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The Precarious Nature of the German Model by W B Vosloo – Wollongong, April, 2013

Although the German peoples had lived in north-west Europe since the Roman times, the various German principalities were only unified as a nation-state by Bismarck in 1871. Within a few decades Germany became the best educated in the world, the first to achieve universal adult literacy and with its universities the world’s finest in virtually every discipline, it was a country where intellectual achievement was justly measured and treated with respect. The defeat of Germany in the First World War brought in its wake a huge war reparations burden on the Weimar Republic, the outbreak of hyper inflation, the rise of Hitler’s Nazi Party, the scapegoating of Jews and the holocaust, the massive death and destruction of the Second World War, the division of Germany in two parts by the victorious Allied Powers after the war and the final re-unification under Chancellor Kohl in 1990 after the fall of Soviet Russia’s Iron Curtain.

In the period since the Second World War, Germany’s work ethic, export success, fiscal discipline and wage restraint enabled the country to become the engine room and financial anchor of the euro zone. Now, at the end of the first decade of the 21st century, Germany is confronted with two political-economic challenges of momentous importance. The one deals with safeguarding its economic prowess in the face of the far-reaching changes in its energy provision initiated by the coalition government between the Greens and the Social Democrats (SPD) under Gerhard Schroeder around the turn of the century. The other challenge is avoiding being swamped by the weight of its debt-ridden, economically stagnant euro-zone neighbours expecting Germany to share their debt burdens and to stand behind their bankrupt banks and profligate governments.

The Energiewende, as the Germans call their energy policy U-turn, involves a shift from nuclear and fossil fuels to renewables. The dislocations and distortions caused by this enforced transformation is now casting a shadow of uncertainty over the country’s manufacturing prowess. The problems involved with this transformation of energy provision and pricing is now exacerbated by the fall-out of the Global Financial Crisis (GFC) which started in 2008. As the GFC contagion spread from the USA and the UK into the euro zone, it exposed the broken balance sheets of the major European banks. The already heavily indebted European governments, Germany’s included, had to step in with additionally borrowed bail-out funds to rescue the banks.

As the GFC gradually transformed into a prolonged economic contraction, Germany, together with its northern neighbours, managed to return to a modest growth path. This was achieved through maintaining their export markets and repairing their public balance sheets through austerity programmes. Now Germany is being urged to stand behind the euro by accepting the “mutualisation of sovereign debt” and to shore up the banking system through “collective action”. These measures are, in effect, relying on German guarantees because the southern members of the euro-zone face mountains of debt and sclerotic growth prospects. To add insult to injury, Moody’s – an American ratings agency – has already sounded a warning that the AAA status of industrious Germany could be jeopardised by looming bail outs.

Early History

According to the Norman Davies history of Europe, the German tribes were identified in southern Scandinavia as Germani by Posinidius in 90 BC, by which time they were well into the task of settling the lands that have borne their name ever since. In the west they were bordered by the Celts and in 2 the east by the Slavs. They traded with the Mediterranean world since Bronze Age times and adopted Roman farming methods, including viticulture. Their clans were united by kinship and ruled in conjunction with a democratic assembly of warriors. (See Norman Davies, Europe – A History, Oxford University Press, 1996, pp.222-225)

Christianity, the “imperial religion” of the Roman Empire, also advanced into the German Rhineland and Elbe areas by the sixth century. During the Middle Ages (c750-1270), the Roman Empire gradually disintegrated and the power of Rome was displaced by the Empire of Charlemagne based in Aachen (c. 768-814). After his death his empire was divided between his grandsons at the Treaty of Verdun which created the core of both the future France and the future Germany.

The Middle Ages were characterised by the hierarchically feudal system, a dense network of contractual relationships which linked the highest to the lowest in the realm. Feudal contracts were recorded in charters and indentures. At the local level the fiefs of princes and barons were reflected in arrangements of manorial estates. The lord of the manor granted a plot of land to each of his serf families in exchange for service. In reality the feudal system was ridden by a confused mass of conflicting dependencies and loyalties, contested privileges and disputed rights. The result was a patchwork of authorities and principalities around stone castles, defended by cavalries and garrisons. With Christianity, the chivalry of knighthood became the twin pillars of the medieval mind. It moulded patterns of interaction, attitudes to property, the rule of law and relations between governmental authority and the individual. Germany was the most feudal country of all. (See Norman Davies, op.cit. pp.313-315)

Religious Tensions

The “Protestant” revolt against the selling of “indulgences” by the Catholic Church in Rome was started by Martin Luther, an Augustinian monk and Professor of Theology at Wittenberg, Saxony. He preached “justification by faith alone”, not through the intermediation of the Church, and nailed his sheet of 95 theses against indulgences to the door of Wittenberg’s castle church on 31 October 1517. Luther further violated a long standing prohibition on translating the Bible into a vernacular language. At the time there were several versions of German spoken in the German area. Germanic dialects had split into High (mountainous, southern) and Low (northern, flatland) varieties. Luther had to compromise and borrowed an emerging standard “chancellery German” as a base. He infused his translation with words he heard on the streets and in the towns and consulted widely to identify which dialectal words would be most widely understood. The result was that his translations of Biblical texts were widely read and remained the most popular translation up to the present time.

Since the start of the Reformation, conflicting Catholic and Protestant camps were formed which culminated in the devastating Thirty Years War (1618-1648) and which involved most of the states and rulers of Europe. It ended with the Treaty of Westphalia which set the ground plan of the European international order for much of the ensuing centuries. Germany lay desolate with its population reduced from 21 million to around 13 million. Cities stood in ruin and districts stripped of their inhabitants, their livestock and their supplies. A whole generation of pillage, famine, disease and social disruption wreaked havoc and traumatised German culture. Germany lost control of the mouths of its three great rivers – Rhine, Elbe and Oder. Destitution was accompanied by humiliation. (See Davies, op.cit pp.567-568)

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Ever since the Thirty Years War, Germany remained divided along religious lines. The western and southern parts remained predominantly Catholic while the central, northern and eastern areas remained strongholds of Lutheran Protestantism. These distinctions constantly introduced disruptive differences into German politics and together with the centuries-long political fragmentation into numerous principalities, stood in the way of the development of a national consensus on key issues.

During the Jewish Diaspora, many thousands of Jews settled in German areas in the course of centuries. After the expulsion of Jews from Spain in 1492, the Jewish Diaspora was again set in motion across Europe. Jewish refugees were confined to segregated areas in cities and towns (ghettos) in France, Italy and in central Europe. The Reformation was of huge benefit to the Jews because it broke up the monolithic unity of Catholic Europe. However, the very large numbers of Jews that sought refuge in German-speaking areas gradually aroused strong anti-Jewish feelings.

