Two developments this week highlight the contradictions that define the European Union and complicate its recovery from the economic and political crisis. First, a leaked report served as a reminder of Germany's challenges as the European Union's main economic and political power. Then a comment by the German chancellor raised questions about the bloc's ability to substantially reform its institutional framework to mitigate the effects of the crisis.
On Monday, German opposition parties criticized Chancellor Angela Merkel's administration after local media leaked an internal Bundesbank report that said Greece would need a further loosening of the terms of its rescue package. The center-left Social Democratic Party accused the German government of lying to the public about the real economic situation in Greece, a country that received two bailouts from the European Union and the International Monetary Fund. German officials, including Finance Minister Wolfgang Schaeuble, have repeatedly denied charges that the government has misled the public, but the issue remains controversial. On Wednesday, Merkel reminded voters that the debt crisis in Europe is not over and said countries should stop "living on borrowed money."
What is a Geopolitical Diary? George Friedman explains.
Greece is putting Germany in a tight spot. Berlin is hoping to prevent an escalation of the economic and political crisis in the eurozone periphery before the German elections, which are scheduled for Sept. 22. But at the same time, Merkel's tough stance on bailout countries — which Berlin and Brussels have pressured to apply deep economic reforms in exchange for aid — is popular among German voters. Merkel wants voters to see her protecting German taxpayers' money. However, the result is that Germany assists the countries it criticizes.
The second event came during a TV interview on Tuesday, when Merkel said, "We don't have to do everything in Brussels," suggesting that some policy prerogatives could be transferred from the European Union back to national governments. To be sure, the statement was made for a domestic audience during campaign season, intended to reassure German voters that the administration will protect Germany's national sovereignty. But it comes at a time when the balance of power between the European Union and its member states is being openly questioned by the United Kingdom and, to a lesser extent, by the Netherlands. In fact, in early August, French President Francois Hollande publicly criticized London's push to renegotiate the powers of the European Union.
These developments show Germany's unique situation in Europe. As the Continent's largest economy, Germany is naturally inclined to be the European Union's political leader. As a result, it often pushes member countries to make concessions and move forward with the process of supranational integration.
But being the leader often means taking the domestically unpopular step of providing financial assistance to distressed member states, most of them located on the outskirts of the eurozone. In turn, German political elites often exploit the anti-periphery sentiment for electoral gains. Part of the German voters' distrust and weariness of countries in Mediterranean Europe is fueled by mainstream politicians, and voter discontentment makes financial assistance and EU integration policies politically costly for German leaders.
This explains the rhetorical acrobatics that we've seen in the German electoral campaign. Political parties have accused each other of not having a coherent European policy. To a large extent this is true, because the situation in Germany and the unusual institutional setting of the European Union make a coherent European policy extremely difficult for German leaders. The handling of the Greek bailout is illustrative of this phenomenon: Germany agreed to the payment of a new tranche of the bailout, but it demanded that the aid be split into more installments in order to maintain some political pressure on Athens.
The future of the European Union will hinge on how its members address the fundamental contradiction between political and economic integration and national sovereignty. Most of the institutional reforms that could help to mitigate the European crisis — such as the creation of a true fiscal union or the issuance of eurobonds — go against national sovereignty and are politically costly, particularly in Germany and France, the two key members of the bloc.
Giving up national sovereignty means making not only political concessions but also economic ones. Keeping the European Union alive in the long run will take a substantial amount of economic resources, beyond the size of the current bailouts. To achieve fiscal federalism, Brussels will have to set in motion a system of transfer payments — in other words, a redistribution of income among member states. Even if the Germans do not have to make that decision in the short term, the campaign rhetoric of some German leaders suggests that the country's elites are not preparing voters for that crucial moment.