The Next Decade (24 page)

Given that the European Union was a single economic entity, and given the fact that the eastern European countries had few resources and limited control over their own banks, the expectation was that the European Union’s healthier countries would bail out the eastern banks. This was the expectation not only in the east, but also of the European countries who invested there. Germany had the strongest economy and banking system, so it was expected to take the lead.

But Germany balked. It did not want to underwrite the rescue of eastern Europe. There was far too much money involved, and Germany simply didn’t want to shoulder the burden. Instead, the Germans encouraged the eastern Europeans to go to the International Monetary Fund for a bailout. This would reduce the German and European burden, diluting their responsibility with contributions from the Americans and other benefactors of the IMF.

This fallout from the 2008 crisis underscored just how far Europe was from being a single country. It also called attention to the fact that Germany was the prime decision-maker in Europe. If Germany had wanted a bailout, Europe would have had one.

But the financial ripples didn’t end there. As recession hit Europe, tax receipts fell and borrowing for social services rose. Some countries were caught in a tremendous squeeze, their troubles compounded by domestic political pressure. For those who used the euro, some of the basic tools for managing a problem like this didn’t exist. For example, a declining currency makes imports more expensive and exports cheaper and more competitive. That hurts on the consumption side but helps create jobs and increases tax revenue. Adjusting the value of your currency is a core mechanism for managing recession, but countries such as Greece didn’t control their own currency; they didn’t even
have
their own currency. Their asymmetry of power turned the EU into a battleground. Germany didn’t want the responsibility for bailing out weaker countries, but the weaker countries didn’t have full control over their economies so they couldn’t take control of their own destiny. The question going forward is whether the EU, especially in light of European history, can withstand this centrifugal force. The answer lies in part in whatever the Germans choose to do.

The euro serves a series of countries in different stages of development and in different parts of their business cycle, and the currency that helps one country doesn’t necessarily help another. Obviously, the European Central Bank is more worried about the condition of the German economy than about that of a smaller country, and that affects valuation decisions.

From its founding in 1993 until 2008, the EU enjoyed a period of unprecedented prosperity, and for a while that prosperity submerged all of the issues that had never been fully resolved. The measure of a political entity is how it handles adversity, and with the crisis of 2008, all the unresolved issues emerged, and with them the nationalism that the federation was intended to bury. At times this nationalism became quite powerful politically. The majority of Germans opposed help for Greece. A majority of Greeks preferred bankruptcy to submitting to EU terms, which they saw as German terms. The situation calmed down after the financial crisis eased, but in 2010 we got a glimpse of the forces churning and bubbling beneath the European calm.

The European Union will not disappear, certainly not within the next ten years. It was founded as a free trade zone and will remain one. But it will not evolve into a multinational state that can be a major player on the world stage. There is not enough common interest among the nations to share military power, and without military power Europe does not have what I have called “deep power.” The Europeans struggled between national sovereignty and a European solution to the economic crisis. The challenge that finances posed for European unity blocks military integration even more intensely. Ultimately, there is a European bureaucracy but no European state.

On the other hand, it is not clear at all that many of the economic controls the EU has now will survive the decade. As the smaller countries discovered, those controls put them at a severe disadvantage. They are managed by a system that is in the control of larger countries. For citizens of the larger countries, working to build political coalitions to help other countries that run into trouble is a tough sell. Devaluing the currency is a much simpler way of making cheaper exports and more expensive imports and thus improving the economy. But once again, Greece, for example, didn’t have this option, because it didn’t have its own currency.

In the years immediately ahead, serious economic constraints will no doubt persist. The hardship will not be unprecedented or unmanageable, but it will remain a factor, posing different problems for different nations. Certainly economic stress will drive wedges among these nations and raise serious questions of the benefits of a single currency. I have no doubt that the EU will survive, but I would be very surprised if some members of the eurozone didn’t drop out, with others placing caveats on the degree to which they will cede control to the Brussels bureaucracy.

We have already seen the high-water mark of European integration. As the tide goes out over the ten years to come, what will be exposed above all else is the power of Germany.

THE REEMERGENCE OF GERMANY

Germany was born out of a war with France, and it was crushed twice after invading France. Its postwar resolution was to align itself closely with France economically and become the new axis of Europe. But while the German military impulse seems to have been set aside, the problem of the power dynamic persists. If France and Germany stand together, they remain the European center of gravity. If Germany and France collide, that collision rips apart the fabric of Europe, leaving the federated nations to divide and realign in some new configuration.

I’m leaving Britain out of this equation for historical, geographical, and economic reasons. The English Channel has always allowed Britain to step back and engage Europe selectively. But beyond this geographical reality, from the Spanish Armada to the German Blitz, Britain has viewed continental powers as a threat to its survival and has chosen to stand apart. Part of its drive for empire was the desire to avoid being entirely dependent on Europe. Britain normally didn’t build a wall against Europe (although it did in extreme cases), but it limited its involvement. Geography made this possible.

While Europe as a whole remains Britain’s largest trading partner, its largest export target among nations is the United States. When Britain is drawn deeply into Europe, the cause is more often war than economics. British strategy has always been to block a unified Europe as a threat to its national security, not least because the idea of a Europe militarily dominated by France and Germany is intolerable. For Britain to be the junior partner in such an alignment is neither prudent nor necessary.

