Just another week in British politics

A new Brexit plan creates fresh depths of chaos

And the worst is yet to come



A REALLY sensible government would have drawn up a plan for how to leave the European Union before calling a referendum on whether to do so. A sane one would have devised a strategy before triggering exit negotiations. Britain, by contrast, announced its departure plan on July 6th, when three-quarters of the time it has for talking to Brussels had already been used up. And even then the long-overdue reckoning with reality sent the government reeling.

Two cabinet ministers and two Conservative Party vice-chairmen have quit; the foreign secretary, Boris Johnson, said in his resignation letter that the Brexit “dream is dying”. Those abandoning ship are furious that Theresa May has dropped a hard separation from the EU for a softer deal, preserving many legal and economic ties. For now, the prime minister seems unsinkable (wooden objects tend to be). But her belated move towards a realistic Brexit has just begun. As the truth sinks in, more turmoil is in store. The task for Mrs May and the EU is to ensure that the Brexit project does not descend into anarchy.

Mrs May’s Brexit plan marks a decisive shift. Her approach had previously consisted mainly of ruling things out: no single-market membership, no free movement of labour, no obedience to foreign judges. Now she has said what she wants. She proposes that Britain remain, in effect, in the single market for goods, and in a looser system of mutual recognition for services. In return she promises not to undercut EU standards for the environment, social policies or state aid. She proposes a dispute-resolution mechanism that implies a role for the European Court of Justice. And she suggests that Britain stay in a customs union with the EU until a clever new tariff-collection mechanism can be set up (which may well mean for ever).

This is Mrs May’s most realistic plan so far, and yet European leaders will demand that she go further. They say she has still not made clear how Britain plans to avoid a hard border in Ireland, something they insist is settled before any deal can be signed. Britain is likely to be told that, if it wants the benefits of the single market for goods, it must seek membership of the whole thing—which in turn means observing other rules, including free movement of labour. The EU will probably want ongoing payments into its budget, too.

This will lead to a Brexit that satisfies almost nobody. Hardline Brexiteers already feel betrayed. This week Mr Johnson complained that Britain would be subject to EU laws without having a say in how they were made, and that obeying these rules would make it harder to do trade deals with other countries. That is true, and adding in budget payments and free movement will surely prompt further cabinet resignations and backbench rebellions.

Remainers are hardly jubilant, either. Many, including this newspaper, see ending up in a situation similar to Norway, bound to the EU but with little say in how it works, as the best Brexit possible—and certainly less bad than the hard sort, which would cause enduring harm to the country’s prosperity. But a soft Brexit is so obviously worse than what Britain has today as a member of the EU that it would underline more clearly than ever the folly of leaving.

As a result Mrs May might struggle to get a deal through Parliament, even though most MPs probably favour a soft Brexit. Although pragmatic Brexiteers and Remainers may back her, hardliners may be tempted to hold out for either a harder deal or for stopping Brexit altogether. Her task will be further complicated by Labour under Jeremy Corbyn, which has yet to produce its own coherent plan. It is likely to put party before country by voting against whatever deal Mrs May brings home, in the hope of bringing down the government. That means even a small rebellion by Tory hardliners could be enough to defeat the plan.

Where does this leave Britain? Do not look to Brexiteers for answers. Although they complain that the people have been betrayed, they have still not explained how Britain could cut all ties with the EU while preserving trade links to what is by far Britain’s largest market. Mr Johnson did not even mention Ireland in his resignation letter this week. It is as if Brexiteers have spent so many years in opposition attacking the EU that they are flummoxed by the idea of coming up with a workable plan. While Mrs May at last faces up to the painful trade-offs that Brexit always required, those who condemned her this week prefer to indulge their fantasies.

The EU could help—and has reason to. It is reluctant to give Britain a bespoke deal, for fear that its other restless members will angle for special treatment, too. This is why Eurocrats solemnly vow that nothing must undermine the single market.

