Undoing Germany's "Reluctant" Hegemony

 July 30, 2015

To those in the know, the Italian peninsula was not only the cradle of the Roman Empire or Rome the centre of the Catholic faithful, but also the birthplace of capitalism and of countless statecraft innovations and institutions still widely used around the world today.

During the middle ages, the Italian city-states thus discovered and perfected what is commonly known among IR specialists as the “balance of power” mechanism. Every time one of the city-states became too powerful economically or militarily and tried to subdue the others, most of the rest of the city-states would form a coalition against the offender, thus preserving their sovereignty over their economic and political affairs.

This time-honoured tradition continued long after the development of nation-states and was successfully used to control the hegemonic designs of European powers, such as France or Germany, to give but two of the best-known examples. For the past two centuries, until some sixty years ago, balance-of-power arrangements were initiated, financed and operated by Britain, which succeeded in defeating both Napoleon and Hitler and in bringing their hegemonic designs to an end. British leadership in this field prevented the loss of sovereignty by continental nations and during the 20th century it preserved democracy and the rule of law, albeit not always by peaceful means.

It would be a mistake to believe that old hegemonic designs nurtured by economically more powerful European nations have vanished since the creation of the European Union. If anything – as demonstrated by the recent developments from the 13th of July 2015 – such hegemonic efforts which chiefly belong to Germany are played out within the existing political structures and institutions of the European Union.

Institutions such as the Eurogroup, although they do not have a legal existence, nevertheless wield enormous power over the economic and financial affairs of EU member-countries since the introduction of the euro. Within this group, Germany plays the leading role and with the help of a few satellite-states makes all the important decisions.

There are other EU institutions, such as the ECB, the ESM or the Commission, that are manned by technocrats who have more decision-power than any elected political leader of any country. Here too, Germany has succeeded in throwing its economic weight around and has used the European Union’s design imperfections to establish its de facto leadership .

Reluctant or not, German dominance within the EU is by now an established fact and should be actively resisted by the rest of the EU member-states, like any other hegemonic episode in our continent’s history.

When one country becomes economically or militarily too powerful at the expense of all other members of the group it belongs to, there are usually two standard responses to such a situation: bandwagoning or balancing.

Today, countries like Austria, the Netherlands or the Baltic states have preferred to bandwagon, becoming German satellites in the process. They have displayed a propensity to endorse Wolfgang Schaeuble’s vision of “reform” for the EU’s structures. The German Finance Minister has declared during a conference at Brookings Institute in April 2015 that even Germany’s former arch-rival France, not only Greece, needs to be “restructured” by a troika, citing however “democracy” as a temporary stumbling block…

The other response – that is balancing – is the preferred method of Italy and France, consummate operators of balance-of-power mechanisms in the past. This is how Shahin Vallée, former advisor to ex-President Van Rompuy, has recently described the current situation in The New York Times:

“This forceful attitudes and the several taboos it broke reveal that the currency union that Germany wants is probably fundamentally incompatible with the one the French elite can sell and the French public can subscribe to. The choice soon will be whether Germany can build the euro it wants with France or whether the common currency falls apart.

Germany could undoubtedly build a very successful monetary union with the Baltic countries, the Netherlands and a few other nations, but it must understand that it will never build an economically successful and politically stable monetary union with France and the rest of Europe on these terms.

Over the long run, France, Italy and Spain to name just a few, would not take part in such a union, not because they can’t but because they wouldn’t want to. The collective GDP and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.”

Since the 13th of July 2015, the number one priority in most EU capitals is no longer the Greek crisis, but how to deal with Germany’s latest hegemonic offensive. Ideally, a “Dexit” followed by the formation of a two-union Europe along the lines I have described in my earlier posts could replace the current dysfunctional union. Alternatively the union might disintegrate, USSR-style, into a myriad of nation-states large and small, dominated by populist or nationalist governments. Such a development, however, would gravely affect economic life as well as the security situation on our continent.

EU: What Are Latin Countries Waiting For ?

 July 23, 2015

Very few American experts grasp the motivations behind the construction of the European Union. As a result, American specialized literature abounds with misguided comparisons, such as that between the US Civil War from the 19th century and today’s tense situation between Europe’s North and South.

Yes, the EEC was initially formed in 1957 to prevent intra-European military conflicts in the future and to create a large-enough internal market for aspiring member-states to rebuild their economies and prosper.

