The past few several weeks have been busy for the Europeans, easily generating more events of consequence than at any time since at least the 2007 financial crisis. There is no specific trigger event here that makes much sense without absorbing the context first, so I’m just going to do what I do and start at the beginning.
Germans aren’t normal.
I don’t mean that as a condemnation of their weather or dourness or food or their linguistic tendency to link a dozen or more words together into typographical nightmares, but instead that Germany’s peculiar geography has made the Germans somewhat…peculiar.
Germany’s geography is the best and worst of all worlds. Best in that it boasts four major and a dozen minor rivers as well as ample stretches of flat land to both ease internal transport and make for cheap development. Worst in that Germany’s most rugged terrain is in the country’s interior while its flattest lands are on its borders, making it easier (historically speaking) for most Germans to integrate with their (non-German) neighbors rather than their own co-ethnics.
Historically, this has made German lands among the most bloodsoaked in Europe, with the whole area being preyed upon over and over and over. The first “Germany” was Charlemagne’s, and it only lasted so long as the great monarch was alive. The Holy Roman Empire was a primarily German entity (occasionally referred to as the First Reich), but it wasn’t even remotely united, comprised as it was by sometimes over 1000 (often mutually warring) statelets.
It was only with the onset of industrialization in the 1800s that Germans were able to use rail and electricity to overcome their internal geographic complexity and achieve unity. But unity doesn’t automatically translate into happy-fun-play-time. The second and third Reichs were Germany’s Imperial and Nazi incarnations. Those governments’ attempts to impose writs on the wider European neighborhood resulted in the most catastrophic wars humanity has ever experienced. For the following 45 years, Germany was the very definition of not united – split into two pieces to serve as mutually-opposing frontline states in the Cold War.
In the years since the Berlin Wall fell, the newly-united Germany – or Fourth Reich if you prefer – has been taking a wonderous vacation from history. It doesn’t need to fight to remain unified; America’s imposition of a global Order makes that unnecessary. It doesn’t need to protect its borders; American-dominated NATO takes care of security issues. It doesn’t need to fight for access to either raw materials or consumer markets. The Americans’ global structure has enabled the rise of the European Union within Europe, and has allowed German firms access to a worldful of consumption. All Germany needs to do to be Germany today is…be. And so the Germany of today is united, free and at peace…without the Germans needing to do a damn thing.
For those of you who would like Germany to exercise more decisionmaking power and take security matters into its own hands, I refer you to literally any book on European history between 1848 and 1945 to highlight why that might not be the fabulous idea you assume it to be.
Anywho, there are now three intersecting problems that all independently threaten Germany’s blissful existence.
First, the Americans are done holding up the collective civilizational ceiling of the world. The United States created the global Order to fight the Cold War, and that war ended when the Berlin Wall fell. The Americans have been edging away from, well, everything, ever since. The day of final abandonment was always going to come, it is now here, and everyone who used to shelter under the American security umbrella or benefit from a globalized economy must figure out a new way forward. That applies to Germany as much as everyone else.
Second, the German economic model of mass exports is running out of road. Mass exports requires a large, highly-skilled workforce heavy with people in their late-40s through early-60s. Germany has had that for the past 15 years, but those skilled workers collectively are crossing the retirement threshold this decade. With no replacement generation coming up through the ranks, Germany can neither consume what it produces today, nor maintain its current production for much longer. That eliminates both the basis of the German economy and the German tax base. Something new, something radical, something that utilizes resources beyond Germany, is required.
Third, the EU – the only meaningful piece of the Order the Americans do not directly control and so the only possible anchor the Germans have keeping them in a safe, peaceful, united Europe – is in mortal danger. In part it is because much of Europe faces the same security and export dependence upon the Americans as the Germans do. But there’s another problem.
Geography.
Northern Europe is flat and well-rivered and so countries there can achieve efficiencies and economies of scale. Southern Europe is rugged and lacks rivers and so cannot. Exceptions abound in a continent as varied as Europe, but the bottom line is that Southern Europe will never be able to compete with Northern Europe economically, just as Northern Europe cannot hope to compete with Southern Europe when it comes to sun, fun, food and flair. (France has a foot in both worlds which is part of what makes the French…well…French.) Anywho, the bottom line is that there is no European Union without both parts of Europe, so the question becomes how to keep it all stitched together without either the American-led Order or the ability to access markets from far beyond Europe?
