Germany Grapples With Role in Rescue

WSJ: BERLIN—As Europe careens deeper into political and economic crisis, the immediate survival of the euro turns more than ever on a single question: Will Germany act?

For nearly three years, Chancellor Angela Merkel has resisted pressure from European neighbors to provide a stronger financial backstop for the euro zone. Germany, the only euro-zone nation with the economic heft to do so, has done the minimum necessary to keep vulnerable countries afloat—and demanded crushing public-spending cuts in return.

Now, with Greece's euro membership hanging by a thread, Spain's banking system in deep trouble and concerns about Italy mounting, the German government must decide whether saving the euro is worth putting the country's own prosperity at risk.

"Germany should reflect quickly but deeply, and act," Italian Prime Minister Mario Monti said late last week.

Few Germans, however, share that sense of urgency. With German unemployment at a 20-year low and falling, and the country's economy continuing to grow despite the debt crisis, not many Germans see the crisis as a threat to their way of life.

Half the German population believes the common currency has been more of a negative than a positive for Germany, up from 43% in February, according to a poll released late last month by public broadcaster ZDF. Nearly 80% are opposed to proposals for euro nations to jointly sell and guarantee euro bonds. A solid majority believes Greece should leave the euro.

Critics of Germany's approach to the crisis, including France and Italy, have said that its strategy of trying to rebuild confidence by imposing harsh austerity measures on Greece and other countries has compounded the crisis, not eased it.

As the Spanish banking system teetered last week, European Commission officials proposed a Europe-wide "banking union" aimed partly at providing relief for Spain's enfeebled institutions and preventing trouble from spreading elsewhere. Minutes after the proposal was unveiled, Germany shot it down.

This week, with the crisis worsening, Ms. Merkel softened her stance, suggesting that the continent's largest financial institutions be placed under direct European Union supervision. Her remarks came after other German officials signaled that they may eventually accept euro bonds or similar measures if European governments submit to centralized fiscal controls.

Still, Ms. Merkel stopped short of endorsing more ambitious plans to safeguard the region's financial system or agreeing to let Spanish banks tap the euro-zone's bailout fund. German officials say any compromise would be contingent on euro-zone members agreeing to tougher, centralized fiscal controls, part of Ms. Merkel's recent call for "more Europe, not less Europe."

The deeper fiscal and political integration that would entail are distant goals that many economists and policy makers say may never be realized if Ms. Merkel doesn't take bold action soon.

"The German elite has not yet learned to lead. It really doesn't want this [role]," says Wolfgang Ischinger, a former German deputy foreign minister who is now chairman of the Munich Security Conference. "Leading in a democratic Europe requires being a benevolent hegemon, being generous and giving away a lot of money." Ms. Merkel's position, he says, reflects the prevailing feeling among Germans that "we've been generous enough."

The self confidence Germans have about their economic priorities is deeply rooted in the nation's postwar history. A dramatic revival in the decades that followed World War II—Germans attribute it to their collective Fleiss, or hard work—led to broad acceptance of the importance of price stability and fiscal restraint. Those beliefs are behind such government policies as Ms. Merkel's recently proposed "fiscal pact"—an effort to impose German fiscal standards across the EU with a treaty that would place strict controls on national budgets.

Tensions over Germany's economic prescriptions boiled to the surface last November during a German parliamentary delegation's trip to Athens. Within hours of the delegates' arrival, what was supposed to be a friendly fact-finding mission devolved into a tongue lashing, according to several people present.

Greek parliamentarians angrily accused Germany of having forced Greece to accept brutal austerity measures, these people say. Some vowed to reject further reforms and said that insufficient World War II reparations had contributed to Greece's debts woes. Germany's tight grip on bailout payments put their nation all but under its occupation again, they complained, according to several delegates at the meeting.

The Germans—even those at odds with Chancellor Merkel's Europe policy—left Athens stunned and frustrated. "They want us to give them money, but without conditions, without political influence," said Viola von Cramon, a Green Party delegate who was on the trip. "But what country would agree to do that?"

West Germans were willing to do something like that for their East German compatriots when the Cold War ended. They spent the equivalent of more than €2 trillion to achieve a historic political goal—Germany's 1990 reunification. Fifteen years later, Ms. Merkel became the first East German to serve as chancellor. These days, the prospect of unlimited transfers to Greece or Portugal in the name of European solidarity isn't an idea many Germans embrace.

"We can't simply socialize European debt," said Udo Vetter, partner and advisory board chairman at German family-owned Vetter Pharma GmbH in the southern German town of Ravensburg. "But Germany has a fiscal-stability culture that could be a recipe for success for the rest of Europe."

Germany's current ambivalence about aggressively safeguarding the euro zone signals a shift in its postwar thinking about Europe. After World War II, Germany often subordinated its short-term financial and political interests to gain the trust of its neighbors.

Today, most Germans don't want their past to define their dealings with rest of Europe. That is particularly true for younger Germans, for whom the war is the stuff of black-and-white documentaries and the reminiscences of their grandparents.