But if the Brexit negotiations fail, and Britain crashes out without any deal at all, it would cause grave damage across Europe and beyond. And in some areas the EU has an incentive to offer concessions. The most glaring is security, where its hardline position is self-defeating. Britain is one of Europe’s two big military and intelligence powers. Limiting its role in projects such as the Galileo geolocation system, at a time when America is wavering on its NATO commitments and Russia is stirring up trouble, endangers all Europeans. Bending rules such as freedom of movement is harder. But the EU can help give Mrs May the cover she needs to sell the deal at home. If she wants to replace free movement with a “mobility framework” that does much the same thing, let her. If she wants market alignment on goods but not on services, so what?

Throw her a lifebelt

And if Mrs May cannot win a Brexit vote? Then the EU should be prepared to grant Britain more time, to avoid it crashing out without a deal. To break the parliamentary impasse, Mrs May might have to go back to the people, either with yet another election or even a second referendum, setting out a concrete plan for Brexit rather than the vague, incompatible promises put before voters the last time round.

That Britain has at last set a course for a soft Brexit is welcome. Getting there will be a very rough crossing indeed.

The irremediable folly of a ‘no deal’ Brexit

Claims that leaving the EU will boost growth rest on questionable assumptions

Martin Wolf


Airbus has threatened to pull out of the UK completely in the event of a 'no deal' Brexit © Bloomberg


Important businesses are losing patience with the UK government over progress — or rather lack of it — in the Brexit negotiations. With just 10 months to go before Britain leaves the EU, that is entirely comprehensible. Airbus, for example, has threatened it might pull out of the UK altogether if no trade deal were agreed. Amazingly, Jeremy Hunt, health secretary, responded that it was “completely inappropriate for businesses to be making those kind of threats”. Is this the “party of business”?

Rival politicians are competing for the favour of their base. But some actually believe a “no deal” Brexit is a credible option, possibly even an attractive one. For support, they can appeal to Economists for Free Trade. While theirs is a minority position among economists, it must be evaluated, not only because some members are reputable, but also because it is influential in Brexiter circles. Two recent papers — Alternative Brexit Economic Analysis and What if We Can’t Agree? — lay out the group’s arguments for the superiority of a clean break over remaining inside the customs union and single market.

There has been an extensive debate about the best economic models to use. In recent work, this group simply argues that “if the correct Brexit policies are fed in, it seems that all of the models produce directionally the same results — all clustered around a positive 2 per cent to 4 per cent of GDP range” from unilateral free trade, under World Trade Organization rules. Yet such results are the opposite of those of almost all other economists. The differences are due to varying assumptions, as Alasdair Smith of Sussex University told the House of Commons Treasury and International Trade Committees’ joint inquiry in May.

These are the group’s key assumptions. The cost of EU membership is not the 4 per cent tariff consistent with its overt trade policy instruments, but actually 20 per cent, because of covert regulatory barriers. Under a clean Brexit, much, or even all, of these burdens could be eliminated.

Furthermore, no additional tariff, transaction or regulatory costs would fall on UK exports from trading under WTO rules. The justification for this extraordinary assumption is that, under unilateral free trade, UK producers will sell everywhere at the “world price”. Consequently, the costs of EU tariffs and other barriers will fall entirely on the EU’s purchasers. Another justification is that WTO rules prohibit discriminatory barriers and eliminate nearly all transactions costs.

In addition, unilateral free trade is equivalent to general free trade or at least gives a lower bound to the benefits of having many free trade agreements.

These are loaded assumptions.

First, the notion that EU barriers have a tariff equivalent of 20 per cent is highly questionable. Yet let us accept it. The free trade group seems to assume that the UK will sweep away vast numbers of unspecified regulations on, let us say, pharmaceuticals, chemicals, motor vehicles, children’s toys or food. Will the public really accept elimination of such notionally burdensome regulations?

Second, if this estimate of EU protection is correct, barriers equivalent to an average tariff of 20 per cent will face UK exports to the EU, in the absence of a trade deal. The group’s apparent belief that this will not be costly rests on the idea that the UK’s biggest market has no market power. That is incredible. Tell Airbus it can sell its wings freely at a known “world price”. The idea of homogeneous products traded freely at world prices, anywhere, is absurd.

