Germany is going through the worst foreign policy crisis in decades. Not many people have actually noticed, but the crisis has isolated Germany in Europe, leaving it more isolated than at any time in recent memory. Germany suddenly seems to have tumbled back into that unfortunate era in which it was viewed askance as the European troublemaker, the hegemon. This time around as the monetary hegemon.

After too many wars, Germany bethought itself of its civil might: i.e. its economic output. It set up institutions to reconcile it, as the hegemon at the centre of the continent, with its neighbours. But Germany never ignored the old schoolyard axiom: nobody likes the guy who’s top of his class. Our neighbours now see Germany once again as the country that calls all the shots, the know-all. In Greece they’ve been drawing swastika flags. In Great Britain the opponents of the euro have been celebrating the recent turn of events: they have always been fired up by the fantasy that Germany could use the single currency to dominate Europe.

Greece, the first domino

And now it’s plain for everyone to see: thanks to the single currency, Germany reaps disproportionate benefits from the single market; with lower wages, greater output and better-quality products, it dominates European exports, creating dependencies that smaller national economies are unable to offset. Germany is living it up as the dealer, whilst the addicts spend all their money on Mercedes and BMWs. And German banks, among others, have a penchant for underwriting foreign government loans – like the ones for Greece, for example.

Greece is now the first domino liable to fall under the twofold burden of global recession and domestic weakness, exacerbated by financial hanky-panky and double-dealing. Portugal and Spain are teetering on the brink. But Germany has shown itself hard-hearted. There’s no aid in the offing, the iron-willed chancellor has given to understand. There can be no European fiscal equalisation because the rules don’t allow it.

Jeopardise the work of whole generations

As a matter of fact, if you want to understand the European disaster, take a good look at the rules. Those rules were not made for a triple-whammy of global recession, mega-deficit and fraud. The rules were not designed for state bankruptcy. The rules were drafted to make the economic hegemon Germany the servant of all the European economies. But the drafters ignored the fact that a common currency also requires a common fiscal and economic policy. The single market cannot maintain the balance all by itself.

Should the single market collapse, or the single currency break down, that would jeopardise the political work of whole generations: the EU. Angela Merkel had to think all that over these past few days. Should she aid Greece, break all the rules, jeopardise the euro, and invite speculators to besiege Portugal and Spain? And raise a storm on the home front to boot, just a few weeks before the state elections in North Rhine-Westphalia, when the opposition is asking whether German taxpayers are also allowed to finance end-of-year bonuses for Greek employees. Or should she provoke a constitutional challenge from the anti-euro faction, an opportunity the latter have been looking forward to for ten years?

She owes Sarko one

In a word, Merkel has to ask herself whether she really wants to put Berlin’s most important foreign policy instrument, the European Union, on the line. Or should she stick to the rules, keep her nerve amid a deafening hue and cry, and force Europe to accept fiscal discipline – one of those dreaded German virtues? Merkel has kept her nerve – and French president Nicolas Sarkozy helped her out. The French statist, who presumably would have forked out a couple euros’ one-off contribution without any qualms, followed Merkel’s call for discipline. So she owes him one.

The initial shock has now given way to the realisation that Europe has a huge problem. Her currency needs a shared economic and financial policy. It requires rules on how to handle the weak and rein in the strong. Finance minister Wolfgang Schäuble seems to have grasped that when he talks about harsh punishments and budgetary controls. His old brainwave of a “core Europe” is now making the rounds again. But Merkel has also figured out that you don’t put new sails up in a storm. The ship has to be fixed first. Just a few weeks after its strenuous efforts to push the Lisbon Treaty through, Europe now has its next really big project to contend with.