Three steps the EU can take to show global leadership
Current account surpluses and debt crises must end, but defence spending must rise
by: Wolfgang Münchau

Angela Merkel called for the EU to become less dependent on the US, but this would require an increase in defence spending to more than 2 per cent © Getty

Angela Merkel has been the first person to dismiss suggestions that she is about to become the leader of the western world. It is hard to say whether this is testimony to false modesty or sober realism, but the statement is correct. However angry you may be about the behaviour of US president Donald Trump or about Brexit, you would be seriously mistaken to jump to hasty conclusions about geopolitical power shifts. Like conspiracies, they do happen from time to time, but they are very rare.

There has been a lot of euphoria about Europe after the election of Emmanuel Macron as president of France. The eurozone is enjoying what appears to be a broad-based cyclical upturn, the first since the start of the financial crisis 10 years ago. There is global political goodwill towards the EU in general, and politicians like Mr Macron and Ms Merkel in particular. It would indeed be a good moment for the EU to grasp a geopolitical leadership role. It is there for the taking. But for that to happen, the EU would need to do three things differently. The chances of that happening are zero.

The first and most important is for EU nations to stop running large and persistent current account surpluses. Forget the German surplus. It is the eurozone’s surplus that matters — of which the German surplus is naturally a constituent part. The eurozone’s current account surplus stood at 3.4 per cent of gross domestic product last year.

European politicians and economists tend to have a small country perspective. Their declared objective is for their own nations to become more competitive. Theirs is not the mindset of a global power. Probably the biggest disappointment of almost 20 years of monetary union is the failure to shift away from this way of thinking. Jacques Delors, a former president of the European Commission, once remarked that the EU consists of two sorts of member states — small countries that know they are small, and those that do not. They will eventually need to get over this.

The eurozone is indisputably large — it is the world’s second-largest economy. What it does matters to the rest of the world. But unlike Americans, Europeans are not used to thinking about the international consequences of their actions. Those who criticise Mr Trump’s “America First” rhetoric should realise that EU countries have been doing exactly the same forever.

The second action is to put an end to the eurozone’s revolving crises. Several member states have unsustainable levels of debt. Banking systems are still weak. Intra-eurozone imbalances are close to an all-time record, as evidenced among other things by Germany’s growing surpluses in the European Central Bank’s Target 2 payment system. The cyclical upswing will not fix any of these problems. The presence of an economic cycle does not qualify you for the position of economic superpower.

Will Mr Macron and Ms Merkel manage to reboot the eurozone’s governance system? What I am hearing from Germany is that there is indeed readiness to engage with Mr Macron. But Germany regards a fiscal union primarily as a vehicle to deliver more austerity. Enjoy!

The third area that needs attention is the EU’s persistent refusal to increase defence spending. There is no way that Germany in particular will fulfil its promise of an increase in defence spending to 2 per cent of GDP — domestic politics has been moving in the opposite direction. In her seminal beer-tent speech in Munich recently, Ms Merkel called for the EU to become less dependent on the US. But she failed to point out that this would require an increase in defence spending to far more than the 2 per cent of GDP Nato commitment.

All three points have in common that the EU’s natural perspective is inward-looking. Even if we take the most optimistic view about a reinvigorated Franco-German agenda, we should not automatically infer that the EU is willing and ready to take on a global leadership role. Neither leader has even begun to prepare their electorates for the shifts in domestic policy that are required.

While Germans would generally agree with Ms Merkel’s suggestion that the EU should stand on its own feet, they would not agree to a single one of the measures that would be required to achieve this — on defence, on the obsession with the fiscal surpluses, and transfer of sovereignty.

Of all EU countries, France is probably more ready than others in the area of defence, but when it comes to free trade you may find it hard to find objective differences between Mr Trump and Mr Macron.

One of the many lessons of the eurozone crisis is that leadership vacuums do not necessarily get filled, because leadership is not a zero-sum game. By far the most probable outcome of an American retreat from global leadership is simply less global leadership.

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