Germany Baulks at Euro Rescue, Insists on Rules

As Germany emerged from the destruction of World War II, it rebuilt its economy on a system of strong rules governing virtually every aspect of business, from auto manufacturing to competition among regional newspapers.

Today, the German economy is Europe's strongest, a regional powerhouse that its indebted neighbors depend on for billions of euros they need to cope their staggering indebtedness. Germany is insisting that they, too, adopt strict rules before it's prepared to release its money.

Left, right and center, a vast majority of Germans and their leaders believe that the combination of free markets and strict competition controls was the key to their country's economic success.

"At the root of the concept is that you put down the rules and let people have a go, but you don't screw with the rules," said Jackson Janes, Executive Director of the American Institute for Contemporary German Studies in Washington.

"That's a very different attitude that doesn't apply in places like Greece," he said. "It's very difficult to get people to focus on that structure that has worked so well for the Germans."

Germans point to their nation's 3.6 percent growth last year, the strongest in Europe, that allowed them to recover swiftly from the 2009 global downturn as proof.

The belief in "Ordnungspolitik," or "order politics," underlies Berlin's years of repeated demands for the European Union to force restrictions on its members in exchange for German funds to rescue neighbors no longer able to service their staggering national debts.

Those demands will be on display Tuesday when Chancellor Angela Merkel travels to Paris armed with plans for a new EU body to enforce strict budget limits and fiscal policy, and calls for all 17 eurozone nations to follow Germany's example and enshrine a balanced budget in their constitution.

Such disagreements over "order politics" are viewed abroad as having hampered Europe's response to the crisis, spawning long political battles with countries that see strict, unchanging rules as unsuited to their economies. That squabbling has undermined investors' faith in the eurozone's ability to manage its members' debt, and the euro and the continent's stock markets have been hit by seemingly unending turmoil.

When Greece first appealed for help in 2010, Merkel demanded a permanent crisis resolution mechanism before it would agree to loosen its pursestrings, ultimately delaying a bailout.

Germany came under fire for insisting that EU members agree to tougher sanctions for countries that have excessive government debt before endorsing the €110 billion ($157 billion) bailout package.

In the end, Merkel backed down, the aid to Greece went through, the regulations didn't and Germany emerged facing accusations of foot-dragging and tightfistedness. Yet the situation continued to worsen. Within months, there was talk of Ireland and then Portugal needing aid.

In Germany, the move had been an attempt to make the package more palatable to voters who feel they repeatedly tightened their belts after the expensive reunification of East and West Germany in the 1990s, and others should do the same.

After the bailout, German tabloids howled that taxpayers' hard-earned savings were being squandered to bail out a nation viewed as indulgent and lazy. The media were flooded with stories of Greek tax-dodging and corruption.

"Germans are a very disciplined people, this characteristic has also made us masters of export in the global economy," said Peter Walschburger, a professor at Berlin's Free University who specializes in the psychology of economics. "The Greeks, by contrast are governed more by emotion and impulse."

Some 90 percent of Germans say they believe state regulation is needed to govern large financial institutes from banks to big businesses, according to the 2010 Pew Global Attitudes survey. Last year, Germany's federal debt increased 21.9 percent to €1.28 trillion ($1.82 trillion), largely due to the need to bail out ailing banks.

EU countries have been patchy at best in keeping their debts below 60 percent and their deficits below 3 percent of economic output as stipulated by the so-called Stability and Growth Pact, pushed in the 1990s by Germany's finance minister at the time, Theo Waigel.

But Germany and France later agreed to weaken the rules, inviting other countries' profligacy.

Now, Berlin's response has been to push for even stricter and more automatic sanctions at the EU level.

"The Germans have set up this whole concept of, here are the parameters, now go to it," Janes said. "When they see them violated, or when they see people cheating on them, it basically makes them enforce it that much more."

Merkel has repeatedly called for a "stability culture on budgets and finances," as she told reporters in October, pointing to Germany as an example.

During Germany's 2007 turn at the presidency of the Group of Eight, Merkel pushed hard for more transparency on global financial markets. But her efforts ran into stiff resistance from Washington and London.

Once the global economic downturn hit in 2009, Berlin clashed again with Washington and London over how best to combat that crisis. Merkel came under fire for failing to launch wider stimulus programs, while expressing criticism of President Barack Obama's decision to push money at the problem in the United States as a rescue measure.

The second Greek bailout package this year only made the situation worse on the home front.

The prospect of yet more eurozone aid has added to tensions within Merkel's center-right coalition, which has spent much of its tenure since winning office in 2009 immersed in internal squabbles over issues ranging from pledges of tax cuts to nuclear energy. The issue is awkward for Merkel because conservatives tend to be particular sticklers for "order politics."

With an election late in 2013 beginning to loom on the horizon, Merkel is caught between being viewed from abroad as not doing enough, and annoying supporters in Germany, where she faces charges of selling out. At the same time, the first signs of a slowing German economy are beginning to show. Numbers last week showed German exports fell 1.2 percent on the month in June.

At a time when strong leadership and clear signals are being called for to calm jittery markets and reassure investors, Germany will be challenged to convince its partners that playing by the rules is enough to guarantee economic success.