Third, the idea that trading from outside the customs union and single market is going to be frictionless is implausible. It is certainly not what business believes. If our newly deregulated haven for dangerous goods wants to export, the EU is going to make sure that its regulations really do apply. That is going to be “frictionful”, especially in the short- to medium- term, as businesses warn. The Brexit Files: How will leaving the EU affect the UK economy?

Fourth, the idea that the WTO will be able to protect the UK is a delusion: its dispute-settlement system is ponderous, and toothless; the US is at present engaged in destroying it; and, above all, the EU may well not view as sacrosanct the WTO rights of a country exiting without meeting its obligations. Who will make them think otherwise?

Finally, as Prof Smith notes, unilateral free trade will almost certainly increase the adjustment shock. In the long run, everybody might be better off, but the long run might be very long. Free trade overnight would be a big shock. One should never ignore such costs.

In sum, the idea that a “no deal” Brexit would bring large benefits and next to no costs is simply incredible. The government has flirted with the “no deal” option. It should forget it.


Hollywood ending

Can Netflix please investors and still avoid the techlash?

Its content consumes 20% of the world’s downstream bandwidth



BIG technology firms elicit extreme and conflicting reactions. Investors love them for their stellar growth and vast ambition: the FAANG group of technology stocks, comprising Facebook, Amazon, Apple, Netflix and Alphabet (Google’s parent), is worth more than the whole of the FTSE 100. Without them to power its growth, America’s stockmarket would have fallen this year. Yet the techlash has also entangled the digital giants in all manner of controversies, from data abuse and anti-competitive behaviour to tax avoidance and smartphone addiction. They have become the firms politicians love to hate.

All but one. Alone among the giants, Netflix is a clear exception to this mix of soaring share prices and suspicion. Since its founding in 1997, the company has morphed from a DVD-rental service to a streaming-video upstart to the world’s first global TV powerhouse. This year its entertainment output will far exceed that of any TV network; its production of over 80 feature films is far larger than any Hollywood studio’s. Netflix will spend $12bn-13bn on content this year, $3bn-4bn more than last year. That extra spending alone would be enough to pay for all of HBO’s programming—or the BBC’s.

The 125m households the company serves, twice as many as it had in 2014, watch Netflix for more than two hours a day on average, eating up a fifth of the world’s downstream internet bandwidth. (China is the one big market where it is not allowed to operate.) Its ascent has mirrored the decline of traditional television viewing: Americans between the ages of 12 and 24 watch half as much pay-TV today as they did in 2010.

Uniquely among tech upstarts that have reshaped industries in recent years, Netflix has wrought its transformation without triggering a public or regulatory backlash. With a share price that has more than doubled since the start of the year, it is as popular with investors as it is with consumers. All of which raises three questions. What are Netflix’s lessons for other media firms? What can the rest of the FAANGs learn from its success? And can it go on keeping everyone happy?

Hollywood ending

Start with other media firms. Moguls who once happily handed their content to Netflix as a source of extra revenue are now scrambling to compete with it. The result is a dealmaking frenzy, with AT&T buying Time Warner, and Disney and Comcast fighting over bits of 21st Century Fox. Consolidation is only part of the answer for conventional entertainment firms, however. They must also follow Netflix’s lead and use the internet to offer consumers lower prices and more choice. Netflix now has more subscribers outside America than inside it. From Mexico to India people stream “Narcos” and “Stranger Things” in a planet-wide community of binge-watchers. It makes expert use of data, categorising individual users’ preferences into about 2,000 “taste clusters”, to serve up different shows to different users, including within the same family, via targeted recommendations. This combination of scale and data science has long been a hallmark of tech firms. Amazon, Disney and others are refining their own direct-to-consumer video services. But most media firms have a lot of catching up to do.

