Our argument is that the rise of Germany as the new political, and not only economic, hegemon will have a dramatic impact on the internal structure of the EU as well as its external behaviour. As this is basically a materialist analysis other export-oriented nations e.g. the Netherlands, Austria and Finland could and should be included in the analysis. But for reasons of clarity and because Germany is not only economically relevant, as are smaller nations just mentioned, but also highly relevant politically, it makes sense to concentrate on the role of Germany.

The unexpected rise of Germany as new political hegemon in the EU

Germany has recently achieved the status of undisputed political hegemon in the EU. This will result in changes to the European Union, which are even more important than what was already apparent at the beginning of 2012.

Germany’s ascent marks a complete break with one of the founding pillars of Western European integration after 1945: the urgent need to control Germany in military and political terms.

The current challenging situation in the EU

Since the introduction of the Euro, Germany has implemented a new production plan. This new policy led to the German economy’s export offensive vis-à-vis its Eurozone partners, which is based on the inability of its trade partners to devalue their currencies. It has to be mentioned here that German exports grew not only in the traditional sectors like machine, steel, chemicals, etc., but also in food and livestock, etc. This important development is to be attributed to wage-dumping in Germany and not to productivity growth.

If Germany were to support the periphery with large sums of money, the result might be a modest growth of the economies of these countries. The case of East Germany proves that there is indeed little chance of support for peripheral areas. If Germany gave such support it would be able to stabilise its own export markets. The question then is: how important is the European periphery for Germany? Our argument is that the periphery of Europe is becoming increasingly less important as an export market for Germany today. Instead, the BRICS markets are becoming more important as they are in great need of exactly those products Germany can offer at highest quality: machines, chemicals and cars for their growing middle classes.¹

Some might now argue that Germany would be wise just to throw the GIIPS states out of the Eurozone. Why should Germany pay for someone it doesn’t need? In the political sphere you either pay for others for sentimental reasons, for example for nationalist reasons, as in German reunification, or you pay for others because they may be dangerous or helpful to you. Greece can certainly not count on German sentimentalism, which should be clear by now after Germany’s chauvinistic yellow press so successfully stirred up prejudice about the “lazy Greeks”. On the other hand, arguments about a dangerous Germany with its Nazi history might still predominate in the public memory, and for very good reasons, but it is no longer possible to activate this in the political arena as an asset deployed against the German elite. The reason for the devaluation of this moral asset is that after the end of the Cold War, too many Western countries wanted to use Germany’s power for solving their own problems in international relations.²

But this is not as easy as it may seem. Although parts of the German public would support such a move by their leaders, the elite has hesitated to adopt the Grexit strategy, at least until now. The point is that already now money is flowing from the periphery to Germany. In the event of Greece’s dropping out much more money would flow to the supposed “safe haven” of Germany. In January 2012 investors even paid the German state to get German state obligations, that is, Germany paid “negative interest rates”:

A dropping out of any state from the Eurozone would immediately lead to a sharp appreciation of the New D-Mark, or “Northern Euro”. The study by UBS Investment Research “Euro break-up – the consequences” argues that (after a Euro break-up) a new German-centred currency would have to realise an appreciation of around 40-50% vis-à-vis the current Euro.³ This would certainly strike at the core of the German growth model: its export industries. The entrepreneurs in Germany and the political elite may not be the brightest intellectuals, but they certainly know that the German internal market has nothing to offer them, after they “successfully” killed any internal demand in recent years.

The German elite sees itself faced with a dilemma

From the viewpoint of the German elite, on the one hand, the costs for helping countries without assets on their sides (countries either with political weight or who deploy the argument of “holding Germany down”, or countries with economic demand for German products), should be reduced as much as possible. On the other hand, a dropping out of the GIIPS countries would have devastating impact on Germany’s ability to export, due to the appreciation of its new currency. For these reasons we can expect some attempt to save Greece, or rather to save the balance sheets of the banks which own Greek state obligations. Huge sums of money will be provided to the Greek state, and to other GIIPS states, but just enough to keep them inside the Eurozone. Under current political circumstances it is to be assumed that no Marshall Plan, such as Barry Eichengreen has repeatedly demanded,⁴ will be adopted in order to boost the so rely needed local industries in the GIIPS states.

