Sunday, 19 June 2011


From the Napoleonic Wars until the end of World War II, France has tried to counterbalance central Europe, first Prussia and after 1870 Germany by various alliance systems that rarely achieved their goal. For its part, first Prussia and then Germany realized that it could not achieve the economic, political and military greatness it sought unless it neutralized not just France, but England and Russia as well. Otto von Bismarck achieved that  goal only temporarily, but it became unraveled after Kaiser Wilhelm II dismissed him in 1890. Bismarck's success rested in his grasp of Germany's powers and its limitations; a balance that the Kaiser failed to grasp.

In 2011, Chancellor Angela Merkel either fails to grasp or refuses owing to political and economic pressures that it is impossible for Germany to retain its power unless its leaders have a realistic assessment of its limitations. One limitation is that Germany is part of a union that has benefits for the economy during economic expansion and costs during contracting cycles. Germany's corporations essentially benefit by having the entire Eurozone at their disposal. Everything from supermarkets to submarines made in Germany is sold to the other Eurozone members and help to strengthen the German economy. In fact, the Eurozone is base from which Germany competes on a global scale.

The situation is not very different for France under Sarkozy. As Germany's Eurozone partner, France dominates Europe's markets and draws capital from the periphery to the core because it has a dominant role in banking and other businesses. Without the benefit of the 'backyard markets' in Europe, France would not be able to be competitive on a world scale. Both France and Germany appreciate the benefits of EU trade and monetary integration, but neither is anxious to incur costs associated with bailouts for periphery countries. Moreover, neither France nor Germany is able to see that it is so deeply integrated with the EU periphery that a structural problem in one of the EU members can potentially act as a 'Lehman Brothers-type' of domino and bring down the entire world economy.

When Greece, Ireland, Portugal, and Spain, all economies thoroughly integrated into the Eurozone economy, and within that into the German and French economies become financially insolvent as they have been since 2010, 'patron-states' France and Germany feel the pain of asking their taxpayers to bail out banks that own bonds from the periphery debtor nations.

The Eurozone (monetary union) has forced both France and Germany to cooperate out of self-interest. The problems in the periphery - Greece, Ireland, Portugal and Spain - are forcing France and Germany to recognize that they must on occasion examine the limitations of their power and realize that acting as EU members only during economic expansion cycles will not solve structural problems that arise during contacting cycles.

The world economy could lapse into a double-dip recession, or it could emerge stronger for the rest of the decade. This is a political decision on the part of Germany and France, strongly encouraged by US, China, and IMF to assume the responsibility of their roles as EU core members for the periphery. If they allow Greece to default, and that may very well be the case in a year or two, what does that say about the integrity of the monetary union, what does that say about Franco-German leadership, where does that leave the world economy? Failure to grasp both potential power and limitations is very dangerous for France and Germany, and just as bad are the consequences for the world economy.

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