The global system is undergoing profound change. Three powers —
Germany, Iran and China — face challenges forcing them to refashion the
way they interact with their regions and the world. We will explore
each of these three states in detail in our next three geopolitical
weeklies, highlighting how STRATFOR’s assessments of these states are
evolving. We will examine Germany first.

Germany’s Place in Europe

European history has been the chronicle of other European powers
struggling to constrain Germany, particularly since German unification
in 1871. The problem has always been geopolitical. Germany lies on the North European Plain,
with France to its west and Russia to its east. If both were to attack
at the same time, Germany would collapse. German strategy in 1871, 1914
and 1939 called for pre-emptive strikes on France to prevent a
two-front war. (The last two attempts failed disastrously, of course.)

As much as Germany’s strategy engendered mistrust in Germany’s
neighbors, they certainly understood Germany’s needs. And so European
strategy after World War II involved reshaping the regional dynamic so
that Germany would never face this problem again and so would never
need to be a military power again. Germany’s military policy was
subordinated to NATO and its economic policy to the European Economic
Community (the forerunner of today’s European Union). NATO solved
Germany’s short-run problem, while the European Union was seen as
solving its long-run problem. For the Europeans — including the Germans
— these structures represented the best of both worlds. They harnessed
German capital and economic dynamism, submerged Germany into a larger
economic entity, gave the Germans what they needed economically so they
didn’t have to seek it militarily, and ensured that the Germans had no
reason — or ability — to strike out on their own.

This system worked particularly well after the Cold War ended.
Defense threats and their associated costs were reduced. There were
lingering sovereignty issues, of course, but these were not critical
during the good times: Such problems easily can be dealt with or
deferred while the money flows. The example of a European development
that represented this money-over-sovereignty paradigm was the European
Monetary Union, best represented by the European common currency, the
euro.

STRATFOR has always doubted the euro would last. Having the same
currency and monetary policy for rich, technocratic, capital-intensive
economies like Germany as for poor, agrarian/manufacturing economies
like Spain always seemed like asking for problems. Countries like
Germany tend to favor high interest rates to attract investment
capital. They don’t mind a strong currency, since what they produce is
so high up on the value-added scale that they can compete regardless.
Countries like Spain, however, need a cheap currency, since there isn’t
anything particularly value-added about most of their exports. These
states must find a way to be price competitive. Their ability to grow
largely depends upon getting access to cheap credit they can direct to
places the market might not appreciate.

STRATFOR figured that creating a single currency system would
trigger high inflation in the poorer states as they gained access to
capital they couldn’t qualify for on their own merits. We figured such
access would generate massive debts in those states. And we figured
such debts would contribute to discontent across the currency zone as
the European Central Bank (ECB) catered to the needs of some economies
at the expense of others.

All this and more has happened. We saw the 2008-2009 financial crisis in Central Europe as particularly instructive. Despite their shared EU membership, the
Western European members were quite reluctant to bail out their eastern
partners. We became even more convinced that such inconsistencies would
eventually doom the currency union, and that the euro’s eventual
dissolution would take the European Union with it. Now, we’re not so
sure.

What if, instead of the euro being designed to further contain the
Germans, the Germans crafted the euro to rewire the European Union for
their own purposes?

Germany and the Current Crisis

The crux of the current crisis in Europe is that most EU states, but
in particular the Club Med states of Greece, Portugal, Spain and Italy
(in that order), have done such a poor job of keeping their budgets
under control that they are flirting with debt defaults. All have grown
fat and lazy off the cheap credit the euro brought them. Instead of
using that credit to trigger broad sustainable economic growth, they
lived off the difference between the credit they received due to the
euro and the credit they qualified for on their own merits. Social
programs funded by debt exploded; after all, the cost of that debt was
low as the Club Med countries coasted on the bond prices of Germany. At
present, interest rates set by the ECB stand at 1 percent; in the past,
on its own merits, Greece’s often rose to double digits. The resulting
government debt load in Greece — which now exceeds annual Greek gross
domestic product — will probably result in either a default (triggered
by efforts to maintain such programs) or a social revolution (triggered
by an effort to cut such programs). It is entirely possible that both
will happen.

