Germany’s Parliament voted on October 26 to limit the German commitment to European bailouts. This move shows Germany’s unwillingness to continue serving as the primary source of funding for Europe as a whole. This means circumstances within Europe must shift in order for the European Union and the euro zone to survive the current financial crisis. Sharp writedowns of Greek debt would have to not trigger a financial meltdown, EU member states would have to put the union’s interests above their own, and outsiders would have to be persuaded to become the primary funders for the European bailout mechanism.
In many ways this is the final stage of the post-Cold War interregnum. In the aftermath of World War II, the European Union (and its predecessors) was created to both constrain Germany and harness Germany’s economic dynamism to bolster French power. This was made possible because Europe was split and occupied by US and Soviet forces, while Germany was denied the ability to unilaterally further its national interests. Those circumstances have changed. The Soviets left, the US presence is a shadow of what it once was, and the Germans are reunified and once again looking out for themselves. With the Cold War over, the European Union is left to its own devices.
Germany benefits greatly from the European Union and the euro zone. These structures keep European competition firmly in the realm of economics and finance, areas in which the Germans, with their capital richness, central location, highly skilled labour and powerful industrial base, are well prepared to win. The European Union even created a regulatory structure that expressly puts German industry at an advantage.
But Germany is no longer willing to fund Europe, which it has done from immediately after World War II until very recently. The Germans have “bailed out” Europe several times. They paid massive war reparations — primarily to the French — after World War II. They funded the majority of the European Union’s development costs and agricultural subsidies for the first three decades of European integration. They paid for the rehabilitation of the former East Germany and contributed the largest share of funding for the rest of the former Soviet satellites.
They also were forced to allow the other euro zone states to enter into the common currency at artificially depreciated currency exchange rates.
Dissatisfaction with this past role was apparent when Germany’s parliament, the Bundestag, voted overwhelmingly to approve Chancellor Angela Merkel’s negotiating position at the EU summit later that day.
The Bundestag capped Germany’s financial guarantee to the European Financial Stability Facility (EFSF) — the euro zone’s bailout mechanism — at its current level of ¤211 billion ($294 billion). (The EFSF does not contain actual state cash; it uses government guarantees as backing to raise money on private bond markets. Contributing states only have to fill their guarantees if states undergoing bailout procedures default, in which case investors will be reimbursed with state money.) The Germans believe they have done enough, and they will no longer serve as Europe’s cash machine. The other important prohibitive clause in the legislation the Bundestag approved is opposition to the European Central Bank’s (ECB’s) purchasing any state debt. Such purchases are already illegal under EU treaties, but in order to prevent financial meltdowns the ECB has been making indirect purchases (it lends money to banks to buy the debt and, through economic machinations, ends up holding the debt).
The Germans see such actions as undermining to their fight to get included in EU treaties, and their efforts to get the weaker euro zone states implement austerity measures.
Reprinted with permission from www.stratfor.com
