Over the past five years a powerful new political dynamic has emerged within the eu, as each successive effort at stabilizing the Eurozone crisis has hardened the core–periphery relation within it.footnote1 A small bloc of northern countries led by Germany enjoys current account surpluses and dictates the terms of economic reorganization to indebted countries of the south, under the imprimatur of the Troika. In Greece, the effects of the world economic crisis of 2008 have been compounded by this grinding austerity, resulting in unparalleled destruction of its national economy. The country has now suffered a depression worse than that of the 1930s, with no recovery in sight within the euro framework. Spain, Portugal and Italy, the latter a founding member of the European integration process, remain trapped in a disastrous downturn. Since 2012, each has experienced an official unemployment rate in double digits—25 per cent in the case of Spain—with youth unemployment still higher.

By contrast, Germany appears to have overcome the worst of the damage done by the crisis. The world’s fourth largest economy, it is distinguished by comparatively low—and falling—unemployment. It is Europe’s main creditor and exporter. Far from the fraying legitimacy of once-hegemonic national orders in the south, here the intra-European scission has encouraged the revival of national stereotypes of Germany as a land of industriousness and responsibility, and the Mediterranean as a zone of idleness and profligacy. For the powerful cdu Finance Minister Wolfgang Schäuble, the answer seems to be to eject Greece from the currency union, a debt-laden scapegoat sent off into the wilderness, and impose German virtue on the remaining members; for the newly formed Alternative für Deutschland, snapping at the cdu’s heels from the right, it is to register losses and put an end to the single currency. Yet, as Marcel Fratzscher insists in Die Deutschland Illusion, closer inspection of Germany’s real economy exposes profound underlying weaknesses, notwithstanding the benefits it enjoys from membership of the Eurozone. Germany has experienced a below-eu average growth rate since the turn of the century and lower-than-average real wage growth. Poverty has risen, as have income and wealth inequalities, now among the highest in Europe. Productivity growth has been weak, the outcome of an investment rate that is among the lowest in the industrialized world, with German competitiveness achieved only by means of wage repression. In the dispute over how to understand this record, a second serious division is emerging in Europe today: not between regions, but within the political establishment of its paymaster.

Strongly supportive of the euro, Fratzscher writes unambiguously in the voice of the most rational wing of international capital. Within the German political spectrum, he stands at the dead centre of the spd–Green mass, but much of his career has been spent abroad. Born in 1971 and brought up in Bonn, he took his first degree in economics at Kiel, followed by a ba in ppe at Oxford and a Masters in international economics at Harvard’s jfk School of Government. He joined the World Bank’s Asia Operations Department in 1996, initially working on China, and then spent two years in Jakarta as an advisor to the Suharto government during the 1997–98 East Asian crisis—sponsored by the Harvard Institute for International Development, which famously collapsed in 1999 after a $25m settlement with the us government following revelations of its double-dealing in Russia. Chalking up a PhD in international finance and macro-economics from the eui in Florence, Fratzscher spent the decade of 2001–12 at the international department of the European Central Bank. In 2013 he moved from Frankfurt to Berlin as an official advisor to Vice Chancellor Sigmar Gabriel, the spd Minister for Economic Affairs and Energy in Merkel’s coalition government, and President of the Deutsches Institut für Wirtschaftsforschung, a well-funded research foundation. Gabriel also appointed Fratzscher to chair the commission charged with boosting a new German internal-investment drive, unveiled in August 2014.

It would be hard to overstate the reception accorded to Die Deutschland Illusion when it appeared in Germany late last summer. The Frankfurter Allgemeine Zeitung toasted Fratzscher as the ‘new economic conscience of the nation’. His book comes with the endorsement not only of Germany’s Minister for Economic Affairs but also that of eu Commission President Jean-Claude Juncker, and was warmly reviewed by the Economist. A bestseller, Die Deutschland Illusion could easily be read on a transatlantic flight. It carries no footnotes or endnotes, and banishes its forty-two charts to an appendix. Fratzscher scolds the ignorance of popular common sense in Germany but clearly aims at a wide, general readership. Against the Eurosceptic rebellion agitating the right of the cdu/csu, its guiding intellectual spirit the Munich-based economist Hans-Werner Sinn, Fratzscher attempts to dispel what he alleges is a scarcely credible fantasy that Germany could give up on the single currency and strike out on its own.

Fratzscher foregrounds his analysis in Die Deutschland Illusion with some personal reflections. He recalls his culture shock on moving to Berlin in early 2013, after twenty years of either living abroad or focusing on European policy from his eyrie in Frankfurt. As a vordiplom student at the Kiel Institute for the World Economy in the early 1990s, he had been accustomed to a self-critical Germany then flagging in international competitiveness and known as the ‘sick man of Europe’. But since then, the national culture had transformed itself. Now characterized by self-confidence and ‘euphoria’, he reports, its attitude is simultaneously one of resentment towards its European neighbours. This culture rests on three fundamental illusions, Fratzscher argues. The first is that Germany has resolved underlying economic weaknesses and is on a path of national economic expansion; secondly, that such a future is possible independent of Europe, since Germany will be increasingly tied to economic trade outside the eu; thirdly, that Europe only requires German credit, and that Germany is the victim of a Europe which is dependent on it, but of which it is no beneficiary. Fratzscher attempts to dismantle each in turn. Along with a ‘Ten-Point Plan’ for ending the European Union’s crisis, this gives the book its basic structure.

Die Deutschland Illusion offers a decisive refutation of the notion that Germany is today experiencing a second economic miracle. It is perhaps here that popular misconceptions, as Fratzscher reconstructs them, veer furthest from historical reality. For Fratzscher, the recent past is forgotten under the cumulative weight of the dax’s record-shattering heights. Stripped of idealization, the German economy of the 1980s only emerged from a long stagnation under the second government of Schröder’s spd–Green coalition, in the aftermath of the recession of 2000–02. The ‘bold reforms’ of Schröder’s Agenda 2010 could only have been undertaken with industrial and trade-union leaderships working together to restore German competitiveness in a period characterized by declining German growth and investment, then far below other major industrialized countries. Fratzscher’s diagnosis of these reforms is that they were a clear success: not because they represented institutional compromise between capital and labour—wage restraint offered in return for renewed investment—but rather as a historic rout of labour and attack upon the social state. Agenda 2010 both reduced public spending on welfare and unemployment, and introduced measures for greater labour-market flexibility. Fratzscher is equally admiring of the political meaning of Agenda 2010: ‘Many were surprised that these reforms came from a Social Democratic government’, he writes approvingly, given the ‘traditionally close relationship it had with workers and trade unions’.

Necessary as they were, the reforms did not have an immediate effect; Fratzscher reports that it was only in 2007 that Germany’s growth equalled that of other European countries. What distinguished Schröder’s agenda from the outset, according to Die Deutschland Illusion, was its broader social significance, marking a turning point in the German polity’s basic social and political-economic expectations. Fratzscher argues that this transformation was not really registered until after the crisis of 2008. Only then did it become clear that German employers could rely on their built-up reserves in order to compensate workers even while cutting their hours, thereby avoiding future costs of training and education in any subsequent recovery. The German state played an important role in this by rationalizing short-term work regulations. Further, the ‘enormous flexibility’ provided by the new collective-bargaining rules allowed for so-called ‘made-to-measure’ wage adjustments, corresponding to sector and region—that is, according to the prevailing productivity and growth rates. Labour, in a historically unprecedented weak position both politically and, in the midst of the greatest crisis since the 1930s, economically, had little means with which to resist these proposals. The result was a stabilization of unemployment, at the expense of wage growth.