Other tech giants can also learn from Netflix. Compared with the other FAANGs, the firm is distinctive in several ways. Unlike Facebook and Google, Netflix has steered clear of news and mostly stuck to entertainment. That has protected it from scandals over fake news, electoral manipulation and political tribalism. And unlike those two ad-based platforms, its subscription-based business model means that the firm does not rely on selling users’ data or attention to outsiders. Instead, it offers customers a simple exchange: a monthly fee in return for television they want to watch. Unlike all the other FAANGs, which are global but unmistakably American, Netflix is becoming truly international: it makes TV shows in 21 countries, dubbing and subtitling them into multiple languages. The other tech firms are not about to rip up their business models; they work too well. But they can still learn from Netflix: to use data with greater care, to be clearer about the terms of trade with their customers and to be more respectful of local markets.

Next up: house of cards

If such traits help to explain why the firm has avoided the techlash, they do not ensure it can keep everyone happy. The short-term danger is financial. Frothy valuations are commonplace at the moment, but Netflix still stands out. To justify its current valuation, Netflix’s gross operating profits in a decade’s time would have to be equivalent to about half of all the profits made by American entertainment firms this year. “If Jesus were a stock, he’d be Netflix,” one savvy investor is said to have observed. “You either believe or you don’t.”

There are plenty of reasons to doubt. The company has amassed $8.5bn of debt. Reed Hastings, its chief executive, has said it will continue borrowing billions “for many years”; free cashflow is expected to remain negative for some time. That strategy will pay off if Netflix can raise prices while continuing to add subscribers—26m in the 12 months to March 31st. But competition is becoming more intense. And in countries without “net neutrality” protections, owners of wireless or broadband infrastructure that also control content-makers may use their distribution clout to favour their own material.

The long-term risk for Netflix, paradoxically, is if today’s dizzying valuation proves not to be too high, but accurate. The techlash has been driven partly by fears that centralised digital platforms will end up throttling competition (see our special report). Some suspect that Netflix harbours ambitions to monopolise TV. Such a move would concentrate enormous amounts of cultural power in the hands of a few content commissioners and algorithms. It would hollow out support for public-service broadcasters, by reducing their audience, and risk leaving poorer users with fewer affordable entertainment options. And it would inevitably find it much harder to avoid the attention of regulators. Here, then, is a final lesson that applies to Netflix, and all tech firms. To keep consumers, regulators and politicians happy over the long term, there is no substitute for competition.


The Battle for Germany’s Soul

Carl Bildt

Protesters wave German flags, alongside a banner saying 'Rapefugees Not Welcome'


STOCKHOLM – One year after the death of former German Chancellor Helmut Kohl, the country he led for 16 years seems to be struggling with whether or not to follow his legacy.

For Kohl, Germany’s history and central position in Europe meant that it must never pursue national greatness as an end in itself. To his mind, the country with more neighbors than any other country on the continent should not throw its weight around. Rather, it should uphold an idea of Europe in which all countries, large and small, feel equally secure.

But since the start of the refugee crisis in the fall of 2015, Kohl’s vision of Europe has been under attack. While Chancellor Angela Merkel has continued to press for cooperative migration and refugee policies within the European Union, a growing chorus of voices in Germany is advocating unilateral action that would most likely come at the expense of other EU member states.

On the surface, the debate consuming Germany nowadays is about whether to turn away asylum seekers who have already been registered in other EU countries, as the federal interior minister, Horst Seehofer of the Christian Social Union (CSU), has advocated. But at a deeper level, the question for Germany is whether it should go it alone or continue to seek common European solutions.

In this new age of identity politics, the dispute over immigration has become a battle for Germany’s soul. Last September, the Alternative für Deutschland (AfD) became the first far-right party since the 1960s to enter the German Bundestag. Then, after the formation of the current grand coalition government, the AfD became the main opposition party. And now it is pushing the CSU further to the right in the lead-up to Bavaria’s regional election this October.

These developments in Germany are in keeping with trends across Europe, where nationalist and populist parties have made electoral gains by rejecting EU-level solutions and calling for closed borders. In Italy, the nationalist League party appears to be calling the shots in its new governing coalition with the populist Five Star Movement. And in Austria, the far-right Freedom Party is exerting its influence on migration policies as a member of the governing coalition.

