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Jul 12 2015

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Germany & the Fallacy of the EU

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The "Indispensable Nation" - for the EU

The “Indispensable Nation” – for the EU

As the Greeks and EU officials again play out a familiar routine of “austerity for bailouts,” the most obvious question is “why.”

Now that EU and international institutions have largely assumed the risk of Greek debt from the private sector, direct economic contagion – that was all too possible in 2010-11 – is largely contained. Why would a union of 28 nations struggle so hard, spend so much, for more than five years, to keep a minor country within the EU – when that nation was so clearly unqualified  for membership to begin with – and has yet to truly implement the reforms that have been promised time and time again?

Part of the reason is certainly found in the vision of the EU writ large. It’s ambition is genuinely breathtaking in scope. Through the use of a suffocating, unaccountable and ever-expanding supra-bureaucracy in Brussels – where no activity is too small to be regulated –  the EU aims at nothing less than to supplant centuries of unique cultural and national identity in Europe with a continental “European” identity. Poles, French and Spanish would ultimately become hyphenated, as we are in the US, becoming Polish-Europeans, French-Europeans Spanish-Europeans.

But, as the sovereign debt crisis has shown, the vision of  a continental conception of self is running up against a millennia of unique, textured and highly diverse cultural factors that no amount of coaxing from Brussels can expunge.

So, recognizing what has become hubristic over-extension, why doesn’t the EU simply cut its losses in Greece and aim for a union of states more broadly comparable with the economic benchmarks and vision that were established in 1999?  Why is an exit from the union so disastrous?

The answer lies in “The German Question.”

At the Beginning:

On the day that President Lincoln announced the Emancipation Proclamation in 1862, the King of Prussia made one of the most consequential appointments in European history; making Otto von Bismark Minister President of Prussia.

Until 1862, what is today recognized as modern Germany was little more than a series of loosely aligned principalities, divided economically and militarily – often feuding with each other as much as with other nations.

But between 1862 and 1870, Bismark fought a series of limited wars against European powers, which had the effect of uniting  these small German states under the control of Prussia. After Prussia’s stunning victory against France in the Franco-Prussian War of 1870, the birth of a united German empire was proclaimed at the Hall of Mirrors in Versailles in January 1871.

This moment, the unification of Germany, may have been the most significant geo-political event of 19th century Europe, that echoed violently through the 20th century to our present day.

“What to do about the Germans?”

After the Congress of Vienna in 1815, which ended the Napoleonic wars, a rough balance of power existed in Europe, where no single nation was considered too strong or dominant. That geopolitical parity lasted more than half a century, but was decisively ruptured by German unification.

Between 1870 and the beginning of WWI in 1914, Germany became the breakout European country.  It’s population grew to 65 million. It’s coal production increased by 400 percent. It’s international trade quadrupled through rapid and large-scale industrial expansion, which increased exponentially.

As a result, at the cusp of the First World War, Germany’s GDP of $244 billion was larger than that of both France ($138 billion) and Britain ($226 billion).  Indeed Germany had eclipsed Britain in industrial production, and had a larger population (and thus a larger pool of military age men and reserves) than France.

With a large land border with Germany, and a history of grievance France,  was uniquely threatened by Germany’s large, modern and highly efficient army.  For its part, Britain, which had been the undisputed naval power of the globe since Nelson at Trafalgar was threatened by a German naval build-up, which, by 1914, had created the second larges navy in the world,  built from scratch in less than 20 years.

In sum, Germany’s political consolidation, dynamic economic growth and military expansion had made Germany the strongest nation in Europe, a result that destabilized the European balance of power. While non-German European nations remained collectively stronger than Germany, any single nation was suddenly vulnerable. And the trajectory of German growth was such that at some point in the future, Germany would become an economic and military colossus capable of taking on any collection of nations, sealing a position of continental dominance.

The Alliance System:

The first European reaction to Germany’s rise was the “alliance system;” the construction of military coalitions of sufficient power to deter Germany. France and Britain buried their centuries long feud over a common fear of Germany.  Russia had already joined France in an alliance, hoping that the prospect of a two-front war would sober German ambitions. But this in turn, only provoked Germany to seek its own allies as a counter-balance.

What emerged looked less like a balance of power than a balance of terror, with two armed blocs facing off against each other, not dissimilar from that of post-WWII Europe. But this initial European effort to contain Germany resulted not in peace and stability, but WWI, which by every measure was catastrophic for Europe.

Britain lost two percent of her population. Both France and Germany lost more than four percent of their respective populations. If this sounds small, consider that a loss of four percent of the US population today would equal 13 million people.

Geopolitically, the end of WWI brought about the collapse of the Russian, German, Austro-Hungarian and Ottoman empires. The British empire was exhausted, having drained its considerable reserves and become a net debtor nation in order to finance the war. French losses in men, territory and industry threatened social cohesion. What had once been a stable if tense European order had been replaced by unimaginable destruction and political chaos in a strategic vacuum.

