Europe led by Germany seems vulnerable to Trump’s threats

Yesterday in Rome Paolo Gentiloni, the Italian Prime Minister received Donald Tusk, the President of the European Council (from left to right). Shoot location: Rome – Italy. Shoot date: 01/02/2017. Copyright: European Union.

Yesterday in Rome Paolo Gentiloni, the Italian Prime Minister received Donald Tusk, the President of the European Council (from left to right). Shoot location: Rome – Italy. Shoot date: 01/02/2017. Copyright: European Union.

Trump’s America and Europe are obviously at odds. The question is how far this division will go? Unquestionably, it’s the new tenant of the White House who fuels this unseen before confrontation between the Atlantic allies, attached by a time cherished bonding that has politically and economically shaped the world as we know it so far. The trade of attacks has reached dangerous heights this week. The unfriendly statements from the US cover the entire European horizon, from NATO to Eurozone.

The latest incident comes from the man who is to become the American ambassador to Brussels. Traditionally, all ambassadors are the well wishers, who at least ostentatiously defend the capital they are posted to in the corridors of power of the country they come from. Not so Professor Ted Malloch, who is handpicked by his Trump boss, to represent Washington in the EU. Speaking in an interview with the BBC last Saturday he predicted, as a modern day oracle, the dissolution of the Union. Diviner Mallock foretold nothing less than “the collapse of the euro within the next eighteen months”. Many and much wiser and knowledgeable than him have made similar predictions, right from the moment the common European currency was physically introduced in 2002.

Europeans taken aback

Against this American war of words the Europeans seem more taken aback than ready to respond. Even the German Chancellor Angela Merkel, who was directly accused by Trump of “following a catastrophic immigration policy”, replied very modestly. She said that “the President laid out – again – his position” and she added that her own stance is already known. Not one European leader, at the exception of the German Vice-Chancellor Sigmar Gabriel, has answered back to Trump & co’s hostile statements. Gabriel boldly reminded Trump that Europe’s problems with the hundreds of thousands of immigrants are the upshot of the flawed American policy of interventionism in the Middle East.

Instead of retorting, many European leaders focus on the internal unity in the EU, as an answer to the American challenges. Donald Tusk, the Polish President of the European Council in a letter to the 27 EU leaders stated last Monday that the EU actually follows the American motto, “United we stand, divided we fall”. On the same line the French minister of Foreign Affairs Jean-Marc Ayrault stressed that the unity of the EU is the best answer to Donald Trump. However, at this point there are some grave observations to be made. The present scenery in the EU doesn’t present a picture of unity. Only last Saturday the south European countries (Italy, Spain, Greece, Portugal, Cyprus and Malta) held their 2nd Mediterranean Conference in the Portuguese capital Lisbon, to challenge the German single-mindedness on austerity. There are more important divisions though than the objections to fiscal austerity.

Talking about Grexit and Italexit?

This week, in Greece, the Grexit option, the exit of the country from Eurozone and the return to the old drachma money, seems to have been inflated once more. The issue is now openly discussed within the left–wing governing SYRISA party. Last Monday, the Parliamentary Representative of the party, Nikos Xydakis, openly discussed this option in a TV interview. But Greece is not alone in being at risk of quitting the euro area. In Italy, the largest party is comedian Beppe Grillo’s Five Star Movement. Grillo and his group want Italy out of the euro area and propose the swift return to the old national currency, the lireta. It’s not only Grillo though who supports the Italexit. Practically all the opposition parties very seriously question the participation of Italy in the single money euro area.

Unfortunately, under the currently followed fiscal policies in the EU, there are strong arguments for Italy and Greece leaving the euro area. The same can be argued for Spain, Portugal and even France. The idea is that the socio-political structures in the South of Europe need a more flexible and less strong currency. The political and social traditions in this huge Mediterranean area oblige all and every government to be susceptible to pressures from society. The vast majority of voters invariably demand more social benefits, more government employment and highly protective labor market legislation.

The euro straight jacket

All that leads, though, to fiscal deficits and less competitive national produce. So, at the time of the drachma and the lireta, practically all governments were obliged to devalue the national currency in order to restore the competitiveness of exports and impede imports. At the same time, the devaluation tradition was greatly reducing the real value of government debt, which was denominated in national currency.

In Eurozone, this option is no longer available. On top of that, Germany, the country which has become super rich at the expense of the European south during the past ten years, doesn’t invest in this region preferring to build factories in China and Mexico. In this way, the foreign account and the fiscal deficits of the south cannot be covered and the result is that Italy and Greece can no more service their accumulated debts.

Non adaptable Germany

In short, under the policies enforced by Germany in the euro area, the single money club cannot go on in its present form. On top of that, Berlin now seemingly prefers a smaller and meaner euro area and has repeatedly offered Athens a supported exit from the club. It’s certain that if Greece and Italy quit the Eurozone, the euro will certainly gain a lot of ground in relation to the dollar. As a result, Germany will be able to highly increase the dollar value of her huge euro reserves, ready to be used for company acquisitions all over the world and preferably in the US. Imagine how much Germany is to gain in dollars if the euro appreciates say 30% vis-à-vis the American money. With the euro at a region of exchange rates around 130-140 American cents instead of 106 today, the German industry would still have no problem to continue exporting high value added products.

This is true of course only if Trump doesn’t realize his threat to impose a 30% import tariff on German cars. The same may be true for the German thirst for acquisitions of real assets in the US. Trump may try to obstruct that too. On top of it, in case that during the next two or three years one or more Eurozone countries abandon the single European currency, Trump’s US will surely try to strike preferential trade agreements with them. In this way, the US will deprive Germany from such captive clients and divide Europe again into many small economies.

In conclusion, such unthinkable only months ago structural mutations of the political and economic Atlas of the West are now plausible. The new comprehensive attachment of Britain to the US after the Brexit is just the first step in this direction. Undoubtedly, these changes will trigger more geostrategic reshuffling in the rest of the world. God forbid that all that could be done without more bloodshed and human suffering.

 

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