it. Some of its members share a currency; others don’t. There is no unified defense policy, much less a European army. Moreover, each of the constituent nations has its own history, unique identity, and individual relationship to the idea of sacrifice. The military authority to act internationally, an indispensable part of global power, is also retained by the individual states. The EU remains an elective relationship, created for the convenience of its members, and if it becomes inconvenient, nations can leave. There is no bar on withdrawal.
Fundamentally, the EU is an economic union, and economics, unlike defense, is a means for maximizing prosperity. This limitation means that sacrificing safety for a higher purpose is a contradiction in terms, because the European Union has conflated safety and well-being as its moral purpose. There is simply no basis for the kind of inspiring rhetoric that could induce anyone to fight and die to preserve the ideals of the European Union.
As we look toward the decade ahead, the delicate balance of power established to contain Germany is coming apart—not because Germany wants it to, but because circumstances have changed dramatically.
The dissolution started during the financial crisis of 2008. Germany had been one of the leading economic powers since the 1960s, when the western portion successfully emerged from the devastation of World War II. The collapse of communism in 1989 forced the prosperous west to assimilate the impoverished east, an economic liability. While this was painful, over the next decade Germany absorbed its poor remnant and remained the most powerful country in Europe, content with the economic and political arrangements of the EU. Germany was its leading power, yet still one of many. It had no appetite for further dominance, nor any need for it.
When the financial crisis of 2008 hit, Germany suffered, as did others, but its economy was robust enough to roll with the shock. The first wave of devastation was most severe in eastern Europe, the region that had only recently emerged from Soviet domination. The banking system of many of the countries there had been created or acquired by western European countries, particularly banks in Austria, Sweden, and Italy, but also by some German banks. In one country, the Czech Republic, the banking system was 96 percent owned by other European countries. Given that the EU had accepted many of these countries—the Czech Republic, Poland, Slovakia, Hungary, Romania, and Bulgaria, as well as the Baltic nation-states of Latvia, Lithuania, and Estonia—there seemed to be no reason to be troubled by this. But although these eastern European countries were part of the EU, they still had their own currencies. Those currencies were not only weaker than the euro, they also had higher interest rates.
In an earlier chapter we discussed the problem created by the housing boom and eastern European mortgages denominated in euros, Swiss francs, and even yen. Banks in other EU countries owned many of the eastern European banks. Those banks in western Europe used euros and were under the financial oversight of the European Central Bank and the EU banking system. The eastern European countries were in the strange position of not owning their domestic banking systems. Rather than simply being supervised by their own governments, their banks were under foreign and EU supervision. A nation that doesn’t control its own financial system has gone a long way to losing its sovereignty. And this points to the future problem of the EU. The stronger members, like Germany, retained and enhanced their sovereignty during the financial crisis, while the weaker nations saw sovereignty decline. This imbalance will have to be addressed in the decade to come.
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
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
