tantamount to simply printing money. What would be so bad about depreciation? Certainly it would make European exports more competitive and bolster economies, including Germany’s. However, that massive depreciation would come at the heavy cost of imports becoming excessively expensive. Consumer lifestyle suffers; each European will find the same income will now buy them less. For a country like Greece, that is an acceptable price to pay in the face of state bankruptcy; for a country like Germany, that seems like a cost they would rather not bear. Yet Draghi’s plan to utilize the ECB’s printing press is going into action anyway. Greece lives to fight another day. For the moment, the markets rest easy.  European leaders at last seem committed to keeping the euro alive. This is all good news for the euro. But it is still only the start for a system seriously under siege.

Sources
http://www.nytimes.com/2010/04/28/business/global/28drachma.html
http://www.economist.com/blogs/charlemagne/2012/06/germany-and-future-euro-1
http://www.guardian.co.uk/business/2012/jun/16/world-bank-euro-collapse-crisis
http://www.nytimes.com/2012/10/05/business/global/european-central-bank-leaves-interest-rates-unchanged.html?pagewanted=2
http://www.ft.com/cms/s/0/558d7996-01af-11e2-8aaa-00144feabdc0.html#axzz28SkudCsX
http://online.wsj.com/article/SB10000872396390443507204578020323544183926.html