23 March 2020

Coronavirus is a one-off opportunity for the EU – can they take it?


In terms of my political risk career, betting against Europe rising to superpower status—as many left-leaning commentators blithely predicated in the early 2000s—has, to put it mildly, not hurt me any.

This is not due to some hateful, xenophobic prejudice against Europe; I have lived in the place for two-thirds of my adult life, and readily admit I adore its quality of life over anything else I have encountered (certainly compared to my decade in Washington).

But the European project, particularly the European Union (EU), has always struck me as one that does better in the sunshine than in the rain. Cosseted for the decades of the Cold War beneath NATO’s nurturing umbrella, the EU came to think that it, and not the transatlantic alliance, was providing the continent security in a dangerous world, which is a bit like the bird perpetually sat on the back of a rhinoceros thinking it is moving the great beast.

This decadent, utopian assumption that calamities have been abolished finds Europe once again psychologically unprepared for disaster, this time in the form of coronavirus.

And what a bad innings Europe has had. All pious talk of ‘solidarity’ has gone out the window, as the German government has been hoarding surgical masks rather than helping the hard-pressed Italians. The new European Central Bank (ECB) chief Christine Lagarde—despite having her fingerprints all over a French financial crisis and debacles ‘stabilising’ Greece and Argentina—has been in rare form, somehow putting into doubt that the bank cared about the growing bond spread between Germany and Italy, igniting an existential crisis that could drive Europe entirely apart.

The equally overmatched new EU Commission President Ursula von der Leyen has made discrete noises from the side-lines, but has done precious little to arrest the market’s tumble. In short, Europe’s leadership has not covered itself in glory over the past week, instead exposing the lie at the heart of the project: Europe is a union only when times are good; when they are bad it is every man for himself.

The crisis is an opportunity for Europe

Yet while the coronavirus has painfully illustrated Europe’s present political impotence, paradoxically a series of seemingly unrelated events allow me to be cautiously bullish about the place for the first time in my adult life.

Think of the great powers (the US, China, and the EU) as players at the poker table. For the past 20 years, the game has been played with a clearly defined set of rules and patterns, and who is winning (China above all, recently) and who is losing (the EU relatively) has not radically changed for quite a while.

For a long time, Europe has been a relatively dwindling force, economically sclerotic, politically divided and strategically (with the exception of France) an afterthought in terms of having full spectrum militaries, who can do everything from warfighting to peacekeeping. All of these power realties contrast with the two superpowers of the era, the US and China.

The coronavirus upends the game, thrusting all the cards high into the air. In a basic sense the player who now picks up their cards—in the immediate aftermath of the global pandemic—and plays them best can fundamentally alter the trajectory of the game itself. That is what a global, once-in-a-generation political risk event does. And it is a crisis that may amount to an opportunity for Europe.

First, Germany will emerge from the coronavirus crisis weakened, which in European terms is a very good thing. As Henry Kissinger astutely noted, the historical tragedy for Berlin is structural: Germany is too powerful to be just one of a series of great European powers (like France, Spain, and Italy) just as it is too weak to wholly dominate the continent. This unsolvable geostrategic conundrum lies at the heart of both the world wars, as well as European impotence over the past generation.

But given the ongoing de-linkage of globalisation—initiated by Trump’s trade wars but undoubtedly to be furthered by the coronavirus crisis—Germany, as one of the world’s premier exporters, stands to lose market share in terms of power over the long term. While it will remain the most important single country in Europe, it will tower less over its fellow European great powers. Given the calamitous do-nothingism of the long-serving Merkel government, this internal power change makes genuine European reform far more of a possibility.

Second, the frugal Germans–at last aware of the danger to themselves–have decided to open the spending spigots to the tune of 500 billion euros to combat the virus. Berlin has pledged to do whatever it takes to safeguard its economy; it can now hardly fault other European countries from doing the same. This removes a major obstacle to EU-wide reform.