What made us look at this in a new light was an interview with
German Finance Minister Wolfgang Schauble on March 13 in which he
essentially said that if Greece, or any other eurozone member, could
not right their finances, they should be ejected from the eurozone.
This really got our attention. It is not so much that there is no legal
way to do this. (And there is not; Greece is a full EU member, and
eurozone membership issues are clearly a category where any member can
veto any major decision.) Instead, what jumped out at us is that
someone of Schauble’s gravitas doesn’t go about casually making threats, and this is not the sort of
statement made by a country that is constrained, harnessed, submerged
or placated. It is not even the sort of statement made by just any EU
member, but rather by the decisive member. Germany now appears prepared
not just to contemplate, but to publicly contemplate, the
re-engineering of Europe for its own interests. It may not do it, or it
may not do it now, but it has now been said, and that will change
Germany’s relationship to Europe.

A closer look at the euro’s effects indicates why Schauble felt confident enough to take such a bold stance.

Part of being within the same currency zone means being locked into
the same market. One must compete with everyone else in that market for
pretty much everything. This allows Slovaks to qualify for mortgage
loans at the same interest rates the Dutch enjoy, but it also means
that efficient Irish workers are actively competing with inefficient
Spanish workers — or more to the issue of the day, that ultraefficient
German workers are competing directly with ultrainefficient Greek
workers.

The chart below measures the relative cost of labor per unit of
economic output produced. It all too vividly highlights what happens
when workers compete. (We have included U.S. data as a benchmark.)
Those who are not as productive try to paper over the problem with
credit. Since the euro was introduced, all of Germany’s euro partners
have found themselves becoming less and less efficient relative to
Germany. Germans are at the bottom of the graph, indicating that their
labor costs have barely budged. Club Med dominates the top rankings, as
access to cheaper credit has made them even less, not more, efficient
than they already were. Back-of-the-envelope math indicates that in the
past decade, Germany has gained roughly a 25 percent cost advantage
over Club Med.

(click here to enlarge image)

The implications of this are difficult to overstate. If the euro is
essentially gutting the European — and again to a greater extent the
Club Med — economic base, then Germany is achieving by stealth what it
failed to achieve in the past thousand years of intra-European
struggles. In essence, European states are borrowing money (mostly from
Germany) in order to purchase imported goods (mostly from Germany)
because their own workers cannot compete on price (mostly because of
Germany). This is not limited to states actually within the eurozone,
but also includes any state affiliated with the zone; the relative
labor costs for most of the Central European states that have not even joined the euro yet have risen by even more during this same period.

It is not so much that STRATFOR now sees the euro as workable in the
long run — we still don’t — it’s more that our assessment of the euro
is shifting from the belief that it was a straightjacket for Germany to
the belief that it is Germany’s springboard. In the first assessment,
the euro would have broken as Germany was denied the right to chart its
own destiny. Now, it might well break because Germany is becoming a bit
too successful at charting its own destiny. And as it dawns on one
European country after another that there was more to the euro than
cheap credit, the ties that bind are almost certainly going to weaken.

The paradigm that created the European Union — that Germany would be
harnessed and contained — is shifting. Germany now has not only found
its voice, it is beginning to express, and hold to, its own national
interest. A political consensus has emerged in Germany against bailing
out Greece. Moreover, a political consensus has emerged in Germany that
the rules of the eurozone are Germany’s to refashion. As the European
Union’s anchor member, Germany has a very good point. But this was not
the “union” the rest of Europe signed up for — it is the Mitteleuropa
that the rest of Europe will remember well.

This report is republished with permission of STRATFOR. Peter Ziehan is a Stratfor analyst.