reflections

Oct 16, 2012 | 04:01 GMT

4 mins read

Europe Fragments Even Further

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

One consequence of the ongoing European financial crisis is the growing divide between countries within the eurozone and countries outside the eurozone. But two statements made Monday show that the European Union may be fracturing even further.

Polish lawmaker Rafal Trzaskowski said he had misgivings about the creation of a separate budget for the eurozone, a project that is slowly taking shape in Brussels. According to Trzaskowski, the budget could exclude non-eurozone countries from EU decision-making.

What is a Geopolitical Diary? George Friedman explains.

Meanwhile, Italian Finance Minister Vittorio Grilli expressed concern over what impact a potential Spanish bailout would have on Italian finances. Grilli said Italy's contribution to such a bailout would equal 1.5 percent of Italy's gross domestic product.

While undeniably divided between each other, eurozone and non-eurozone countries are also divided among one another. Rifts between northern and southern eurozone countries formed as soon as the crisis began. Traditionally austere and fiscally disciplined countries, such as Germany, Finland and the Netherlands, pressured southern countries, such as Greece and Portugal, to meet their deficit targets. Financial assistance to southern Europe is a constant source of political tension in the parliaments of northern Europe.

In the south, Italy and Spain supported bailouts to other peripheral countries, like Greece, even though Athens clearly is not meeting the targets to which it agreed with the European Union and the International Monetary Fund. Rome and Madrid believed the bailouts for Greece, Portugal and Ireland were essential to prevent the crisis from reaching Italy and Spain.

Grilli's comments show that peripheral countries may no longer agree. Italy is interested in a Spanish bailout — it could reduce Italy's borrowing costs — but Rome's new misgivings may be well founded. The government of Mario Monti is struggling to reduce Italy's deficit and debt, which accounts for more than 120 percent of its gross domestic product amid a lingering recession. Simply put, Rome is being forced to choose from two unpalatable options: give away needed money or face the risk of a contagion of the crisis to Italy.

Aside from the north-south division in the eurozone, there is disagreement at the heart of the European Union between France and Germany. While the two countries are interested in preserving their joint leadership of the European Union, they have different long-term visions of the regional bloc.

France has been pushing for the creation of a debt mutualization mechanism for the eurozone. The country is more flexible regarding the situation of the countries on the periphery of the eurozone and favors economic growth over fighting inflation. Conversely, Germany envisions a European Union where all member states move within a framework of strict fiscal discipline under increasing control of European bureaucrats. These conflicting plans will make it difficult for the European Union to decide on substantive issues.

Countries outside the eurozone are similarly divided. Some of them believe the European crisis is expediting the integration of eurozone countries to the exclusion of the remaining ten. Officially, EU projects, such as the creation of a banking union or the signing of the fiscal compact treaty, are formally open to non-eurozone countries. However, these projects by design cater to the eurozone. Non-eurozone countries see the proposal to create a common budget — the proposal Poland's Trzaskowski spoke out against Monday — as evidence of their marginalization.

For its part, Poland fears that the crisis is undermining Warsaw's already weak position in European decision-making. Central and Eastern European nations fear that the creation of a budget for the eurozone could reduce European contributions to the Common Agricultural Policy, a key subsidy for these countries. They also fear that such a budget could limit Western European contributions to structural funds, the European tool designed to finance infrastructure projects in the less developed members of the European Union.

The United Kingdom does not share these fears. A net contributor to the European Union, Britain considers its contribution to the EU budget excessive. While the details of the proposed eurozone budget have yet to be announced, London would enthusiastically support any initiative that would potentially reduce what it contributes.

The United Kingdom could be supported by Denmark and Sweden, two countries that do not benefit from European subsidies and are not interested in accessing the common currency. These contradictory interests among non-eurozone countries weaken the possibility of forming a common front if any were to block the proposal at the supranational level.

As the European crisis progresses, the European Union will continue to fragment. Already there are divisions between northern and southern eurozone countries with contradictory national interests. There is also a growing distance between Western Europe — mainly eurozone members — and Eastern Europe, where most countries have retained their national currencies. European fragmentation now threatens to spread across the continent since consensus among all 27 EU members has become almost impossible.

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