As European leaders prepare for a crisis summit next week, STRATFOR CEO George Friedman argues that German determination to dominate trade may be a principal cause and that some of the smaller European countries may not be able to survive without protection.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy. Colin: China's manufacturing sector contracted in November, for the first time in three years. Russia is worried about investment plans and privatization, and even prosperous Australia has cut public spending to match an income shortfall, all blaming the slowdown in the deteriorating eurozone. The head of the EU's monetary committee talks out the crisis. Poland chides Germany and tells it to show more leadership. And a critical EU summit is coming up in eight days time. Colin: Welcome to Agenda with George Friedman. George, it sounds like not much has changed really. George: Well, I think everybody's focused on the financial fallout, that's certainly significant, I'm interested in a deeper issue that's inherent in Europe, which is the idea of free trade. From my point of view, one of the problems that caused this financial crisis was the fact that the European Union was built around the world's second-largest exporter. Rather than having positive balance of trade, the peripheral countries in Europe had negative balance of trade because Germany was sending half its exports into these countries. Germany depends on these countries. Unless these countries can become competitive with Germany, they are constantly be overwhelmed by the trade flow which, in turn, is going to lead to both the development of black markets off the books, protected industries in many ways, and simultaneously, tax bases that are contracting. So everybody is spoken about how absurd southern Europe's social spending was, the other way to look at it is the size of the economy makes it impossible. Can Europe continue, in other words, with pure free trade? Is it possible to solve the underlying financial crisis, the imbalance between expenditures and the size of the economy, without some degree of protection. We have to remember that the Germans developed in a protected environment. So did the Japanese. The Chinese, today, operate in that. We don't live in a free trade world, or at least we haven't lived in one, you know, for very long. So, the real question in my mind, that's coming to the fore, is not the financial problem, that's the expression of the underlying problem. And I really do wonder now whether the Euro will survive or not, that's interesting in some ways, but whether or not the European Union as conceived with open borders and absolutely free trade, whether that is going to be able to survive. Colin: Of course, there are quite a few groups, particularly trades unions, who are advocating protection. But once you down that road, you get into what the free traders call "beggar thy neighbor" policies. George: Well, the argument would be that the current situation of Europe is "beggar thy neighbor." I have a larger industrial plant, Germany says. Part of the reason I have that industrial plant is was I was able to protect it in the 1950's, when it was developing. I'm going to use that plant to sell products. I must sell products because my industrial plant is way too big for domestic consumption. If I don't sell products, I'm going to wind up with 15, 20 percent unemployment. So "beggar my neighbor," I'm going to sell those products. I'm not going to allow them temporary protection. I'm not going to allow them the sorts of things that they require to grow. Well, we see that one of the outcomes of that has been this financial crisis. It has other roots as well. I mean its not the only one, but it's certainly one of them. So, the argument that you wind up in a trade war, may well be the case, but I don't know that with the politics that is developing here, how the pro-Europeanist elite survives. The situation in Europe is fairly disastrous. You have a political elite that is dedicated Europeanist. By political elite, I mean not just the politicians, I mean the bankers, I mean the journalists, and they have just committed themselves to the idea that Europe must survive. And in many countries, a middle and lower class that's being really pressed by this crisis, certainly it's not only happening in Europe, it's happening in the United States and other countries, but in Europe, it's particularly intense and it's particularly sensitive because you have very old animosities. You have countries that remember Germany in a different way. Many of these wonder whether or not the Germans are doing this for their own best interest or so on and so forth. Colin: Yes, and you have the Polish foreign minister jumping in, yesterday, suggesting that Germans were self centered, and, interesting for a Pole, telling them "You Germans have got to start leading." George: Well, the problem is what does leadership mean? And where are they going to take Europe. Germany is leading, but the interests of the different countries are so different, the Germans ultimately have their primary responsibility to themselves. They're badly trying to keep the European Union in place, including allowing the Greeks not to pay their loans and so on, because it's the Germans that must have these markets. Remember, if the Germans can't export to these markets, they're going to be experiencing a catastrophic recession, perhaps a depression. They must have the European Union functional. And so, many of the things that the Germans are doing is designed to keep that market alive. And you could even argue that German and other countries' lending practices over the past three years, the loans that can't be paid back, were primarily designed to maintain demand for their products, and keep the process going. At this point, you are in a situation where that isn't working any longer. So, calling for German leadership simply puts the Germans is in a position where they have to answer the question, "Am I a German or a European?" And the answer comes back, "I'm a European because it's in the best interest of Germany." Colin: The chairman of the EU monetary affairs committee says, "We're now in a very critical period." We've heard that before, of course. But the crunch point does seem to be coming up with the European summit on December the 9th. George: I think that the crunch point is well past. I think that the framework holding the European Union together really has dissolved to the point that you really just have a collection of nations. It seems to me that these talks, that are coming up, face a fundamental question. They're going to be about whether or not the other countries of Europe are going to give a degree of sovereignty to the EU, and particularly to the Germans and the French, who will be in a position to come to their ministries and oversee many of their operations, setting limits to what they can. The Irish have already made it clear that they're not going to go along with this. I don't know how many governments in Europe and Italy and Greece could possibly survive, if they agreed to what the German recommendation is. And that's the problem. There are solutions to this. The solutions either require these peripheral countries to absorb a massive contraction of their standard of living and/or give up sovereignty that many of them have fought for, maintaining formal control. But if you can't control your internal fiscal life, you know, what do you really have? If you don't have your budget, you have don't your government. I think you're winding up in a situation where the price, that the Germans are asking to keep it going, is too high. Paradoxically, the Germans are the ones who can't really afford to let it go. So you have, you know, not a crunch. It is a reality that is reared up, and everybody is trying to solve what I think is a fundamentally insoluble problem. Colin: Well, I suppose we should end an optimistic note. Central banks, led by the Fed, have decided to make it easier for the Europeans and other to get hold of dollars, which may stave off crisis for a few days or so. George: But I think the most interesting part of this is, you know, we talked about the Chinese bailing out at the Europeans for the Russians. The lender of last resort, in the end, is still the United States. And that is one of the interesting things when we look at the international balance of power for all the wretched things that have happened in the United States, for all the miscalculations, for all the incompetence, banality and everything else, when push comes to shove it was the Americans that the Europeans turned to and the Americans that were able to provide something of a solution. I think it is a temporary solution — I don't think it really solves any underlying problem, but it is a couple of aspirins to take on the fever. It won't last for a while and I don't think the enthusiasm for it is appropriate. I'm far more interested in the fact that, in the end, the United States has retained his role, wisely or not, as the lender of last resort and, just as money is fleeing to the United States for safety, so too the United States has the ability to address this question. Whether it is wise or not is another issue that happened to tell us about how this world works. Colin: George Friedman there, ending Agenda for this week. Thanks for joining us, and until the next time, goodbye.