Managed Weakening of Germany:

The Treaty of Versailles, dictated by the Allied powers, ended WWI. But far from designing an enduring equilibrium in Europe, the document sought to create a  balance of power that artificially subordinated Germany by severely restricting German economic and military potential. This, combined with the creation of a series of new nations, from the territory of collapsed empires, would, in league with the French,  serve to counter-balance to any German breakout.

Under the Versailles agreement,  Germany was stripped of 25,000 square miles of territory, home to seven million German citizens. Germany would be forced to pay reparations to allied nations harmed by the war ($442 billion in 2015 dollars). Allied powers would occupy German territory east of the Rhine river for 15 years to ensure German payment from the industrialized Rhineland. Restrictions were placed on the size and scope of the German armed forces to ensure that Germany could never again become an offensive military power. And, despite the very complex origins of WWI, Versailles forced the Germans to admit responsibility for starting the war.

The demise of the Versailles European order was planted in the Versailles treaty itself, which was ultimately vindictive, uncompromising and short-sighted. War guilt and occupation insulted the German nation, to no constructive point, and became the anchor narrative for extremist politicians in Germany who sought to blame Versailles for all of Germany’s internal problems.

The economic burden placed on Germany was – tellingly in light of present day Greece – out of all proportion to what the Germans themselves could pay, leaving no light at the end of the tunnel. This triggered an unvirtuous economic cycle that led to the collapse of the post-war Weimar Republic, and ultimately to the rise of Hitler.  Indeed, opposition to the Treaty was key to Hitler’s early political career, and most of  the pre-WWII European diplomacy revolved around appeasing German demands to modify or abandon Versailles terms to keep the peace. The crisis that ultimately triggered WWII was, in fact, a Versailles creation – the Danzig Corridor – which cut off the German enclave of east Prussia from the rest of the German nation, ostensibly to create a port to the Baltic for Poland.

Economically, the political renunciation of Versailles led to a dynamic increase in German growth, just as the rest of the world was coping with the legacy of the Great Depression. When war came to Europe in 1939, Germany was again the most powerful nation in Europe, with an  economy that was nearly double the size of France, and one-third larger than that of the UK.  It was also larger than that of Soviet Russia, which was 20 times larger geographically than Germany at the end of the 1930s.

The failure at Versailles catalyzed WWII, which brought with it a level of carnage and continental destruction, unmatched in  history. 85 million people were killed or wounded in WWII, including more than seven million Germans and an astonishing 27 million Russians.

In the aftermath, one issue was certain: something would have to be done to ensure that the Germans could never do this again.

Germany Dismembered:

Allied planning for post-war Germany essentially erased the nation, dividing Germany into occupation zones, each controlled by a victorious allied power. In the lead up to peace, some American politicians had advocated turning Germany into an agrarian nation (regardless of its geography). Officially, American planners aimed to limit German industrial capability to 50 percent of its 1938 level, a metric designed to ensure that Germany could never again pose a threat to its neighbors. At the same time, the Russians forcibly repatriated as much German industrial plant as it could find, deconstructing any German infrastructure that may have been left undamaged or repairable after the war.

The future of any German nation appeared bleak.

But the emerging Cold War radically changed the priorities for the US and Western powers. With communist parties resurgent throughout Europe, and the Soviet Union a clear threat to the West, the US, Britain and France agreed to unite their sectors into one zone, which would create a buffer state and act as an anchor against the rising Left in Europe. In 1949, the Federal Republic of Germany (FRG) or West Germany was born. Shortly after,  in retaliation, the Soviets established a competing, Democratic Republic of Germany (DRG) in their sector, or East Germany.

German division was now the foundation of a new European order, defined by the Cold War.

Germany Contained:

Under the leadership of Germany’s first, post-war Chancellor, Konrad Adenauer, West Germany charted a course of reconciliation and cooperation, focusing on its internal development. When the FRG was formed, it was immediately eligible for economic aid provided through the Marshall Plan. The FRG also joined the NATO military alliance as full member on May 9, 1955, ten years to the day that WWII ended, firmly anchoring the country’s military forces within Western structures of collective defense.

American leadership and engagement, absent after WWI, was critical to this rehabilitation of the new, free West Germany. European nations, with the scars of two world wars in less than 20 years still fresh in their minds, could only countenance Germany’s rebuilding and rearmament only as far as it was embedded and subordinated to  Western economic and military alliances led by the US superpower.

These arrangements poised the FRG for a spectacular renewal.

From its founding in 1949, until the fall of the Berlin Wall in 1989, the FRG became a Western economic miracle.  Indeed, in less than 25 years from its founding, the country went from utter ruin to become the fourth largest global economy. Germany’s armed forces, integrated into the NATO military command, were the largest Western contingent of NATO forces in continental Europe, and on the front lines against the Soviets and Warsaw Pact.