Martin Luther’s work Von den Juden und ihre Lügen (On the Jews and their Lies), published in 1543, is considered as one of the first literary expressions of anti-Semitism. Luther focused on their role as money lenders and their “usuriously extorted” wealth. He described Jews as “intellectually subversive”. Many Jews found refuge in Rhineland Catholic principalities where they lived as Marranos or Conversos (baptised). One expulsion provoked another as Christian bankers and craftsmen got Jews banned. As Jews were driven from Italy, Provence and Germany, they moved further east into Austria, Bohemia, Moravia, Poland, Lithuania and Russia.

The German anti-Jewish iconography was known as Judensau. The most potent and enduring of abusive stereotypes of Jews were of repellent, unclean, sub-human creatures that should be excluded from civilised society. In reality, Jews remained in Germany in large numbers and over many generations also produced individuals who made significant contributions to German society: Marx, Wittgenstein, Mendelssohn, Heine, Meyerbeer, Mahler, Johann Strauss, Freud and Einstein.

Despite Germany’s long tradition of anti-Jewish feeling, Jews felt at home in Germany. It was a society which honoured and revered intellectuality. Jews could move from a yeshivah into one of Germany’s universities where intellectual achievements were treated with respect. Several German Jews were awarded Nobel prizes in medicine, chemistry and physics. The habit of constant occupation is something that is generally deeply instilled in German households and it rubbed off on all newcomers. (See Johnson, P., A History of the Jews, Phoenix Press, 2003, pp.242-310)

The German Unification of 1871

When the German nation-state came into being under the leadership of Prussian Chancellor Bismarck, many parts of the German cultural community were not included: the Germans living in contiguous areas in France, the Alps, Poland, the Baltic states and Austria. The unification of 1871 created a federation of authoritarian principalities, brought together not of and by the people, but for them by the astute leadership of Bismarck. Germans thenceforth tended to associate national fulfilment not with liberal democracy, but with the strong hand of an inspired political leader. The system of executive leadership was not deeply embedded in a democratic political culture based on effective checks and balances. This vacuum left the door open for a bungling, inexperienced, arrogant Kaiser Wilhelm II, an ineffective Weimar constitution and a political vacuum for a power- craved Adolf Hitler. What had become the most populous industrially developed and militarily powerful nation in continental Europe, found itself at the mercy of disastrous leadership. German 4 society was not able to furnish itself with the constitutional trappings of maintaining effective and responsible democratic leadership.

The famous German sociologist, Max Weber, wrote the following words after the Kaiser had blundered Germany into World War I: “Bismarck left behind ... a nation accustomed to submit, under the label of constitutional democracy, to anything that was decided for it without criticizing the political qualifications of those who took the reins of power into their hands.”

This perceptive assessment by Max Weber applied a fortiori to the arrival of Hitler’s Third Reich. At the time, the 1920s, the 1930s and the 1940s, the Germans possessed no nationally meaningful and universally relevant philosophical direction – in the form of a clear sense of purpose which might have inspired, oriented and united public opinion and national aspirations. The Germans suffered from a perennial uncertainty as to their proper role in world affairs and the ideals that the German state purports to represent. Without such ideals, Germany had to rely on the unifying inspiration of either cultural traditions or nationalistic bravado. The state remained “above” the people rather that “of” or “by” them as a collective embodiment of their values and feelings of moral responsibility. (See Mayer, J.P., Max Weber and German Politics, Faber & Faber Ltd, 1943, pp.58-59)

The First World War

The First World War (1914-1918), was sparked off by the assassination of the Austria-Hungarian Archduke in Sarajevo, Bosnia, by Serb nationals. The explosive international atmosphere that was sparked off into a global war was created over several decades by opposing geopolitical diplomatic and military blocs. Bismarck was able to construct a system that would protect Germany from French aggression with his Dreikeiserbund of Germany, Austria and Russia and later the Triple Alliance between Germany, Austria and Italy. But France’s loathing for Germany drove her into the arms of historical colonial rival Britain in the Entente Cordiale, which was extended to the Triple Entente of France, Britain and Russia in 1907. The cauldron of rivalries, fears and hatreds steadily escalated to explosive proportions. Within weeks after the gunshots in Sarajevo, Europe’s diplomatic and military restraints broke down. Vienna wanted action against Serbia and received carte blanche from Berlin. Russia’s Imperial Council mobilised support to Serbia, which caused Germany to issue ultimatums, first to Russia, then to France. The British government sent an ultimatum to Germany. The five major European powers then embarked on a catastrophic war which took an estimated 20 million lives and around 17 million additional casualties. The instruments of destruction had outstripped anything previously known and spread across the globe.

When the dust finally settled, Europe lay in ruins. The democratic Western Powers could only survive by calling in the assistance of the USA. The Germans were completely overpowered by the combined forces of the rest of the Western world. Though ruined and ransacked, it remained Europe’s most dynamic but also disgruntled nation-state.

The Weimar Republic

The Weimar Republic was destined to fail. It inherited the politically unintegrated condition of German society, the disappearance of the monarchy which was the symbol of the nation-state, the psychological consequences of a lost war, an astronomical debt burden of war reparations to be paid to the victors, the destruction of the population’s cash holdings through runaway inflation, and, by the end of the twenties, the impoverishment and demoralisation of a world-wide depression. The 5 governmental apparatus that was tasked to deal with these challenges consisted of a two-house legislature, a cabinet, a prime minister (Chancellor) and a presidency. The upper or federal house (Reichsrat) was largely advisory. The real source of legislative power lay in the Reichstag, whose members were elected by proportional representation. The President, elected on a direct popular basis, was to be more than a figurehead. Effective political power in practice came to be shared by the Reichstag and the Presidency. The Reichstag could overthrow the Chancellor and the Cabinet by a vote of no confidence, but the President had the power to select the Chancellor and the Cabinet. The President could, in order to preserve safety and public order, “take measures as are necessary” – even to assume all legislative initiative himself. Initially the balance of power was held by a coalition of three parties: the Social Democrats, the Democratic Party and the Catholic Democratic Center Party. By the election of July 1932, the Reichstag included members of eight different groups, with Hitler’s National Socialists holding the support of 37 percent of the popular vote and the Communists 14 percent. As the liberal democratic center melted away, the economic crisis worsened and the Reichstag became more sharply divided and stalemated. The Reichstag was compelled to abdicate its legislative power in favour of a “constitutional dictatorship” in the hands of the President. On January 30, 1933, President von Hindenburg appointed Hitler as Chancellor. On the night of February 27, 1933, the Reichstag building was set on fire, allegedly by Communists. Acting through the President, Hitler proclaimed a state of emergency. In the March 1933 elections, the Nazis gained 44 percent of the popular vote – as against the 14 percent for the Center Party, 18 percent for the Social Democrats and 12 percent for the Communists.

