Published in Business Spectator (Melbourne), 17 August 2011

To fully appreciate the subtle ironies of the euro crisis it takes a sense for history. Europe’s common currency has practically achieved the very opposite of what its creators originally intended. Instead of framing the Germans in Europe, the crisis has elevated Germany to the continent’s new, albeit reluctant, hegemon. Former French President François Mitterrand must be spinning in his grave.

Last Sunday, the Asia Society hosted a dinner for World Bank President Robert Zoellick in Sydney. His warnings about a further escalation of the debt crisis were widely reported, and the high-calibre audience certainly appreciated his views on the state of emerging markets. However, Zoellick also gave a fascinating insight into the early history of European monetary union.

After the fall of the Berlin Wall in November 1989, Zoellick was the lead US official in the ‘two-plus-four’ negotiations that prepared Germany’s re-unification in October 1990 (so named after the two German states and the four allied forces – Britain, France, the Soviet Union and the US). He was thus intimately involved in the diplomatic balancing act of unifying Germany while reassuring the British and the French that they had nothing to fear from this new and bigger country in the heart of Europe. For his achievements, Zoellick was even made a Knight Commander of the German order of merit, a very high award for a foreign national.

British Prime Minister Margaret Thatcher was horrified about the prospect of a united Germany. “We beat the Germans twice, and now they’re back,” she allegedly told a meeting of European leaders at the time. Thatcher even invited historians to a seminar at Chequers to discuss the question of how dangerous the Germans really were. Her trade minister, Nicholas Ridley, was forced to resign after he had compared German chancellor Helmut Kohl to Adolf Hitler in an interview with The Spectator.

French suspicions of the rise of a new evil German superstate were equally strong, as previously confidential memos now released by the British Foreign Office reveal. President Mitterrand was convinced that the prospect of unification had turned the Germans into the ‘bad Germans’ they used to be. He saw them as behaving brutally in the pursuit of their new national interests, thereby upsetting the political and security settings of Europe. In a conversation with then US President George Bush Snr, he also remarked “I like Germany so much, I think there should be two of them!”

The tensions between Germany and its neighbours around the time of unification were enormous. Even the Soviet Union was more open to the idea than West Germany’s old allies. France especially needed to be convinced that it had nothing to fear from a reunited Germany.

There had always been rumours that in the two-plus-four negotiations the French had demanded Germany to give up its beloved Deutschmark in return for a French ‘oui’ on unification. More than once the dominance of the über-solid Deutschmark had caused the French and other European nations pain. Forcing the Germans to abandon their currency would surely be an appropriate way to weaken them so they could not become a threat to other nations, the French probably thought.

The only problem with this account of history is that there is no solid evidence for it. When Der Spiegel news magazine reported these rumours once again last year, representatives of the old Kohl government were quick to dispute that there had been any secret deals at the time. “There never was an agreement,” German treasurer Wolfgang Schäuble (who was home secretary at the time) boldly claimed. His predecessor Theo Waigel flatly denied any link between unification and the euro.

Such previous denials made Robert Zoellick’s remarks at the Sydney dinner all the more remarkable. Almost in passing, and as if it was the most obvious thing in the world, he explained his understanding of how Europe got its common currency. And his account confirmed the rumours that it had a lot to do with German unification.

As Zoellick told his audience (that was probably unaware of how controversial these issues still are in Europe) it was very clear that European monetary union resulted from French-German tensions before unification and was meant to calm Mitterrand’s fears of an all-too-powerful Germany. According to Zoellick, the euro currency is a by-product of German unification. As one of the key insiders in the two-plus-four negotiations, trusted and highly decorated by the Germans, nobody would be better qualified to know the real story behind European Monetary Union. Despite all official denials coming from the German government until the present day, there are no good reasons not to believe Zoellick’s account of the events.

The great historical irony of this story is, of course, that if the French had really planned to weaken the powers of newly reunited Germany through monetary union, this attempt has now completely backfired. Sure, the Germans will pay massively for the sake of keeping the euro project alive (if they don’t pull out of monetary union once they realise this). But in strategic terms, Germany’s influence has never been greater. As the continent wants to bank on Germany’s AAA rating, Berlin can now effectively dictate fiscal policy to Athens, Lisbon and Rome – perhaps in the future to Paris, too. This is most definitely not what Mitterrand had planned.

Perhaps an even greater irony, however, is that the Germans are not at all happy with their new hegemonic power within Europe. As opinion polls show they have not the slightest interest in ruling the European periphery. Large majorities reject the euro and neither want to pay or rule. In fact, the Germans would be content being just a greater version of Switzerland – prosperous, a bit boring and vigorously unengaged in international affairs. It is the very role the West Germans learnt to play to perfection between 1945 and 1990. This also means that France and Britain would have had nothing to fear from the Germans at the time of unification. If they had known the post-war Germans better, they would have been very relaxed about a larger Germany.

As it turns out, the euro is not only an unworkable currency. It actually started as a French insurance policy against German power. But even as an insurance policy it has failed. Against their will, it has turned the Germans into the new rulers of Europe. And it has consigned France to be the weaker partner in the Franco-German relationship.

If Mitterrand had known all this in advance, he would have insisted on Germany keeping the Deutschmark as the price for German unification.