Dr. Michael Ivanovitch

Source: France and Germany are uprooting the pillars of the European Union

  • A deeply wounded, impoverished and divided Europe began to come back together after two world wars around the French-German reconciliation in the early 1950s.
  • The two countries made a deal in order to move the European project forward, but that uneasy alliance stumbled upon major difficulties posed by the last financial crisis, because Berlin and Paris have always been worlds apart.

Emmanuel Macron Attends People's Day Of Mourning In Berlin

A deeply wounded, impoverished and divided Europe began to come back together after two world wars around the French-German reconciliation in the early 1950s. That epochal event eventually became the foundation of the European economic and political union — a 60-year old work-in-progress.

During most of that time, Germany was taken as the paragon of economic and political stability — a critically important counterweight to France’s notoriously volatile body politic.

Those two countries made a deal — French agriculture in exchange for the free pass to Germany’s powerful manufacturing industries — in order to move the European project forward. The deal still holds, but that uneasy alliance stumbled upon major difficulties posed by the last financial crisis, because Berlin and Paris have always been worlds apart in the way they could handle their fundamental economic, social and political challenges.

Despite efforts to keep the appearances, the ever fragile bilateral relationship began to fray ten years ago. France simply could not keep up with the discipline of public finances and income policies dictated by German taskmasters seeking an unconditional “schwarze Null,” literally “black zero” (balanced) budgets — with a surplus bias.

Merkel is leaving a mess

As always, Germany came up on top by shifting unemployment to the rest of Europe with its export-led growth on the back of their meek Euro-partners.

But then came Germany’s great unraveling in 2015 as a result of its ill-conceived, open-door immigration policies to welcome people from war-torn Middle Eastern and North African countries. Originally, German Chancellor Angela Merkel dressed that policy up around humanitarian considerations, while not hiding the fact that she wanted a large influx of foreign labor to man Germany’s export powerhouse.

Predictably, Merkel’s fateful mistake — derided by a French philosopher as “violins and adding machines” — quickly created unbridgeable divisions among Germany’s two center-right governing parties and their center-left coalition partners.

To get out of that bind, Merkel, using a compliant European Commission, then unsuccessfully sought to impose mandatory immigration quotas on other European countries. Realizing that she could not manage the massive inflow of invited “guest-workers,” she wanted to dump them on the rest of Europe.

That uncontrollable immigration was the last straw, a watershed event that unleashed pent-up tensions in the German society — rising poverty, crumbling infrastructure, xenophobic and quite dangerous extreme right nationalist political forces.

Politically, that was Merkel’s undoing. If the elections were held now, Merkel would be presiding over a minority government. The most recent opinion polls show that the governing coalition of Christian and Social Democrats and the Socialist Party would only get 41.7 percent of the popular vote.

Those are cataclysmic events where the left-leaning Greens, polling at 20 percent, have emerged as the second-largest political party. At the extreme-right, the Alternative for Germany (AfD), coming out of nowhere in 2013, is now the country’s third-largest party with 15.2 percent of the votes.

And there’s worse. Merkel’s own political family — the Christian Democratic Union (CDU) — is a deeply divided house. In a leadership contest last Friday, Merkel’s handpicked stand-in and potential successor, Annegret Kramp-Karrenbauer, just squeaked through with only 517 votes of 1001 delegates to the party’s congress.

That’s the Germany Merkel leaves after 13 years at the helm of the EU’s largest country and economy. No wonder many German observers of all political stripes doubt whether Merkel deserves a long goodbye to finish her head of government’s mandate in 2021.

Macron’s violent rejection

And that’s the Germany that the beleaguered French President Emmanuel Macron set out to imitate. He introduced radical, painful and highly controversial labor market reforms, and a slew of fiscal changes in response to German pressures to keep the budget deficit below 3 percent of GDP, and to rapidly move toward the budget balance — a French “schwarze Null” command performance.

Legislating a liberal hiring and firing did not help the French labor market. The unemployment rate last October stood at 8.9 percent, the fourth-largest in the EU (after Greece, Spain and Italy) and roughly unchanged from the year earlier, with the youth unemployment at a devastating 21.5 percent – nearly four times larger than in Germany.

Oblivious to his free-fall rating of 21 percent, Macron then tried to move closer to Germany by raising the fuel taxes to prevent the budget deficit running over the mandated limit. The move was ostensibly defended as a sound environmental policy, but it opened up the floodgates of a deep-seated social discontent, spanning the cohorts of high-school students, middle-class people and battle-hardened trade union militants.

To quell the gathering avalanche of “yellow vests” (the vests French motorists must wear in case of a road accident), the government has temporarily rescinded the fuel taxes, but that left open all sorts of other claims, one of them being what French commentators call “a violent rejection of Macron and his government.”

The French Interior Ministry reported that the four-week old country-wide demonstrations gathered last Saturday 125,000 people, resulting in 1,385 police arrests and 975 people jailed. The interior minister called it “mission accomplished,” and the president congratulated some 90,000 army and police personnel, operating in full combat gear and armoured vehicles, for the job well done.

The former investment banker is indignantly branded as “the president of the rich,” disconnected from the ordinary people and disdainfully indifferent to their plight.

Macron’s chances of political survival and recovery seem heavily compromised. But even if he somehow beats the odds and remains in office, the ill-fated French-German couple is already condemned as a terminally dysfunctional engine of EU management.

That leaves Germany alone, with possibly some smaller northern allies, to exercise a European leadership — a totally unacceptable prospect to France, Italy, and the Visegrad Group (Poland, Hungary, Czechia and Slovakia).

Investment thoughts

The Europeans and any investors in euro-denominated assets should count their blessings for having the
European Central Bank
so brilliantly executing its genuinely independent policy mandate. In spite of a relentless attack from Germany for offsetting unreasonably tight fiscal policies with a carefully calibrated monetary easing, the ECB continues to save the day for struggling European economies.

Germany will carry on exporting unemployment by its self-centered economic growth. Based on data for the last three years, Germany systematically collected between 150 billion euros and 160 billion euros in annual wealth transfers from the rest of Europe.

Nobody is doing anything about that. For decades, Washington has been looking the other way. U.S. President Donald Trump keeps saying that “we want to change that,” but Germany pocketed a $56.5 billion surplus on its U.S. trades in the first ten months of this year — a whopping 8.2 percent increase from the year earlier.

If Trump is too distracted by other pressing issues, the Congressional leadership should perhaps take a look at trade policies that are messing up the markets taking nearly a quarter of American exports. Those American sales to Europe of about $400 billion (expected by the end of this year) mean that a lot of U.S. jobs and incomes depend on properly balanced and growth-oriented intra-European economic and trade policies.