Nonetheless, the European Union does not and will never have the same objectives as – to use another example in US commentary columns – American colonists did against British domination at the end of the 18th century. This is so because unlike nations around the world, the countries of Europe appeared on the ruins of the Roman Empire. Whenever politicians, kings, emperors and military leaders attempted to unite the continent’s nations into larger political units, their inspiration – whether consciously or not – has always been the Roman Empire.

Before 1957, quite a few European nations had tried their luck, rather unsuccessfully, at duplicating Roman hegemony across the continent. The emperors of the Holy Roman Empire, followed by Napoleon or Hitler have all done their best, in their own way, to emulate the Romans’ success by military means. Their efforts eventually ended up in failure, as no European nation was either big enough or strong enough to impose its will on all the others except for brief periods of time.

For the first time in the continent’s history, however, the launch of the political project of the European Union aimed to achieve unification by peaceful and democratic means. The experiment has been partially successful until two decades ago, when neoliberal policies and an ill-inspired monetary union have fatally undermined it.

When it comes to monetary union, it is also useful to remember that this was largely a French-inspired project which Germany joined only grudgingly. The first monetary union on the continent was also initiated by the French under the name of Latin monetary union (LMU). It lasted from 1865 to 1927 and included at first France, Belgium, Italy and Switzerland. Interestingly enough, the LMU was joined by Greece as early as 1867. The Latin bloc’s objective for all participating countries was to impose common standards for coinage at a time when the gold standard dominated commercial transactions on the continent. More astute than Germany of late, Austro-Hungary refused to join the LMU, as it rejected the bi-metallist approach of the French to coinage.

Today’s monetary union is now clearly in danger of disintegration, but preventing such an outcome is still possible. The first step in the right direction would be for the Latin group of countries to act again as a bloc. The latter should make it clear to Germany that a Dexit solution to the current predicament is necessary in order to salvage both the euro and what remains of European political unity. As matters now stand, the political systems of the southern half of the Union are close to implosion, witness recent developments in Greece, Spain, Italy and even France. Germany, meanwhile, does not only enjoy a healthy economic growth rate, but is basking in a political stability obtained at the expense of every other country in the Union…

Again, the historical experience inherited from the Roman Empire is a very useful guide to preventing a Soviet-type implosion of the union. Naturally, Germany’s recurring hegemonic tendencies and the fact that it has benefitted handsomely from the introduction of the euro for its exports, mean that in Berlin there is at present no appetite for doing the right thing by its European partners. This fundamental lack of empathy with the difficulties experienced by economically and politically less stable members of the EU has been proved time and again, with the EU leaders’ conference held on the 13th of July 2015 being just the latest in a string of such episodes.

Still, France, Italy, Spain and Portugal need to get together to gently ease Germany out of the euro and subsequently of the EU. As I have explained elsewhere, the German departure from the current financial and political structures of the Union should not, however, be an acrimonious process. After all, a diminished but more cohesive European Union will still have to trade and live side-by-side with Germany and its satellites, and vice-versa. For the political leaders of the Latin group of countries, however, there is no better solution to the euro-crisis than asking Germany to revert to the D-mark, as it is much better able to withstand an exit from the Eurozone than countries like Greece, Spain or even Italy.

EU: Grexit or Dexit ?

 July 19, 2015

Some seventeen centuries ago, emperor Diocletian realized that the Roman empire had grown too big and too diverse to be ruled from a single centre. Diocletian therefore decided to split it in two, the west ruled from Rome by a fellow army officer and the east controlled by himself. The east-west division became more or less permanent during the reign of Constantine. It was a wise administrative decision, which saved the integrity of the empire for another hundred years.

Fast forward to the present. The European Union, built on the ruins left behind by World War II, is experiencing a similar if not identical predicament. The citizens within its 28 member-countries, are growing more and more disenchanted with the Union’s leadership by the day. Truth be told, the EU has become much too big, too culturally diverse and politically unresponsive to continue to be viable in its present form.

One of the chief characteristics of the current political arrangements in the EU is Germany’s hegemonic status over its economic and political structures. As we can all recall, the Union was formed in the wake of WWII in order to prevent yet other military conflicts on the continent, involving again mainly Germany and its neighbours. To that end, an initial nucleus of six states (France, Italy, West Germany, Belgium, the Netherlands and Luxembourg) created an economic union which helped all of them rebuild their war-shattered economies and prosper. The victorious powers led by the United States forgave Germany most of its debts, opened up their markets to German-made goods and supplied the seed capital necessary (Marshall Plan).

