Yesterday was International Workers’ Day. It was celebrated all over Europe with public holidays. It is a bit ironic that on the day that Europeans celebrate our workers so many millions of these workers are on the dole. Traditionally, periods of high unemployment are also periods of social and political change. It is easy to see how the present levels of unemployment might lead to political U-turns.

Today, unemployment in Spain is 23.6%, Greece 21%, Portugal 15% and Ireland 14.7%. Greek, Italian, French and Irish voters will all be given a chance to express their preferences over the coming weeks and months. Although some of the political elites are trying to divorce local difficulties from greater European issues, everyone realizes that it is mendacious to try to do so because policy is being set in Europe.

And it is not just policy that is being set in Europe. Governments too are being determined by EU technocrats. This is extremely dangerous. Lest we forget, in the past six months, two legitimate national governments have been deposed by the EU. The democratically elected leaders of Italy and Greece have been thrown out and replaced by technocrats. These are now EU puppet governments. In Ireland, the government’s job, to use the words of one of our senior Labour politicians has been reduced to “policing” EU agreements.

The biggest loser in all this, if other electorates turn, is going to be the German view of the European Union.

Are we seeing the beginning of a process whereby Germany becomes isolated in Europe?

The Germans know that they do not yet have the “permission” to behave like a bully in Europe. If they overstep the mark, most countries have sufficient collective memory of German “form” to react in the expected way.

But Germany itself is changing too.

We now know that the design flaws of the Maastricht Treaty that created the rationale for European monetary union in 1992 have been exposed by the current sovereign crisis. Convergence, the mantra of EU central bankers, politicians and bond dealers in the 1990s, has proved a cruel mirage.

The Mediterranean did not magically transform into Greek, Italian and Spanish templates of sober, inflation obsessed, high savings, high tech Germany. Nor did we become a Celtic version of the Saxons.

The Euro triggered a tsunami of wasteful fiscal spending in Greece and Portugal, the loss of export markets for family owned Italian firms dependent on lira devaluations and an epic construction bubble in Spain whose denouement has devastated its banking system and cajas. Ireland has mirrored Spain.

“Convergence” was an illusion in Europe and the ECB’s “one size fits all monetary policy” was a disaster under Wim Duisenberg, Trichet and possibly even Draghi. Europe simply did not meet the economic model of an optimal currency area even a decade after the creation of the ECB and the Euro.

Germany has unquestionably benefited from the Euro project, the strategic goal of every postwar German chancellor since Konrad Adenaur. The people of Germany loved their Deutsche Mark but German industrialists dreamed of having a cheaper currency. Within the Euro, German business created a trillion euro export colossus and accumulated the world’s largest trade surplus. In fact, the crisis in peripheral Europe benefited Deutscheland AG since it triggered a devaluation of the Euro against the dollar and the Chinese Yuan, increasing Germany’s most important trading partner.

Just examine the graph, which shows the different unemployment experience of Germany versus Spain, Ireland and Italy. German unemployment is now the lowest in twenty years, while the rest are experiencing something quite different.

By using the French-German axis, symbolized by the term “Merkozy”, Berlin has emerged as the geopolitical and financial hub of 21st century Europe. Germany is no longer an American appendage, occupied and self-conscious, but the strategic partner of Russia and China in the brave new world of international power politics.

Ever since the Greek debt crisis escalated in May 2010, Germany in Europe has imposed its fiscal diktat: austerity and cuts in government spending in exchange for Troika bailouts.

But all is not rosy in the Teutonic garten. The Bundesbank was forced to acquiesce in the ECB’s giant “cash for trash” scheme. In addition, in recent weeks Chancellor Merkel’s insistence on balanced budget amendments in the “fiscal compact” which is supposed to seal German dominance in the EU is running into trouble.

The Dutch budget crisis, Nicholas Sarkozy’s humiliation in the French elections and the Spanish repudiation of its deficit targets are all symptoms of a new backlash against the German vision for Europe.
In the past week alone, there have been safe haven flows into German Bunds and US Treasury debt and rumours that the Bundesbank is secretly preparing for the end of the Euro. (These rumours are now monthly occurrences in financial markets.) However, if the Elysee Palace in Paris under Hollande were to become a fulcrum of anti-austerity, the Germans could look quite isolated and the unthinkable could become thinkable.

Berlin is losing its tenuous power to dictate the future of Europe.
But what happens if Germany decides it doesn’t care? Yes it is looking isolated, but what if the Germans’ patience with the rest of us is also fraying?

If Germany keeps being blamed for the woes of others and if it senses that it is surrounded by a bunch of ingrates who assume that Germany will write the cheque every time, might the Germans themselves get fed up?
Sometimes when we listen to the debates here on the fiscal compact, we could be forgiven for thinking that the world is waiting for us to make up our minds. This is not the case. The world is moving very quickly, with many parts in motion. We are now part of a European process.

Up to now, the talk has been that certain countries — Spain, Italy and Greece – might go it on their own, but what if the country that breaks ranks is Germany?

Have we considered that one yet?

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