Comment: Some Psychological Aspects of EMU

4 Colum. J. Eur. L. 487 (1998)

Doris E. Grimm. Counselor at the Embassy of the Federal Republic of Germany in Washington, D.C.

In my opinion, we live in a world largely driven by clichés and perceptions. The topic of Economic and Monetary Union (EMU) provides a good example of this. Many have long held the view that Europeans, with all their diversity and supposed incompatibilities, will never be able to reconcile themselves psychologically with the idea of having to abandon their national currencies. Even less could they psychologically accept obeying some distant body of faceless technocrats ruling out of the dismal German city of Frankfurt, where streets are deserted after six o’clock in the evening, and pedestrians respect traffic lights, even in the middle of the night.

Of course, I feel best-equipped to comment on such perceptions whenever my own country, Germany, is directly concerned. But first, please allow me to say a few words about my European neighbors. Based on my personal, subjective experience, people outside Europe sometimes underestimate how psychologically hard it was for the French, Spanish, Italians and others to see their currencies constantly depreciate. I am leaving aside the esoteric discussions of a few affluent economists about the competitive advantages certain industries might obtain from exchange rate depreciation. I am talking about the population at large.

Perhaps Americans do not have to worry about the exchange rate of the dollar, because they do not see exchange rate changes having any effect on their daily lives. However, the French, Spanish and Italians have experienced the effects of exchange rate depreciation very strongly-not as a boost to their economies, but primarily as a loss of wealth, a loss of real income, and as a kind of imposed impoverishment. I am not saying this perception was always justified, I am only discussing the psychological side of things at the receiving end of the line.

Contrary to certain rumors, I believe Italians never liked inflation. Psychologically, southern Europeans have always felt more like victims, not beneficiaries, of inflation and exchange rate depreciation. To them, the poor inflation records of their countries reflected the records of their often weak, cynical political leaders-it was not a record they would have chosen. The people of Italy and Spain always saw in exchange rate depreciation the principal constraint which blocked them from achieving the kind of living standard they saw their northern European neighbors enjoying. Therefore, getting rid of exchange rate depreciation is now perceived by large parts of the southern European public as a kind of liberation, a kind of long-deserved chance to finally move on to a better and safer neighborhood.

Some American economists often ask: Why on earth are the French and Latins so crazy about accepting German-style stability policies? I think these economists somewhat misread the psychological forces at work among the peoples of Europe. The French, for example, have a long tradition of sometimes being very psychologically “fixed” on even extreme degrees of “monetary stability.” Their long-standing, almost metaphysical, love affair with gold as the ultimate coinage of hard currency is well documented. Barry Eichengreen and others have argued that the excessive insistence of the French on “monetary stability” in the 1920s was one of the deeper causes of the worldwide depression starting in 1929. Psychologically, the French always wanted the franc to be a strong franc, for the franc to be one of the hardest currencies in the world. This is precisely why they found exchange rate depreciations, particularly against the deutschmark, so humiliating. I know that, economically, this way of thinking makes no sense at all. But, economic analysts sometimes underestimate the psychological reality of this. For the same reason, I am not at all personally concerned that the French might secretly seek a soft euro. I am convinced that the French honestly do want a strong euro, because-psychologically–they will be looking at it as a strong franc. And that is fine with me.

In brief, I find somewhat exaggerated the typical characterization of the EMU negotiating process as a competition between different types of economic regimes or preferences. Many international economists like to emphasize how similar broad patterns of economic behavior-social protectionism, risk-aversion, etc.-are in all of the EMU countries. Are not these same economists telling us that, when it comes to economic policy, all Europeans have been making the same mistakes? I personally think the EMU negotiating process is driven much more by the psychological need for a “fair” distribution of decision-making power inside Europe, rather than by a fight about the types of decisions to make.

How about the psychological readiness of my own country? We have heard over and over again about the powerful psychological role the deutschmark has played in post-war Germany as the only national rally point left for the German people. Later, it was even to become the defining symbol for East Germans as well. This perception of our post-war identity certainly contains a great deal of truth. But it may not be one hundred percent complete, and these types of moods or mind-sets are not totally static. Another hugely important psychological feature of post-war Germans, I believe, is our passion for travel- and not just because of the lousy weather back home. In fact, our passion for a strong currency and our passion for travel may even be closely interrelated. Older Germans love the deutschmark, because their parents still remembered the 1920s, when the mark was like the lira today and the franc was like the mark. Younger Germans love the mark because, thanks to its purchasing power abroad, they can travel as much as they do. But things do not stop here. Their travel experience, combined with the strength of the mark, induced many Germans to purchase second homes abroad. Millions of Germans chose to retire in Spain. Although many Germans learned the language of their preferred summer holiday destination, the Spanish recently had to start a public campaign to keep the island of Mallorca bilingual. So many Germans live there, the authorities felt some need to maintain the Spanish language on the island. I believe that Germans’ increasing familiarity with other European countries has changed somewhat the psychological setting in Germany. Now that we have actually established some presence in other European countries (and in many cases even acquired wealth there), I believe we now appreciate it more and more when certain material and operational standards in these countries become as high and good as we, psychologically, want them to be. As frequent visitors to Spain, we no longer want the peseta to be weak or cheap. Rather, we want real estate values in Spain to rise, and we want to be able to earn real income on Mallorca that is as high as that earned in Munich.