There is no good answer. Even more problematic, what might prove a good answer for Ireland would be hilariously inappropriate for Croatia. What most everyone can agree on, however, is that Europe as a combined entity will be better able to get what it needs than the EU’s constituent members acting independently. And so Europe has been limping along since the 2007-2009 financial crisis, economically suppressed, strategically adrift, politically riven…but with no one (save the Brits) willing to pull the plug on the whole project.
In my new book, Disunited Nations, I’ve got a whole chapter on called “Superpower, Backfired” on the hows and whys Germany ended up in this situation and where it is likely to lead.
And then there’s the coronavirus.
Just as there are differences in European financial and economic structures on a country-by-country basis, so has the virus impacted EU members differently.
It comes down to vectors and weather. Most of the cases in Germany originated at a series of Alpine ski parties for 20-somethings. When the virus started to spread, it spread among the population most able to survive it. In addition, late-winter and early-spring in Germany isn’t exactly tourist season, so most elderly stayed locked up at home. Germany was able to address the virus outbreak relatively quickly and move on.
Not so in Italy. Patient zero went to a massive outdoor soccer game and became one of the first COVID superspreaders. Elderly Italians are also more likely to live in a multi-generational household than elderly Germans because…well… sun, fun, food and flair. It wasn’t long before the Italian health care system was overwhelmed.
Finances matter too of course. Germany has been whittling away at its national debt for twenty years, and so had plenty of dry powder to apply to the crisis without needing to ask anyone for help. Italy…hasn’t. When the crisis exploded upon the Italians they almost instantly ran out of cash and had to turn to the EU hat-in-hand for help.
The response was underwhelming. The Germans – backed up by the European Central Bank (ECB) chief – told the Italians that saving Italy wasn’t their job. As a point of comparison, across the Pond the Americans slapped together humanity’s largest-ever stimulus program in a matter of days.
It didn’t take long for German Chancellor Angela Merkel to realize that the situation was untenable. It wasn’t so much that Italy and others were facing fiscal collapse because of COVID (although they were), it was that Merkel knows full well that the road the EU is on means that Italy and others would inevitably face fiscal collapse. COVID just brought the end forward by a few years. The question Europe has been struggling with since 2007 – now that we are certain this is unsustainable, what do we do? – had moved from the hazy future to the here-and-now. And Merkel simply didn’t have an answer. If she had, she would have produced it. Years ago. And so the demurring and dithering continued.
Ironically, it took events within Germany itself to force the issue. On May 5 the German Constitutional Court ruled that methods the ECB were using to keep some of Europe’s weaker states on life support were unconstitutional. Specifically, the ECB can only purchase government debt if it does so proportionally to the size of all eurozone economies. Since the Germans have been paying their debt down, there wasn’t much German debt left to buy. And since the Italians were in a COVID pickle, the Italians needed to issue more debt. The ECB did the logical thing and put its resources where they were needed. The German court ruled that the ECB’s logic violated European law in general and the German constitution in specific, and that the German government must cease all cooperation on the issue within 90 days.
Running the European Central Bank without the participation of Europe’s largest economy would open up a hilariously huge barrel of worm-ridden monkeys, taking us down paths so convoluted and impractical as to be positively Venezuelan. But those monkeys and paths all take us to the same place: no European bond market, no European currency, and – very likely – no EU.
A world without America. A Europe without the EU. Germany left to look after its economic and security issues on its own, likely in competition with its current EU partners. That is nothing less than Merkel’s worst-case scenario, and so she did the only thing she felt she could:
On May 20 in a joint presser with French President Emmanuel Macron, Merkel proposed the EU’s first mutualized debt. For those of you not in finance, that’s a fancy way of saying that not only will Germany co-sign for some Italian borrowing, but that Berlin will agree up front to use the EU’s common budget to pay for some Italian spending. Simply put, Merkel committed Germany to paying for the ongoing existence of the EU in general and the EU’s weaker members in specific in the hopes of buying more time to find a better solution.
Many many details remain.
How big of a fund are we talking about? At present the combined floats of the Germans, French and the EU Commission total something around 1.5 trillion euro. (Right now that’s about $1.65 trillion US, so, you know, real money.) That’s roughly ten times the current total EU budget. That would probably cover the EU’s current needs this year, but only this year. And all the proposals to date are nothing more than one-offs designed to counter COVID impacts. This doesn’t actually help the EU survive in the long-run. For this to work and for the EU to function as a true superstate, the EU needs a full transfer union of at least these volumes annually.
