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Fragmentation in Europe (Agenda)

October 5, 2012 | 1517 Print Text Size

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Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, Stratfor cannot guarantee their complete accuracy.

Video Transcript:

Colin Chapman: What's going to happen to Europe? It's now much more than a financial crisis or a battle between the north and south. The big beasts of Europe — the French and the Germans — are drifting apart. The British are almost disengaged. And newer members like Poland are worried and apprehensive.

Welcome to Agenda. I'm Colin Chapman. And like me, Stratfor's Reva Bhalla has just been in Europe. Reva, there's the 27-strong European Union run largely by elites and, within that, there's the eurozone the very existence of which is now in doubt. How do you see the interplay between these three concepts — and between the nations of Europe, many of which have very different ideas about the future.

Reva Bhalla: Well, Colin, I came from Poland, where I was I spending a lot of time with what you may call the European elite — a lot of the EU bureaucracy. And over and over again I kept hearing about the number of meetings that were being held in search of a solution. A line that I kept hearing about is: "Well, the European Union will remain united because it must remain united, and there must be a solution because the alternative is just too scary to really imagine." So, in my view, the conversation is still avoiding the really hard questions. So when you look at the fundamentals of the crisis — the unsustainable debt levels, the end of the growth era in many of these countries — and then you take a look at the disconnect between the generation in their twenties right now, that are not finding the jobs that they are trained in — a whole generation lost in the periphery — and the northern industrial states where growth rates are maintaining themselves up pretty okay levels, you're seeing a very wide gap on the Continent.

So then the issue of integration, which is really the central word that you hear on the Continent, means different things based on where you sit on the Continent. So if you're in the periphery, "integration" means you are going to get a steady flow of bailout funds. If you're in the north — if you are Germany — "integration" for you means that you're going to have oversight authority over countries' budgets and taxes to ensure that you're not endlessly bailing out this financial crisis to the point that it's going to come back to get you at home — and where the politics eventually catch up with you.

So I think that's where the European elite is struggling to ask itself: "What is the difference between Europe and the European Union?" I think it may be a bit delusional to think that the European Union will go back to what it once was. But that doesn't mean that Europe just disappears altogether. You're going to have a regionalization effect take place, which we're already seeing as the eurozone core is dealing with that paradox of integration. But then you have those on the sidelines — the United Kingdom, the Baltic States, the Nordic States, the Central Europeans — who are watching what's going on and they're not integrated into that core decision-making process anymore. So more and more they're having to ask themselves: "What are the benefits of remaining within this union?" And that's a question that's going to become much more prominent over time as the crisis worsens.

Colin: I've heard it said that for the eurozone to survive, Germany would have to leave it in return to the Deutsche Mark. That seems unthinkable. But realistically the eurozone cannot drive a two-speed Europe.

Reva: Germany is really the pivot to this crisis, because the country's industrial capacity actually exceeds its domestic consumption. So Germany needs to maintain this market at all costs. So when you see market and media speculation about when will Greece be ejected from the eurozone and who is going to be next, it really fails to understand and internalize Germany's constraints. Germany needs to maintain the market for its own reasons. It needs to maintain the idea of a political union, and so it's ready to expend a great deal of resources to do that. Now, we've seen Germany engage in very tough rhetoric when it comes to the conditions for bailouts, but eventually Berlin always ends up giving in. And that trend will continue until we start to see local politics in Germany catch up to it, but we're just not quite there yet.

Colin: One problem with a fragmenting Europe is defense. There's been a half-hearted attempt within the European Union to have a serious discussion about a common defense policy, but that has gone nowhere. It looks as if NATO will be the fulcrum, but there are many questions now about the future of NATO.

Reva: I think NATO suffers from many of the same ailments as the European Union. It's an institution with a foundation that is severely lacking. So who is the common enemy? That is certainly up for debate. Also NATO operations need the United States. We saw that example most recently with Libya, where NATO could not really act independently. And it's especially true now with defense budgets being slashed left and right. So that's why we're seeing alternative regional security formations develop as states are seeking out other allies with common interests and trying to gauge the United States' reliability as a security guarantor. If they can't rely fully on the United States, they are going to have to take matters into their own hands and think about their own defense in more independent terms. I think that's something that Poland is starting to grapple with.

Colin: Yes. And, of course, since the collapse of the Soviet Union, Poland has put its faith in these two institutions— the European Union and NATO. Now it wonders how reliable they are.

Reva: Yes. So it may be time for Poland to start looking at alternatives and, most important, to start looking at itself to see how it can develop itself to basically prepare for a much rougher neighborhood in the future. Poland understands its history very well. It understands that it is surrounded by two very big powers in Russia and Germany. Defense policy is one part of that equation. But even economically, if you look at Poland, it's the eighth largest economy in European Union. It's the largest economy in Central Europe. It has been dynamism that the rest of the Continent is severely lacking right now. They have a pretty strong demographic profile and a large working class that is going to last them through the decade. This is a very big contrast to the rest of the Continent — especially Germany, a major trading partner. In many ways, Poland benefited from not being good enough to join the eurozone when it applied. Now, it has been able to insulate itself from that market, and it's definitely bracing itself for more negative news to come. But I think it has the ability to weather a lot of this crisis much better than many of its neighbors.

Colin: Reva Bhalla, who has just returned from Europe. That's Agenda for this week. Thanks for your company. Have a good weekend.

Europe's Economic Crisis Timeline

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