A Net Assessment of Europe – Stratfor

The European crisis was simple, at its core. Germany had the fourth-largest economy in the world. It derived over 50 percent of its income from exports, half of which went to the European free trade zone. In addition, using its substantial influence, the euro maximized the interest of the European economy as a whole. Given the size of the German economy, it is only a slight overstatement to assert that its economic needs defined Europe’s economy. The euro helped stabilize and sustain German growth, as did the regulations created by Brussels. This limited entrepreneurial behavior in countries where low wages ought to have been the impetus for growth. Instead, these countries became opportunities for German investment.

All of this was bearable before 2008, because since EU members signed the Treaty of Maastricht in 1992, which led to a common currency, they had seen a period of extraordinary prosperity. A rising tide floats all ships. But in 2008, a routine financial crisis (from the standpoint of a century) tore apart the fabric of the peninsula. During any economic crisis, the most important question is who shall bear the burden, the creditors or debtors? Broadly speaking, Europe split along these lines. Germany was the peninsula’s major creditor. Southern Europe was its major debtor. Leaving aside the moral posturing over who committed what injustice against whom, the Germans insisted on austerity. International institutions, including the International Monetary Fund, aligned with Germany.

The interests of the European Peninsula diverged into four parts: those of Germanic Europe (Germany, Austria and, to some extent, the Czech Republic); Mediterranean Europe; the eastern frontier of the European Union; and the rest of northern Europe.

Germany has an overwhelming interest in the European Union and its free trade zone. It is an inherently weak nation, as are all countries that are dependent on exports. Germany’s well-being depends on its ability to sell its products. If blocked by an economic downturn among its customers or political impediments to exports, Germany faces a declining economy that can create domestic social crises. Germany must do everything it can to discipline the European Union without motivating its members to leave. (The issue is not leaving the euro, but placing limits on German exports.) Thus Germanic Europe is walking a fine line. It is an economic engine of Europe, but also extremely insecure. Given the fragmentation in the European Union, it must reach out to others, particularly Russia, for alternatives. Russia is not an alternative in itself, but in a bad situation it could be part of a solution if Germany could craft one. This is, of course, a worst-case scenario, but the worst case is often the reality in Europe in the long run.

Southern Europe is seeking a path that will allow it to escape catastrophic austerity in a Europe that seems unable to generate significant economic growth. If that does not save Southern European nations, they must decide, in simplest terms, whether they are better off defaulting on debt than paying it. While Germany is currently inclined not to force them to this point, it is emerging on its own. This is the fundamental reality of Europe: Germany wants to save the free trade zone, but without absorbing Europe’s bad debts. Southern Europe needs to shift its burden and will eventually reconsider the viability of free trade, though it has not yet done so. Just as there are limits on agricultural trade, why not create the same environment that the Germans enjoyed in the 1950s, when they were able to protect themselves from American industrial exports, thereby growing their industry with minimal competition?

Central and Eastern European countries are in a complex position with the European Union, since they are generally members that are not in the eurozone. But for most of them, the question of Russia’s power and intentions is more important than the Greek crisis. For the east, there is an awareness that Europe never did progress to a common foreign and defense policy and that the European Union cannot defend them against Russia. They are also aware that NATO cannot defend them, except with American involvement, which is coming in very measured and slow increases.

Then there is the fourth part of Europe, particularly France, which is supposed to be Germany’s equal in the European Union but has fallen behind in recent decades, as it did in the 19th century. France is as much part of Southern Europe as Greece, along with high unemployment in the south. And along with the Southern Europeans, who are facing problems in the Mediterranean and North Africa alongside their economic woes, France is not drawn east, nor is it comfortable with German policies, but it is being drawn in multiple directions on economic and strategic issues.

[…]

The Net Assessment of Europe is that the Continent’s basic geographical split remains in place, and Russia still holds the weaker position. However, its relative strength has increased with the rise of divergent interests within the European Union, and its primary concern regarding the Continent is not Europe but the United States. Therefore, the crisis in the European Union will define the broader situation in Russia, and that fundamental crisis appears insoluble within the current framework of discussion. The discussion will move from debt and repayment to the creation of a sustainable European Union in which Germany may not get to export all it wants but must accept limits on its prosperity relative to its partners. Since politics makes that unlikely, the fragmentation of the peninsula will increase, and with it, Russia’s relative power will rise, drawing in the United States.

A Net Assessment of Europe.

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