Who would get the funds, and who would pay the funds back and how? At present the idea is to funnel everything through the European Commission, with funds being dispersed into (suddenly engorged) EU programs, while payback would come from the various member states who fund the Commission directly. Needless to say, that would be wildly inefficient and cumbersome, although it would wildly strengthen the EU’s administrative core and take Europe a few big steps down the road to full federalization on the American model.
Can this – institutionally – happen? It doesn’t look great. Big things like this normally require a treaty, and the EU has rarely managed negotiating and ratifying a treaty on anything less than a decade timescale. Moving forward without a treaty would still require unanimity, and several EU states have already voiced their vociferous opposite to the plan.
But, again, let me be clear here. Between the Americans’ withdrawal and Europe’s demographic implosion, the very existence of the European Union is at stake. This was always true. This was always inevitable. But COVID and the German court ruling makes the crisis imminent. In a Europe without either America or the EU, Germany must reorganize into a form that enables it to protect and further its own interests without outside support. This isn’t “simply” an existential crisis for the Germans. It is an existential crisis for all Europeans.
And historical annihilation tends to focus the mind.
So let’s take a brief look at the four hard-nos in this debate: Austria, the Netherlands, Denmark and Sweden.
The bulk of Austria’s population lives on the southern watershed of the Danube. The entirety of the Netherlands lies atop the delta of the Rhine. Those two rivers are core Germany population, industrial and transport zones. The Austrians and Dutch have zero geographic insulation from Germany.
Neither country may like the financial implications of where the debt-mutualization path leads, but both are deeply, painfully aware of precisely where European collapse leads: a Germany forced or induced to seek out German national interests to the detriment of its neighbors. Historically speaking, once the Germans get rolling, maintaining an independent Austria or Netherlands is pretty much impossible. The Austrians and the Dutch know this. Both can be armtwisted into accepting Merkel’s (costly) logic.
And that assumes Merkel doesn’t do her traditional thing. Unlike most leaders, Merkel tries to shun the spotlight and instead lead from behind. She allows her opponents to stake out bold positions, and then unobtrusively steps back from the shouting and quietly cobbles together a majority position that doesn’t include the troublemakers, leaving them with the option of joining the crowd or screaming into the void. She’s done this (repeatedly) to consolidate control of her political party in Germany. She’s done this (repeatedly) to defang troublesome governing coalition partners. She’s done this (repeatedly) to guide Europe through the financial crisis. It is highly likely that the Austrians and Dutch will be Merkel’s next void-screamers.
Denmark and Sweden are a different sort of challenge. Sweden doesn’t border Germany, while the bulk of the Danish population lives not in peninsular Denmark, but instead on the island of Zealand. Culturally, economically, and above all strategically both only have one foot in Continental Europe. In particular, both have historically been closer to the United Kingdom (and dare I say, the United States) on defense issues than to Germany. As such neither are even members of the eurozone. That makes the pair less likely to be cajoled into participation, but it also means there is another potential path.
Rather than run the funds and the debt through the EU budget, the funds could be kept aside as a purely eurozone project which could exempt any EU state that didn’t also use the European currency. (In addition to Denmark and Sweden, this list also includes a variety of Central European states such as Poland, Hungary and Romania.) It’d be messy organizationally, and arguably unnecessarily so, but the EU does tend to excel at spawning unnecessarily messy organizational structures.
Anywho, lots of details to work out. What Merkel and Macron are attempting on the fly is the first real step towards federalizing the European Union. Europe has a common currency (which not everyone is a part of) and a common foreign policy (which requires unanimity) and a common market (regulated by national governments), but until it has a common budget it is most certainly not a superstate and it is most certainly not pooling its national resources into a more powerful, more cohesive whole.
That more powerful, more cohesive whole is the only thing that matters if the EU is to persist through contorting geopolitical and demographic circumstances. There is no guarantee the current plan will be adopted, much less work, much less expand into something that would make the EU a true, durable power. But the fact remains that for the first time in years I have a faint glimmer of hope that this thing we call the European Union might, just might, survive.
On June 3 Melissa Taylor and Peter Zeihan will be hosting a video-conference on Manufacturing in a New Era. We’ll address the future of automotive, automation, reshoring, COVID’s shattering of supply chains, consumption shifts, as well as get you an update on the deepening trade war.
For those of you who don’t want to pop for the fee, we’ve recently completed a video on our projected shape of the COVID epidemic to come. You can watch it for free here.
Our June 3 manufacturing video-conference is only the first of a series which will include events focusing on Mexico, China, Energy and Agriculture. Scheduling and sign up information can be found here.
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