If this policy is successfully installed in the EU it will mean nothing other than a permanent deflation in the EU’s peripheral countries. As we can see nowadays in Europe, deflation is compatible with economic growth in the central regions of the EU. The Troika programmes represent the rigorous implementation of these plans.

How much money then will flow from the centre to the periphery in the future?

In short: as little as possible, but as much as is needed. As little as possible means: much less than is needed to rebuild, or rather build up for the first time, an autonomous local economy. The amount of money will be far less than what West Germany used to spend in building up East Germany after the local, fairly successful industry was destroyed by the reunification process. What does “as much money as needed” mean? Germany has to prevent, at least at this stage of development of the crisis, any breakup of the Eurozone. Usually analysts assume that this strategy is pursued to prevent losses for the German and French banking system. In addition to this point, we argue that the danger of lasting and permanent appreciation of the “core-Euro” is the real issue at stake for “Merkozy”.

It seems reasonable to assume that this will remain a major strategy for the German government as it serves both German financial capital, in securing “it’s way out” of Greek “toxic” papers, and in the prolongation of the export model of the real economy, which is also where the heart of the German trade union movement is.

Restrict the room for manoeuvre of the peripheral societies and build bridgeheads

With this strategy of “paying something but not enough” the European central elites are pursuing the goal of tactically restricting the room for manoeuvre of the societies of the GIIPS states. The money which is spent by the central elites is meant for suppressing public outrage by building up strategic bridgeheads in the peripheral states. These social bridgeheads will be kept alive and in their respective power positions only by the financial injections into the peripheral systems by the central states. The money will thus be used to keep the outraged and desperate parts of the GIIPS state populations isolated from each other. The socio-economic systems of the peripheral states will thus slowly be strangled to death, slowly but steadily, and the local elites will increasingly keep their societies in pace with the requirements put forward by the central EU elites.

What will the future EU look like?

Many EU citizens dreamed of an EU where the living standards are increasingly equalised, so that the material bases for a common identity can evolve. This dream has faded; the periphery had its chance, but we will now witness its demise. There will be some isolated examples of high-growth regions, but these regions will not serve as growth poles which radiate into their surrounding regions. On the other hand, we will see a north-western European group of states emerging, which will together establish a “look east” policy towards China. These export-oriented states will not offer good opportunities to all their citizens, but the unemployed in these countries will still be better off than their counterparts in the unfortunate GIIPS states. The elites of the export-oriented European states will ensure that this difference continues to exist, as through this a transnational coalition of the excluded can be prevented.

The external behaviour of the EU – or: What does the Fiscal Pact have to do with the “Global Europe” strategy?

One variable which influences the behaviour of actors in international relations is their internal social structures. How then will changes in the internal structure of the reproduction of European societies influence the actions of the EU on the world level?

The structure of the internal European integration process

Although the integration of Europe was pursued through market integration measures, the economic sectors which first became integrated in the 1950s make evident the deeply political meaning of this project: coal and steel on the one hand, and the territorial region on the other hand, which came under a real supranational authority. It was no accident that this region was the Rhine valley, as it comprises most of Western Europe’s core growth area. This area was the main production site for the development of weapons. For this reason integration by economic means can rightly be interpreted as deeply political. After the First World War, France occupied large sections of this area, in order to control Germany’s weapon production. History showed that occupation was not a feasible solution; as a result, supranational integration was decided on after 1945.

Germany rising…

The European Union is now at a very crucial point in its history. In recent years Germany has become the EU’s new political hegemon. This has changed the balance of power in Europe in an unprecedented way. Integration concepts have accordingly changed completely. Before the crisis, in essence Germany was the undisputed economic power of the EU, but France had the political power. Ideas for further integration were developed in the Élysée Palace rather than in Berlin. Unfortunately, the German perception of how to solve economic problems has now attained an unchallenged ideological hegemony in the EU. In the last month Germany’s elite dictated how the people of Europe are to deal with the crisis.

