Why Germany Kant Kompete
By Paul Krugman

(FORTUNE Magazine) – A while back various versions of a fake European Commission document began circulating via e-mail. The memorandum argued that once a common European currency had been established, the obvious next step would be adoption of a common language. Practical considerations dictated that this language be English, with a few improvements. Thus, the memorandum suggested that the superfluous hard "c" be replaced with "k," eliminating one source of konflikt; that in order konfusion to avoid writers the verbs at the end of the sentence put should; and by the end of the memorandum English had been transformed into German.

What gave the joke its edge was, of course, the presumption that the new Europe would be dominated by Germany. Not only is Germany the most populous nation of the European Union, but it has also traditionally had its most powerful economy. Indeed, since the early 1980s, Germany has effectively exercised monetary hegemony over its neighbors; the job of Dutch, Belgian, even French central bankers was simply to follow the Bundesbank's lead. But somehow, when we weren't looking, Germany stopped being the powerhouse of Europe and became its biggest source of weakness.

When did Germany become the economic sick man of Europe? For anyone old enough to remember the '50s and '60s, the very adjective "German" cries out to be followed with the words "economic miracle." As late as the early '90s, German performance still looked pretty good by international standards. But lately almost all the news from Germany has been bad.

Some attribute the problems to missteps by the current government of Gerhard Schroder, which has undermined business confidence with its occasional reversion to traditional socialist rhetoric. But German economic growth was sputtering before Schroder was elected; all he has done is to make a bad situation a bit worse.

Others date the problem to Germany's reunification after the fall of the Berlin Wall. Certainly the unintended effect of that reunification was to turn Germany into a sort of cold, damp version of Italy. Just as Italy is divided into a prosperous, productive north and a backward south, Germany is now divided between a productive west and a dependent east; and in both cases the aid provided to the backward region strains not only the budget but the society, creating in the recipients a sort of culture of dependency.

Still others date the problem much earlier. It is now 20 years since the German economist Herbert Giersch coined the term "eurosclerosis" to describe how overregulation and a too-generous welfare state undermine efficiency and job creation; and he was thinking of Germany in particular.

But this seems to make the contrast between Germany and the vigorous Anglophone economies a simple left-right matter: free markets vs. the heavy hand of the government. And while there is something to this, anyone who has spent time talking to German economists and officials knows that in some ways they are more conservative--that is, more opposed to activist government--than Americans. Perhaps they don't believe in letting grocers stay open whatever hours they want to, but they do believe in sound money and sound budgets and abhor the idea that the government should lower interest rates or--horrors--devalue the currency to fight unemployment.

Well, here's my theory: The real divide between currently successful economies, like the U.S., and currently troubled ones, like Germany, is not political but philosophical; it's not Karl Marx vs. Adam Smith, it's Immanuel Kant's categorical imperative vs. William James' pragmatism. What the Germans really want is a clear set of principles: rules that specify the nature of truth, the basis of morality, when shops will be open, and what a Deutsche mark is worth. Americans, by contrast, are philosophically and personally sloppy: They go with whatever seems more or less to work. If people want to go shopping at 11 P.M., that's okay; if a dollar is sometimes worth 80 yen, sometimes 150, that's also okay.

Now, the American way doesn't always work better. Even today, Detroit can't or won't make luxury cars to German standards; Amtrak can't or won't provide the precision scheduling that Germans take for granted. America remains remarkably bad at exporting; the sheer quality of some German products, the virtuosity of German engineering, have allowed the country to remain a powerful exporter despite having the world's highest labor costs. And Germany did a better job of resisting the inflationary pressures of the '70s and '80s than we did.

But the world has changed in a way that seems to favor flexibility over discipline. With technology and markets in flux, not everything worth doing is worth doing well; in an environment where deflation is more of a threat than inflation, an obsession with sound money can be a recipe for permanent recession.

And so Germany is in trouble--and with it, the whole project of a more unified Europe. For Germany is supposed to be the economic engine of the new Europe; if it is a drag instead, perhaps the whole train in the wrong direction goes, not so?

PAUL KRUGMAN is a professor of economics at the Massachusetts Institute of Technology.