The European Band Plays On

By George Friedman

In an interview with Bloomberg, Italian Prime Minister Matteo Renzi addressed the various crises currently facing the European Union, saying, “The EU is like the orchestra playing on the Titanic.” I don’t think anything captures the reality in Europe better than that quote, save for one thing. The orchestra on the Titanic knew that the ship was sinking and that they were going to die. They played in defiance of their fate. The leadership and apparatus of the EU are on a sinking ship, they see the water rising, but they insist that if they simply keep playing their old tunes, the ship will refloat and sail on. That orchestra on the Titanic played with heroic courage. The EU band is playing with an apparent denial of reality. There is a vast intellectual and moral distinction between the two and I suspect Renzi is aware of that distinction.

Meanwhile, the foreign ministers of the six founding members of the EU met in Rome on Feb. 9. Ministers from Belgium, France, Germany, Italy, Luxembourg and the Netherlands issued a joint communique, saying they were “concerned about the State of the European project.” They cited two serious problems challenging the European Union: migration and terrorism. Take a moment to appreciate what was left out: the catastrophic economic condition of southern Europe. Greece and Spain both still have unemployment rates at about 20 percent, as does southern Italy. Also left out of the ministers’ statement was the inability of the EU to formulate a joint policy to do something about the economic crisis. Or to act jointly and decisively to mitigate the social catastrophe that is underway. That silence was the sound of denial – denial of the fact that one part of the EU is in a catastrophic condition and is regarded by the other part of the EU as a foreign entity, not as part of a single cohesive union.

The meeting raised the possibility of a solution to the core problem. The communique said, “We firmly believe that the European Union remains the best answer we have for today’s challenges and allows for different paths to integration.” It was made clear that one of the possibilities that was discussed was increased integration among the founders, while allowing other members to pursue other paths. However, this is already happening. Southern and northern Europe have already followed different paths. In dealing with migration, each nation appears to be setting its own rules. And in terms of terrorism, the EU has no military force or combined defense policy. So by definition, each country is following its own course.

But there is an interesting hint in that statement. The EU founders might increase their integration, while others would be permitted to follow their own path. The immediate assumption is that the founding members were referring to the United Kingdom, which is trying to modify its relationship with the EU to avoid a forced withdrawal altogether after the coming referendum. But the statement was not referring only to the U.K. The former Soviet satellites have adopted a very different position on refugees than the one advocated by Germany. Among other things, they are not economically capable of sustaining large numbers of refugees. They have ignored EU directives and have followed their own path.

Therefore, the idea expressed at this meeting is in one sense simply recognizing what has already happened. The experience of being European has diverged. Someone from Greece experiences Europe differently than someone from Poland or the Netherlands. For the Greeks, being European is about trying to subsist. For the Poles, it is about dealing with Russia. For the Dutch, it is about protecting their high standard of living. This is not meant as a criticism of any of these countries. It merely points out that since 2008 the experience and reality of being European has already diverged so dramatically that it is hard to see what remains integrated, considering the constraints on solutions embedded in Brussels’ rules.

The idea of closer integration between the six founding members is expressed as an implicit acknowledgement of the reality. The inner six, as they were once called, have a common experience of being European. It is possible they could increase integration among themselves. The British are different and have always stood apart to some extent — and sometimes to a great extent. The Eastern Europeans have fears the inner six can’t fathom it seems. And the southern Europeans live lives of noisy desperation.

It is an interesting idea – a Europe with an inner circle of highly integrated countries, and an outer circle of less integrated countries. However, there are three problems here.

The first is Italy. It may be part of the inner six, and northern Italy may enjoy economic standards similar to the inner six, but southern Italy shares the catastrophic condition of Greece and Spain. It is facing a banking crisis in which some of its largest banks must be helped and the inner six, particularly Germany, show no inclination to help. This explains Renzi’s bitter refrain, but it also points to the fact that unless Italy fragments, it will be the inner five integrating, not the six. But it might also be only four. France is not enjoying the economic success of Germany or the Netherlands. Integration means greater harmonization and the French have refused to adhere to rules on budget deficit limits. This was not because the French didn’t want to adhere to the rules, it was simply impossible for them to do so, and I suspect this will remain the case in the future. So unless greater integration leaves out fiscal policies, which it can’t, we are down to the inner four. To be more precise, we are down to the Benelux countries and Germany. And while Belgium’s Flemish population might go along, integration might alienate the poorer French-speaking Walloons and split an already divided Belgium. So when you look closer at what a more integrated union would look like, the core of Europe keeps shrinking.

The second problem facing Europe’s inner circle is the euro. A lot of countries are in the eurozone that wouldn’t be part of the new core. The policies of the European Central Bank (ECB) have already increased the difficulties southern Europe has had in managing its economic problems. I suspect that increased integration of the core would lock in the current policies of the ECB. This would ultimately force southern Europe to withdraw from the eurozone, redefining the EU boundaries in as disorderly a way as possible. 

Finally, there is the problem of Germany. The Germans rely on exports to maintain their prosperity, and they need the European free trade zone as a market they can dominate. As the inner six pushes the rest into the outer darkness, many members will reconsider whether free trade works for them. And if that happens, Germany’s already precarious export situation — given the state of most of its global customers — could become disastrous.

The idea of a more integrated core Europe is an illusion. Consider that Italy is dealing with an acute banking problem that I suspect will become a crisis. Europe’s financial institutions own large amounts of Italian paper, including sovereign and corporate debt. Italy is 11 percent of Europe’s GDP. If Italy is part of the core, does further integration include taking responsibility for managing Italy’s banking system? How does that square with Germany’s visceral opposition to bailing out non-German banks? And if banking integration of a sort that allows Italy to get through this crisis is not part of greater integration, then what is?

In point of fact the leaders of the six, with the exception of Renzi, do not appear to have really thought through the meaning of a two-tier Europe. This tiered system is a way to imagine a return to the world in which membership in the EU meant only happy things. But the biggest problem with this approach is that it would take a long time to implement because it is complex and the EU moves excruciatingly slowly. Europe is sinking, and the solution being bandied about is redesigning the ship.

If you want an example of the orchestra playing while the ship sinks, consider the concept that was floated at this meeting in Rome. There are geopolitical realities emerging, whether or not the statesmen acknowledge their existence. The massive disintegration of Europe into incompatible parts is one of them.