Europe’s path out of crisis: amidst powers shifts and divisions

The Euro cri­sis has deeply affect­ed Europe’s eco­nom­ic and polit­i­cal land­scape. Years of eco­nom­ic reces­sion have fuelled intra-Euro­pean divi­sions and Euroscep­tic ten­den­cies. Ger­many has emerged as the EU’s main eco­nom­ic motor and ‘reluc­tant hege­mon’. North and South have been divid­ed in the so-called ‘aus­ter­i­ty vs. growth debate’. Mean­while, one of the most pow­er­ful EU mem­ber states, the Unit­ed King­dom (UK), has announced a ref­er­en­dum on its con­tin­ued EU mem­ber­ship. Recent years have thus seen signs of impor­tant and poten­tial­ly durable pow­er shifts. While Euro­peans broad­ly acknowl­edge these changes, their per­spec­tives on them often differ.

Germany: ‘too big for Europe, too small for the world’

There is gen­er­al con­sen­sus that Germany’s pow­er has increased through­out recent years. The key rea­sons were Germany’s posi­tion of unpar­al­leled eco­nom­ic strength and resilience cou­pled with its active role in the man­age­ment of the Euro cri­sis. What was for­mer­ly known as Europe’s ‘Fran­co-Ger­man motor’ has grad­u­al­ly turned into the ‘Ger­man engine’. In EU mem­ber states and can­di­date coun­tries, Germany’s lead­er­ship role is close­ly asso­ci­at­ed with the per­sona of Chan­cel­lor Angela Merkel. In 2014, she ranked top of the Forbes list of the world’s most pow­er­ful women for the ninth time in a decade. Some of the EU-28 Watch coun­try reports quot­ed nation­al press to depict her as the ‘moth­er of all Euro­peans’ or as the ‘Queen of Europe’. How­ev­er, Germany’s increas­ing pow­er and lead­er­ship role in the eco­nom­ic domain have pro­voked mixed reac­tions across Europe.

A first group – large­ly com­posed of small­er as well as Cen­tral and East­ern Euro­pean mem­ber states – view Ger­many as an anchor of sta­bil­i­ty and call for a more pro­nounced lead­er­ship role. This is exem­pli­fied by Pol­ish For­eign Min­is­ter Radoslaw Sikorski’s 2011 state­ment that he was less afraid of Ger­man pow­er than of Ger­man inac­tion. This group of mem­ber states also favours stronger Ger­man engage­ment in the Com­mon For­eign and Secu­ri­ty Pol­i­cy. In light of devel­op­ments in Ukraine, the Baltic coun­tries specif­i­cal­ly call on Ger­many to play the role of a secu­ri­ty guar­an­tor counter-bal­anc­ing against Rus­sia. Oth­er mem­ber states, such as Fin­land, also per­ceive Ger­many as an ally of small­er states.

France and the UK can be said to form a sec­ond group. Both mem­ber states acknowl­edge Berlin’s pre­dom­i­nant role but view it with a degree of scep­ti­cism. A stronger Ger­many also implies a diver­sion of pow­er away from them. The UK is wary of a ‘reluc­tant hege­mon’, which does not know how to use its pow­er and may effect changes in Euro­pean inte­gra­tion or with­in the Euro­zone that are inim­i­cal to British inter­ests. Mean­while, French Pres­i­dent François Hol­lande has been strug­gling to imple­ment an alter­na­tive eco­nom­ic mod­el and was, at first, reluc­tant to cede Europe’s eco­nom­ic lead­er­ship to its East­ern neigh­bour. Paris has attempt­ed to com­pen­sate for its eco­nom­ic weak­ness through an active for­eign and secu­ri­ty pol­i­cy, for which it often sought Ger­man and Euro­pean back­ing ex post. Hol­lande has increas­ing­ly bowed to Germany’s eco­nom­ic lead­er­ship and its aus­ter­i­ty course. How­ev­er, domes­tic resent­ment cul­mi­nat­ed on 25 August 2014 when point­ed remarks by for­mer Econ­o­my Min­is­ter Arnaud Mon­te­bourg on the country’s ‘Merkel-inspired’ aus­ter­i­ty course induced the Pres­i­dent to dis­solve the gov­ern­ment. Germany’s Euro­pean lead­er­ship has thus become part of France’s inter­nal pow­er struggles.

