European Finances Pt. 2
Intended as Part 2 to European Fiances, I will finally go through why the EU will collapse as an institution. Now, if you were paying attention, you will remember two things about the last article: Europe’s debt and who holds the cards in the EU. Due to the Euro and the 2008 financial collapse, Europe as a fiscal unit is in a perpetual slow-motion tailspin and, as we will see, has no way of getting out of it. Next, I do want to go into a little more detail on what the EU really is. I mentioned it briefly, but the EU really was created by the French as a platform for French power. It was created to ensure French exports and tame the more hostile European powers to France (read West Germany). But the situation changed when West Germany became just Germany in 1990 (Gow).
See, this was the third time Germany tried to unify ‘all German lands’ and the first two times saw the Germans march through Paris, so the French were none too pleased with this prospect. To resolve the obvious tensions, the two countries met and discussed what it would mean for the EU (Howorth). The deal they reached was that the French would do what they wanted politically and the Germans would foot the bill and deal with finances (Howorth). The French loved the deal because they had free political reign to do what they wanted. But the Germans loved it because they were given control of the finances and the only thing scarier in Europe than a German with a checkbook is a Swiss with a checkbook. The Germans decided to try and use their position to shift the EU from a French project to a German one. The goal was to use the EU’s free customs space to export as many German goods as possible, thus making Germany the dominant state in Europe. The key hurtle was that not everyone was in the same currency space and much of southern Europe did not have access to the capital necessary to buy as many German goods as Germany wanted them too (Cisneros). So the Germans came up with an idea that they decided to call the Euro. It is Southern Europe's fault for lying about their finances and taking out loans they couldn’t pay back, but the Germans are also at fault for, to an extent, guiding them in that direction (Cisneros). Both during and after the crisis, Germany has attempted to stop Southern Europe from stepping into a protracted Depression by imposing austerity and bailing out necessary countries enough to keep them from default, but not enough to actually solve the problem (Smith).
And that brings us right back to today with Germany. As established, in order for Germany to keep up its budget profile and afford the benefits it gives its people, it has to, at least, keep up the trade balance it has with the rest of Europe. But that is becoming impossible due to one thing: Europe is getting a lot older, a lot faster. The median age of Germany is 47.4 years old; by 2040 it will be 51.0 (CIA)(Statista). Italy is currently 45.8 and will, in 2040, be 50.2, and Greece is 44.9 and will be 52.7 (CIA)(Statista). The trend is persistent for most European countries. So by 2025, 33% of the German population would be over 60 years old, and that changes the math substantially (Statistisches Bundesamt). As more and more Germans retire, tax revenue will fall and state expenditures will rise meaning that Germany will need to increase its exports to compensate. But since the rest of Europe is aging at the same rate as Germany, there aren’t any more young people to do any consuming. So Germany will have to cut costs to keep giving benefits to their citizens, and what costs do you think they’ll cut first? Why should Germany keep supporting countries that are fiscally unsalvageable when they can’t even import German goods? The Germans will drop the Greeks in a second, and the Greeks will leave the Euro. Italy has an NPL (Non-Performing Loan) stack of 17%, and is the third-largest economy in the EU; they won’t have the population needed to import German goods (FRED). So should the Germans stop supporting Italy financially because they no longer can, nor see a benefit to doing so, then the third largest economy on the continent will face its greatest economic shock in almost a century. And the same story is true for Spain, Portugal, Ireland, and every other over-credited country in the EU. From their perspective, why should any of them stay in an institution that dropped them as soon as they became inconvenient for its most powerful member. They won’t.
But let’s end this lesson in arrogance with a silver lining, and the invocation of treasured dumbass Icarus. Germany would fly too close to the fiscal sun with the Euro only to eventually fall when their demography is no longer able to support the economy they fashioned. Then France (playing Daedalus if one were to follow the analogy) who created the wings of the EU and did not indulge in the same temptation of fate as Germany, would be able to pick up the pieces and do whatever they want. (And I find that, aside from the coming massive economic collapse, kinda funny). Remember, France gave Germany control of the fiscal side of things so all of those problems are Germany’s problems. France’s NPL stack is at a nice and healthy 3%(FRED), their average age today is 41.5 and will be only 45.3 in 2040, and their economy is not hooked into the EU so should it fall, France will be fine (Statista). The French will again have an empty continent to do whatever it wants with, and as some real interesting stuff is gonna come to Europe (think Russians), France will have a free hand in how to deal with it. So look out with hope; if not on Europe’s future, than at least France’s.
Bibliography:
Cisneros, Ignacio. German Economic Dominance within the Eurozone and Minsky’s Proposal for a Shared Burden between the Hegemon and Core Economic Powers. http://www.levyinstitute.org/pubs/wp_913.pdf.
CIA. https://www.cia.gov/library/publications/the-world-factbook/fields/343rank.html
FRED. https://fred.stlouisfed.org/series/DDSI02ITA156NWDB, https://fred.stlouisfed.org/series/DDSI02FRA156NWDB,
Howorth, Jolyon. Pg 127. Review: France and the Unification of Germany: Clio's Verdict?.
Nelsson, Richard. “German Reunification: Together into the Great Unknown - Archive, October 1990.” The Guardian, Guardian News and Media, 5 Oct. 2018, www.theguardian.com/world/from-the-archive-blog/2018/oct/05/german-reunification-october-1990.
Smith, Geoffrey. Germany Tried to Remake the Eurozone in Its Own Image. The Trouble Is, It Half-Succeeded. https://fortune.com/2019/04/05/eurozone-crisis-germany-economy/.
Statista. https://www.statista.com/statistics/624303/average-age-of-the-population-in-germany/, https://www.statista.com/statistics/275395/median-age-of-the-population-in-italy/, https://www.statista.com/statistics/276412/median-age-of-the-population-in-greece/, https://www.statista.com/statistics/275391/median-age-of-the-population-in-france/
Statistisches Bundesamt. https://service.destatis.de/bevoelkerungspyramide/#!y=2028