EUROPEAN BALANCE OF POWER: Markets over States

In a recent press conference, former German Chancellor Helmut Schmidt, chief architect of the European Monetary Union, argued that the conservative Angela Merkel government has a very thin understanding of international finance and economics. I would add that she has a good grasp of these areas, but she narrowly focuses on markets and finance capitalism as catalysts to determining her policies and the European balance of power.

Balance of power is not something Europeans have had to think about since WWII, but it is now time to revisit this idea that originated with the Concert of Europe that was responsible for avoiding a European-wide conflict from 1815 to 1914. Today, markets are threatening to upset the European balance of power along with the social contract and destabilize the entire continent.

The aging Helmut Schmidt maintained that the direction of the EU is headed for serious trouble, largely because the German political leadership and the German central bank are reactionary, looking at short-term issues of German financial/economic hegemony at the cost of long-term economic contraction and political harmony across Europe. Indeed, the larger issue is to what degree is Germany willing to sacrifice social peace, political stability, and the European balance of power for the sake of satisfying the demands for higher profits of a few large banks and corporations? All of this because the interdependent integration model on which the EU was founded under Schmidt has been converted into a patron-client model intended to best serve finance capital within the core EU countries, especially Germany.

During the EU meeting on 8-9 December 2011, the agenda involved restructuring the zone so that fiscal policy is centralized in a similar manner as monetary policy. The rift between the UK and the Franco-German bloc widened. The result is an alienated Britain, along with a European-wide austerity program intended to strengthen the private sector. Although it was French President Sarkozy who decided to be theatrical toward David Cameron, while Merkel stood her ground as the winner of summit meeting, the casualty is the European middle class and workers, as well as the balance of power that had kept the EU loosely together.

Financial markets reacted favorably to the restructuring, largely because it means fiscal policy for EU members will be under the rigid rules that Germany has imposed; for it would mean keeping the overall sovereign debt below 60% of GDP and the annual debt below 3%, with the goal of balancing it; for it entails that the public sector will limit its borrowing so that the private sector can have greater availability to capital. In essence, this means that no country would be able to engage in unchecked deficit financing policies in order to stimulate economic growth, and no country would be able to pursue economic and financial policies tailored to its own needs if that goal conflicts with the EU, namely with Germany.

For the past two years, I have argued that Germany, followed by France whose leadership operates under the illusion that it has more to gain than to lose by following Germany's lead, has been seeking to restructure the integration model on which the European Union was built. The reason that Germany seeks to do this is fear that it must protect its own national economy and maintain German hegemony in the Eurozone so that it can compete effectively with the rest of the world.

Behind imposing fiscal discipline on all EU members rests Germany's goal to strengthen its own national economy. Moreover, Germany has the most to lose from a weak euro and its powerful banks, which are behind the government's policy of restructuring the integration model, are only interested in protecting their assets, regardless of what may mean for the rest of Europe or for Germany long-term, as former Chancellor Schmidt argued. 

Markets are on Germany's side, because it means that the rest of EU will be operating under austerity measures that help transfer wealth from the public sector to the private, thus strengthening the credit system by demonstrating its credibility through tight fiscal measures.Although it is a fact that markets play the determining role in the balance of power, does this best serve the people of Europe and does it safeguard from future conflicts within and outside of Europe? This larger issue concerns many who think beyond the quarterly report of a multinational corporation.

Should the people of Europe be applauding, in the manner that markets did, especially Wall Street, the fact that Germany imposed austerity measures across the eurozone and in the process isolated the UK in a very reckless manner? Is this in the best interests of Germany and France, or are we witnessing a scenario similar to pre-1914 when the 'long fuse' (long-term causes of the Great War) was finally lit largely because of the Anglo-German conflict?

During the Age of Absolutism, the European balance power was based on the grandeur of monarchs and their ability to amass taxes in order to build up their armed forces. This was certainly the case from Henry VIII to Catherine the Great, until the Industrial Revolution began to change the dynamics of political power owing to the emerging capitalists demanding a strong if not hegemonic voice in government and institutions. Absolutism  never entailed that monarchs enjoyed 'absolute' power, as they had to cooperate with and consider the interests of the nobility, the upper clergy, and powerful merchants. Similarly, today's strong political leaders are only as strong as markets permit them.

Otto von Bismarck was the first to publicly acknowledge that Iron (industrial capitalism) was indispensable to military power, thus sending the message to his own country and the world that Industrial capitalism was the catalyst to determining the European and thus the global balance of power. With the advent of finance capitalism, banks became the primary force and catalyst in determining the balance of power in the early 20th century, and that has remained the case until today.  

The UK voted against the Franco-German restructuring of the EU, arguing that it needed special protection from financial services regulation imposed by Germany on all EU members. The UK also objected to a host of other issues that would undercut its trade owing to eurozone monetary and fiscal policies that may either create a currency that is too strong or too weak in relationship to the pound and would deprive London from fiscal and monetary independence, thus of economic sovereignty. A decade or so before WWI, Germany had opted to become the hegemonic power not just over the continent, but throughout Europe, thus undercutting Britain's sea-based power. 

No matter what Germany does with regard to restructuring the EU, the process of implementing the new structure will take more than a few months, possibly several years, during which period efforts can be made to accommodate the UK. Regardless of what Germany does with regard to the UK, it will not escape a downgrade by the rating agencies and regardless of the austerity measures that Germany has now imposed on the entire eurozone, the euro will not escape continued devaluation. Given that Standard and Poor's has placed the entire EU area and the major EU banks on the hit list for a downgrade, Germany cannot escape the inevitability of the wider crisis impacting its economy, even if every EU member goes along with its master plan for centralized control of fiscal policy intended to maintain the euro's inflated value.

The more serious question for European governments, and above all the people of Europe, is the degree to which they want markets, namely a small percentage of very rich people, determining the balance of power and threatening the continent's stability. The US does not have the same problems because it has been blessed with weak neighbors to the north and south, and two oceans to the east and west. Should the EU be trying to copy the US patron-client integration model used in the last 100 years with various trade treaties, including NAFTA, that it has signed?

If Europe is to remain economically strong for its people, can it afford to base its policies at all levels on the markets at the risk of everything from lowering living standards for the middle class and labor to risking future conflict? Finally, did the EU meeting of 8-9 December 2011 represent a victory for Germany and a defeat for the UK, or a resounding victory for finance capital and a defeat for the rest of the Europeans and for the fragile European balance of power?