EU on brink: How Angela Merkel’s ‘U-turn’ issues bloc critical dilemma

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At the end of May, France and Germany announced they are backing the creation of an EU bond to raise €500billion (£447billion) to boost the European economy, severely weakened by the coronavirus pandemic. If approved, it would be the first time the bloc has pooled its debt in this way. The measure immediately raised objections from the Netherlands, Austria, Denmark and Sweden, known as the “Frugal Four”, who support the establishment of a one-off emergency fund but do not back debt sharing or a significant increase in the EU’s next seven-year budget.

However, the pressure that the pandemic poses on the EU as a whole might work in favour of the Franco-German joint proposal.

The plan is, nonetheless, a huge turnaround move for normally fiscally cautious Germany, whose Chancellor has opposed similar proposals for years.

While this new action plan has almost gone unnoticed, a throwback report by former research director of the European Council on Foreign Relations, Hans Kundnani, suggests that behind Germany’s move there is more than what meets the eye.

In an entry for the London School of Economics (LSE) ‘s blog in 2015, Mr Kundnani argued that while Germany was no longer a threat from a military perspective, its economic power put intolerable pressures on other members of the eurozone, generating instability in much the same way as its previous military power once did.

This instability centred around the standoff between creditor and debtor countries, underlined by the victory of populists movements in Italy, Greece and Spain.

He wrote: “The ‘German question’ – which Europe seemed to put behind it – has now re-emerged in ‘geo-economic’ form.

“Whereas in the past Germany had faced potential enemies on all sides, it is now surrounded on all sides by NATO allies and European Union partners – in other words, in geopolitical terms, Germany is benign. But Germany’s persistent current account surplus puts intolerable pressures on other countries in the eurozone and in particular on the countries of the “periphery’.

“The size of Germany’s economy, and the interdependence between it and those around it, is now creating instability within Europe as its military power once did.”

At the same time, however, the expert noted, Germany remains too fragile to take on the burdens of hegemony, whether through fiscal transfers or a mutualisation of European debt or moderate inflation.

He continued: “In short, although Germany’s increased power and France’s relative weakness have allowed Germany to impose its preferences on others in the eurozone, it is too small to be a European hegemon, as some see it or urge it to become.

“What this may mean in concrete terms is a geo-economic version of the conflicts within Europe that followed German unification – in particular, something analogous to the kind of competitive dynamic of coalition formation among great powers that existed in Europe before 1945.

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“Since the crisis began, member states have adopted a mixture of bandwagoning and balancing in relation to Germany: some (especially those in central Europe whose economies are now deeply integrated with Germany’s) are beginning to form a kind of geo-economic equivalent of a sphere of influence; others (especially those of the so-called periphery) have found themselves under increased pressure to form what George Soros has called a ‘common front’ against Germany.

“This in turn seems to be leading to a geo-economic version of the old German fear of encirclement: Germany now fears the emergence of a coalition of weak economies rather than strong armies.”

This fear of an anti-German coalition, Mr Kudnani noted, increased since the European Council meeting in June 2012, when Mrs Merkel succumbed to pressure from France, Italy and Spain and agreed to enable the European Stability Mechanism, the Eurozone bailout fund, to directly recapitalise banks in crisis countries.

Although the European Central Bank kept the euro together, it was not enough on its own to create growth or to bring down the extraordinarily high levels of unemployment in eurozone countries such as Greece and Spain.

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As a result, the expert concluded, frustrated with the failure of centre-right and centre-left parties, voters are increasingly turning to radical left-wing and right-wing parties.

He added: “Thus the geopolitical dilemmas that Europe struggled with for centuries seem to have returned in geo-economic form, centred this time on the conflict between the interests of creditor and debtor countries locked into a single currency.

“What is unclear is how much conflict within Europe will be needed to resolve this dynamic.”

It can be argued that at the beginning of the coronavirus crisis, the fear of an anti-German coalition exponentially grew in Berlin, leading to Mrs Merkel joining France’s call for a €500billion (£447billion) recovery fund for the EU.

While the move might still not prove to be enough to quash anti-EU feelings completely, Germany’s U-turn has arguably highlighted a crippling dilemma in the bloc and its institutional fragility.

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