Shortly thereafter Hitler introduced into the Reichstag a measure to enable laws to be enacted by the Cabinet and attained a two-thirds majority to change the Constitution after forcibly excluding more than a hundred opposing members from the Reichstag session. Four months later all parties other than the National Socialists were banned. Upon the death of President von Hindenburg in August 1934, Hitler merged the offices of Chancellor and President into the new office of Reichskanzler und Führer, which he immediately assumed himself. Henceforth Germany was to be Hitler, and Hitler’s police-state apparatus, was to be Germany.

The Totalitarianism of the Third Reich

The many brutalities of the Nazi Third Reich are explicable only as the actions of sick and evil men. In retrospect, however, it is clear that a combination of several internal and external factors enabled Hitler to mobilise enough support for the Nazis to capture the commanding heights and levers of power of Germany.

The chief components of a plausible explanation could be found in the following: - The Treaty of Versailles had stripped Germany of large territories and populations and imposed reparation debts payable over 42 years secured against the German state railways; - The humiliation of the French occupation of the Rhineland area in 1923; - The impact of post-war economic conditions, the hyper inflation of the 1920s followed by the Great Depression which started in 1929; - The impact of deep-rooted elements of anti-Semitism in Germany ranging from Lutheran Judensau to pseudo-scientific race theories of the Aryan herrenvolk coupled with popular perceptions of the corrupting influences of Jewish promiscuity, permissiveness and moral degradation of the German culture – particularly around what was considered as “decadent” Berlin; 6

- The impact of the emergence of the totalitarian political party structure which Hitler was able to bring to life with his exceptional organisational skills and demagogic oratory combining a socialist group, the German Workers Party with strong-arm ex-service nationalists; - The exploitation of the long-range threat of Soviet Communism as a dangerous geopolitical adversary (weltmacht oder untergang); - Hitler’s National Socialist Democratic Labour Party (SNDAP) being fed on fusing the grievances of both the Left and Right factions of the German voters.

To comprehend the ascendance of the Nazis from the early 1930s in Germany, it is necessary to understand the essential characteristics of totalitarianism as it developed in the Soviet Union, Fascist Italy and Nazi Germany as set out by Carl Friedrich, et.al, Totalitarianism in Perspective: Three Views, New York, 1969): - Central Ideology. All totalitarian systems are based on a central ideology that dominates all public discourse. The Soviet Union embraced “National Bolshevism” in contrast to the “National Socialism” of the Nazis. Where the Communists turned to Marx’s “scientific socialism”, the Nazis based their theories on eugenics and racial science. In both cases it proved to be pseudo-science. - Utopian Goals. Totalitarian movements find it necessary to set up Utopian goals to mobilise society, hoping to reach a New Order cleansed of all present impurities. In the Soviet Union they sought to cleanse their state from bourgeois impurities. In Italy it was the ideal of the restoration of a pseudo-historical fascist Roman Empire. In Nazi Germany they sought a Jew-free Aryan paradise lasting a thousand years. - Overriding Party-State. Once in power the totalitarian party used its own organs or personnel to oversee all existing government positions or institutions. State structures became subservient conveyor belts for executing the party’s dictates. - Leader Principle. The Fascists in Italy believed “Mussolini ha sempre ragione”, meaning the leader is always right. In Nazi Germany it was called the Führerprinzip, exacting slavish unquestioning obedience from underlings. It was the centrepiece of both Stalinism and Hitlerism. - Gangsterism. Just as professional criminal confraternities do, totalitarian elites habitually terrorise both their own members and their victims in order to eliminate rivals. They manipulate the law and use blackmail and extortion to take control of everything around them. - Bureaucracy. All totalitarian regimes required a vast army of bureaucrats, made up of droves of opportunistic individuals who were seeking rapid advancement of their own interests and standing by exploiting the platforms provided by the governmental structures. - Propaganda. Totalitarian propaganda owed much to the techniques of modern mass media advertising – employing emotive symbols and shameless demagoguery directed at the vulnerable elements of society. - Aesthetics of Power. Totalitarian regimes enforced a virtual monopoly in propagating an aesthetic environment which glorified the ruling regime and the heroic images of national myths and fantasies. - The Dialectical Enemy. Totalitarian regimes need to justify and legitimise their own policies and actions by setting up a dialectical enemy as a permanent and ubiquitous adversary to contend with. It serves the purpose of having a scapegoat to blame for everything that is wrong or irksome. - The Psychology of Hatred. To raise the national emotional temperature, totalitarian regimes constantly beat the drum of hatred against enemies within or without society. In Nazi Germany Communists and Jews headed the bill and alleged saboteurs were mercilessly pursued. 7

- Censorship. Totalitarian ideology can only operate under the shield of pre-emptive censorship. Controlling all sources of information, unwanted opinions and facts are suppressed. Information that needs to be circulated is carefully prefabricated. - Coercion and Genocide. Totalitarian regimes have pushed political violence beyond all previous limits with an elaborate network of political police and security agencies to keep opponents and undesirables under control. Where considered necessary, these elements are eliminated altogether. Mass arrests, shootings, concentration camps are the instruments used to eliminate enemies or to keep potential adversaries in a state of fear. - Collectivism. Social discipline and conformist behaviour are both cemented by all sorts of activity that strengthen collective bonds and weaken individual identity. Hence totalitarian regimes promote state run nurseries, youth movements, party rituals, military parades and group uniforms. - Militarism. Totalitarian regimes habitually magnified “external threats”, or invented them to rally citizens to the fatherland’s defence. Armed forces enjoyed high social prestige. - Universalism. Marxism-Leninism was always universally orientated, intending to spread its ideas and institutions around the world. The German Nazis also marched to the call of the world – morgen die ganze Welt. - Moral Neutrality. All totalitarian regimes shared the view that their goals justified their means.

In the early 1930s the Nazi Party established themselves as the largest single party in the Reichstag. After endless Cabinet crises Hitler was made Chancellor in December 1932 by President Hindenburg, hoping by this action to stem the rising influence of the Communist Party. A month later a mysterious fire destroyed the Reichstag building. The Nazis blamed the Communists and won 44 percent of the popular vote at the next election. They passed an Enabling Act granting the Chancellor dictatorial powers for four years. He organised a plebiscite to approve Germany’s withdrawal from the League of Nations, receiving 96 percent support. In August 1934, following Hindenburg’s death, he called another plebiscite to approve his own elevation to the new party- state position of “Führer and Reich Chancellor” with full emergency powers. This time he received 90 percent support. Hitler was now in control. The democratic process now produced a dictator who used his party’s elite guard, the SS (Black shirts) to wipe out the Party’s older formation of storm troopers, the SA (Brown shirts). He banned the Communist Party and then dissolved all the other parties.

Hitler’s economic policy was based on a combination of Keynesian financial management with complete state direction of industry and agriculture. The trade unions were replaced by a Nazi labour front and strikes were outlawed. A state-funded work creation programme ensured full employment: building the autobahns, the launching of Volkswagen and, above all, rearmament. In 1936 he introduced a Four-Year-Plan including a state-owned steel corporation. In 1935 Hitler reintroduced conscription.

