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How to Repair Europe by Leveraging German Overreach

German Chancellor Angela Merkel and Greek Prime Minister George Papandreou give a statement on September 27, 2011 in Berlin.
German Chancellor Angela Merkel and Greek Prime Minister George Papandreou give a statement on September 27, 2011 in Berlin. Greece's prime minister lashed out before at critics that say his country is not reforming fast enough and vowed he would continue to make the efforts required to tackle its crippling debt crisis. AFP PHOTO JOHN MACDOUGALL (Photo credit should read JOHN MACDOUGALL/AFP/Getty Images)

CORFU, Greece -- Anti-semitism makes the Jew, Sartre once famously said.

In the same way, the return of "the ugly German" (to use the phrase of former German Foreign Minister Joschka Fischer) has "made" Syriza in Greece and the other populist parties of both the right and left arising today in Spain, Italy, France and elsewhere.

Social thinkers have long noted the relationship between threats and the reactive fortification of identity. The greater the threat -- of economic pain, violence, upheaval or exclusion -- the more rigid and "solitarist" identities become, Amartya Sen noted in his seminal book "Identity and Violence."

Intense threats, or their perception, demote plural influences in the lives of persons and communities alike and elevate a singular dimension to existential importance. Conversely, prosperity, stability and inclusivity generate open and adaptive identities.

By reducing the historic project of an integrated Europe to the euro defended by merciless austerity, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble, riding high waves of popularity at home, have inflamed the very "solitarist" nationalisms the union was meant to douse. Instead of reconciled national identities, borders of the mind have been resurrected across the continent. The idea of Europe is disappearing behind all the flag waving.

Once passions are stirred and mobilized into politics, polarization sets in and sensible solutions are elusive. For those looking north in Europe today, the present crisis "is all the fault of German austerity policies." For those looking south, "it is all the fault of the Greeks unwilling to reform."

Responsible leaders who would seek common ground, like George Papandreou -- the center left Greek prime minister forced out of power five years ago by diktat from above (by then French President Nicolas Sarkozy and Merkel) and disconsensus at home -- have been marginalized. His sin was, through a proposed referendum, to seek a governing mandate on bailout terms (much less punishing than those now accepted by Syriza) so that Greeks would "own their own reforms" and thus stick to them.

There Is a Greek Problem

When I spoke with Papandreou at the Symi Symposium here last week, he was forthright that there is indeed a "Greek problem." For him, the Greek state has been characterized by "crony capitalism" and the clientelism of organized interest groups from shipbuilding magnates and bankers to public employee unions. To turn things around, he had initiated reforms on the transparency and independence of the justice system, on tax evasion, evaluation of teachers and professors, professional licensing, the labor market and pensions.

In Greece, as he pointed out, radical reform seems as intractably difficult as it is deeply and widely understood as necessary. Even the most patriotic Greeks readily cite a litany of abuses in the present system, such as the case where a taxi driver was being paid disability for being blind or when medicines were over-prescribed by doctors and pharmacists in order to cash in on government subsidies. When Papandreou introduced an e-prescription system that enabled the transparent tracking of such charges, the cost in subsidies dropped 50 percent, saving 2.5 billion euros in government expenditures -- an amount greater than property tax collections at the time.

Papandreou grasped the value of being able to leverage the EU and IMF demands to implement structural change against the daunting inertia of decades of bad governance. Yet, he also was keenly aware that such a transformation could not take hold when there was no growth to cushion it but only austerity to compound the pain.

As Gerhard Schröder, the German chancellor before Merkel, told Papandreou, the tough structural reforms he introduced in 2003-2005 that boosted German competitiveness in global markets could not have succeeded without growth. If that were the case for Germany, how could it not be the case for a much weaker Greece?

Both Greece and Europe today need balanced and dispassionate figures like Papandreou to show the way forward after the present debacle in which Syriza's frontal resistance has hardened German intransigence and vice versa. Even those who sided in the scheme of things with Germany on the most recent bailout, such as Italy's Matteo Renzi, have proclaimed that "enough is enough."

Post-Bailout Agenda for Europe

The opportunity now is to leverage German overreach against itself, like in judo, to flip the agenda of building Europe's future toward a broader approach beyond sovereign debt and the euro. Now that German dominance of Europe has been manifestly established, with even France relegated to junior status, the logic of every lesser power will be to band together to force the Teutonic hegemon to take their interests into account and move beyond intransigence to repair a divided Europe.

