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Is a German 'Fourth Reich' emerging?

Europeans accuse Berlin of using the euro crisis to boost German power.

currency, but also from its neighbors’ profligacy. The euro zone has provided Germany with a massive market into which it can sell its products easily and cheaply. And heavy borrowing by other members drove greater demand for its exports, making up for Germany’s relatively weak domestic consumption growth. In other words, without the euro zone, Germany’s economy would not have performed nearly as well.

“The counterpart to Germany living within its means is that others are living beyond their means;” said Philip Whyte, senior research fellow at the London-based Centre for European Reform. “So if Germany is worried about the fact that other countries are sinking further into debt, it should be worried about the size of its trade surpluses, but it isn’t.”

The view from Germany

Only a few years ago, as economies elsewhere on the continent boomed, Germany was regarded as the sick man of Europe. It was still bearing the huge costs of reunification with East Germany. Unemployment was stubbornly high. A decade ago, it endured a tough restructuring of its economy, including unpopular labor and welfare reforms.

“Germany did what Greece and Italy and France will now need to do,” said Ulrike Guerot, head of the Berlin office of the European Council on Foreign Relations. “We did this 10 years ago and we are now seeing the fruits of what we did.”

On a macro level, the belt-tightening appears to be yielding results. The economy is showing relatively strong growth. Unemployment has fallen to the lowest level since reunification, and exports have soared.

Germany’s recent struggles mean that its electorate sees matters quite differently from the rest of Europe. Just as they have stepped out of the mire, Germans see the euro zone’s profligate countries dragging them back in.

Another key fact is that while other countries regard Germany as an economic colossus with the means (if not the will) to help, the reality for its workers is at odds with this image. While wages increased significantly in many other countries over the past decade, in Germany they have remained stagnant for years. A report released by the Berlin-based German Institute for Economic Research last week showed that when adjusted for inflation, wages actually declined by 4.2 percent over the past decade.

In part, this is due to the mushrooming of low-paid, precarious jobs, a result of the labor law liberalization that helped boost growth. Yet even in highly unionized jobs, wages have not risen significantly.

“There has been a large shift of income from labor to capital,” said Whyte, at the Centre for European Reform. “In other words, German firms are now sitting on large piles of cash, but German workers have not been getting pay rises.”

Selling the bailout to Germans

The plight of the German worker makes the bailouts a harder sell. The advantages of a strong euro zone aren’t clear to the many people who have not gained financially from the country’s increasing wealth.

“Many Germans basically have not seen the fruits of the euro and benefits of the single market in the first place, and now they feel like they are going to pay for the all others,” said Guerot, from the European Council on Foreign Relations. “It’s very hard to make the argument among Germans that they should put billions on the table for Italy or Greece to save the single market.”

Opinion polls support this theory. The majority of Germans are not happy about the bailouts. After all, when they joined the euro zone, they had been assured that they would never be liable for other members’ debts. The electorate has already shown its wrath, punishing the governing parties in a string of regional elections this year.

A recent poll, carried out by Infratest Dimap for the public broadcaster ARD, showed that while support for Merkel’s current handling of the euro crisis is now growing slightly, 82 percent of Germans fear the worst is yet to come, while 84 percent said they feared Germany would end up having to pay even more for the bailouts. And with no final resolution of the debt crisis in sight, they may be right to be worried.

This increases the pressure on Merkel to attach as many strings as possible to the bailouts. “If they are going to have to pay, then they want to have a say,” said Paterson, the professor at Aston University. “They want the conditions to be the ones that they would favor.”

Given that Germans have endured cuts and liberalizations to make their economy strong, it makes sense to them that others should do the same. Yet unlike Germany, which could count on the booming euro zone to drive growth at a time when budgets were being slashed, Italy, Greece and other indebted countries don’t have any such engine of growth to latch onto.

The wrong medicine

“The policies which it has been imposing on other countries are flawed policies,” said Whyte. “Germany wants to turn the euro zone into a larger version of itself. That is essentially going to push the block as a whole into a depression.”

This in turn could lead to growing hostility towards Germany, he said. “If you’re swallowing what is perceived to be German medicine, and that medicine is essentially forcing economies to contract by 20 percent, with sharp increases in unemployment — and on top of that the Germans are saying, well, you clearly haven’t gone far enough and you need to do even more — then it’s inevitable that anti-German feeling is going to increase.”

Teemu Lehtinen, a Finnish public-policy adviser living in Athens, said, “It currently seems like the EU is being run by a group of large states, and the head of those is Germany.” This does not go down well at home with ordinary Greek citizens, he said, and makes them feel that the decision-making power is taken away from them and their elected politicians.

“It’s not that the Greeks trust their government or their parliament that much,” he added. “But it leads to the question: Who is in charge of our future? And more and more it seems that the Greeks think their future is in the hands of Mrs. Merkel.”