The Weak Hegemon Problem
Germany is to the Euro zone what the US was to the world: a weak hegemon
In the many decades since World War II, the US morphed into a weak hegemon, providing financial support and military protection to the world, with little asked in return. Indeed, the current head of President Trump’s Council of Economic Advisors - Steve Miran - has argued that the US accepted an overvalued Dollar and large current account deficits as the price to pay for providing the rest of the world with a reserve asset, one particular manifestation of this. That depleted US manufacturing, making this act of economic altruism politically unsustainable.
Indeed, “Make America Great Again” is the inevitable backlash against this economic altruism. As I’ve shown in posts earlier this week, the US has a deeply segmented labor market, which left many - especially young men - on the sidelines. The Biden immigration wave - another act of altruism - collided with this labor market picture to make the backlash complete, setting the stage for Trump 2.0, which is all about making countries pay up for US military protection and economic support. Being a weak hegemon is therefore politically unsustainable. Economic altruism to the benefit of others doesn’t fly unless your economy is perfect.
Germany is to the Euro zone what the US was to the world: a weak hegemon. The umbrella of protection it provides to the Euro zone is its fiscal space, allowing highly indebted countries like Italy and Spain to keep borrowing from global capital markets at low interest rates, when - without German help - they’d have been shut out long ago. Indeed, the remarkable narrowing of Italy’s spread over German Bunds - as I argued a few weeks ago - is manifestation of this. Markets think elevated geopolitical risk - especially the war in Ukraine - makes Germany even less likely to exact a price for this protection. The weak hegemon of the Euro zone is becoming ever weaker.
The problem with this - as in the US case - is that it’s politically unsustainable. The German economy was already struggling before Russia’s invasion of Ukraine and it’s really struggling now. The rise of the AfD - like the rise of MAGA - is a symptom of this and will continue until Germany’s weak hegemon status ends: Germany will demand payment for its umbrella of fiscal protection and - unless that payment happens - this umbrella will be withdrawn.
This doesn’t have to be as apocalyptic as it sounds. Since its inception, the Euro has been a stand-off between high-debt countries in the South and low-debt countries in the North. For the past decade, the South has held the upper hand. Germany’s shift away from weak hegemon status will just be a renegotiation of this, which in many respects is overdue.
This is quite gloomy, almost echoing the Euro opponents of the late 90s who founded the AfD. It is unclear what Germany’s actual disadvantages from its Hegemon position are. It’s neither higher interest rates nor inflation. The widespread dissatisfaction in the population has more to do with immigration than with Europe. Since more than 50% of Germany’s export go to other European countries, I would argue that there is more benefit than downside to Germany’s role within the EU.
The germany export led economy has benefited greatly from the euro being weaker than the Deutschmark would have been in recent history.