If one were to listen to these parties’ rhetoric, one might think that refugees and migrants are pouring into Europe unhindered. But while the Balkans did become a highway for asylum seekers fleeing Syria for Germany and Sweden in 2015 and 2016, that route was effectively closed down when Turkey agreed to host refugees in exchange for EU financial aid. And though the refugee situation in the Central Mediterranean continues to make headlines, the number of migrants crossing from North Africa has actually declined sharply over the past year.

Still, immigration has remained a hot-button issue across Europe, owing to the shock of the initial refugee crisis, which still reverberates in voters’ minds. Politics is about perceptions, not raw numbers. And populist and nationalist parties have managed to paint a picture of a Europe under siege.

In the current political environment, if Germany were to send refugees back to Austria, then Austria would almost certainly send them back to Italy. But that would take the EU back to the same situation that it was in before, when asylum seekers were not being registered on arrival in Italy, and when it was all the more difficult to turn them back at other borders. Inevitably, the situation would degenerate into a volatile mess, with EU member states pitted against one another, and populists commanding center stage.

Kohl’s Germany, by contrast, would consider the European dimension of its policies and shape them accordingly. It would not simply dump its national problems on its smaller neighbors, because it would recognize that their security is synonymous with its own.

The attack on Kohl’s vision by nationalist forces could have ramifications well beyond the immigration debate. At stake is not just Germany’s role in Europe, but also the future of European integration. A Germany that abandons Kohl’s legacy would suddenly become a source of deep uncertainty, rather than a bastion of stability at the center of Europe. With the West already under attack by the likes of Russian President Vladimir Putin and US President Donald Trump, that is the last thing Europe needs.

To be sure, the immediate crisis will most likely be resolved through a series of imperfect compromises – both at the EU level and within Germany’s governing coalition. That, after all, is often how the EU works, as in the case of the Greek sovereign-debt crisis.

The matter is unlikely to end there. German wavering on Kohl’s legacy is a trend that is larger than any single issue. But how the refugee debate plays out in the coming weeks will reveal much about Germany’s future direction – and about the future of Europe.


Carl Bildt was Sweden’s foreign minister from 2006 to October 2014 and Prime Minister from 1991 to 1994, when he negotiated Sweden’s EU accession. A renowned international diplomat, he served as EU Special Envoy to the Former Yugoslavia, High Representative for Bosnia and Herzegovina, UN Special Envoy to the Balkans, and Co-Chairman of the Dayton Peace Conference. He is Chair of the Global Commission on Internet Governance and a member of the World Economic Forum’s Global Agenda Council on Europe.


In Search of a Third German Economic Miracle

By Jacob L. Shapiro

 

Germany’s economy is in trouble. According to the Ifo Institute, a top German think tank based in Munich, “storm clouds are gathering over the German economy.” And like a storm, the problems have appeared suddenly. It was only a year ago that Handelsblatt, a German business newspaper based in Dusseldorf, said that 2017 was to be a record year for the German economy and that prospects looked good for the future. It was only six months ago that the International Monetary Fund marked up its forecasts for German economic growth in 2018, and just five months ago that the German government revised its own growth forecasts up to 2.4 percent from 1.9 percent. And it was only four months ago that the EU patted itself on the back for its largest growth rates in a decade, credited largely to Germany’s economic revival.
That all seems like a long time ago now. Die Welt, an influential conservative daily, proclaimed on June 19 that “the second German economic miracle is over.” The Ifo Institute recently cut its growth forecast to 1.8 percent from 2.6 percent; another Berlin-based think tank called DIW slashed its forecast to 1.9 percent this year and 1.7 percent next year. Official German economic data showed that growth in Q1 of this year was half the rate of the previous quarter. Q2 followed with decreases in industrial production and industrial orders – bad omens for the near future. On June 20, Daimler AG, one of Germany’s most visible and important companies, “adapted” its earnings expectations. At least the German penchant for euphemism remains undiminished.

