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The Return of the German Question

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STOCK MARKET GERMAN DEBT
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It is now a commonplace that the inability of Eurozone decision-takers to halt the threat to the world economy from their benighted currency lies in a so far irreconcilable conflict between political and economic imperatives.

It is a bit like the age-old dispute between Israel and the Palestinians. We know exactly what has to be done to reach a solution. Its elements are before our very eyes. But the political will is just not there to make the deal.

The impasse has brought the return of the German Question, first posed early in the last century when politicians worried about accommodating within Europe a powerful, ambitious and newly created German state.

It took two world wars to thwart Germany's ideological and militarist ambitions. The big loser in western Europe from the rise of Germany has always been France - from the arrival of the Prussian army on the battlefield of Waterloo to ensure Napoleon's defeat in 1815, through the disaster of the Franco-Prussian War of 1871 and the blood-letting of the First World War, to the ultimate humiliation of defeat and occupation in the Second. No wonder the first priority of French foreign policy since 1945 has been Franco-German reconciliation.

The instrument of reconciliation has been since its foundation in 1958 what has today become the European Union. From the French perspective the Union entangles Germany in a web of multilateral and supranational obligations such that it can never "go rogue" and attack France again. This suits the Germans fine. I once heard Chancellor Kohl say that EU integration was the price Germany had to pay for being the dominant power in Europe. But, here is the rub. An integral part of that integration is the Euro, launched for largely political reasons. The only way that Kohl could get the German electorate to accept the loss of the trusted Deutschmark was by telling them that the Eurozone would be set up on the soundest of German fiscal principles. By definition this meant that all the Eurozone member-states would be able to abide by these principles.

But, this was a false prospectus and the German government knew it. It was rather, as a very senior member of the German Ministry of Finance told me at the time, a gamble, a leap of faith, not the mature reflection of economic and statistical evidence. The Germans were aware from the start that Italy was not fit for the Euro. But politics prevailed - how could you keep a founder-member of the old Common Market out of the Eurozone? They compounded the problem by letting in Greece, Portugal and Ireland. The hope, a vain one as it turned out, was that adoption of the Euro would itself be the catalyst for the spread of good German economic practice.

Now the chickens have come home to roost in the Eurozone sovereign debt crisis. Merkel's obsession with moral hazard at the expense of the German taxpayer is simply another way of telling the world that it's going to be Germany's way or no way. It is Kohl's old compact with the German electorate in 21st century form. The Euro is not going to be debauched by bailing out profligate states like Greece.

Only time will tell whether Merkel can hold firm to this position. Meanwhile, another ingredient is added to the toxic brew of economic and political calculation. It is almost a moral issue. What exactly is Germany's ambition? If you are Anatole Kaletsky in the Times this week, you believe that Germany is achieving economically what it failed to achieve militarily in 1939-45: a Europe that dances to the German tune. Even France, once seen as Germany's equal within the EU, is reduced to the status of junior partner as the yield on its bonds creeps upwards to almost twice that of Germany's.

Others talk of Germany as the reluctant European superpower, unwilling to take the responsibilities that come with this status, still psychologically scarred by the experience of the Third Reich. Either way the dilemma for Cameron is acute. How does he play the German Question? Should he create the third side in a Franco-British-German triangle? Should he ally himself with France in a ploy to balance Germany's power, redolent of the 19th century? Or should he side with the more powerful Germany, with whom, if the truth be told, our national interest is more closely aligned?

Britain has cards to play. In 1997, just before I became Ambassador to Germany, French officials told me that British adoption of the Euro was essential to balance German power. When I arrived in Germany to take up my job, German officials said exactly the same thing about the French. Little has changed since then as Franco-German tensions rise. Has Britain, under Cameron and Hague, the diplomatic skill to exploit this situation? The jury is out.

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