For six decades the European Union grew, expanding southwards and eastwards, while the German economy became a powerhouse on the continent. In the wake of the fall of communism and the implosion of the USSR, West Germany had reunited with East Germany, and started to dominate not only the continent’s economy but also its political and – since the introduction of the euro- its monetary affairs.

The latter developments have unfortunately proved to be an unmitigated disaster for all its other EU partners. In truth, events over the last decade – the financial crisis, the sovereign debt crisis, austerity policies – have conclusively proved to many specialists that Germany, with a group of northern Protestant countries, has a vastly different set of economic responses and values, which are at odds with those prevalent in the southern part of the EU.

Thus, while Germans and their allies highly value a strong currency, low or zero inflation, low or zero budget deficits, a culture of thrift and the continuous reduction of public debt, countries like Italy, France and Spain – not to mention Greece, Portugal or Ireland – would prefer a significantly weaker euro, flexible budget deficit targets, higher inflation, the resorption of public debts through economic growth instead of austerity measures, and a massive reduction in the unemployment rates affecting them.

So far, Germany has succeeded in forcing all EU members to adopt its “six-pack” and “golden rule” and to maintain inflation close to zero. The outcome of these policies on the continent has translated into economic stagnation, social strife and a never-ending obsession with austerity and public debt reduction measures.

The current Greek crisis has merely highlighted the folly of such policies, as well as the unshaking determination of the German leadership to push the entire continent towards economic ruin. To avoid this, which could only lead to an USSR-type implosion of the Union, it would be more rational for Germany to leave it, reintroduce its beloved deutschemark and form an economic and political union of its own in the north of the continent. In other words, for the European Union to be saved from impending collapse, a “Dexit” option – and not “Grexit” – is what is currently needed. (Greece would not be able to threaten the survival of the EU the way Germany does.)

A Dexit should by no means be an acrimonious affair, or a disorderly one. Angela Merkel herself had alluded to the possibility of forming a Baltic Union as early as 2008. Starting with 2012, economists such as Alfred Steinherr, Anatole Kaletsky, Michael Mross, Aleš Michl, Kenneth Griffin, Anil Kashyap, Guillermo Nielsen, Ashoka Mody , Rolf Weder and Pedro Braz Teixeira have started recommending Dexit as the solution to the EU’s current economic and political predicament. The advantages of Dexit are clearly explained in a Time article from 2012:

 

“By contrast, if Germany were the one to leave, the euro would be the currency that falls in value, relative to Germany’s new national currency and also to the dollar. The weaker European countries would get to keep the euro but still get the devaluation they need, which would reduce their labor costs far less painfully than through wage cuts. In addition, the value of their outstanding debt would decline along with the value of the euro, and they would be more likely to be able to make payments on that debt and avoid defaulting.”

 

Viewed in this light, the third Greek bailout about to be concluded is rather of secondary importance. What is now needed is to start planning for an amiable and orderly Dexit, one which would benefit all EU member states. Failing to agree with the partition of the current Union into two entities – namely, an European Union centered around France and Italy and a Baltic one centered around Germany – could only result in a violent, USSR-type disintegration, accompanied by social strife, the revival of nationalism and xenophobia on our continent. Fortunately, such a partition will not lead to military conflict between the two sides further down the track, as NATO will still be there to prevent any such developments.

The SCO's Landmark Ufa Summit

 July 11, 2015

On the 9th and 10th of July 2015, the Shanghai Cooperation Organization (SCO) has held a landmark summit in Ufa (Russia), its 15th to date. Ufa has simultaneously hosted the BRICS summit, which was meant to further strengthen economic ties between its five emerging economic powers.

Founded in 2001 by Russia, China and four Central Asian republics, the SCO had until recently as its main objective fighting “the three evils: separatism, extremism and terrorism”. At Ufa, the six founding members have for the first time agreed to allow for the expansion of the organization by offering full membership to both India and Pakistan. Thus the US geopolitical push to see India included into a balance-of-power mechanism in Asia aimed at containing China has been thwarted. Accordingly, the United States will remain with a handful of allies in Asia, from the Philippines and possibly Vietnam to its old-time ally Japan.

The expanded SCO covers a huge geographical area which includes Eurasia, China and the entire Indian subcontinent, with a combined population in excess of 3 billion. Four of its members (Russia, China, India and Pakistan) are nuclear powers and have large, well-equipped military forces. During the summit the leaders of member-countries, new and old, have expressed their willingness to also enhance economic cooperation in strategically important sectors such as transport and energy production/distribution.

The State Department officials have reacted to the new developments in Asia by declaring that the United States do not consider Russia or China as “existential threats” to the Americans.