BRUSSELS, BELGIUM – OCTOBER 18: German Chancellor Angela Merkel (L) talks with the French President Emmanuel Macron (C) and the Luxembourg Prime Minister Xavier Bettel (R) ahead of round table talks at a EU leaders summit on October 18, 2019, in Brussels, Belgium.
Thierry Monasse | Getty Images News | Getty Images
The process of European unification shows that its current leaders are neglecting the economic foundations of an essentially political project.
The long journey toward a united Europe began in the early 1950s when, with generous help from Washington, the French and the Germans decided to renounce centuries-old enmities by putting together their coal and steel resources. At that time, coal and steel were considered the ultimate instruments of war, and their common management meant a guarantee of peace and reconciliation on a devastated and impoverished continent.
A few years later, the success of the French-German coal and steel venture led to a truly epochal event: A customs union among France, Germany, Italy and the three Benelux countries, enshrined in the Treaty of Rome in March 1957. Officially, that customs union was known as the European Economic Community, but most people called it quite correctly the Common Market.
At a stroke of a pen, the Europeans created the world’s new political entity, exercising its power through a quasi-free trading regime within the six countries, with a porous trade wall toward the rest of the world.
The political character of the customs union logically followed from a common regulatory framework to manage free trade and to coordinate economic policies, while maintaining unified trade and economic relations with the outside world.
Having no doubt about the political dimension of the customs union, the British decided to stay out of a community of nations “determined to lay the foundations of an ever closer union among the peoples of Europe” – the key statement in the preamble to the Treaty of Rome.
Almost twenty years later, London changed its mind and joined the booming customs union, thinking that “opt-outs” would limit its membership to a free-trade area without large sovereignty transfers to European institutions. Ultimately, that miscalculation, and more than four decades of British soul searching, have led to the decision to leave the European Union.
The British will be leaving at a time when France and Germany are trying to forge a strengthened European economic and political community. That is a difficult work in progress, where the French sense of urgency and its political (over)drive are hitting against Germany’s ponderous pragmatism, political instability, ominous social divisions, and strands of extremism, xenophobia and racism.
Underlying all that are permanent crosscurrents of Paris-Berlin rivalry. A great deal of calm and wisdom will be required to overcome that dangerous obstacle to an apparent French-German determination to work together.
But there are two things that France and Germany share in their analysis: (a) the European Union is totally sidelined on the world stage, and (b) the recognition that the two countries – acting alone — cannot defend their vital economic and political interests.
So, what should they do?
The answer is simple: A French-German effort is needed to create a flourishing EU economy. That would provide the best foundation for the union’s stronger political structure.
Predictably, that objective is now beyond reach in a moribund EU economy, where sluggish growth and high unemployment are wasting human and (physical) capital resources. Partly as a result of that, the European industries are manufacturing the products of yesteryear, and relying on American and Chinese service sector, information and telecommunication technologies.
The fact that the EU does not have its own 5G technology is a case in point. But more traditional products also show the backwardness of EU industry: While the Germans keep tearing themselves up about hopelessly outdated diesel cars, the Dutch just bought – after extensive testing – 259 electric buses from Chinese manufacturer BYD.
The rest of Europe cannot be far behind as a captive market for foreign-produced electric cars and 5G industrial platforms, among other things.
Sadly, Germany won’t budge. It is sitting on huge surpluses in trade and public finances, and steadfastly refusing to step up investment spending to produce technologies of the future.
France and Germany must lead the EU to stronger economic growth and a more competitive global posture. That would (a) strengthen the union’s political system, (b) beat back Euroskeptics and (c) guarantee an EU place at the table where the big powers make decisions about the emerging new world order.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.