Europe in 2015: Its Link to the 14th Century

In the 14th century, Europe was vastly different than today, although there are some similarities.  At that time, what today is Germany created a trade network throughout the Baltic that rivaled that of Rome to the south at its height.  In fact, Germany dominated European economics and politics until Great Britain emerged as the undisputed leader after colonization of America and its vast stores of raw materials.  As the continent entered the Industrial Revolution, Prussia gained prominence and it was the political leadership of Otto von Bismarck that eventually unified Germany.  Unfortunately, the creation of this economic juggernaut also created tensions in central and northern Europe that made armed conflict inevitable.  The resulting 70 years of war was the result.

After the collapse of Nazi Germany, Europe lay in ruins.  The Soviet Union was expanding their influence through the spread of communism creating a  buffer zone between itself and the rest of Europe.  After all, they had suffered three major armed invasions in a relatively short period of time resulting in a paranoia against Western Europe that persists to this day.  As for Germany, their first major decision leading to their rebirth occurred in 1948 when the deutschmark was introduced.  Although domestically many lost net worth, it allowed Germany to become more competitive in trade and laid the groundwork for their export economy.

In 1951, they helped form the European Coal and Steel Community which is basically the forerunner to the European Union.  France, which had been invaded by Germany in recent memory, joined in this German-Franco alliance primarily for security reasons, while Germany needed a major European trading partner.  This symbiotic relationship between two former adversaries where there was much justified mistrust held firm for years.

Furthermore, in this period the overriding concern was the Cold War.  Laying aside this mistrust against a common enemy to the east, Germany rose in prominence economically on the back of their exports.  Today, greater than 50% of Germany’s GDP is attributable to exports.  Germany, in turn, is reliant on Europe as a source for those exports.  This became even greater after the Berlin Wall fell and the two post-War Germanys were reunited. The fall of the Iron Curtain also opened new markets on the continent.  In effect, Germany had resurrected the trade league that existed in 14th century Europe.

The next big event occurred in 2000 with the advent of the euro.  With its adoption, many European countries lost the only economic leverage they had over the German export-driven economy, namely devaluation of their currency.  This further allowed Germany to become more competitive globally and their reach extended beyond Europe.  With the 2008 economic crisis, debt account balances had to be reconciled.  Germany ended up with a net surplus equal to over 5% of their GDP while other countries like Portugal, Ireland, Greece, and Spain (PIGS) had huge deficits relative to their GDP.  This, in turn, led to the 2012 euro crisis.

The German solution was to force the remainder of Europe to do what they had persevered at the end of World War II which was to reform their economies through pragmatic austerity with the goal of coming out an exporting country on the other side.  With declining purchasing power on the continent, Germany needed someone to take up the slack which is why Germany was and is the major driver between free trade between Europe and the United States while there is opposition in other European countries.

While the PIGS countries embarked on their German-induced austerity programs, other major players like France and Italy refused.  Part of this was due to that residual mistrust of Germany.  Because they refused German-backed EU bailouts and the austerity strings attached, they never embarked upon that austerity campaign.

To be sure, it has created hardships in many countries, especially Greece.  You also had competing economic theories with people like Paul Krugman arguing that the Central Bank of Europe pump money into the system- a program akin to the Federal Reserve’s Quantitative Easing in the US. The primary concern about this was the possibility of inflation, but using the US as an example, the Central Bank- against Germany’s protests- recently agreed to it.  However, the European Central Bank is dumping the money in participating country’s central banks.  It is then up to the individual countries to do what they want with the money.  In effect, this tactic is countering German economic influence in Europe.

Speaking of that austerity campaign,  there has been serious resistance in Greece and other countries. However, in November 2014 Spain boasted their largest employment gains ever.  With 24% unemployment, there is obviously still a way to go but they may have turned the corner.  Likewise, Ireland’s economy is projected to grow 3.6% this year- the largest growth rate in Europe.  Meanwhile, the economies of Italy and France have largely stagnated along with Portugal.  Greece, due to internal politics intrinsic to that country, has headed south.

The intransigence of many countries is born of that mistrust of Germany and German designs.  The Franco-German alliance ensured that no one single European power dominated.  Likewise, that was a consideration with the founding of the EU.  Because Germany is effectively making the decisions for Europe on a de facto basis, it scares the rest of Europe only too aware that the continent was ripped apart by war less than a century ago.

It should also be mentioned that in order for the German economy to continue to exist and grow, it is dependent on the free flow of labor.  This was another selling point of the EU.  However, it also opened the doors to foreign labor entering Europe and most of that labor came from Northern Africa and the Middle East which is the root of their current Islam problem.

What does this have to do with the United States?  The European Union is our top trading partner, so political stability and a growing economy there benefits us here.  While the continent fears and mistrusts a strong Germany, we have no such concerns.  This lack of concern directs our foreign policy towards Europe by, in effect, siding with Germany.

The fact is Germany became pragmatically austere and deliberately became an export driven economy out of necessity.  It was a shrewd post-war political move that has benefited that country.  And they had a great, pragmatic reason for doing so: their country lied in ruins after losing a war.  Without a restrictive Versailles Treaty hanging over their heads, they prospered.  Other countries now facing German-induced austerity in exchange for German bailouts have no such excuse.  As a result, there is the rise of nationalist and populist political parties thriving on that natural prejudice against and fear of Germany.  Greece was always largely dependent upon some sponsor state and Spain’s economy grew in the past as a result of conquest and plunder in the Americas.  That is no longer the case.  Germany had a base upon which to build at the conclusion of World War II.  Their expertise in engineering placed them in a unique position.

It should come as no surprise that when the EU announced a modified Quantatative Easing program, the four countries that voted against it were Germany, Estonia, Latvia and the Netherlands.  These countries are the very same ones that banded together in the 14th century to dominate the northern European economy, commerce and trade.  French and Italian intransigence towards austerity have only emboldened populist and nationalist factions in Greece.

Germany cannot transform Europe alone.  With the numerous threats facing the world, mainly terrorism, a politically stable Europe in some form is the most desirable outcome for US foreign policy. However, Germany is battling centuries of cultural history that, unfortunately, results in mistrust of Germany.  The recent terrorist attacks in France may have awakened the rest of Europe to the fact there is a greater threat to their survival than an economically strong Germany calling the shots.