Eurogeddon and the stresses on European unity

by David Pratt

Ottawa Citizen
November 30, 2012

The terms “Eurogeddon” and “Eurodammerung” have come into vogue this year to describe the European financial crisis. While some might find them dramatic, the economic and security implications of what is unfolding in Europe should not be under-estimated.

The gravity of the sovereign debt crisis and the potential unravelling of the European Monetary Union threaten to set back the dream of European unity and wind back the clock on many economic and security gains dating back decades.

In the postwar period, greater economic integration and security co-operation were seen by many as critical if Western Europe was to avoid yet another internal war and defend itself against the external menace of Soviet communism. As Lord Ismay, NATO’s first Secretary General, stated in 1949, the purpose of the North Atlantic Alliance was “to keep the Russians out, the Americans in, and the Germans down.”

Economic integration followed the creation of NATO with the Treaty of Paris in 1951 and the creation of the European Coal and Steel Community. This in turn laid the foundations for the Treaty of Rome in 1957 and the European Economic Community.

The story of Europe in the decades of the Cold War was one of slow but steady economic and political integration. Tariff barriers came down, a customs union was established, agricultural, trade and transport policies were harmonized, the EEC expanded and the European Parliament gained more power.

The demise of the Soviet Union and the fall of the Berlin Wall had some unintended political and economic consequences for Europe. While Lord Ismay’s objective of keeping “the Germans down” militarily was achieved, keeping them down as an economic power was neither desirable nor possible.

Conjuring up the ghosts of the past, the prospect of a united Germany was viewed with alarm by the French and particularly François Mitterand.

The French solution was to tie Germany ever more tightly to a united Europe. And for their part, the Germans were happy to oblige. For Helmut Kohl, German and European unification were “two sides of the same coin.”

It was not long before an aggressive plan for a European Monetary Union and deeper inter-governmental co-operation was hammered in 1989. Two years later, the Treaty of Maastricht was signed, paving the way for the euro, creating the European Union and attempting to broaden and deepen intergovernmental co-operation in areas such as justice and a common foreign and security policy; although with the latter, national interests always seemed to trump a common position.

But the euro, when introduced in 1999, was built on an unstable foundation that had more to do with politics than economics. With no common treasury, no shared fiscal policy or political union, and one interest rate for a set of very diverse economies, many critics felt it was only a matter of time before the euro’s weaknesses were exposed.

As governments, companies and individuals steadily piled up debt during the last decade in places like Portugal, Ireland, Italy, Greece and Spain, all the conditions were present for a full-blown economic crisis.

Acting like an accelerant on insolvency, the sub-prime mortgage crisis hit in 2008 and banks in North America and Europe started failing.

The cost of borrowing has spiked upward, and harsh austerity measures have had to be applied. There is mounting social unrest in Southern Europe and politicians are blaming other European countries and Europe generally for the current predicament.

In a poll taken for the European Commission, trust in the European Union is at an all-time low, having fallen from a high of 57 per cent in 2007 to 31 per cent in 2012.

As Chancellor Angela Merkel struggles to reform Europe’s financial underpinnings, it is ironic that almost 70 years after the end of the war, Germany, which once brought Europe to the brink of destruction, may be the only country capable of saving it.

David Pratt is a Senior Research Fellow of the Canadian Defence & Foreign Affairs Institute.