The third group is con­sti­tut­ed of the South­ern mem­ber states and the ‘bailout coun­tries’. The Cypri­ot coun­try report cap­tures their gen­er­al per­cep­tion rather well: “The euro cri­sis has trans­formed polit­i­cal and eco­nom­ic rela­tions with­in the EU from a club of sup­pos­ed­ly equal coun­tries to groups of cred­i­tors and debtors. As the largest cred­i­tor coun­try, Ger­many has gained dis­pro­por­tion­ate polit­i­cal pow­er with­in Europe.” Ger­many is viewed as the prin­ci­pal pro­po­nent of Europe’s strict aus­ter­i­ty ‘dik­tat’, with its dire socio-eco­nom­ic con­se­quences. In recent years, Berlin’s lead­er­ship was often per­ceived as a ‘self­ish’ or ‘ruth­less’ effort to eco­nom­i­cal­ly dom­i­nate the con­ti­nent. In sev­er­al of these coun­tries, opin­ion polls revealed that Ger­many was even seen as an out­right threat to the domes­tic econ­o­my. Pop­ulist polit­i­cal forces, par­tic­u­lar­ly in Italy and Greece, engaged with these nar­ra­tives and nour­ished the brew­ing anti-Ger­man sen­ti­ment with ref­er­ences to the country’s Nazi past.

Anoth­er dimen­sion rel­e­vant to the per­cep­tion of Germany’s role in Europe is relat­ed to the enlarge­ment dossier. Ger­many is gen­er­al­ly viewed as a rather strict gate­keep­er in the enlarge­ment process. This is cer­tain­ly the case for Turkey’s EU acces­sion, but also – to a less­er extent – for the West­ern Balka­ns. Can­di­dates for EU mem­ber­ship such as the for­mer Yugoslav Repub­lic of Mace­do­nia and Mon­tene­gro view Ger­many as a key play­er in their acces­sion process­es whilst recent­ly acced­ed Croa­t­ia described it as a ‘hard­lin­er’. Ice­land con­sti­tutes a spe­cial case. The Ice­landic gov­ern­ment has sus­pend­ed acces­sion nego­ti­a­tions in May 2013. In this waver­ing can­di­date coun­try, the ques­tion of pow­er rela­tions in Europe is per­ceived in terms of the inter­ac­tion between large and small mem­ber states. The Ice­landic No-Cam­paign depicts Germany’s pre­dom­i­nance as anoth­er sign that the EU is a slow mov­ing train in which large mem­bers impose speed and direc­tion while small­er ones have to fol­low (see Ice­landic coun­try report).

Ger­many has thus encoun­tered ambigu­ous and part­ly con­tra­dic­to­ry expec­ta­tions from its neigh­bours. In reac­tion to harsh crit­i­cism from cri­sis-torn coun­tries, Berlin under­lined that deci­sions have been tak­en by the Euro­zone coun­tries as a whole and were not imposed by Ger­many. Mean­while, the for­eign pol­i­cy elite, led by Fed­er­al Pres­i­dent Joachim Gauck, has respond­ed to exter­nal calls for more polit­i­cal lead­er­ship. In his open­ing speech at the 50th Munich Secu­ri­ty Con­fer­ence in 2014, Gauck announced the new par­a­digm of ‘respon­si­bil­i­ty’, promis­ing a more proac­tive Ger­man for­eign and secu­ri­ty pol­i­cy, includ­ing the use of mil­i­tary force.

