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By George Friedman

German Chancellor Angela Merkel was named “Person of the Year” by Time Magazine today for having the most effect on the world in 2015. It is a surprising but not inappropriate award. It is surprising in the sense that Merkel has had several bad years as the leading political figure in Europe. It is appropriate because few politicians have managed an impossible and ultimately insoluble problem as she has. Geopolitical Futures will outline just why we believe she is so extraordinary.

Germany is caught between a rock and a hard place. The rock is their absolute need to maintain the European free trade zone, and its support mechanism, the euro and the Brussels regulatory system. The hard place is that all planning for the rock assumed ongoing prosperity and stability in Europe. The economic crisis in Europe has created centrifugal forces that in the end could result in a broad exit from the free trade zone, not to mention the euro and regulations. Germany can’t permit this, and therefore must use its resources to stabilize dysfunctional economies, now and in the future. In other words, it is caught between the rock of needing an integrated Europe, and the hard place of having to potentially deploy substantial resources to maintain that system.

Germany needs Europe for two reasons. The first is that after Hitler, Germany was a pariah state. Its redemption rested in never threatening Europe again, and the proof of that redemption rested in creating a system in which Germany was integrated with the rest of Europe. One nation among many and in particular, one nation linked with France, indivisible. The EU provided the political framework for building strategic trust and the foundation of moral redemption.

The second reason was economic. Like Japan, Germany was devastated during the war. With a highly skilled workforce and almost universal poverty, rebuilding Germany depended on the production of goods that would be sold outside of Germany. It first built its industrial plant and then built domestic consumption. The United States aided in this process in the 1950s by allowing Germany to adopt protectionist policies against American goods while allowing Germany access to the American market, far and away the healthiest in the world.

Germany, therefore, built its economy around exports with its industrial plant both focused on exports and always more productive than German domestic consumption could handle. This was not much different than Germany’s economy between unification and World War I. Later comers to the capitalist game must export their way to prosperity, and like others, Germany has never come into rough alignment between production and domestic demand. In fact, Germany approximately exports about 50 percent of its GDP. Half of its economy depends on exports, which substantially outstrips China’s dependence on exports, for example.

This is a dangerous game for any nation to play. It depends on the ability and willingness of other countries to buy their products. The economic crisis of 2008 created a massive threat that Merkel had to handle. The European free trade zone purchased half of Germany’s exports, and therefore supported one-quarter of Germany’s economy. Their limited ability to import German products was a deep blow. Germany handled this by lending money to support demand during the crisis. It was assumed by Merkel that in due course the debtors would revive, pay off their debts and continue their consumption of German goods.

That didn’t happen, at least not to the point where the debts were safely repaid. Over time Greece became the poster child of the problem. If Merkel simply let Greece off the hook, other debtors, maybe Italy, would be the next. So Merkel could not permit Greece to simply default. On the other hand, if the pressure grew so great that Greece lost all incentive to repay the debt, and decided to protect its economy by not only leaving the Euro but also the free trade zone, it would set a potentially catastrophic precedent. Put different, if Greece bolted and defaulted, and did not sink into the bowels of the earth, others might follow its lead. And if they did, Germany would lose its global market for various reasons.

Therefore, Merkel invented a marvelous game that it played over and over. First it focused on Greece as if it was the only troubled economy in Europe, making it clearer that Greece was uniquely at fault. This was useful because she played chicken with only about two percent of the EU’s collective GDP. Second, it ferociously attacked Greece for the utter irresponsibility of anything Greece had ever done, carefully forgetting that for every bad borrower, there is a bad lender. She threatened Greece with expulsion and disaster. Then as the last moment occurred, an agreement was reached where Greece would agree to all matters of concessions. Merkel could claim that her ferocity cowed the Greeks. Of course the concessions that the Greeks made could never be fully honored since Greek resources were vastly outstripped by Greek debts.

But the fact that the Greeks could not honor the promises they made simply allowed the game to be repeated endless times. The Greeks were never expelled, never left, and never actually lived up to any promise they made. But it was the moment of ferocity followed by capitulation which focused attention. The non-compliance was a long, tedious and non-dramatic event. All nations were aware of German ferocity. All of them saw Greece crumble in fear. Greece did not leave the EU, it agreed to pay its debts and the details of actual compliance — which all the players knew was not going to happen — passed everyone by. And the sheer ferocity of Merkel motivated others to pay up.

And therefore Merkel found the exit between the rock and the hard place. The free trade zone held and with it German exports — the rock. And Germany’s losses on bad loans was controlled and limited — the hard place.

But the purpose of the EU was moral as well as economic. It was intended to tame the German spirit. In a continent still scarred by grandparents’ recollections of the war, Germany’s reemergence was not without concern. The ferocity of Merkel’s behavior toward Greece relieved others that they weren’t Greek, but also reminded them that Germany is Germany. Merkel escaped one trap, at the price of passing through a door she never wanted to pass through — the door in which Germany openly managed Europe’s affairs, and did so with a stick as well as a carrot.

Merkel deserved to be named Time’s “Person of the Year” because she has had the greatest impact on the world. Her management of the European economic crisis has led Germany from being an utterly benign power to being an assertive and frightening one. That is not a bad thing for most nations to become, but it is a tough place for Germany to be. Merkel took Germany there and no one else changed the world more than she did in doing this.

George Friedman
George Friedman is an internationally recognized geopolitical forecaster and strategist on international affairs and the founder and chairman of Geopolitical Futures. Dr. Friedman is a New York Times bestselling author and his most popular book, The Next 100 Years, is kept alive by the prescience of its predictions. Other best-selling books include Flashpoints: The Emerging Crisis in Europe, The Next Decade, America’s Secret War, The Future of War and The Intelligence Edge. His books have been translated into more than 20 languages. Dr. Friedman has briefed numerous military and government organizations in the United States and overseas and appears regularly as an expert on international affairs, foreign policy and intelligence in major media. For almost 20 years before resigning in May 2015, Dr. Friedman was CEO and then chairman of Stratfor, a company he founded in 1996. Friedman received his bachelor’s degree from the City College of the City University of New York and holds a doctorate in government from Cornell University.