Stephanie Blankenberg (School of Oriental and African Studies, University of London) pointed out in the opening address of the Euromemorandum’s 2010 workshop that while neoliberalism attacked the social welfare state in the past, the new regime is directly attacking the state as such. Consciously or not, it is precisely this offensive that is being pursued by the German government. But in the convoy led by the German government we find in prominent places all the governments, without exception, of those countries which realise export surpluses inside the Eurozone. These countries are historically known as the “D-Mark-Bloc“, as they have been based on strong economies for decades.

One side effect of the current economic crisis in Europe is that the old idea of peripheral regions catching up is no longer realistic. In the 1990s and 2000s it had become the fashion in mainstream economic circles to talk about new growth regions, which would outshine the old so-called “Blue-Banana” region of Europe. To become an organic intellectual of the bourgeoisie one needs to tell the public that the free market will make the hitherto marginalised sections of societies or regions catch up; for that reason a lot of different potential growth regions were “discovered” by zealous economists. The most prominent is the “Golden Banana”, a region between Barcelona (Eastern Spain) and Genoa (North Western Italy). The funny thing is that these regions never showed great growth rates. But reality is irrelevant when it comes to promoting the free market.

The “Schwäbische Hausfrau” as the macroeconomic role model for the Eurozone

Looking at the decisions taken in the last month by the EU member states, though outside the EU institutions,⁵ we can understand the perception of the crisis by the European elites. To state it simply: their anti-crisis recipe stems from a famous interview with Chancellor Merkel. Asked how Europe should behave now in the midst of the crisis she argued in favour of the “Schwäbische Hausfrau” (Swabian housewife) as role model. The image of a housewife is deeply embedded in West German culture. It stands for a microeconomic perception of the larger economic sphere. Saving money is rational for single economic actors; of this there is no doubt. But unfortunately in Germany saving money is perceived as the best way of bringing a stagnating economy back to a sustainable growth path. If small economies like Luxembourg behave in such a microeconomic-oriented way, it does not influence the international markets, as Luxembourg is far too small to generate much domestic demand. This can unfortunately not be said about the most populous country in Europe, Germany, which is again by its sheer size the most important key market in Europe. Due to the growth of German power, this microeconomic rationality has become inscribed in the political and juridical system of the EU.

How do the reactions of the EU elites influence the future behaviour of the EU vis-à-vis its international partners in terms of international trade?

My basic point is this: The current re-writing of the rules of economic exchange in the EU will lead, intentionally or not – and we can even say: behind the back of the involved actors – to a completely new foreign-trade policy. In the years to come, so the argument, new trade initiatives will be developed by the European Commission, which will be completely focused on short-term profit for the big European TNCs without any sophisticated long-term strategy. This means that Europe’s trade partners have to reckon with aggressive trade behaviour from the European Commission.

The four different sectors of a national economy and their role in growth

The EU-internal problem is excellently described by Richard Koo, Chief Economist at the Nomura Research Institute in Tokyo.⁶ His argument is that Europe is in the midst of a balance-sheet recession, where monetary policy has no impact at all. Such a crisis, which is not a usual cyclical one, is triggered by the fall of asset prices in equities and homes. Each economy has four sectors:

1.         private households

2.         capitalist enterprises

3.         government with its huge budget

4.         the rest of the world

When there is a balance sheet, recession the private households and the capitalist enterprises do not want to borrow any money other than at the real interest rate, even if this rate is negative, because they have to deleverage due to previously taken loans. In such a situation only the state can lead the economy out of the crisis by investing money and thus using the funds which are accumulated by the two private sectors: the households and the enterprises.

According to Richard Koo, Europe is in such a situation, that is, in which only massive state intervention can secure the growth rates needed. But as discussed above, Europe has put itself in a straitjacket that will prevent any such move.

Let us look at the new rules of the European economy and see what we can deduce from them in terms of their effects on the current recession Europe suffers from:

Private households

In the GIIPS states the private household sector is dramatically over-indebted, and the need to deleverage is urgent there. The new economic governance programmes of the EU and the Troika favour further privatisation of public services, like the health and pension systems. This means that even in the central states of the EU private households have to save money. They become so-called “capitalists against their will”. They have to feed the financial “industry” with their small savings if they want at least to hope for a decent living in the future. As they are forced to set money aside, they cannot stimulate the necessary demand. This is a very dramatic situation: As Richard Koo shows, the leading economy of Europe, Germany, did not react to the monetary incentives of the ECB, but was brought back on the path to growth only through the high unsustainable debt in the GIIPS states. Only the demand which was artificially generated by over-indebted private households in the European periphery stimulated the (in reality rather meagre) growth rates in the EU in the last two decades.