In Mein Kampf Hitler set out his ideas about the German herrenvolk (master race) and Germany’s right to seek Lebensraum in the East. He divided mankind into a hierarchy of races: culture founders, culture bearers and culture destroyers. All great cultures from the past perished from blood- poisoning. Each healthy nation needs its own soil. He also believed in the “iron logic” of “racial purity”. Jews ought to be excluded from German citizenship and from state employment. Jewish traders should be boycotted and marriage and sexual intercourse between Jews and non-Jews forbidden. These measures were clearly defined in the Nurnberg Laws of 1935. The Nazis approved euthanasia for mentally and genetically handicapped. Nazi propaganda peddled strange notions 8 about Teutonic Knights and created a Hitler personality cult of all that is wise and good. The Party Guard, the Schutzstaffeln and the Gestapo (Secret State Police) were used to supplement existing military and police forces. Nazi-run People’s Courts and People’s Judges increasingly absorbed the work of the traditional judiciary. Starting in 1936 some 500,000 German Jews were persecuted and expelled. Apprehension really mounted after the Kristallnacht of 1938 when Jewish synagogues and shops were damaged or smashed.

In 1938 Hitler started to reach across the German borders when he engineered the Anschluss or merger with Austria. In 1939 he reclaimed Sudetenland from Czechoslovakia and then Danzig from the Poles after organising a rapprochement with Stalin. On September 1st, 1939, Hitler’s army invaded Poland and started the Second World War, facing a rather impotent array of Western Powers wracked by the fallout of the Depression years.

After the fall of Poland, 13 European countries were due to be overrun: 8 by Hitler and 5 by Stalin. In the summer of 1940, first the Low Countries and then France fell in a matter of weeks under the onslaught of Hitler’s Blitzkrieg. The British Expeditionary Force was soon beaten on the dunes of Dunkirk. Then followed a costly failure when the Nazi air offensive against Britain failed. Hitler then switched to this fatal Russian offensive.

The wholesale onslaught on the Jews in Germany and in the occupied territories in the form of the “Final solution” was started under the signature of Göring on 31 July, 1941. The policy was annihilation under the official euphemism of “resettlement”. As the German armies advanced into the heart of the former Tsarist “Pale” territories, the notorious Einsatzgruppen rounded up Jews by the thousands, driving them to pits and gulleys to be shot en masse. At one such action near Kiev around 70,000 Jews were killed.

Adolf Eichmann was head of the section tasked with the Jewish action. Decisions were taken to proceed with experiments to use Zyklon-B gas to create a number of dedicated death camps at Chelmno, Belzec and Treblinka; to expand Nazi concentration camps in Poland, notably Auschwitz and Birkenau; to consult the best German firms regarding crematorium design; to draw up timetables and rolling-stock arrangements for international railway transports. The ultimate death- toll will never be known, but at the Nurnberg Trials after the war, an estimate was made of 5.85 million. But although no accurate figures could be obtained, no responsible estimates have brought the figure down below 5 million. (See Norman Davies, op.cit. p.1023)

The Compounded Oppression of Two Dictatorships

Analysts often overlook the compounded suffering meeted out to the peoples of central and eastern Europe by two interacting totalitarian dictatorships: those of madmen Joseph Stalin and Adolf Hitler. Using similar tactics of deceit and oppression, their actions and strategies brought untold misery and death to millions of people from the Atlantic Coast to deep in the Russian hinterland. Their combined toll of human lives could well add up to around 90 million people.

The grim statistics of the loss of human lives during the Second World War tell its own tales. Military losses on the part of the Allied powers (USA excluded) totalled 10,026,945, with the Soviet Union losing 9 million, Britain 264,443, France 213,324 and Poland 123,178. The Axis Powers’ military losses totalled 4,335,232, with Germany losing 3,500,000, Romania 300,000, Italy 242,232 and Hungary 200,000. 9

Civilian losses on both sides totalled an estimated 27,000,000. Of those an estimated 16 million died in the Soviet Union, 6 million in Poland, 1,2 million in Yugoslavia, 350,000 in France, 800,000 in Germany, 290,000 in Hungary and 200,000 in Romania. The Netherlands lost 200,000, Belgium 76,000, Italy 153,000 and Britain only 92,673. The huge losses suffered in the Soviet Union include the losses suffered by Ukrainians, Byelorussians, Russians, Poles and Balts. As some of the figures quoted are estimates, they should only be used as general indicators of the scale of losses involved. (See Norman Davies, op.cit. p.1328)

To bring the enormous suffering experienced by the peoples of the Soviet Union into perspective, one should also look at the additional misery inflicted by the Stalin regime. The following table sets out the numbers of people killed in the period 1917 to 1953.

Categories of People Killed in Soviet Russia 1917-1953 (excluding war losses 1939-1945)

Minimum Maximum Civil War and Volga Famine 3,000,000 5,000,000 Political Repression 1920s tens of thousands Forced Collectivization after 1929 10,000,000 14,000,000 Ukrainian Terror-Famine, 1932-3 6,000,000 7,000,000 Great terror purges (1934-39) 1,000,000 Deportations to the Gulag, to 1937 10,000,000 Shootings and random executions 1937-39 1,000,000 Deportations from Poland, Baltic States and Romania 1939-1940 2,000,000 Foreign POWs 1,000,000 Deportations to the Gulag, 1939-45 7,000,000 Deportations of nationalities (Volga Germans, Chechens, Tartars) 1,000,000 Post-war screening of repatriates 5,000,000 6,000,000 Gross total (median estimate) c. 54 million (See Norman Davies, op.cit. p.1329)

The human misery caused under Stalin and Hitler leadership is immeasurable. On Stalin’s side, millions of hapless victims were annihilated under quota requirements, random denunciations and systematically executed purges. On Hitler’s side, the hapless victims were systematically eliminated on an industrial scale. Under the aegis of both, millions of soldiers and civilians were killed by destructive military equipment the world had never seen before.

Today’s Germans pick over their Nazi past remorsefully and remorselessly. Unfortunately, nothing like this is happening in contemporary Russia. Memorials to the victims of Stalinism are rare and Putin’s fingerprints are carefully erased. Few Russians are prepared to face up to their past as candidly as a new generation of Germans are prepared to do.

The Post-War Constitutional Model

In May 1949, the German Basic Law which provided for a new constitution was approved. The basic difference between the Weimar and the new Federal Constitution is the limitation of the powers of 10 both the President and the legislature in favour of increased scope of action for the Chancellor. The President is no longer elected on a popular basis, but indirectly by a special convention consisting of the members of the lower house (Bundestag) plus an equal number of persons elected by the parliaments of the Länder. The President can no longer declare a state of emergency and largely occupies the position of a ceremonial head of state.

