Germany Calls the Shots

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Niccolo and Donkey
Germany Calls the Shots

New York Times

Risto Penttila

March 21, 2013


THE crisis in Cyprus has taken a nasty turn, but it will not wreck the euro. Chancellor Angela Merkel will simply not allow it to happen. For Germany the euro is the goose that lays golden eggs. It has allowed Germany to accumulate more than €1 trillion in trade surplus with other E.U. countries in a little more than a decade. Germany will not let the golden goose die.

The European sovereign debt crisis has fundamentally changed Europe’s geopolitical map. Instead of Europe being divided into West and East as it was during the Cold War, the Continent has become divided into a relatively prosperous North and a chaotic South. Instead of Europe being led by France and Germany with Britain playing a balancing act, leadership has fallen squarely on Germany’s shoulders. It is no longer about a more European Germany. It is about more German Europe.

Germany is calling the shots when it comes to the future governance of the euro zone. It is also calling the shots with regard to the Cypriot problem. If Cyprus can be guided out of the euro zone without endangering the credibility of the euro, Merkel will gladly make an example of the small island nation. If she thinks that a Cypriot exit will damage the euro’s reputation, she will not let it happen. The euro is simply too valuable for Germany to be risked.

Two economists, Jorge Braga de Macedo and Urho Lempinen, have shown that between 1999 and 2011 Germany accrued a cumulative trade surplus with the rest of the European Union of more than €1 trillion. Since the euro zone makes up about 75 percent of the European Union, the German trade surplus with the rest of the euro zone was about €750 billion during this time period. This was by far the biggest trade surplus within the euro zone. (Holland’s figures are even more impressive but they are explained by transit through its huge ports.)

There are two conclusions to be drawn. First, Germany is more dependent on the European market than it is on the rest of the world. Second, Germany can compete with other members of the euro zone better than it can compete with the rest of the world. One reason for this is the fixed exchange rate within the euro zone. As long as Germany can keep its own costs down, it is able to export to the rest of Europe more easily than to the rest of the world. This is about good housekeeping but it is also about geopolitics.

Geopolitics is not a concept that is often associated with the European Union. But it is a concept that is irrevocably linked with Germany’s history and its future. In the first part of the 20th century the country’s big geopolitical idea was “Lebensraum,” or living space. The idea fueled German expansionism in the 1930s and led in part to the outbreak of World War II. After the war, the leading idea was Germany’s Western orientation. Chancellor Konrad Adenauer understood that West Germany could rebuild its economy and society only as long as it was committed to two Western institutions, NATO and the European Economic Community.

The next grand geopolitical idea was German reunification within the framework of the European Union. Chancellor Helmut Kohl realized that Germany could become united only as long as it pledged allegiance to an ever more integrated European Union.

Today it is a different Europe: Germany may be first among equals, but it is still committed to the European Union.

Cyprus is playing a geopolitical game of its own. It will be interesting to see whether it repeats the same choreography that Iceland followed during its financial crisis, when the country was in danger of being shut out by Western institutions. After announcing that it was in talks with Russia, the International Monetary Fund decided in 2008 to offer Iceland assistance. Cyprus, by turning to Moscow, is forcing the European Union to think hard about increased Russian influence within the Union’s borders.

Merkel has staked her political future on the idea that Germany’s interests are best served by the present constellation of the euro zone. If she is right, she will be considered one of the great postwar German leaders, together with Adenauer and Helmut Kohl. If she is wrong, all of Europe will suffer. She will not let a small island nation ruin her geopolitical vision for Germany and Europe.

Risto E.J. Penttila is president of Finland Chamber of Commerce and secretary general of “Northern Light,” a forum for European and Russian business leaders.
Niccolo and Donkey
niccolo and donkey

Did you know that Cyprus is the biggest foreign investor into Russian economy?

Russia went ballistic (both Putin and Medvedev spoke out) when it was announced that Cyprus might do a one-time 10% tax on deposits.

You can connect the dots, why Russia has so much influence on Cyprus I guess.