Reinforcing Germany’s Economic Leadership in the Eurozone: Challenges and Options

Germany currently faces major challenges to maintain its standing as the economic locomotive of the European Union and the eurozone. Firstly, the ordoliberal tradition of Germany’s economic is challenged by increasing domestic political instability on the federal and the regional levels with growing levels of support for parties which were formerly positioned on the political fringes. Secondly, US-President Trump and his administration, among others, regard Germany’s record current account surpluses as unjustified and harmful especially for the United States. From the German perspective Trump’s focus on spreading protectionist measures at several levels is regarded as an outright assault on Germany’s economic business model. Thirdly, French president Macron’s proposals to reform the institutional framework of the eurozone reflect the traditional French position that progress in European integration can only be achieved by ultimately moving towards a federal model of governance. This approach challenges the traditional German insistence on reconciling liability and control in economic and fiscal policy. For Germany these developments are problematic because the country pursues two overriding priorities: maintaining momentum in European integration and preserving open markets in a liberal world order. Both are vital for cross-border business models characteristic of German industry and in turn also for large parts of the EU outside of Germany. The latter results from intermediate input linkages. Many jobs in Germany’s EU partner countries hence are also dependent on the success of German exports to the rest of the world and to the US. The purpose of the paper is to analyse possible scenarios which avoid the likely outcome of simply muddling through with Germany remaining a reluctant partner in the eurozone who is cherry-picking from French proposals. More is needed to stabilise the eurozone for the long term and to counter Trump’s “America first”-protectionism. The paper will discuss several options in the areas of foremost economic policy but also trade, foreign and security policy, which are currently under discussion in Germany and amongst its European allies.