This rhetor­i­cal shift away from the tra­di­tion­al cul­ture of polit­i­cal and mil­i­tary restraint reflects the elite’s aware­ness that Ger­many is expect­ed to play a role in inter­na­tion­al affairs that is com­men­su­rate to its eco­nom­ic weight. How­ev­er, for his­tor­i­cal rea­sons, the broad­er pub­lic remains uneasy about pro­nounced Ger­man lead­er­ship, par­tic­u­lar­ly in the mil­i­tary realm. Ger­many is also reluc­tant to play a counter-bal­anc­ing role vis-à-vis Rus­sia. Polit­i­cal elites and the pub­lic oppose a per­ma­nent NATO pres­ence in the Baltic coun­tries or Poland. In addi­tion, polls shows that most Ger­mans oppose fur­ther EU enlarge­ment. While Ger­many undoubt­ed­ly remains Europe’s eco­nom­ic pow­er­house, it is not ready to project polit­i­cal or ‘hard’ pow­er on or beyond the continent.

From austerity to growth and fiscal flexibility?

Recent years have seen intense debate con­cern­ing the best way out of eco­nom­ic cri­sis and reces­sion. The debate fea­tured a divide between north­ern economies advo­cat­ing a strict aus­ter­i­ty course and debt-laden, most­ly south­ern economies, oppos­ing strict aus­ter­i­ty and call­ing for mea­sures to stim­u­late growth and employ­ment. Where­as the first group has enjoyed low bor­row­ing costs and grad­u­al­ly increas­ing growth rates, the sec­ond has strug­gled with high bor­row­ing costs, large pub­lic debts, zero-to-neg­a­tive growth, and record unem­ploy­ment. The divide between aus­ter­i­ty and growth also ran across coun­tries along the left-right polit­i­cal axis. The ide­o­log­i­cal rift became appar­ent dur­ing the Euro­pean Par­lia­ment elec­tions, in which Euro­pean Social­ist can­di­date Mar­tin Schulz advo­cat­ed a renun­ci­a­tion of the aus­ter­i­ty course, while his coun­ter­part Jean-Claude Junck­er from the Euro­pean People´s Par­ty backed Ger­man-style aus­ter­i­ty prescriptions.

Pro­po­nents of a strict aus­ter­i­ty course view fis­cal con­sol­i­da­tion and dis­ci­pline as well as struc­tur­al reforms as pre­req­ui­sites for sus­tain­able growth and com­pet­i­tive­ness. Mean­while, oppo­nents of the aus­ter­i­ty course all for the intro­duc­tion of Eurobonds or the estab­lish­ment of a redemp­tion fund for coun­tries with exces­sive nation­al debt. They favour a revi­sion of the Fis­cal Com­pact towards more flex­i­bil­i­ty and demand greater empha­sis on mea­sures such as the ‘Youth Guar­an­tee’ scheme, the ‘Com­pact for Growth and Jobs’ and a deci­sive revival of the ‘Europe 2020 Strategy’.

There has been increas­ing con­ver­gence between these two camps, based upon the recog­ni­tion that growth and aus­ter­i­ty are not mutu­al­ly exclu­sive and that the debate con­cerns find­ing the right bal­ance between the two. Germany’s grand coali­tion between the Chris­t­ian Demo­c­ra­t­ic Union and the Social Demo­c­ra­t­ic Par­ty (in office since 2013) has soft­ened the country’s strict aus­ter­i­ty course. Oth­er pro­po­nents of aus­ter­i­ty, such as Fin­land and Den­mark, have grad­u­al­ly loos­ened their stance over time. Mean­while, some of the south­ern economies, notably Italy and Spain, are now more inclined to accept the Union’s bud­get rules on the con­di­tion that they are com­ple­ment­ed with growth measures.

