BERLIN -- “The message is this: The muddling through will continue.”
The speaker was Markus Kerber, head of the German Federation of Industries, responding to a question over whether Europe’s leaders can find a way out of the economic crisis that threatens to destroy decades of postwar efforts to build a united Europe. These days, “muddling through” is what passes for optimism on the continent as it faces its biggest economic and political crisis since the end of the Cold War.
Recently, a group of American and German journalists brought together by Germany’s Bosch Foundation and the Center for Transatlantic Relations at Johns Hopkins University had a chance to meet with German and European leaders to see whether the euro can survive.
In Germany, seen by needy countries as the potential but reluctant savior — a “bad Samaritan,” in the words of one pundit — the answer is a resounding Yes. But no one knows when, nor how. Germans feel resentful over being cast as the bad guys, even as anxiety rises in other capitals with each new declaration of one more bank or treasury facing insolvency and one more meeting of statesmen and bankers comes up empty-handed.
The big fear is that a failure to “muddle through” would lead to the collapse of the common currency and bring about the unraveling of the 17-nation Eurozone and, eventually, the larger, 27-nation European Union, the great postwar project designed to create a network of common interests and consign the rivalries that bred centuries of chronic warfare to the history books.
As an economic entity with a common trade policy and a single market, the EU has been a grand success. In 2011, it generated a gross domestic product of $17.578 trillion, surpassing the United States as the biggest economy in the world. But the dream of the EU’s founders and the implicit aspiration of its current leaders has always been something greater — a true political union consisting of separate countries with their own cultures and traditions (and 23 official languages) but sharing a common bond and some sort of strong central government.
Pipe dream? At the moment, it seems more unrealistic than ever. Yet to understand what’s at stake it’s worth recalling why the European Union was created in the first place and why nerves are strained as Europe slogs unhappily through its summer of malaise.
Ninety-six years ago this month, the balloon went up on the great Somme offensive of 1916 in northwestern France. It was designed to break the stalemate of trench warfare in World War I but it proved to be one of history’s greatest military follies. When it was over as winter set in, the battle had produced little except slaughter on a grand scale. Of the 100,000 British soldiers who entered no man’s land on the first day, 20,000 did not return. The renowned military historian John Keegan estimates that by the end, 1.2 million German, British and French soldiers had been killed and wounded at the Somme. Despite these staggering losses, the front lines hardly moved.
The Somme was the culmination of more than a thousand years of bad history across war-ravaged Europe. In The First World War, Keegan writes that the battle became a turning point in history: “The Somme marked the end of an age of vital optimism in British life that has never been recovered.” Much the same can be said for Europe as a whole.
No one today imagines that Europe will regress to the days when peace was only a brief interval between savage wars. But some of Europe’s thinkers, like Hanns Maull, chair of international relations and foreign policy at the University of Trier, believe the current crisis has brought the European Union’s standing to a dangerous new low.
Maull said a return to the dynamic of German/French hostility, the cause of so much bloodshed over the centuries, is a “credible scenario” over the next decade or two if no solution to the current crisis is found.
Inevitably, a collapse would affect the United States, especially trade centers like Miami. The EU is the world’s largest exporting entity, but “free trade” usually becomes an early victim of economic contraction. In addition, the EU is the world’s largest donor of foreign aid and a critical source of foreign capital for other parts of the world, including Latin America. NATO would remain, but the absence of the EU as a political partner and diplomatic ally of the United States would weaken the Western alliance.
The great unifying force of postwar Europe was the Soviet Union, the common menace. For self-preservation, Europeans forgot about their rivalries and made common cause with the United States — the West, in diplomatic shorthand — under the NATO shield. That gave Western Europe more than a half-century of peace and allowed statesmen to form an economic union and start to build a common future.
But there is a crucial difference between the military alliance and the continental union. In NATO, said Kerber, the head of Germany’s industrial federation, the United States pays the bills and calls the shots. In the EU, each country goes its own way, and that is what the crisis is all about: Who pays (when money is tight), who benefits, and who decides?
Interviews with a number of officials in Germany and the EU made it clear that Europeans believed that by forming a single currency, they would create momentum toward “convergence,” one of the catchphrases of the current period. It means that the mechanisms that would forge greater unity — “More Europe,” in the words of German Chancellor Angela Merkel — would emerge spontaneously in response to the currency arrangement. Today, it is seen as a huge mistake to have assumed that if a common currency was created, everything else would follow.
There is a European Central Bank, but it does not have the powers of the Federal Reserve, and thus has proven inadequate in confronting Europe’s huge sovereign and private debt problem. It can’t “buy” debt like the Fed can. Nor there is there a common bank regulator. Nor is there any agency that can force a government to open its books to verify that its balance sheet is credible.
At one time or another, everyone’s broken the rules. After the Maastricht Treaty was approved in 1993 to formally establish the European Union, the rules of the game were set out, but there was no referee to blow the whistle. “We established stability criteria on deficits and debt — and the first to violate the rules were Germany and France,” lamented Thomas Matussek, a prominent former German diplomat and spokesman today for Deutsche Bank.
The debate comes down to whether Germany and other countries seen as relatively wealthy can agree to “mutualize” the debt — another catchphrase, meaning turning one nation’s debt into the common debt of every country. But the Germans argue that’s putting the cart before the horse. First, a governing mechanism will have to be put into place so that countries can be forced to abide by spending and debt ceilings. “We have waited too long to do this,” said one official.
That, however, requires that every country be prepared to give up some sovereignty — letting the central authority make crucial decisions about national budgets and borrowing limits. The borrowing countries refuse to agree, but the creditor countries won’t loosen the purse strings otherwise.
Germans point out that they have thrived precisely because they went through a wrenching economic readjustment some 10 years ago and manage to keep wages in check and productivity at a higher level. As a result, crucial economic measures like labor costs per unit — how much it takes to produce something — are lower in Germany than in Greece. In Greece, the work week is 35 hours. In Germany, it’s 42. Germany just raised its retirement age to 67. France just lowered it to 60 for some workers. Thus, the Germans feel, it’s not fair to blame them for not wanting to risk their own economic wellbeing to save the slackers.
Can the euro be saved? If Europe is not doomed to wallow in “permanent disappointment,” in the words of a prominent European official, it must make a quantum leap to a higher level of unity. Last weekend’s summit of European leaders produced an agreement toward a “banking union,” something Germany had been demanding as a preliminary step toward better economic regulation. The Central Bank emerged with stronger powers, more like the Federal Reserve.
Thus, the outlines of a deal are foreseeable — Germany and its allies yield on “mutualization,” making it easier for others to borrow money, but Chancellor Merkel will demand more “convergence,” or tighter regulation. More Europe.
Few credible voices in Europe call for dissolution. Hans Maull, who said a return to open hostility is a possibility, was quick to label that an improbable, worst-case scenario. “I’m no prophet of doom,” he insisted. Yet the best description he could muster when asked about the future of the European Union was “radical uncertainty.”
This is a watershed moment for Europe. The present is unstable, going back to the past is unthinkable, and moving forward nearly impossible as long as political leaders are unwilling to accept the fiscal restrictions that “convergence” requires.
“Things are a bit tricky at the moment, but they’re not impossible to solve,” said Kerber, leader of the German industrial federation. That’s the optimistic view again, yet somehow it sounds like whistling past the graveyard of Europe’s bitter history.