Here are two key pillars of what a post-bailout agenda would look like:

1. Debt Relief by Another Name

The IMF has declared Greek debt as "unsustainable," and by its rules, cannot engage in bailout deals with countries that cannot ultimately pay their debts. It has therefore called for debt relief.

The EU has said it will only participate in a Greek bailout if the IMF remains part of the troika along with the European Central Bank -- but won't accept debt relief. As Schäuble has repeated ad nauseam, writing down Greece's loans is illegal in the eurozone and according to the German constitution because it would amount to a fiscal transfer from one member state to another.

The answer thus seems to be "debt re-profiling" instead of a "haircut" on the principal of the debt, which the creditor democracies are bound not to accept. This would mean cutting the interest rate on loans to Greece and extending the terms of repayment into the distant future, perhaps as much as 100 years. In this way, Greek debt would become "sustainable" while opening up some fiscal space to promote economic growth.

After all, Great Britain just paid off it last WWI loans in December 2014, a hundred years later. Similarly, Germany only paid off its last WWI debt in October 2010.

2. Rebooting the European Narrative

If in this way Europe can get past this debt crisis denouement, the path will be paved for relaunching a forward-looking narrative that can once again enlarge introverted nationalized identities and give new impetus, especially for the younger generation, to the idea of integration beneficial for all.

For a fresh start Europe needs to build integration with a positive vision from the ground up instead of only through the back door of a common currency rooted in the negative constraint of rigid debt and a deficit constraints.

The earliest success in moving toward a common Europe was the Coal and Steel Community in the late 1940s and 1950s. That project harnessed Europe's industrial might on behalf of the community instead of individual nations that had deployed their manufacturing prowess to wage war.

A similar historical role could be played today through a "European Digital Community" that harnesses the new power of the information age by forging a convergence of connectivity, renewable energy and smart transportation into the so-called "Internet of Things."

In essence, this project would piggyback on the momentum already underway to establish a single market of 500 million people stretching across 27 countries from Portugal to Poland.

In seizing this new orientation, Europe could boost the lagging "aggregate demand" which has led to stagnant growth by building out the infrastructure of what Jeremy Rifkin calls the "third industrial revolution."

Laying extensive broadband networks, retrofitting homes, renovating energy transmission lines for two-way flows and implanting sensors would all be highly job intensive. John Chambers of Cisco estimates that 850,000 jobs could be created by digitizing the European economy.

In January, European Commission President Jean-Claude Juncker proposed a 315 billion euro investment plan that would leverage initial capital from the European Investment Bank with EU guarantees and private sector finance aimed at advancing a single digital market and energy union.

This plan has been gestating since it was first conceived three years ago by the Berggruen Institute's Council on the Future of Europe and originally championed by Ursula von der Leyen, who was at the time Germany's labor minister and is now its minister of defense. At a town hall in Paris in May 2013 it was endorsed by French President Francois Hollande and Spanish Prime Minister Mariano Rajoy as well as the Italian labor minister.

Another key element of the original plan, proposed by George Papandreou, was to pair it with a jobs plan for European youth that would expand the "Erasmus Program," in which the EU funds scholarships for students to study anywhere in Europe, to include the "two track" approach of vocational on the job training that has worked so well in Germany.

In addition to the Juncker and "Erasmus for Jobs" plan, a further adjustment that would boost growth prospects would involve removing borrowing for productive investment from the calculation of the 3 percent budget deficit limit imposed on all members of the eurozone. Italian Prime Minister Matteo Renzi has championed this redefinition as a way to create new jobs while maintaining fiscal discipline in operating budgets. At the request of Juncker, former Italian Prime Minister Mario Monti is leading a study commission to propose the precise criteria by which such investments would be allowed under the present fiscal rules.

German Support, a Greek Face

The key to moving this agenda forward is robust support for it by Germany in the European Council, which determines the course of common European policy. While German power must stand behind any new narrative for Europe, that narrative also needs a promotional face that conveys how all the suffering of recent years has not been for naught, but should be seen as downpayment on a future that works for all Europeans. What better face of reconciliation than that of George Papandreou?

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