Italy, which cur­rent­ly holds the rotat­ing Coun­cil Pres­i­den­cy, has called for greater flex­i­bil­i­ty in the inter­pre­ta­tion of the Sta­bil­i­ty and Growth Pact in return for deci­sive struc­tur­al reforms. While a revi­sion of the Pact has been exclud­ed, the Euro­pean Coun­cil agreed on 26–27 June 2014 to make “best use of the flex­i­bil­i­ty that is built into the exist­ing (…) rules”. How­ev­er, the sub­se­quent meet­ing of the Eco­nom­ic and Finan­cial Affairs Coun­cil on 7 July 2014 demon­strat­ed that the mem­ber states diverge in the inter­pre­ta­tion of the phrase “best use”. Germany’s Finance Min­is­ter, Wolf­gang Schäu­ble, and Euro­pean Com­mis­sion Vice-Pres­i­dent, Siim Kallas, rebuked the pro­pos­al by Ital­ian Prime Min­is­ter Mat­teo Ren­zi to exempt invest­ment on dig­i­tal infra­struc­ture from the cal­cu­la­tion of pub­lic deficits. They also stressed that struc­tur­al reforms were no alter­na­tive to fis­cal con­sol­i­da­tion. The debate between aus­ter­i­ty and growth has thus been lift­ed to anoth­er lev­el. The ques­tion is not so much one of ‘either/or’ but rather con­cerns the direc­tion of Europe’s growth strat­e­gy and the bound­aries of flex­i­bil­i­ty in the imple­men­ta­tion of its bud­get rules.

Opposing Brexit and ‘Europe à la carte’

A clear major­i­ty of EU mem­ber states oppos­es the UK’s pos­si­ble with­draw­al from the Union. Many expect a UK exit to weak­en the EU´s for­eign and secu­ri­ty pol­i­cy, thus dimin­ish­ing its pro­file in inter­na­tion­al affairs. Lib­er­al-mind­ed politi­cians are wary of los­ing an impor­tant ally in eco­nom­ic affairs and pro-open mar­ket poli­cies. Busi­ness rep­re­sen­ta­tives across Europe fear a UK exit, due to close trade ties with the island nation and the degree of eco­nom­ic uncer­tain­ty its with­draw­al would cre­ate. Oth­ers, such as the Czech Repub­lic are wary of los­ing an impor­tant counter-weight to Europe’s pro-inte­gra­tionist core. Ire­land is par­tic­u­lar­ly con­cerned as its only land bor­der is shared with the UK. In addi­tion, neg­a­tive reper­cus­sions on the peace process in North­ern Ire­land are expect­ed. Mean­while, a range of Cen­tral and East­ern EU mem­ber states as well as can­di­date coun­tries are afraid of los­ing an ally in their push for con­tin­ued EU enlarge­ment. This argu­ment is recur­rent, although the UK’s politi­cised dis­course on the immi­gra­tion of Bul­gar­i­an and Roman­ian work­ers cast doubts on its pro-enlarge­ment stance.

Only a few, often sub-nation­al groups, express a more favourable atti­tude towards a pos­si­ble ‘Brex­it’. Among them are Euroscep­tic forces, which could por­tray a UK with­draw­al as an exam­ple for the EU’s grad­ual demise and dis­in­te­gra­tion. For exam­ple, rep­re­sen­ta­tives of the Ice­landic No-Cam­paign would like­ly depict it as a tri­umph and encour­age Britain’s re-entry in the Euro­pean Free Trade Area and mem­ber­ship in the Euro­pean Eco­nom­ic Area. It would also rein­force Euroscep­tic ten­den­cies in Den­mark, where polls con­duct­ed after the announce­ment of a pos­si­ble UK ref­er­en­dum showed that half of the Dan­ish pop­u­la­tion was in favour of fol­low­ing the British exam­ple. A UK ref­er­en­dum would also con­sti­tute an impor­tant prece­dent for pro­pos­als such as that of Italy’s Five Star Move­ment to con­duct a ref­er­en­dum on the country’s con­tin­ued Euro­zone mem­ber­ship. Inter­est­ing­ly, a sec­ond group with a more pos­i­tive atti­tude towards a poten­tial ‘Brex­it’ is the pro-inte­gra­tionist camp – for instance in Aus­tria, Esto­nia, and Lux­em­bourg – that views the UK as an obsta­cle to Europe’s grad­ual federalisation.

In the UK itself, the ques­tion of a poten­tial exit remains open. Much will depend on the out­come of the 2015 gen­er­al elec­tions. Labour announced that it would not con­duct a ref­er­en­dum unless forth­com­ing Treaty changes sub­stan­tial­ly affect­ed the UK’s nation­al sov­er­eign­ty. Mean­while, the Con­ser­v­a­tive Par­ty promised to rene­go­ti­ate the terms of EU mem­ber­ship and to put the results of this process to a ref­er­en­dum by 2017. Accord­ing to recent polls, Labour and the Con­ser­v­a­tive Par­ty are like­ly to go head to head in the 2015 gen­er­al elections.