The media narrative that has fast taken hold puts the blame on U.S. protectionist policies. To be sure, U.S. President Donald Trump’s menacing tweets about slapping 20 percent tariffs on imports of German cars have not helped matters for Germany. But that is not the primary cause of Berlin’s troubles. It is also tempting to ascribe the instability in the German economy to the political strife in Berlin, where Chancellor Angela Merkel’s every statement is being nervously parsed for signs of weakness. The ties that bind Merkel’s Christian Democrats and their Bavarian sister party, the Christian Social Union – a political alliance that has lasted 69 years – are fraying. But the truth is that Die Welt has it right.

Germany’s economic problems are structural, an inevitable outgrowth of the same aspects that catapulted Germany from stagnation to the European economy’s only hope after the 2008 financial crisis.
 
Germany’s first economic “miracle,” the so-called Miracle on the Rhine, came after World War II. West Germany’s rapid recovery from that war was stunning but, in the literal sense, not quite miraculous – unlike a miracle, West Germany’s regeneration was very explicable.

First, there was a population explosion. West Germany, which on the eve of World War II looked like a demographic nightmare, saw its population grow by 28 percent from 1950 to 1970, with an average total fertility rate almost double the current 1.5 percent. Second, the Nazis left Germany with a haunting moral inheritance but bequeathed to West Germany a tremendous economic head start. The Allies succeeded at damaging only about 20 percent of the German industrial plant by May 1945, and the Nazi government’s massive investments in new industrial equipment and its focus on industries such as engineering and vehicles made German production of these goods world class. In other words, Germany wasn’t known as a manufacturing powerhouse before the 1950s. And then there was the immense support of the United States, which needed to rebuild West Germany to hold the line against the Iron Curtain. Through the Marshall Plan alone, the U.S. contributed $1.45 billion (about $13.77 billion today) to West Germany’s reconstruction.
 
For almost four decades, the West German economy hummed along, until the Soviet Union unexpectedly collapsed in 1991. Most economists believed that German reunification would cripple the West German economy. Indeed, the early results weren’t pretty. All told, Germany spent roughly 2 trillion euros ($2.3 trillion) to provide East Germans with social benefits, to rebuild East German infrastructure and to offer a 1:1 exchange for East German currency. The situation was so grim that by 1999, an Economist report concluded that Germany was consigned to the role of “sick man of Europe” for the foreseeable future. The coup de grace of the analysis was a comparison of the freshly unified German state to the sclerotic Ottoman Empire on the eve of its collapse. At first, it seemed like the correct analysis. In 2003, after years of stagnant growth, the German economy shrank by 0.71 percent.
 
But then, Germany took off once more. The recipe for the second German economic miracle bore little resemblance to the first. Germany’s fertility rate continued to decline throughout the 1990s and 2000s. But Germany compensated for this by taking advantage of cheap labor in Eastern Europe. By relocating production to the east and introducing German technology and industrial production methods, costs plummeted and productivity soared. The establishment of the common currency in 1999 helped make German goods more competitive throughout Europe and put an end to the volatile effect German boom-and-bust cycles had on the deutsche mark. Good policy also helped. Brought to economic crisis and sporting stubbornly high unemployment rates relative to the rest of Europe, especially in the former East Germany, the German government had no choice but to enact major labor market reforms as well as large cuts to the aging country’s long sacrosanct welfare state.

The combination of these developments worked. The German economy went from shrinking to growing at almost 4 percent annually. But the seeds of the current crisis were laid in the very solutions that allowed reunified Germany to prosper. Germany became addicted to exports to fuel its economy. In 1991, Germany’s economy depended on exports for 27.3 percent of its gross domestic product. According to the World Bank, that figure had climbed to 46.1 percent by 2016. For the Eastern European countries that have become part of the German supply chain, this number is astronomically larger.
 
Furthermore, the labor reforms that kick-started the German economy and reduced unemployment to record lows had an unfortunate byproduct: economic inequality. In many cases, the rich got richer while the poor simply got less generous government benefits. Monetary easing policies enacted after the 2008 financial crisis aggravated the problem, to the point that Germany now has the second-highest wealth inequality rates among Organization for Economic Cooperation and Development countries (only the United States outdoes Germany in this regard).

