These are uncertain times for Europe, and unsafe times too. On top of military aggression from Russia comes rapidly increasing, cutthroat economic competition from China. And the great ally sounds again: America First.
And Europe itself? This actually causes political disruption internally and weakens it economically. In a short time, the governments of the two largest EU countries, Germany and France, have fallen. First, last month, the one in Berlin, and this week the one in Paris. Germany, traditionally the economic engine of Europe, is in a state of economic malaise. And France, politically and militarily of great importance, becomes bogged down in debt.
Does Europe have the political and financial and economic strength to hold its own in these times of geopolitical storms?
There are plenty of threats and risks. In a few weeks, Donald Trump will be in the White House. Whether Europe will retain its cozy US defense umbrella under a new round of Trumpism remains to be seen. On the trade front, the would-be president is threatening a series of tariffs that will likely also hit European exporters.
Meanwhile, Europe’s industrial base is threatened by China, which provides its own industry with generous subsidies. And the US has also opened its subsidy tap to boost the industry. In combination with the relatively low energy prices in both countries and their growing technological lead, this is pricing European companies out of the market.
That is now clearly felt. For the first time in 87 years, Volkswagen wants to close factories in Germany; Last week there was a massive strike at the company. It does not stop at the automotive industry: chemical and steel companies such as BASF and Thyssenkrupp are also cutting thousands of jobs. And it doesn’t stop at Germany: In Italy, the car industry, tire maker Michelin, is groaning closes French factoriesfrom the Netherlands to Spain chemical factories are closing.
And then there is Europe’s physical insecurity, due to Vladimir Putin’s relentless war against Ukraine, plus his parallel, ‘hybrid’ war against the West. The European Union accuses Moscow of “destabilizing” cyber attacks, sabotage and disinformation.
German malaise, French debts
It was against this background that the fall of the German and French governments took place. In both cases, disagreement over the budget was the reason – although the financial problems of Germany and France differ widely.
Germany is mainly economically stuck. GDP shrank last year and probably this year too. Not a week goes by without layoffs being announced somewhere in the industry. Germany’s infrastructure is neglected, innovation does not keep up with that in China and the US. Proposals to strengthen the economy with government funds shattered the coalition in November.
France is doing somewhat better economically, but it is now confronted with the consequences of years of reckless budgetary policy. The national debt (barely 113 percent of GDP, far above the EU maximum of 60 percent) is in danger of becoming unsustainable. Now there are urgent and significant cuts to be made – but there is currently no majority for this in the fragmented French parliament.
The EU has traditionally run on a strong Franco-German political axis. The countries aim to bridge their major political differences and translate them into compromises and initiatives in Brussels. The axis has not been turning smoothly recently: the personal relationship between French President Emmanuel Macron and German Chancellor Scholz is considered difficult and there was disagreement this year about, among other things, military aid to Ukraine, EU import duties against Chinese electric cars and the EU trade agreement with the Mercosur countries.
Now the political paralysis in Berlin and Paris has been added to this. None of the governments have a strong political mandate anymore. Germany will hold early elections on February 23. In Paris, even when he has appointed a new prime minister, Macron cannot ignore the fact that he does not have a majority in parliament. The president lost that majority in the parliamentary elections of June and July, which he himself unexpectedly called after the European elections.
It is not yet clear what the paralyzed character of the German and French governments in the EU administrative capital Brussels will mean. Lack of leadership from Paris and Berlin will not be regretted by everyone. Other Member States, or the European Commission, can then try to increase their influence. Think of Italian Prime Minister Meloni, or Commission President Ursula von der Leyen.
But Europe will need the Germans and the French anyway. The increase in defense expenditure by all member states is considered urgent given the Russian threat. An effective industrial policy that counteracts the deindustrialization of Europe cannot wait either.
On defense: a study by the European Defense Agency showed this week that although Germany has increased its defense spending, it clearly does not yet meet the NATO standard of 2 percent of GDP: the Germans reach 1.6 percent. France has barely increased expenditure and remains stuck at 1.9 percent.
Financial straitjacket
This is where German and French politicians encounter (very different) budgetary problems. Germany has constitutionally established a brake on incurring new debts (the Schuldenbremse). As a result, Berlin is in a financial straitjacket and it is also a lot less agile politically when, as now, the world becomes less safe. This is also increasingly felt in Germany: this week German central bank chief Joachim Nagel spoke in favor of more flexibility so that essential defense and infrastructure investments can continue. Christian Democratic opposition leader and possible new chancellor Friedrich Merz spoke earlier careful in the same sense out.
And France? That has actually long since lost its scope for additional investment. With the current budget deficit of 6 percent (twice the EU maximum), the top-heavy national debt will only continue to increase. The French are under pressure to cut spending, from the bond markets (interest rates on government debt have recently risen) and from institutions such as the European Commission and the International Monetary Fund.
In the meantime, France, like all European countries, is threatened with additional expenditure in the medium term due to the aging population, the energy transition and economic damage due to climate change. It only increases the pressure on budgets.
Taboo on EU debts is being lifted
What if Europe, as a bloc, managed to make the investments together – around all those national political problems – to increase its security and strengthen its economy?
That is the idea behind plans to invest much more heavily in industry, in innovation, in the energy transition and in defense at EU level, with jointly borrowed money. Hundreds of billions of euros per year in investments are needed to prevent Europe from declining into an increasingly poor society, according to the much-discussed report by Mario Draghi, former president of the European Central Bank, which was published in September. He supports pleas to finance the public part of these investments – the business community must also contribute – with jointly issued EU bonds.
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Such bonds, which are backed by financial guarantees from member states, have traditionally been a controversial idea: financially solid countries such as Germany and the Netherlands would then take on the risks of debtor countries such as France and Italy. The corona pandemic has in fact already lifted the taboo on EU debts. The European Commission temporarily issued loans covered by the Member States for the EU recovery fund to boost the economy.
Since then, the debate has raged on whether these loans should become permanent. That discussion gained extra momentum this week: Denmark, traditionally skeptical about this, gave up its resistance. The time for EU bonds is ripe now that Europe needs to better defend itself and now that it is in danger of losing out economically to the US and China, according to Danish Prime Minister Mette Frederiksen.
Defense breakthrough?
Meanwhile, negotiations on a specifically defense-oriented European investment fund have now entered an advanced phase, reported business newspaper Financial Times this week. The intended fund of 500 billion euros would be used for common weapons projects and for procurement of weapons and equipment. It would be financed by joint loans issued by Member States. The European Investment Bank (an EU institution) would have a technical role in it, but non-EU countries such as the United Kingdom and Norway could also participate. That would represent a political breakthrough after Brexit, the British EU exit in 2020.
Under pressure from the rapid geopolitical changes in the world, much seems to be becoming fluid in Europe, whether political stagnation and economic malaise in the two largest member states or not.