Germany is suffering from a serious case of cognitive dissonance. The country desires two conflicting things. On the one hand it wants the euro to survive. But on the other hand it wants to avoid a debt union, in which Germany would help to guarantee the borrowings of other eurozone nations. The problem is that the financial markets are making it clear that Germany cannot have both. Without a guarantee that Europe's strongest economy will stand behind the debts of the weaker nations of the currency zone, investors will not lend to those states. And if the likes of Greece, Ireland, Portugal, Spain and Italy cannot borrow on the financial markets, the single currency will inevitably break apart.
We British, pickled as we are in euroscepticism, find it hard to believe that the German people really want the single currency to survive. But it's true. I have just returned from two weeks in Hamburg and Berlin. In Germany I failed to find a single person who was sanguine at the prospect of the euro breaking apart. Rightly or wrongly, the German people regard the single currency as the crowning achievement of the post-war European project. The German Chancellor, Angela Merkel, summed up the nation's view in May last year when she argued that "If the euro fails...Europe fails. The idea of European unity fails."
And yet there can also be no denying the unpopularity among Germans of a eurozone debt union and more bailouts for weaker European economies. The Germans take an extremely moral view of macroeconomics. Professor Peter Bofinger, of the University of Würzburg, described the German mentality to me this week as, "we did everything right, others did everything wrong". While Germany saved and ran a trade surplus, other nations borrowed and imported too much. And Germans do not like the suggestion that they could now be forced to pick up the bill for the mistakes of others. Philipp Rösler, the leader of the Free Democratic Party (a junior partner in the governing coalition) argued bluntly last month that his party will "not accept having German taxpayers pay for the debts of other countries".
But the time has come for Germany to make a decision. Does it love the euro more than it loves economic morality? On 29 September, the German parliament will vote on whether to approve the deal struck in Brussels last July, which will extend a further bailout to Greece and enhance the powers of the €440bn stabilisation fund for the eurozone. If the Bundestag fails to sanction the agreement, the global financial markets will swiftly go into meltdown.
The expectation is that the deal will ultimately go though. Some parliamentarians from Ms Merkel's own party, the Christian Democrats, are threatening to vote against the package. And a ruling next week by the German Constitutional Court on whether eurozone bailouts are legal could complicate matters. But the opposition Social Democrats and the Green Party strongly support the Brussels package, which should guarantee its approval in the Bundestag.
Yet the eurozone debt crisis is unlikely to go away, even if this package is given the green light. Without a very strong economic recovery, the doubts of investors about the sustainability of the debt burdens of weaker eurozone economies are going to persist. And, crucially, the Brussels deal does not extend the size of the stabilisation fund. Investors will welcome the fund's new powers to buy up eurozone sovereign debt, but until the pot is large enough to rescue large economies such as Spain and Italy (if necessary) the markets will not be satisfied. So even if Ms Merkel survives this month's test, she will only have bought herself some time. It will probably not be long before another, more extensive, rescue package is up before the German parliament for approval.
So what is the endgame? If it eventually comes down to a straight choice between the break-up of the euro and the establishment of a full-blown debt union what would Germany choose? For Germany to make a choice it needs to know that it faces one. And most Germans are simply unaware of this. This is thanks to a lamentable failure of leadership. Ms Merkel is fighting a fierce tactical battle to keep her fragile coalition from breaking apart. But she has completely missed the strategic challenge. She has not spelled out the costs to Germany of allowing the euro to break up. Nor has she articulated the benefits Germany has reaped from the single currency over the past decade. These are considerable. Domestic spending in Germany has been flat for a decade. Germany's economy has grown almost solely through exports. And some 40 per cent of Germany's exports go to the eurozone. Germany's export sector would suffer considerably if the single currency unravelled. As one German policymaker put it to me last week: "Even if there are fiscal costs involved in preserving the euro, the economic advantages for Germany are much greater". Yet Germany has not heard this argument from its Chancellor.
Ms Merkel has also been a poor advocate of European solidarity. She has failed to challenge many of the myths in circulation in Germany about the laziness of southern Europeans. Indeed, rather than tackling prejudices she has, at times, pandered to them for short-term political gain. In May she argued in a speech, "We can't have a common currency where some get lots of vacation time and others very little". This was a worrying echo of Germany's best-selling newspaper, Bild, which describes Greece as "the land of bankrupts, luxury pensions, tax dodgers and rip-offs". Ms Merkel is following public opinion, not leading it. Yet public opinion is confused, because the public has not been informed about the nature of the choice before them. A poll of Germans last month indicated that 71 per cent of the population are either partially or completely in the dark about the technical reasons behind the single currency crisis. Cognitive dissonance tends to lead to anger and denial. That is the painful condition in which the Germans find themselves regarding the future of the eurozone. Only bold leadership can break them out of this trap. The future of the single currency could rest on whether Ms Merkel is capable of providing it.Reuse content