These are the real problems Germany faces. There are no more labor productivity gains to be made – Eastern European labor productivity rates surpassed that of German workers years ago. There are no more babies to be had – fertility rates hit a 43-year high in 2016, but at 1.59 it is still far below the replacement rate of 2.1, and its population is one of the oldest in Europe. There is no new, large market to sell to – China is trying to increase domestic demand, the U.S. has turned protectionist, Europe is oversaturated, and the purchasing power of the average Russian wouldn’t make much of a difference even if EU sanctions weren’t preventing Russian-German economic relations from deepening. And all of this is to say nothing of Germany’s antiquated education system, high corporate tax rates, 20th-century digital broadband connectivity infrastructure and hierarchical company structures that stifle innovation. Even in the areas where Germany is supposed to excel, like cars, Germany’s best days seem behind it. Volkswagen, Audi, Porsche, BMW and Daimler have now all been accused of distorting emissions and are recalling hundreds of thousands of vehicles in what has become known as “Dieselgate.” Last but not least, Germany’s banking system is in shambles.
 
There is a silver lining to these clouds, however. Germany is not in the throes of a crisis yet – it is standing on the precipice. And when modern Germany (i.e., post-1871) reaches serious moments of crisis, petty political squabbles are usually put aside, and the German population responds with a social discipline that few other nations in the world have ever matched. For example, Germany’s industrial plant survived World War II intact, but the German rail system did not. On V-Day 1945, only 10 percent of German railways were operational. Just 13 months later, West Germany had rebuilt 93 percent of its railroad system, which included repairs on 800 bridges. Germany had advantages – not the least of which was U.S. economic aid – but what Germany was able to do with that aid was nothing short of remarkable. The same can be said of Germany’s rapid recovery from its integration of East Germany and its subsequent sickness of the late 1990s, a process that would have crippled less coherent nations.

The missing piece in all this is where Germany is going to find productivity gains. In the 1950s, it was the population explosion, and in the 2000s, it was Eastern Europe. The only saving grace of the German economy right now is healthy domestic demand, but current levels of domestic demand cannot make up for the over-reliance Germany has developed on exports. Perhaps Merkel’s plan with refugees and migrants all along was to infuse Germany with a fresh batch of young people, her own version of the West German guest worker agreements of the 1950s, ‘60s and ‘70s. Perhaps her idealism was so fervent that she believed any Syrian or Somali or Afghan could be integrated into a Germany that had left its past behind and embraced the idea of a cosmopolitan, multicultural Europe. Japan is in many ways the mirror image of Germany, with a shrinking population and export dependence of its own, but Japan prepared for its current predicaments by sacrificing growth for almost three decades. Germany took the money and ran – and now the bill is coming due.
 
The inequity of Germany’s predicament is hard to escape. Germany is simultaneously the boogeyman and savior of the European project. German economic growth and Germany’s handling of the 2008 financial crisis made eurozone countries extremely uncomfortable – that is, until the prospect of German economic growth stalling became a realistic possibility. Germany’s consistently paltry defense spending – well below the agreed-upon 2 percent by NATO countries – is a problem for its NATO allies. But if Germany actually began remilitarizing, hysteria about the imminent return of Teutonic knights, Frederick the Great’s tall Prussian soldiers and Nazi Panzer divisions would soon ensue. Even now, as anti-German sentiment has increased across the European Union, pro-EU officials look to Berlin for the answers. So far, the best response they’ve gotten appears to be, “Ask Paris.”
 
And yet despite this dissonance, the fear is not exactly unreasonable. Germany’s predicament may be unfair – but then, Germany has much to pay for. The hypocrisy of Germany’s enforcing austerity on Greece while it sat on large trade surpluses, or its lambasting the United States without any sense of appreciation for the tax dollars U.S. citizens sent to rebuild a once-mortal enemy seems lost on a German government that, with the best intentions, believed the lions had already lain down with the lambs and the swords had already been beaten into plowshares. Now Germany, which ascended to its position on the backs of the euro and the U.S., must look to its own national interests, and try to defend them without imposing its will on its European neighbors. If Germany can find a way to do that, perhaps there is room in history for miracles after all. Either way, the storm clouds are gathering, and the world waits to see if lightning will strike a third time.