Capitalist enterprises

Can we expect growth stimuli from the entrepreneurs in Europe? There is not much hope that they will invest any more than they have done in the past, knowing as they do that private demand will drastically fall in the coming years. To understand how reduced the readiness to invest is in the European capitalist enterprises one only has to look at the extremely low investment rates in German enterprises during the height of their boom. Competitive advantage was not sought in technological advancement but by undercutting the prices of their competitors.⁷ Profit which was earned was not reinvested in production, but was instead invested in the financial sector, as that is where higher returns were expected. Economic journalists in Germany for example spoke about the prestigious car manufacturer Porsche as “Porsche-Bank”, because large parts of its profit were earned through financial investments, and not by selling cars.

Government and the public sector

As Richard Koo points out, the state has to intervene in a situation in which neither capitalists nor consumers are spending money. The problem for Europe is that it has chosen to save itself to death rather than invest in a better future. The new rules for economic governance in the Eurozone make it impossible for the public sector to fulfil its necessary role as investor of last resort, so to say.

The rest of the world – conclusion

Europe is in a dramatic predicament in which no domestic sector is able to generate the necessary growth stimulus which could lead Europe back to stable growth rates. There is only one way out for the hegemonic bloc in Europe: Europe as a whole has to imitate Germany’s “successful” development path of recent years. Europe as a whole has to become a surplus-exporting economy. In this logic, the only hope for Europe to achieve tangible growth rates is to conquer foreign markets. The Wall Street Journal wrote on March 16, 2012 that:

The third successive rise in euro zone exports in January boosts hopes that improving foreign demand will help the euro zone return to growth sooner rather than later”, said Howard Archer, economist at IHS Global Insight, a consultancy. He said recent weakness in the euro will help exporters. […] A growing number of European leaders are calling for a renewed focus on fostering trade and other sources of growth, to offset cuts in government spending and help the region escape its long-running sovereign debt crisis. The heads of 12 governments – including Italy and Spain, the third- and fourth-largest euro-zone economies – wrote to the European Commission in February calling for “concrete steps” to modernize the economy, including new trade deals with other countries around the world (emphasis added).⁸

What is necessary in this struggle is that Europe excludes equal trade relations. As Europe is internally forced by its own rules to become a permanent deficit economy, with structural loss of demand, Europe needs only external markets as places to sell its own products. The rest of the world sees itself exposed to the threatening situation in which the biggest economy of the world copies a role model allowed only for catch-up economies: developing itself through export strategy. 

If these assumptions are right, which means that the European elites are able to impose this disastrous economic model on its own people, Europe will not remain a growth engine of the world economy. This in turn means that large parts of the emerging markets will lose a very much needed export market to develop their own industrial bases.   

Notes

1. See Bloomberg: “Germany’s Future Rising in East as Exports to China Eclipse U.S.”, April 7, 2011; tinyurl.com/3dwk8f7
   
   
2. The whole debate on the alleged “normalisation” of German foreign policy is based on this. 
   
   
3. http://bruxelles.blogs.liberation.fr/UBS%20fin%20de%20l%27euro.pdf
   
   
4. http://www.social-europe.eu/2011/07/general-marshall-on-the-aegean/; http://www.social-europe.eu/2011/09/europe-on-the-verge-of-a-political-breakdown/
   
   
5. This is to say that treaties were signed to integrate the EU further, but these treaties were signed outside of the legal procedures. The new rules developed in this way are thus international, not supranational. This again shows that the European Parliament and the European Commission are perceived as dangerous by the national elites.
   
   
6. Richard C. Koo: Learning wrong lessons from the crisis in Greece, May 20 2011.
   
   
7. http://www.bloomberg.com/news/2012-04-01/euro-was-flawed-at-birth-and-should-break-apart-now.html
   
   
8. Wall Street Journal, Alex Brittain: “Euro Zone Exports Rise for Third Straight Month”, http://online.wsj.com/article/SB10001424052702304692804577284990329954190.html