Victorian Germany

Germany is tempted by its new Eastern ally: China could become the country’s biggest trading partner by the end of 2012 and signals a key shift in economic power balances. Germany does not need Europe to succeed anymore – and it might rethink its commitment to the Euro.

In a recent column in the Financial Times, Wolfgang Münchau suggested an interesting proposition: What if Germany detached itself from the Eurozone and started feeling and behaving like a BRIC state (Brazil/Russia/India/China)? Münchau reported the opinion of the CEO of Linde, Wolfgang Reitzle, who called on the government in Berlin to opt out of Europe. The feeling expressed by the FT article is that “The Germans do not want to lead in Europe because they are not ready to pay the price for leadership.”
But detachment of Germany from Europe may not be an option anymore as it may have already happened. Münchau writes that China may become Germany’s largest trading partner before the end of 2012, leaving France behind for the first time in history. If that happened, the center of Germany’s national focus would not be Europe – or even the West – anymore, but the far East. In February, German chancellor Angela Merkel paid her fifth visit to China since taking office in 2005, demonstrating a traveling frenzy to Beijing that equals the one taken in the opposite direction, to Washington.
Another signal of the divorce is represented by the post-crisis recovery pace of European countries. After the 1993 slump, Germany returned to a GDP growth comparable to those of France, Italy and Spain; the same also happened during the early 1980s. In both cases, the various European nations rebounded equally from a period of economic hardship. Yet the recovery in 2008 and 2009 was different: While in 2010 Germany sped up at 3,6%, the others struggled, with GDP variations ranging from -0.1% (Spain) to 1,5% (France). Differences widened further in 2011, as Germany hit a record growth of 3%, according to some estimates. Meanwhile, the others struggled to pass the 1% mark.
Part of this situation can be explained by the German choice to substitute its European suppliers for Chinese ones: Now, when Berlin smiles, Beijing laughs. We should forget that in the first eleven months of 2011, EU exports to China totaled 112 billion Euro – and Germany’s stake was 48% of that amount. If China becomes Germany’s largest trading partner, the effects on the continent will be widely felt. The impression by some people living in highly indebted countries is that Germany exploited the advantages of the Euro – i.e., a devalued and export-boosting currency – without assuming responsibility for continental leadership.
Germany is behaving like Victorian England. Its main European concern is that the political situation in Europe does not become too costly, and that debts are paid back. As for the economic focus, Germany’s center of attention is located in the East, with China taking on the role that was formerly played by British India. Germany’s power, as Britain’s in the 19th century, is based on strong commercial success, industrial prowess, and the country’s position at the center of a monetary union – in the 19th century, the Bank of England influenced most of the world’s currencies through the Gold Standard.
But one should consider both sides of the story. The German perception is that it has lent Europe more than money. It lent financial credibility (the German “Glaubwürdigkeit”). Europe’s financial situation in the late 1990s was an outright mess, and the “Europeization” of the Central Bank in Frankfurt allowed a switch from a political focus to currency speculation (thank you, Mr. Soros!) to reforms. Nevertheless, it is not excusable that Spain invested lower credit rates in real estate speculation, that Greece cheated on its books, and that Italy chose to be stuck in the Bunga Bunga quagmire – which was not a nice place to be, unless your name was Silvio Berlusconi.
The strategic move to go East could be a winning choice for Germany if China keeps up its pace. Consider the experience of German car companies: they were among the first to open up plants in Asia, and now are there to stay. Fiat’s efforts in the US are less likely to pay out as much as VW’s in China.

The question now is whether a “Victorian Germany” is a sustainable model, and what its consequences will be for the rest of Europe. The coming months will be quite revealing.

Read more in this column Stefano Casertano: Steady as she goes

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