George Friedman - The Next Decade

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.

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.