George Friedman - The Next Decade

The EU was envisioned to serve two purposes. The first was the integration of western Europe into a limited federation, solving the problem of Germany by binding it together with France, thereby limiting the threat of war. The second was the creation of a vehicle for the reintegration of eastern Europe into the European community. The EU turned from a Cold War institution serving western Europe in the context of east-west tensions into a post–Cold War institution designed to bind together both parts of Europe. In addition, it was seen as a step toward returning Europe to its prior position as global power—if not as individual nations, then as a collective equal to the United States. And it is in this ambition that the EU has run into trouble.

In the late eighteenth century, when thirteen newly liberated British colonies formed a North American confederation, it was as a practical solution to economic and political issues. But the United States of America, as that confederation came to be known, was also seen as a moral mission dedicated to higher truths, including the idea “that all men are created equal and that they are endowed by their creator with certain inalienable rights.” The United States was also rooted in the idea that with the benefits of liberal society came risks and obligations. As Benjamin Franklin put it, “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.” In the United States, with such sentiments at its core, the themes of material comfort and moral purpose went hand in hand.

The United States was also created as a federation of what might be called independent countries, sharing a common language but profoundly different in other ways. When those differences led to secession, most of the remaining states of the United States waged war to preserve the Union. That willingness to sacrifice would have been impossible unless the United States was seen as a moral as well as a practical project.

In the United States, the Civil War established that the federal government was sovereign, and absolutely sovereign in foreign affairs. The federal victory put to rest the claims of the Confederate states that sovereignty rested with each of them individually.

In the European Union, by contrast, the confederate model is still in place, and sovereignty rests with each individual nation-state. Even at the level of its most basic premise, then, the European Union sets severe limits on its claims to authority and its right to command sacrifice. This union is stranger still, in that not all Europe is part of 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 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.