Predominant legislative power is vested in the lower house, the Bundestag. Its members are elected by a proportional list system combined with single-member constituencies. But the Bundestag shares legislative powers with the federal upper house, the Bundesrat, whose members represent their respective Länder governments. When deadlocks occur between the two chambers over draft laws, a joint arbitration committee proposes a compromise which both houses must then vote upon and accept. The Bundestag may override general laws rejected by the Bundesrat by a two-thirds majority. The constitution also requires a “constructive vote of no confidence” in the Chancellor, i.e. the Bundestag must elect a new Chancellor and Cabinet to replace an existing Chancellor and Cabinet. If a Chancellor asks for a vote of confidence and does not receive it, he (she) has the right to ask the President to dissolve the Bundestag. If the Bundestag cannot agree upon a successor within two weeks, new elections must be held.

Since 1949 this system has provided a high degree of stability. The political scene has been dominated by two major parties, the Christian Democratic Union (CDU), a conservative party, and the Social Democratic Party (SPD), a secularist and welfare-statist party. There are also two other minor parties, the Free Democratic Party and the Green Party – both of which have been acting in coalition with the two major parties.

The German Education Model

Since the Middle Ages, Germany developed a school system based on a three-tier structure: the Hauptschule (for students who hope to go on to an apprenticeship), the Realschule (whose graduates typically take white collar jobs) and the Gymnasium (awarding the Abitur that admits the holder to university). Only at the Grundschule (elementary level) are pupils from all ability groups taught together.

Education has for a long time been a battleground for ideologically inspired conflict. Leftists insist on a unified school system where all ability groups are thrown together – to ensure equal opportunities for all. The right insists on keeping the stratified system. Since the mid-sixties a number of Gesantschulen (comprehensive schools) were opened, but by 2010 only around 1,000 out of 20,000 secondary schools were Gesamtschulen.

In most Länder, following four years of elementary school, pupils are streamed into one of the three kinds of secondary schools. It is not impossible to change school systems, but pupils who cannot cope with Gymnasium standards may find themselves transferred, or “demoted” in the eyes of leftists. Parents tend to spend extra money for supplementary private tutoring. In 2006 reforms were introduced to give schools more say in curricula content and to introduce a wider range of “competencies”.

It would seem that Germany’s “dual system” of vocational training which combines classroom instruction with work experience is producing meaningful dividends for the economy. It has produced a large pool of skilled workers for the country since around 50 percent of German high- 11 school students go on to dual training in one of 344 trades, from tanner to dental technician. Many of the courses are set by committees consisting of representatives of trade unions and employers’ federations. As a result German youth unemployment is much lower than elsewhere in the EU. Compared to many other members of the EU, Germany has become a huge social and economic success based on the productive efficiency of its people.

German Social Solidarity

The philosophical underpinnings of German precepts of social solidarity under the umbrella of the state, have taken a convoluted path through the writings of many philosophers – from Cante and Hegel to Marx and Engels. Particularly since the Age of Enlightenment, philosophers have been preoccupied with attempts to identify the highest values for civilised societies. Few efforts have managed to proceed beyond the age-old trilogy that dates back to ancient Greece: the postulates of justice (fairness), equality and freedom (liberty).

Christianity has always proclaimed equality before God and there has never been doubt that equality has something to do with justice (as fairness). Equal treatment of equal cases has always appeared to be the very core of justice, but it was never made clear what is equal, i.e. what cases are equal and what real equality of treatment would mean and involve with reference to the redistribution of property, obligations to work or the allocation of rewards. Human beings are similar in many respects but different in many others. Freedom (or liberty) only gradually emerged as a realistic ideal, even though it was given philosophical priority since ancient times. Only after feudalism declined and the Renaissance and the Reformation fashioned a new self-assertion of the individual and its worth, was it possible to think of freedom as a natural, self-evident condition and inalienable right, rather than a special privilege granted by governmental authority. Freedom stood out as a primordial right in Cante’s philosophy. It has for long been recognised that freedom does not mean “unlimited scope for action”, since some actions clash and are incompatible. The solution Cante proposed was that each person’s freedom must be compatible with every other person’s freedom. But Cante’s formula does not contain clear-cut criteria by which to recognise this kind of freedom. It was left to the revolutionary socialism of Karl Marx and his followers to deflate the German debate on social solidarity from the metaphysical heights of the philosophers of the Age of Enlightenment to the adversarial class-based politics of the late 19th century.

Karl Marx was the harbinger of class-based politics. He was born into a Jewish family in Trier. His family converted to the Christian faith, an act Marx later described as “an entrance-ticket to European society”, and which was followed by at least 250,000 Jews in the 19th-century Germany. Marx used his anti-Jewish sentiments as the theoretical base for his theory of anti-capitalist communism. Marx argued that self interest was the profane basis of Judaism. It elevated money as the self-sufficient value of all things. Materialism has deprived the human world and nature of their own proper value and alienated the essence of man’s worth and existence. The god of the Jews has been secularised and has become the prime mover of this world. Using their money-power, the Jews emancipated themselves and enslaved the Christian world. The underlying disease is the religion of money, and its modern embodiment is capitalism. Workers and peasants are exploited not just by Jews but by the entire bourgeois-capitalist class. In this way Marx expanded his anti-Jewish sentiments to become an elaborate anti-capitalist theory. The making of money through trade and finance he considered essentially a parasitical and anti-social activity which is not merely based on race and religion but essentially on class distinctions. In time, socialism became the anti-Semitism of 12 intellectuals. The Jewish caricature came to be seen as a capitalist monster for most of the second half of the 19th century.

Under the leadership of Chancellor Otto von Bismarck, Germany was the first state to introduce a system of compulsory state health insurance and old age pension in 1880. Bismarck was by no means attracted to socialist thought per se, but he considered these new welfarist policies as useful vote-winners in a world of rapidly widening electoral franchises and the popular appeal of Marxist revolutionary socialism. He realised that the poor outnumbered the rich at the ballot box. Bismarck argued that state health insurance and pension entitlements would engender a more stable state of mind amongst the great mass of unpropertied poor. Hence he advised conservative leaders that “whoever embraces these ideas will come to power”. And so the welfare state was conceived and given birth in the world of electoral politics.

In current German debates on social justice the word gerechtigkeit (justice) is often conflated with gleichkeit or gleichförmigkeit (equality). These debates are linked to many controversial issues such as social solidarity, minimum wages, welfare reform, executive pay, inheritance taxes, income tax levels and levies on wealth. At issue is how a country can provide basic security for the weak, reward talent and effort with higher incomes, provide access to opportunities and balance burdens between generations. The continuation of Germany’s success record ultimately depends on how it manages to find a balance between justice as fairness, equality of opportunity and creative liberty.

