Why you should care
Because Brexit might foreshadow an even bigger EU breakup.
Nearly 70 years ago, six countries — Belgium, France, Germany, Italy, Luxembourg and the Netherlands — started a grand experiment to secure a lasting peace following two world wars that had erupted in the heart of Europe. The European Coal and Steel Community was established in 1950 as a first step in integrating the continent economically and politically into what would eventually become the European Union.
Thirty years later, the genesis of the single market came as a growing union began sorting out the free flow of goods across national borders. Then, in 1985, the Schengen Agreement all but abolished internal border checks.
All the while, Germany was reasserting its European hegemony, but this time with economic dominance, not military might. It went on to become the EU’s economic powerhouse and, in 1999, with the introduction of the euro as a single currency, commenced its finishing touches on a masterpiece decades in the making.
But is there such a thing as too much success?
In 2017, Germany reported a record $1.6 trillion in exports — more than three times that of the EU’s next largest exporter, France.
Those record numbers — representing nearly 35 percent of Germany’s GDP — contribute to what is now the world’s largest trade surplus, which at $287 billion is bigger than China’s.
A powerful German economy with burgeoning exports means a strong EU, right? Not so fast. What if Germany’s muscular performance is actually a black swan — a low-probability, high-impact event — that triggers a sudden EU breakup in 2018, marking an abrupt end to the world’s second-largest economy?
It may not be a far-fetched scenario. Germany’s trade surplus is viewed with resentment across the EU due to the implied — and in some cases, tangible — economic imbalance that benefits Deutschland at the expense of über alles and could lead to the dissolution of Europe’s grand experiment.
Because Germany’s dominant economic position gives it leverage to dictate wider EU policies, from immigration to austerity, bitter indignation from the Balkans to France portends an uncertain future for the EU. It is a reality acknowledged even by German politicians like Fabio De Masi, member of the European Parliament.
Britain’s vote to exit the EU cracked the door for other members that think they have an even rawer deal in the shadow of Germany.
“Germany is the fourth-largest economy in the world and has an enormous political and economic power in the European Union, not least because Germany is selling more and more abroad than it buys, which means a high export surplus,” De Masi told the website Debating Europe. It also means its trading partners go into debt, he explained, leaving Germany “the only country to have the fiscal ammunition for the so-called euro rescue packages, which were, in reality, bank rescues. Thus, Germany can largely dictate policy in the eurozone.”
The economic imbalances feed into other policy areas that cause massive strains, especially in immigration policy as Germany’s open-armed stance on migrant flows from the Middle East led to political crises in Europe’s periphery in recent years. The anger is directed at Brussels and Berlin, and, at some point, a breaking point will be reached.
Sebastian Dullien, a senior policy fellow at the European Council on Foreign Relations, sees that point nearing in places like the Czech Republic, where workers at Volkswagen plants earn a third of the wages of VW workers in Germany, even though the assembly lines run at the same speed as the ones in Wolfsburg. He thinks the Czechs feel this value is taken from them, only to accrue to the Germans.
“This feeling of being second-class Europeans when it comes to wages also has consequences for other policy fields,” Dullien wrote in an article for the ECFR. Could Czech resistance to accepting refugees be linked to views that Germany is acting imperialist?
Indeed, from Hungary to Poland to Austria, elections have resulted in wins for immigration hard-liners and nationalists at odds with Germany and the EU at large. All this comes after the Schengen Agreement, a central EU pillar, began to crumble under the weight of the migrant crisis, with Hungary erecting border fences and France resurrecting border checkpoints. Britain’s vote to exit the EU cracked the door for other members that think they have an even rawer deal in the shadow of Germany.
While not saturating news coverage like before, the migrant crises in Europe still fuel populist fires that could bring the EU house down. The risk could manifest in the form of an indignant Austro-Hungarian axis that breaks away from Brussels and Berlin to form its own competing union, upending Germany’s supply chains and sending the euro tumbling as movements to reintroduce national currencies gain traction.
That scenario would be a massive departure from the currently resurgent European economy. The capital disruption would be immense, and domino effects would circle the globe as market participants tried to wrap their minds around the implications of the end of a European experiment 75 years in the making.
Such is the nature of political risk — the European narrative of 2018 could turn from unified economic sunshine to earth-shaking political plot twists that change the world as we know it, and empty investors’ accounts in the process.
Jeffrey Moore II is a senior analyst at Global Risk Insights.
Political and geopolitical publisher Global Risk Insights sets off with OZY to explore our volatile world.