In a recent hourlong appeal to save the euro, former Chancellor Helmut Schmidt, who fought in the war, urged Germans not to forget their historical responsibility. "More than once we Germans have caused others to suffer because of our position of power," the 93-year-old elder statesman said. In a criticism of Ms. Merkel's demands for austerity from weak euro-zone nations, he warned that "whoever doesn't understand this original and still relevant reason for European integration is missing the indispensable requirement for solving today's precarious crisis."

Isabel Winzer, a 26-year-old art-history student who was in the audience, found the speech stirring but wasn't swayed by the history argument. Ms. Winzer, a former staffer for the center-left Social Democrats that Mr. Schmidt once led, said the appeal didn't resonate with a generation raised in an age of prosperity and peace. "For us, the peace argument is not so important," she said. "We never experienced war and we couldn't imagine it."

The prospect that Europe—and thus Germany—would lose its global economic influence if it didn't stick together was a more convincing argument, she said, echoing a commonly held view in Germany. But Ulrike Guérot, a senior fellow at the European Council on Foreign Relations in Berlin, says that economic rationale doesn't make for a persuasive rallying cry. "We keep trying these new narratives for Europe, but they can't compare to the motivating power that war, the Holocaust and the threat of Soviet domination had," she says.

Aleks Lessmann, 44, is a Bavarian political director for Germany's upstart Pirate Party, which has showed strongly in recent elections, especially with younger voters, with its platform of Internet freedoms and civil liberties. He says Germany—and Europe's—political leaders have failed to steer Europe out of the crisis because they lack such a grand vision.

"I understood the goals of the European movement of the '40s and '50s. We had a lot of wars. But where are we all going together now? What are the long-term goals?" he asks. "No one has been able to explain it to Europeans, and I suspect it is because they just don't have a big plan."

The hyperinflation that Germany experienced in the 1920s is often cited as the source of the population's ingrained fear of rising prices. A more recent financial trauma, however, was the currency reform that followed World War II. In 1948, Germans were forced to exchange their Reichsmarks for a new currency, the Deutsche Mark, in most cases for less than 10% of face value. Family savings were wiped out.

"We are always told we're the know-it-alls, that we think we know how Europe should do everything better," said Michael Stübgen, a German lawmaker in Ms. Merkel's Christian Democratic Union. "But we came to these [measures] based on our own experience."

Frankfurter Allgemeine Zeitung, an influential conservative daily, captured the prevailing German view in a recent front-page editorial. Countries that don't accept the necessity of austerity, the paper wrote, "mistook the euro zone for a paradise, where prosperity comes without hard work."

Ms. Merkel and her party colleagues have admonished countries to "do their homework" on the fiscal front.

That rhetoric plays well at home, but it has opened the kind of fissures with other countries that monetary union was supposed to help prevent. Many Europeans are frustrated by what they perceive as a German tendency to turn the crisis into a morality play about the virtues of frugality and diligence.

"Part of the problem is that Germany acts as if it's the only virtuous country in the world, as if Germany has to pay the bill for everyone else," Luxembourg Prime Minister Jean-Claude Juncker said recently. "That's hugely insulting to the other countries."

In the years immediately following the euro's introduction, Germany's heavily regulated economy lagged behind. Germany responded by keeping a lid on wages and reforming its labor market—the same medicine it now demands of others. Those measures paid off for Germany because of a booming global economy, and strong demand in the rest of the euro zone boosted exports. In the current economy, Spain, Ireland and Italy don't have those advantages.

Critics of Germany's approach to the crisis contend that if all euro-zone countries followed Germany's example by relying on exports and modest consumption, there would be no one to buy the goods. Germany is now the main beneficiary of the euro because the currency's relative weakness makes its goods more competitive in other parts of the world, these critics say.

These critics say that Germany's strategy is shortsighted. German companies and banks may have limited direct exposure to smaller countries such as Greece and Ireland, but they are heavily invested in Spain, Italy and France.

A potential euro collapse poses a significantly greater threat to the German economy than vouching for other countries' debt, they say. If the euro implodes, the value of a new German currency would surge, making the country's cars, machinery and other exports less attractive to other countries.

China, Brazil and other emerging economies have driven German export growth in recent years, but the euro zone still buys more than 40% of the goods that leave the country.

A growing number of economists are expressing doubts about the viability of the euro zone in its current form. Some southern European countries face years of recession and agony to restore their international competitiveness. Greece, where an upstart leftist party that vows to stop honoring the terms of the country's international loans may win the coming election, shows the potential for political backlash.

Germany, at the moment, doesn't appear to be overly concerned. In a week that saw Spain inch closer to the abyss and the euro dip to two-year lows against the dollar, German politicians and media were immersed in domestic issues, such as energy policy, child-care subsidies and the prospects for the national soccer team at the coming European championships.

At a conference in Brussels last week, Thomas Steffen, state secretary at the German finance ministry, responded to criticism that Germany had been too slow to help its neighbors by making reference to the fable of the ant and the grasshopper. The ant, he noted, works through the summer to store up food for the winter while the grasshopper wastes the warm months singing.

Some in the audience took the analogy as a call on southern Europe to take their fate into their own hands.

Mr. Steffen didn't tell audience members how the fable ends: When winter comes, the starving grasshopper begs the ant for food. Rebuking the grasshopper for his idleness, the ant turns his back and crawls away.

—Stephen Fidler contributed to this article.

Write to Vanessa Fuhrmans