The Post-War Economic Model

Germany entered the post World War II era split in two parts as the victors divided the country according to the lines drawn by the occupation forces. The Soviet Union held the eastern parts which later became the Democratic Republic of Germany. The Western allies held the western part which became the Federal Republic of Germany. It took several decades until the end of the Cold War before Chancellor Helmut Kohl managed to secure the unification of East and West Germany after the fall of the Iron Curtain.

During the period 1946 to 1949, the German population went through terrible hardship: food shortages, unemployment and poverty were the order of the day. On the Western side the bulk of the population had to rely on American food aid. The economy was kept afloat with the aid of the American-funded Marshall Plan. General Clay, the Commander of the US military occupation, appointed as head of the American and British occupation zones an economist from the Freiburg School of “Ordoliberals”, Dr Ludwig Erhard. This proved to be an inspired choice. Erhard succeeded in getting approval for the re-introduction of the German currency, the D-mark, in 1948 – thereby enabling the German economy to take off.

With capital provided by the Marshall Plan, small and medium sized companies (Mittelstand) sprang up and became the backbone of the German economy. They were the first enterprises to start producing goods and services for the local market and to start employing the vast reservoir of unemployed people on a decentralised basis. Today they still employ 70 percent of the workforce, account for 46 percent of investment, creating 70 percent of all new jobs. As export companies they compete at the top end of the market by devising excellent technical solutions, supplying reliable goods and building long-lasting relationships with their customers. German manufacturers, small, medium-sized and large, became famous for their obsession with detail and strong emphasis on safety and durability. Their products were expensive but top quality. Their brand names became 13 well known around the world: Mercedes Benz, BMW, Volkswagen, Bayer, BASF, Miele, Behr, Bechstein, Trumpf, Siemens, SAP, etc. Most are focused on improving their products rather than the fast moving, mass consumer markets ruled by pushy marketing. In time, Germany’s export prowess pushed it to the top three exporters in the world, creating a current account surplus varying between 6 and 10 percent of GDP.

West Germany’s first Chancellor was the highly respected Konrad Adenhauer. He was ably assisted by Ludwig Erhard, his Finance Minister. The result was the German Wirtshaftswunder – an economic miracle. In the miracle years of 1950-1973, GDP grew by an annual average of 6 percent. With the bounty the government was enabled to extend the benefits of the welfare state. The core of Erhard’s Ordnungspolitik was the concept of a “social market economy” which came to describe the German economic model in the post-war years. It holds that competition was the best way to prevent public or private concentration of power, the best guarantee of political liberty as well as providing a superior economic model. It looked in many ways like a typical “mixed economy” because at all levels of government – federal, state (länder) and local – public ownership was broad in scope. In included transportation systems, telephone, telegraph and postal services as well as radio and television networks and utilities. Partial public ownership also extended to coal, iron, steel, shipbuilding and other manufacturing activities. But in contrast to the practice in France, the German state did not take control. It created a network of institutions to enable the market to function effectively. The economy operated under the tripartite management of government, business and labour, called Mitbestimmung. This corporatist system was embodied in supervisory boards called Betriebsrätte, consisting of representatives of all three sectors. It propelled Germany to the centre of the European economic order within a decade and firmly established it as the locomotive of European economic growth. Germany also provided job opportunities to millions of migrants (guest workers) from Turkey, Greece, Italy and Spain.

Chancellor Gerhard Schroeder took office with the support of the Green Party. The Chancellor squeaked home by polling just 6000 votes more, in an electorate of 61.4 million, than the conservative Christian Democrats and their Bavarian sister party, the Christian Social Union. Mr Schroeder persuaded the Ossis that he was their friend and offered cash and a spirit of national solidarity. With the two main parties finishing neck and neck with 38.5 percent of the national vote each, the Greens provided coalition support for a centre-left alliance. But the Greens were more focussed on environmental issues and less concerned about economic fundamentals.

The first years of the new millennium saw the German economy weakening. Germany was plagued by severe economic stagnation. Although its economy was the biggest in Europe, larger by a third than both Britain’s and France’s, the German economy showed the lowest growth figures in the whole of the European Union. The German economy was still struggling to fully absorb the bankrupt East Germans; it was stifled by a hugely restrictive and intrusive web of regulations, an inflexible and protected labour force and an over-generous welfare system. Unemployment stood at 10 percent of the workforce in 2002. Germany’s biggest firms were setting up plants abroad to manufacture products more cheaply. Bankruptcies increased to unprecedented levels. The hourly cost of labour in the manufacturing industry in Germany (including wages, social security and pension contributions) was 13 percent higher than the USA, 43 percent more than the UK and 59 percent more than in Spain. Its global share of exports declined from around 12 percent in 1992 to around 9 percent in 2002. Venerated firms became vulnerable to hostile foreign raiders. Commentators described Germany as the “sick man of Europe”.

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During his second term which started in 2002, Chancellor Schroeder appointed Peter Hartz, a top VW manager to propose reform measures to Germany’s onerous labour-cum-welfare system. Mr Hartz’s proposals were aimed at making the labour market more flexible by reducing job protection and lowering social security contributions for part-time jobs. It involved the creation of “personnel service agencies”, to be run by private enterprises which would take on people who had previously been unemployed and hired them out as temporary workers. Those who rejected an offer for employment from such an agency faced the risk of having their benefits docked. He also proposed “mini jobs” with private households where employers only paid a flat-rate of 10 percent social security contribution. Self-employed people were given tax incentives to set up companies with a minimum of paperwork and earnings of up to €25,000 taxed at a nominal rate of 10 percent. The onus was placed on job seekers to explain why a job offer was unsuitable before the state would provide welfare benefits.

Since 2006 the German economy experienced a healthy rebirth. Its exports exceeded any other country’s in the world – and remained world class. The economy started growing again at a rate close to 2 percent. After years of chronic depression, the general mood started to improve. The new Chancellor, Angela Merkel, engendered a feeling of optimism and the political-economic system started delivering the incremental changes expected by the methodical new Chancellor. A doctor of physics, she took office in 2006 at the head of a grand coalition of the two major parties, the CDU and the SPD. By taking “small steps” she succeeded in reducing the budget deficit, increasing the value-added tax rate from 16 percent to 19 percent and to curtail the veto rights of länder over federal affairs in return for gaining more local powers over education.

Despite the best efforts of the Hartz proposals, Germany’s labour market remained bureaucratic and over-protective of vested union interest. Wages are still set by national peak-level bargaining. The effect on labour costs is magnified by the way the country finances its welfare state: through a payroll tax with matching contributions from employees and employers. Contributions added up to 40 percent of gross income in 2006 compared to 28 percent in 1970. In effect, the de facto minimum wage is set by welfare benefits.

The Energiewende Policy

The German economy was saddled by the Energiewende policy by the left-wing government under Chancellor Gerhard Schroeder. He came to power after the fall of Chancellor Helmut Kohl in 1998 when the Social Democrats (SPD) formed a coalition with the Greens. Chancellor Schroeder was pressured by the Greens in 2000 to introduce an ambitious, but highly risky policy to cut carbon emissions with renewable energy. The initial plan was to phase out nuclear power by 2050.