I still believe that sustained currency appreciation is a very smart way to improve living standards for people with no wealth. Twice in this century, we Germans have lost all our wealth; wealth which we otherwise could have passed on to our children. Twice in this century, our families had to start from scratch. Now we again possess accumulated wealth. The generation now poised to take over the country is the first generation in one hundred years to inherit considerable wealth. And I believe our psychology has probably evolved somewhat in parallel: from the psychology of wage-maximizing workers on a package-deal tour, to the more mature psychology of wealth owners. We feel safer and can afford to consider a broader range of investment opportunities. And, we know Europe as a whole relatively well. Again, I am not talking about a sophisticated, narrow, upper-class elite. I am talking about our population at large.

Partly as a result of this, issues such as the need to harmonize economic conditions and standards across Europe in order to make Europe a single economic space (a truly single market), and the need to raise standards that may still be lagging behind the European norm, are intuitively well understood by our broad public, even by those who still express skepticism in the polls about the details of a single currency. This high degree of awareness of how dependent our own well-being is on the well-being of our neighbors characterizes not only the German public of today, but also the public in all EMU countries. By my experience, this awareness is psychologically far more deeply entrenched in Europe than in America, for reasons not difficult to understand. In my view, this is also the principal reason why some of our local politicians, who in recent local elections attempted to run on a moderately Euro-skeptical agenda, failed miserably. In Germany today, tentative appeals to slow down or reconsider the pace of European integration are intuitively disbelieved by voters from all relevant parties. It seems that Germans now identify with the idea of a unified Europe just as strongly as they used to identify with a strong mark.

One may say that this all sounds very nice. But is this not the typical opinion of a selfish, materialistic, saturated West German who wants to keep what she has, having little concern for the more immediate and pressing needs of poor eastern Europeans (including her East German compatriots)? Again, I will discuss neither economics nor foreign policy, since I am speaking of psychology. True, our psychology may indeed include a dose of West German selfishness and arrogance. But, I also happen to believe that it would be well within the interest of our eastern neighbors if we maintained at least some of that. If I read our eastern neighbors correctly, they do not wish to join in a new central European economic area with Germany alone. They want to join and become part of Western Europe. Given the magnitude of their trading relationships with Germany, they can only achieve their goals if Germany remains subdued under a firm, broad and indestructible Western European roof. Our eastern neighbors can only be expected to accept close and strong economic ties with Germany when Germany is part of a larger political and economic entity; an entity which will be at least as much French and Latin as German. Perhaps this is precisely why all our eastern neighbors (and here, again, I mean the broad public) subscribe so enthusiastically to the ideals of the European Union. Understandably and legitimately, they find this much more attractive than just “linking up with Germany.” If Germans maintain and continue to deepen Western European integration, I am convinced that we are doing exactly what eastern Europeans want us to do.

I should not conclude without bringing East Germany and the return of our capital to Berlin into the picture. Is Germany condemned to become less “western,” simply because Germany’s inner center of gravity is shifting eastward once more? Again, one should not ignore the psychological side of things. As is perhaps clear from reading American newspapers, many East Germans do not like West Germans. This is surely a somewhat sad state of affairs for Germany, but it may be quite positive for Europe. Many East Germans actually seem to like the British and French better than West Germans, and the highest market share of French cars outside France–believe it or not- is in East Germany. The East Germans do not mind an integrated Europe, partly because they sense it will mean less power for West Germans. They find this psychologically satisfying, apart from the more material fact that regional aid flowing from Brussels into eastern Germany is not insignificant.

And Berlin? Will Berlin relate to Brussels in the same way Bonn has? Needless to say, I strongly hope that Berlin will again become the dynamic and attractive cosmopolitan cultural laboratory it was in the 1920s. This would be invaluable for Germany as a whole. But there is one thing Berlin will never be again: the capital of Prussia. Prussia is dead and nobody can resurrect it. Nobody in Germany today has any doubt that southern and western Germany’s spectacular post-war comeback–economically, politically and historically-will be of a permanent nature. Our chemical companies will continue to operate out of the Rhineland, our luxury cars will continue to come out of the far southern parts of the country, and Frankfurt will remain our financial center. The people of these western and southern regions are far too committed to allow any reversal of this new, but already confirmed, historical pattern. This pattern underlies another psychological reason why they are so firmly committed to  European integration at the same time: The Germany of the future will remain a “Germany minus Prussia.” Perhaps this hardly-noticed change in domestic German psychology may even be the deepest secret behind the successes of European integration and the strides toward achieving European Monetary Union.