Germany as Eurozone Leader

Stratfor Global Intelligence (Link) (May 14, 2010)

German Chancellor Angela Merkel said Thursday that the fate of the euro is the fate of Europe, and that the economic crisis facing the eurozone today is an opportunity to fix the underlying problems that have brought the Continent to the brink of economic collapse. Her comments echoed those of her mentor and predecessor as head of the conservative Christian Democratic Union, Helmut Kohl, the architect of German reunification. Kohl recently said in a widely publicized comment that the eurozone is a �guarantee of peace� in Europe.

The outpouring of support for the eurozone from Germany�s top political echelon may seem confusing considering the past four months of foot-dragging from Berlin. Germany�s stalling on the Greek bailout nearly threw the world into another September 2008-like crisis, with both the United States and Japan urging Berlin to act.

However, despite the fact that Germany needs the eurozone to remain relevant as a global player, as well as for its own economic benefit, the crisis had another dimension: domestic politics. Merkel hoped to win a key state election for her governing coalition on May 9, and acting tough on Greece � by talking about potentially kicking Athens out of the eurozone � had its own domestic logic. Investors took the tough talk on Greece as a sign of Berlin�s wavering support and punished Athens.

Germany now senses the opportunity to reform the eurozone so that similar crises do not happen again. For starters, this will likely mean entrenching the European Central Bank�s ability to intervene in government debt as a long-term solution to Europe�s mounting fiscal problems. It will also mean establishing German-designed European institutions capable of monitoring national budgets and punishing profligate spenders in the future. Whether these institutions will work in the long term � or fail as attempts to enforce Europe�s rules on deficit levels and government debt have in the past � remains to be seen. But from Germany�s perspective, they must.

Germany�s attempts to rationalize and consolidate the eurozone after the sovereign debt crisis in the immediate to midterm will be the focus of European politics. However, the underlying geopolitical trend � inexorably linked with Berlin�s attempts to redraw eurozone rules � is Germany�s return to a status of a country pursuing its interests unfettered by institutions designed to limit its power. Germany is no longer bound by the Cold War, nor by the immediacy of reintegrating East Germany, as it was in the 1990s.

Germany is not only unfettered, it is also facing a Europe no longer held together by the opposing forces of the Cold War. Without the Cold War to provide the geopolitical impetus for European unity, the European Union now becomes a thoroughly German-led project.

And that project will have to deal with a number of other geopolitical trends unraveling around it. These trends include the Russian resurgence in Central and Eastern Europe, NATO�s increasing tensions, the United States� eventual move to counter Russia�s resurgence, Central European security fears of a resurgent Russia, a French realization that Paris is no longer equal to Berlin, and Europe�s underlying demographic and debt problems. How Europe faces these developing trends will now depend more than ever on how Germany faces them. As Germany consolidates the euro bloc � which is essentially its �sphere of influence� � and entrenches its leadership inside the eurozone, it will also have to establish its leadership of the eurozone in international matters.

It is still too early to tell how this will play out. But we can answer one question, the proverbial American question of where to call when one needs to talk to Europe. After this crisis, it should be pretty obvious that the phone call begins with + 49 30.