For all these reasons, British grand strategy is incompatible with an open-ended commitment to Europe. Rather, the British strategy has been to align militarily with the United States. Britain never had the weight to block the Soviets by itself, nor to manage events in Europe. Its alignment with the United States allows it to influence the major imperial power at relatively low cost. Over the next decade, Britain will continue to hedge its bets on all sides, while tilting, as the French and Germans say, to the Anglo-Saxon bloc and culture.

The Franco-German alignment has its own problems. There are two areas of tension today between France and Germany, and the first one is economic. Germany is much more disciplined fiscally than France, which means that the two countries are rarely in sync when it comes to financial cooperation. The second tension revolves around defense policy. The French, and particular the Gaullists, have always seen a united Europe as a counter to the United States, and this would require European defense integration, which inevitably would mean a force under Franco-German control.

The Germans of course value what integration with France and Europe brings, but they have no desire to take on either France’s economic problems or the creation of a European military force set against the Americans. They simply don’t want the potential burdens of the former or the risks of the latter.

Another problem facing the Germans is that once again, owing largely to the financial crisis and the U.S. war in Iraq, their relations with the United States have declined. Germany is an exporting country, and the United States is a major non-European customer. The Obama administration created a stimulus package to get the American economy out of recession, but the Germans took no such measures. Instead they relied on the American stimulus to generate demand for German products. This meant that the United States went into debt to jump-start its economy while (at least from the American point of view) the Germans got a free ride. The Germans also wanted the Americans to participate in the bailout of European countries through the IMF. But beyond these substantial economic disagreements between the two countries, there was a real geopolitical split. The Americans, as we’ve seen, have significant issues with the Russians, but Germans wanted nothing to do with U.S. efforts to contain them. Beyond their aversion to encouraging another Cold War, the Germans, as we’ve already seen, depend on Russia for a large part of their energy needs. In fact, they need Russian energy more than the Russians need German money.

U.S. relations with both Russia and Germany will vary over the next ten years, but we can anticipate a fundamental shift. Whatever the atmospherics, Russia’s growing presence to the east of the European peninsula threatens American interests. Similarly, the more the United States sees its global interests dragging it into wars in places like Afghanistan, the more Germany is going to want to distance itself from its Cold War ally. The greater the U.S. level of concern about Russia, the greater the distance between the Germans and the United States. The sixty-five-year relationship that began at the end of World War II will not survive the decade ahead unchanged.

Germany can afford to distance itself from America, in part because its traditional problem of being squeezed from both sides is gone and it has a close and friendly relationship with France. Germany no longer borders Russia but now has Poland as a buffer. Germany needs natural gas, which the Russians have in abundance, and the Russians need technology and expertise, both of which Germany has to spare.

In addition, significant population decline will soon affect Germany’s industrial plant, as a labor shortage, combined with an aging population, creates a formula for economic disaster. Even with its own decline, Russia will still have a surplus of labor that Germany can utilize, both by importing Russian workers and by moving production to Russia. The only way to counteract population decline is by encouraging immigration, but immigration and national identity in Europe are at odds.

If Germany doesn’t want to bring workers to its factories, it can move its factories to where the workers are. Russia is also undergoing a decline in population, but because it has such a weak economy focused on primary commodities, it still has a surplus workforce, meaning people who are unemployed or underemployed. If the Russians want to move beyond simply exporting energy and grain and develop a modern industrial economy, they need technology and capital, and the Germans have both of those. The Germans want workers to man their factories and natural resources to fuel their economy. German businesses of all sizes are already deeply involved in Russia, adding to the new reality of a Moscow-Berlin relationship that soon will be the pivot of Europe, more dynamic if not more significant than the other relationships each country has.

With France at Germany’s back—tied there by economic interests—Russia will move closer to the European core, setting off a new dynamic in the EU. Tension between the core and the periphery is already rife. The core is Germany, France, the Netherlands, and Belgium, the advanced industrial heartland of Europe. The periphery is Ireland, Spain, Portugal, Italy, Greece, and eastern Europe. Still in the early stages of economic development, these smaller countries need looser monetary policies than their more advanced neighbors and will have wider economic swings, so they will be more vulnerable to instability.

Meanwhile, France has hedged its bets, positioning itself as both a northern European power and a Mediterranean power, even to the point of considering the formation of a Mediterranean Union alongside the EU. In French thinking, this would include southern European countries, North African countries, Israel, and Turkey. This is an attractive idea in the abstract, but in reality the difference in developmental stages between Libya and Italy is so profound that it dwarfs the difference between Germany and Greece. Still, we can expect the French to dabble in the Mediterranean, trying to compensate for being Germany’s junior partner in the north.

Germany is uncomfortable in the role that was pressed on it during the 2008–2010 crises. As the Germans reconsider their interest in the EU periphery, the peripheral countries raise questions about the economic benefit of integrating with the Germans. They resent losing control over vast areas of their economies, such as the banking sector, especially when they are expected to stand on their own if a crisis occurs. That those on the periphery are expected to sustain their economies with a monetary policy designed for the core adds to the pressure on both sides.

The old periphery, from Greece to Ireland, is firmly focused on economics. The new periphery, the Intermarium—and Poland in particular—is deeply concerned about Russia. And as we have seen, Poland is especially uneasy over being a neutral buffer between Germany and Russia, a role that historically has never ended well for it.

Also uncomfortable with this alignment is Britain. The UK could live with a Paris-Berlin axis as long as it was countered by the United States, with Britain as the balance point midway. But including Moscow puts too much weight on the European mainland, posing a challenge to British commercial and strategic interests.