After the Fukushima disaster in 2011, Chancellor Merkel, in a knee-jerk reaction, decided to order the immediate closure of seven reactors and to phase out the remaining 17 reactors by 2022. Germany reaffirmed its clean-energy goals which involved cutting greenhouse-gas emissions from 1990 levels by 40 percent by 2020 and by 80 percent by 2050. It meant those targets were to be met without nuclear power.

In 2010 Germany’s nuclear power stations supplied 23 percent of its electricity. Around 86 percent of its electricity was provided by an oligopoly of big suppliers: EON, EDBW, RWE and Vattenfall. Then the fortunes of Germany’s energy suppliers started to change very swiftly. First the European Commission (EC) forced them to spin off their transmission networks. Then the German 15 government ordered them to take their nuclear plants – their most predictable source of revenue – offline by 2022. In addition, the power companies are obliged to pay a nuclear-fuel tax of around €2.3 billion a year until 2016.

The Energiewende policy also opened the door to thousands of heavily subsidised wind farms and solar arrays across the countryside. The renewable energy law entitles anyone who puts in a solar panel or a windmill to sell surplus power to the grid, receiving a generous “feed-in tariff”, guaranteed over 20 years. This gives electricity generated by renewable power priority over conventional power and pushed up its contribution to close to 20 percent of electricity output. The government’s plan is to push renewable energy’s target up to 35 percent by 2020.

The renewable energy push has unleashed an avalanche of “energy co-operatives” – from less than 100 in 2008 to around 600 in 2011. Solar parks have migrated in many cases from the countryside to the rooftops of family houses and apartment blocks. These changes have perked up local economies in windy areas and became important sources of revenue in smaller settlements as surplus power supplies are intermittently fed into the grid.

But the Energiewende has a serious downside too. It raises the cost of electricity, unsettles supply and is provoking rising resistance at the local level. The cost element is a very serious matter. Wholesale electricity prices have already risen significantly and are predicted to be 75 percent higher by 2025. Further capital expenditure on transmission lines is required to accommodate the many smaller input points. Intermittent wind and sun power create a need for back-up or base-load generators while making it difficult to develop business models that justify investment in such standby power generators.

From a macroeconomic perspective significant electricity price increases have cumulative effects on all facets of economic life: industrial costs, household budgets, transport costs, export prices, etc. In particular, it affects the competitive strength of the German industrial output, which is in many ways the mainstay of the German economy. In addition, the intermittent nature of wind and solar electricity generation affects the reliability of energy supply. It urgently requires backup generation facilities which, in the absence of nuclear generators, have to fall back on gas and coal power stations – defeating the reduction of carbon emission objectives. The subsidy-fed explosion of wind and solar power generation has distorted the allocation of capital investment. It not only pushed up industry’s electricity bills relative to its competitors, but exposed them to the instability of power interruptions. Since most energy intensive consumers are shielded from higher tariffs, other segments of society including ordinary folk, have to foot the bill. Subsidy distortions to the market destroy normal market dynamics and expose the energy industry to bureaucratic intervention, pressure from the renewable lobby and a wasteful transition from fossil and nuclear fuel to unreliable renewable energy. The price will by high and the risks are large. Extra subsidies may be needed to encourage investment in standby generation capacity.

Chancellor Angela Merkel has taken charge of the implementation of the Energiewende policy in the hope of staying ahead of the risks and pushing back against the cost escalation. Germany is now exposed to a greater dependence on the gas and oil exports of Putin’s Russia. If the possibility of increases in the charges for carbon emissions remains open ended, investment in standby gas and coal-fired power stations will remain uncertain. The total impact of the Energiewende policy has cast a cloud of uncertainty over the future of the German manufacturing prowess.

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Chancellor Merkel is likely to lose the support of the bulk of her own political base, the Christian Democrats (CDU) and the Free Democrats (FPD). She now seems to rely on the support of her traditional opposition, the Social Democrats (SPD) and the Greens in addition to her own dwindling conservative supporters. These support groups are unlikely to return to nuclear power generation or to support the introduction of the technology of “directional drilling” to tap coal-seam gas resources. Thereby Germany would not be allowed to tap into the potential of an important new technological breakthrough in the field of energy generation.

Germany and the Euro-zone Imbroglio

The German economic model together with its highly decentralised federal political system makes it an important partner and player in the European Union. But the German Chancellor cannot escape political-economic factors on the home front. Hence, the interplay of these factors determines what can be expected from German inputs and reactions to efforts to solve euro zone problems. Germans have their own unique set of expectations, priorities and contributions. It requires proper understanding of their post-war emergence as Europe’s economic powerhouse, its intricate sensitivities about its Nazi history and its understanding of the causes and implications of the euro zone’s current frailty.

It is within this intricate, fine-tuned, minutely structured and finely balanced society that the struggling Mediterranean members of the euro zone are seeking to find assistance to help them recover from decades of deficit spending, mountains of public debt and sclerotic economic growth. Germans do not appear to be fundamentally opposed to European co-operation. They have been core members of the “European project” since the Treaty of Rome in March 1957 which paved the way for the formation of the European Economic Community (EEC) which later transformed into the European Union (EU) with its 27 members today. The Germans also allowed their cherished Deutsche Mark to be replaced by the Euro as the legal tender in the 17 member euro zone currency union. They also agreed to accept the authority of the European Central Bank (ECB) to set a single interest rate for the whole euro zone. They appear to see no alternative to a continuation of the “European project” on condition that it proceeds “step by step” – in the words of Angela Merkel. But the Germans do not want to be its milk-cow and resent being made the object of special burdens and impositions. Monetary policy has been handed over to its own independent central bank, the Bundesbank. Their political system is based on a broad consensus: checks and balances to restrict the power of government, a set of social and political institutions which have primacy over the market (the law, the constitution and a supreme court to interpret it), the corporate governance principle of mitbestimmung and consensus politics relating to modest tax rises and cuts in the budget deficit. These are the factors that produce the stability and progress of German society. On what ground should these factors be jeopardised?

As a member of the EU and more directly the euro zone, Germany is now confronted with a conundrum: how to deal with the dangers of being dragged down into a political-economic abyss if they jump into the whirlpool to help out their profligate co-members along the Mediterranean. How much of its resources can Germany afford to sacrifice before it also drowns? Germany only recently recovered from lifting its 17 million Eastern compatriots out of the tribulations of Soviet Communist rule. Can the German economy with its 82 million citizens, with its head barely above the water, rescue its numerous neighbours along the Mediterranean with a combined total approaching 200 million? Even a strong swimmer can only save a limited number of drowning swimmers.