The sweep­ing vic­to­ry of the UK Inde­pen­dence Par­ty (UKIP) in the 2014 Euro­pean Par­lia­ment elec­tions put addi­tion­al pres­sure on the Con­ser­v­a­tive Par­ty to bol­ster its Euroscep­tic cre­den­tials. Ear­ly reper­cus­sions could be observed in the debate on the appoint­ment of the next Com­mis­sion Pres­i­dent. Prime Min­is­ter Cameron was fierce­ly opposed to major­i­ty can­di­date Junck­er, and argued that Europe need­ed a reform-ori­ent­ed leader rather than an engrained rep­re­sen­ta­tive of the Brus­sels bureau­cra­cy. He warned that a UK exit would become like­li­er if Junck­er was to be appoint­ed.  How­ev­er, in late June 2014, Britain was out­vot­ed by 26 mem­ber states and only backed by Hungary’s Vic­tor Orbán. To assuage the blow, the mem­ber states declared that Britain’s con­cerns about the Union’s future would be addressed, that the Treaty’s prin­ci­ple of an “ever clos­er Union” allowed for dif­fer­en­ti­at­ed inte­gra­tion, and that the appoint­ment pro­ce­dure for the Com­mis­sion Pres­i­dent will be reviewed.

Nev­er­the­less, polls showed that the share of Britons favour­ing a with­draw­al increased after Juncker’s appoint­ment. Mean­while, only few mem­ber states are will­ing to accept a Europe à la carte to cater to British excep­tion­al­ism. At this stage it can­not be expect­ed that a rene­go­ti­a­tion of the UK’s mem­ber­ship terms will sub­stan­tial­ly alter the pic­ture. A vic­to­ry for the Con­ser­v­a­tive Par­ty in the gen­er­al elec­tions is thus like­ly to lead to the UK’s with­draw­al. The UK main­tains a broad diplo­mat­ic net­work, is the Union’s third largest econ­o­my and its biggest defence spender, and has the bloc’s third largest pop­u­la­tion. Its with­draw­al would not only lead to a redis­tri­b­u­tion of polit­i­cal pow­er with­in Europe, but also to a sig­nif­i­cant decrease in Europe’s col­lec­tive ‘soft’ and ‘hard’ power.

‘It’s the economy, stupid!’

Whether the described pow­er shifts and divi­sions will con­sol­i­date over time will large­ly depend on the extent and speed of eco­nom­ic recov­ery. The past years have shown that shared pros­per­i­ty rather than the last­ing paci­fi­ca­tion of the con­ti­nent draws Europe’s cit­i­zens togeth­er. Cur­rent­ly, the per­spec­tives for eco­nom­ic recov­ery and sus­tain­able growth are still uncer­tain and above all, uneven. While the north­ern economies seem to be back on track, the South – includ­ing France and with it Europe’s sec­ond-largest econ­o­my – con­tin­ues to stag­nate. Unless a sat­is­fac­to­ry bal­ance between growth and aus­ter­i­ty is found, the gaps between North and South as well as left and right are like­ly to widen. While the EU would prob­a­bly sur­vive a UK exit, a last­ing North-South divide and enhanced polit­i­cal polar­i­sa­tion will be hard to digest.

This sur­vey was con­duct­ed on the basis of a ques­tion­naire that has been elab­o­rat­ed in March 2014. Most of the reports were deliv­ered in June 2014. This issue and all pre­vi­ous issues are avail­able on the EU-28 Watch web­site: www.eu-28watch.org.

The EU-28 Watch No. 10 receives sig­nif­i­cant fund­ing from the Otto Wolff-Foun­da­tion, Cologne, in the frame­work of the ‘Dia­log Europa der Otto Wolff-Stiftung’, and finan­cial sup­port from the Euro­pean Com­mis­sion. The Euro­pean Com­mis­sion is not respon­si­ble for any use that may be made of the infor­ma­tion con­tained therein.