Firmly rooted in multilateral and bilateral institutions – the UN, the European Economic Community (EEC), the GATT (forerunner to the WTO) and NATO – West Germany became rich and prosperous, but critical for its neighbors, fully contained.

Amidst political division, which was at the heart of the Cold War, it appeared that Europe had found a solution to the German problem. But the resolution was only successful for as long as Germany was divided.

That ended in 1990.

First Among Equals:

The reunification of Germany in 1990-91 was as historic as its unification 120 years before.

But the end of German division, and the concurrent end to the Soviet occupation of eastern Europe, triggered fresh anxiety among non-German Europeans, concerned about a future where Germany was suddenly unchecked, amid a political order that had disintegrated in a matter of weeks. While the integration of eastern Germany into Germany proper would take years to complete and cost trillions of dollars to accomplish, the memories of Germany’s past were real. Safeguards would be essential.

The most immediate safeguard was NATO. Despite the end of the Cold War and the disillusion of the Warsaw Pact (and the redeployment of Soviet forces back to Russian territory), NATO remained intact, in large part to reassure Europeans of America’s binding involvement in Europe, and to continue to bind Germany to a collective, limiting military structure, run by the US.

On a parallel economic track, France pro-actively sought German partnership to build out a binding economic structure, designed to tightly integrate economies, and lead to eventual  political union, to prevent Germany’s size and power from catalyzing another European war.

 That effort became the European Union.

An Atlantic vision rapidly emerged. A continental union, from Portugal to the Russian steppes with member states ceding partial sovereignty to a collective European body, which would establish a European identity. Banished forever would be the nationalistic impulses that had previously driven Europe to ruin.  Eventually, a new, supra-national government in Brussels would eclipse existing national governments, uniting foreign, security and economic policy with one voice for the entire continent.

But it never got that far.

The crowing achievement of the EU was the creation of the single currency, the Euro, in 1999. As Ramesh Ponnuru said in 2011:

Proponents of the euro adopted the optimistic theory that its introduction would eventually make the region an optimal currency area. The euro would facilitate tighter economic integration, thus causing the business cycles of European economies to converge. It would also give rise to stronger European political institutions.” (emphasis added).

The French, always fighting the last war, were especially interested in the second result, to prevent a German military breakout, which would ever more bind Germany into a web it could not extract itself from.  The Germans, meanwhile, far were more interested on the first that would lead to greater economic growth.

But this was wishful thinking from the start.  As Milton Friedman correctly foresaw before the Euro was even established:

The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent [economic] shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”

16 years later, Friedman’s forecast has come to pass in the form of the European sovereign debt crisis.

It is not without a bit of irony then that the French inspired EU project, designed to contain Germany within a collective union with France as an (artificial) equal partner, has instead created a economically dominant Germany that is first among equals in the EU.

In the hunt for greater political union, France ceded the terms of the Euro to Germany, which had required such control as the price for giving up its beloved Deutsche Mark. As a result, monetary policy for the EU would be conducted in the German way, with policies promoting sound money, fiscal restraint and low budget deficits.

Without fully appreciating it at the time, French agreement to German terms on the Euro had laid the foundation for both German dominance as well as the sovereign debt crisis that swept Greece and southern Europe in 2010.

 A currency union of diverse players, without political recourse, is a recipe for disaster.

In the hour-by-hour negotiations on Greek bailout, it has been the French who have pushing hardest to find a deal.  And so it should be. France stands to lose much more than Greek membership in the EU if creditor nations push Greece out the Union.

The very concept of a united Europe, which has been at the heart of French foreign policy since the end of WWII is at stake.

When the EU was founded, no provision was made for an acceding nation to exit the Union. If Greece is ultimately forced out, this is uncharted territory that creates the precedent for future exits. The danger of a “Grexit” is that membership in the Union essentially becomes conditional or even optional.

For the French, the nightmare isn’t specific to the over-leveraged countries of southern Europe, but to the Germans. Not only is Germany the largest economy in Europe, it is also “paymaster” for the bailouts necessary to keep the Greeks and others in the Union. Without Germany, there is no Union. What if the Germans become fed up with redistributing their wealth to the “spendthrift and undisciplined” nations of southern Europe and decide to exit themselves? No matter how small the door is cracked open, a Grexit takes the proposition from hypothetical to real.

And there is no Plan B.

For the French and other Europeans that have sought for over 140 years to contain a country they cannot compete with, a Grexit threatens the foundation of the Union established to keep Germany in check.

Everyone knows it, even as no one will say it.

This is what is driving Europe’s five year effort to resolve the sovereign debt crisis within the Union, and why, in the end, Greece matters so much.

That monetary union was a perceived short-cut by anxious and impatient non-German Europeans to hasten political unity and contain Germany has now been exposed as a fundamental error in the EU; a fault line that cannot be papered over.

Two questions remain.  What are the Europeans going to do with Germany? And what are the Germans going to do with the rest of Europe?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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