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The European Disease

It is important to realise that all the social-democracies in Europe and elsewhere suffer from the same political-economic disease: living beyond their means, financed by compliant bond markets allowing over-spending governments to use chronic deficit budgeting to cover their spending on unaffordable welfarist benefits and oversized bureaucracies. In all the advanced countries, both public and private households are saddled with heavy debt burdens as a result of their deep-rooted addiction to credit financing - without proper regard to affordability. Sooner or later the reality of bottom line discipline comes into play.

When the GFC struck in 2008, many advanced economies were already vulnerable to contagion on many fronts. Government debt levels were already unsustainably high as a result of the cumulative effects of deficit budgeting over many years. Governments were already committed to high levels of spending on welfarist benefits, public sector employment and, in some cases, heavy defence or security spending. In most cases spending levels increased much faster than income levels when the GFC virtually pulled the plug on economic growth.

The average growth rate of every major advanced country has been on the decline for several decades. The economic sclerosis affecting the advanced economies manifests itself in many symptoms: unemployment rates around more than 10 percent, chronic budget deficits with levels of public spending approaching, or exceeding in several cases, 50 percent of national output, social welfare systems placing an unsustainable tax burden on society. Public debt levels have created “debt traps” where interest rates charged by bond financiers have raised to levels where governments have to pay more interest than they can service (as in the cases of Greece, Portugal, Spain, Italy and France). Inflationary expectations are undermining confidence to invest in job- creating economic growth. In most social democracies, public expenditure burdens have risen faster than economic growth.

The critical variables are the levels of confidence of the buyers of government bonds, the interest rates they require and the repayment terms involved. These requirements, in turn, depend on perceptions of the relevant government’s fiscal rectitude and the economic potential of the country and the willingness and ability of its taxpayers to shoulder the commitments made by their governments. A country with a firm growth potential, a stable political system and a convincing record of sound economic management is likelier to raise loans domestically or internationally to cover its debt requirements. The ability of a country to meet its debt obligations depends on its projected disposable income stream. You cannot spend yourself out of debt with money you don’t have.

The Pressures of the World of Finance

The Economist, an influential newspaper owned by financial interests in the UK and beholden to financial interests in the City of London and in Wall Street, has systematically been propagating the idea that “... the fate of the world economy depends on Germany’s Chancellor, Angela Merkel” (see The Economist, June 9th, 2012, p.13). It argued that the fate of the Mediterranean stragglers has been compounded by errors in Europe’s creditor countries: their overwhelming focus on austerity, a succession of half-baked rescue plans, and the refusal to lay out a clear path for the fiscal and banking integration that is needed for the single currency to survive. Since Germany has largely determined this response, The Economist preferred to pick on Angela Merkel, completely ignoring 18 the fact that the mayhem of the GFC was unleashed in the USA’s Wall Street in the first place. It argued that a “consensus” has developed that Merkel had to shift from austerity to far greater focus on economic growth (ignoring Germany’s strong growth record), complementing the single currency with a banking union (with euro wide deposit insurance, bank oversight and joint means for the recapitalisation of failing banks) and embracing debt mutualisation to cover the mistakes of wayward members. This message has been repeated in several issues of The Economist and refrained in the Anglophone media. It is clear that the interests of the bondholders are deeply involved in this sustained propaganda campaign.

In the world of finance, it is the investors in the bond market (largely sovereign wealth funds, private equity funds, hedge funds and pension funds) which are the “Scarlet Pimpernels” who operate with impunity under cover in the dark pools of the shadow banking system without proper public accountability. They are the financiers of the deficits of government institutions, large companies and banks. They can manipulate interest rates in capital markets by virtue of sheer size, share prices in stock markets through high-frequency algorithmic trading and negotiate secured debt instruments such as covered bonds or derivatives where creditors are first in line to be repaid. They can plunge a country into more debt in order to repay its banking system’s debt. Imposing losses or “hair cuts” on bondholders is not something that meetings of finance ministers are likely to do because of their dependency on bond markets to finance their budget deficits. To avoid moral hazard, bondholders should be required to bear the losses they incur when they make bad loan decisions.

Germany’s Challenges

The critical question for Germany is how to safeguard its own national interests. Will Merkel’s demands for austerity and her refusal to bail out her peers in the euro zone bring about structural reform in Europe? Is it appropriate to take the lead to achieve deeper political-economic integration in the euro zone? Deeper integration means handing more decision-making power to Brussels and saddling Germans with the debts incurred by others. It would move the EU at large or the euro zone in particular towards a federal state, with a common fiscal policy and more representative political structures. Berlin argues that European leaders like to talk of mutualising national liabilities, but avoid mentioning sharing national sovereignty. Are the citizens of the euro zone countries uber haupt ready to give up more sovereignty to save the Euro? A process of deeper euro zone integration lacks a clear democratic mandate – not only in Germany, but also in France and other member countries.

Jens Weidemann, President of the German Bundesbank and former economic adviser to Angela Merkel, recently expressed the German perspective as clearly and unambiguously as can be expected from a central banker: “Communalising risks weakens the foundations of a currency union based on fiscal responsibility.” It is unrealistic to expect the German taxpayer to shoulder responsibility for profligate public spending in the Mediterranean countries with workers retiring at ages below 60 whereas Germans have to work until the age of 67 and where workers work fewer hours per week than in Germany. No German government can realistically expect to remain in power when it is pressured by foreign interests to commit Germany to accept such debt and risk sharing – in whatever form it is disguised by deft financial engineering devised in the City of London or in Wall Street, USA. Moreover, it is unrealistic to expect the German economy to successfully carry the burden of lifting the euro zone stragglers out of the economic holes they have dug for 19 themselves. During the first two quarters of 2012, the German economy grew by only 0.3 percent. France, Italy and Spain did not show any growth at all during the same period.

It requires more objective and independent analysis to determine how the responsibility for fixing the economic distress of the euro zone should be apportioned. If the economic future of the world at large is at stake, then it is a problem requiring the serious attention of all stakeholders: creditor nations as well as trading partners and bondholders. In the world of business there are insolvency laws to deal with the distressed assets of bankrupt enterprises and with the status of creditors who may be financiers, suppliers or employees. In some cases it is possible to steer a business out of trouble by cutting costs, mobilising productive assets and nurturing markets for their products and services. Ultimately, it is the discipline of the bottom line that determines success or failure.

Even under the most favourable conditions, the German economy finds itself in a precarious balance. It currently faces the Herculean task to pull its elaborate and highly subsidised carbon emissions reduction scheme into a system providing reliable and affordable electricity. Much could go wrong with this ill-conceived intervention that was initiated by the former left-wing coalition government between the Social Democrats and the Greens. It is unrealistic to expect the German people to volunteer their support for an unlimited transfer of assets to their profligate EU neighbours. It is still more unrealistic to expect that the German economy would be strong enough to stand behind trillions of euro’s worth of European debt.