Who governs the European Union? The usual answer points to Brussels, Berlin or Paris. But real power in the EU does not lie only in institutions, summits and press conferences. It lies in who can use the bloc’s economic structure most effectively. In the euro area, that means one thing above all: who gains the greatest advantage from the common currency.

From the start, the euro was presented as an instrument of European cooperation. It was meant to deepen the single market, remove exchange rate risk and bring Europe’s different economies closer together. That was the version of the story designed for political marketing.

The reality was much harsher. The euro brought together economies that were too different to be affected in the same way. The result could not be neutral. Some made money from the euro, while others paid through lost competitiveness.

The French economist Charles Gave summed up the euro’s problem as early as 2002 in a line that sounded like a bon mot but proved to be an accurate diagnosis: too many houses in Spain, too many civil servants in France, too many factories in Germany. The common currency did not create a single European economic model.

On the contrary, it allowed states to deepen both their strengths and their weaknesses.

Winners and Losers of the Single Currency

The euro’s first big winner was Germany. Not because it broke the rules, but because it made the best use of their logic. Had Germany kept the mark, its exchange rate would probably have appreciated over the long term. A strong mark would have made German products more expensive abroad and curbed the export dominance of German industry. The euro switched that mechanism off.

Germany gained a weaker currency than an independent mark would have been and secured a permanent competitive advantage. It was the dream of every exporting power: an industrial powerhouse without a currency that would naturally make its success more expensive.

The euro’s first asymmetry was obvious. Germany gained the protection of an undervalued currency, while weaker economies lost the ability to devalue. As their industries came under pressure, they had to adjust more painfully through wages, unemployment, deficits or debt.

That was not European harmony, but an imbalance built into the system. Germany used the euro as an export machine. Spain used it as a source of cheap capital for a real estate boom. France used it as a way to maintain a vast state apparatus without immediate pressure from financial markets. Each played its national game, albeit with a European currency in hand.

For a long time, Germany was the eurozone’s anchor: more industrial, more disciplined and more fiscally responsible than the others. But that phase has begun to run out of steam. Cheap Russian energy, Chinese demand and globalization, on which German exports depended, have all started to crumble.

The euro may have helped Germany build export superiority, but it could not replace the conditions on which that superiority rested.

The New Logic of the Eurozone

The eurozone’s own logic also changed after the covid pandemic. The winner is no longer necessarily the country with the best factories. It may also be the one that can use the credibility of the common currency to finance its own deficits for the longest time. Whereas the euro once favored German exports, it now increasingly shields indebted states from the full cost of their fiscal policies.

Normally, countries with chronic deficits and rising debt would face harsher pressure from financial markets. Investors would demand higher yields, the currency would weaken and governments would have to hit the brakes. In the euro area, however, that mechanism is weaker.

France, Italy, Slovakia and others do not borrow as isolated national economies. They borrow as members of a currency club, backed by the European Central Bank and by the political assumption that the eurozone will not be allowed to break apart in a crisis.

That creates a moral hazard at the very heart of European integration. States can live beyond their means over the long term because the market does not place its trust in them alone, but in the whole architecture of the euro. Germany’s credibility thus becomes a public good from which even those who have never been governed with German discipline can draw.

That reverses the question of power in the EU. It is no longer only a matter of who produces the most, but of who can convince others that their debt is everyone’s problem. In the first phase, the exporters won. In the second, the debtors may win. Not because they are stronger, but because the system punishes them less and less.

The End of German Exceptionalism?

For Germany, this means a very unpleasant awakening. The euro area, which Berlin wanted to build on stability rules, has turned into a space where those rules have become a matter of political negotiation.

The question, therefore, is not only who currently benefits from the euro. It is when Germany will run out of patience and what it will do once it realizes that it no longer has the power to discipline others.

This is where Merz’s investment shift comes in. Massive spending on infrastructure, defense and modernization is meant to reboot the country. But if it does not translate into productivity growth and merely produces more debt, Germany will not regain its exceptionalism. It will lose it.

German exceptionalism was not based solely on the size of the economy, but above all on the belief that Berlin was more industrial, more frugal and more disciplined than the others. If it responds to the current crisis with the same recipe as everyone else, with more debt, a bigger state and postponed reforms, it will cease to be the euro area’s arbiter. It will become merely its biggest participant.

That would be a classic strategy of ruin. The problem created by postponing painful adjustment would be solved only by further postponement. Instead of taking pressure out of the boiler, Germany would add to it. But nobody saves themselves by translating structural problems into the language of cheaper debt.

The real tragedy of the euro is not only that it has created winners and losers. It lies in the fact that it forces all players to accept the logic of a system that none of them can repair.

The euro once allowed Germany to live with a currency weaker than the mark would have been. Today, Berlin may discover that the price of that advantage is much higher than it originally expected. The monetary union that helped Germany dominate Europe’s industrial space may become the mechanism that destroys the last remnants of its exceptionalism.

Berlin may lose not because others overwhelm it, but because it simply begins to resemble them.