Third, and further afield, the all-suffocating American embrace is bound to lessen following the pandemic. The US, while undoubtedly possessing both the most advanced and most dynamic economy in the world, also has a terrible political leadership (the congenitally erratic Trump is just the most obvious example) that has been dreadfully slow to react to the coronavirus.

Fourth, Merkel’s particularly ruinous reign — during which Germany have perpetually blocked any real efforts of enacting EU-wide reform, such as what French President Emmanuel Macron has been proposing — may at last be coming to an end.

A Macron-style deal in general would see Germany provide an economic backstop (largely on its terms) to the EU, leaving it with a real treasury ministry, real fiscal policy, and euro-bonds commonly held from here on out (though debt up to now would be state-to-state). In essence, Macron wants a confederation at a minimum and a federation at a maximum. Germany might over time just agree to the former.

As such, the ramifications of an obscure election in the German state of Thuringia cannot be overstated. It saw Merkel’s chosen heir, Annegret Kramp-Karrenbauer (know universally as AKK), lose control of the local Thuringian CDU party, of which she was the national head. Ignoring her flaccid entreaties, the local CDU chose to vote alongside the heretofore anathema far-right Alternative fur Deutschland (AfD), favouring a third candidate for the Thuringia state leadership.

Merkel was forced to condemn both the local Thuringian CDU party for casting in its lot with the AfD, as well as her ineffectual acolyte AKK for not preventing the mess in the first place. This scolding proved to be the final nail in AKK’s coffin. She dramatically resigned the national leadership of the party, and with it, scuppered Merkel’s plans for a stable succession.

Two very different candidates have since sprung up, contesting the party leadership contest, which will be held on 25 April. It amounts to the most important election in Europe in years.

Armin Laschet, regional leader of the populous state of North Rhine Westphalia, has emerged as the compromise candidate, tacitly blessed by both Merkel and the party establishment. A victory for Laschet would signal more of the same, with the CDU hewing to a centrist course domestically, with little hope for German support for European reform. As was true with AKK, Laschet will be little more than a Merkel mini-me.

However, the favourite (and long-time Merkel nemesis) Friedrich Merz is a man cut from an entirely different cloth. Long the standard-bearer of the right wing of the CDU, the confident, market-friendly Merz would amount to a repudiation of Merkellism. Not only would he tack the party back its rightwards home (hopefully hoovering up AfD voters, much as Boris Johnson amalgamated Nigel Farage’s support), but he would be open to a hard-headed deal over Europe with Macron.

At long last, then, there is a glimmer (and that’s all it is) of hope for Macron’s ambitious and necessary European reform agenda. It is true that, before the Elysee pops the champagne corks, a number of caveats are necessary. In moving to the right, Merz would have to be mindful of betraying the concerns of some of his new eurosceptic constituents.

Even more importantly, German governments are habitually coalitions. Who the CDU enters into coalition with will largely determine its European policy. A deal with the surging centre-left Greens is the best-case scenario, but there are a bewildering array of other possible coalition outcomes, almost all of which lead to further deadlocks over European reform. However, even with these necessary caveats, one thing is surely clear: the long-slumbering German giant is at last awakening. And that is good news for the European project as a whole.

Can compromise produce a Europe that works?

So there is a real chance for European reform, if the major players can compromise. A Germany (and its Hanseatic League allies such as the Scandinavian countries and the Netherlands) that grudgingly allows more continent-wide spending and even a common coronavirus bond (at today’s subterranean interest rates), but largely on its own exacting terms; a France that settles for less than an EU super-state but does manage to move Europe toward at least confederation; and an Italy that gets to spend more but only on specifically targeted areas to stimulate future structural growth, is at last possible. It will take vision to achieve Europe’s dramatic turnaround, but at least—following the carnage of the coronavirus—the pieces to do so are on the table.

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Dr. John C. Hulsman is Chairman of the global political risk consultancy John C. Hulsman Enterprises, and author of 'To Dare More Boldly; The Audacious Story of Political Risk'.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.