Germany May Be a Bigger Threat to the European Union than Brexit

BY MAULDIN ECONOMICS 

Two polls were recently released that call the European Union in question.

A poll in Italy reported that the Five Star Movement (a populist political party that wants to hold a referendum on whether Italy should remain in the European Union) was the most popular political party in the country ahead of local elections scheduled for next month. 

On the same day, British researchers who surveyed nine EU countries reported that 45 percent of respondents believed that their country should hold a referendum on whether to remain in the EU.

48% of Italians want to leave the EU 

Reuters tried to explain that political scandals, which have undermined public confidence in current Prime Minister Matteo Renzi’s Democratic Party, affected the poll numbers. But this is Italy we’re talking about, the same country that brought us Silvio Berlusconi. 

The country is no stranger to political scandals. A few instances of corruption would not be enough to make an anti-establishment party like the Five Star Movement as popular as it has apparently become.

The problem in Italy is economic. Unemployment in at least four of Italy’s southern provinces is over 18.8 percent, and in the other southern provinces, it is between 12 percent and 18.7 percent. And Italy hasn’t yet solved its non-performing loan problem.

Two simultaneous phenomena are occurring here. The first is disillusionment with the Italian government. What was an economic problem has become a political problem, and since Italy is a democracy, its leaders can be voted out of office. The next general election is not until 2018, but if developments continue to unfold in Italy, the situation is only going to get worse for mainstream political parties.

The second, deeper question is whether Italy wants to stay in the European Union. A Euroskeptic party is becoming the most popular political party in the eurozone’s third-largest economy. The rise of euroskepticism manifests itself in the polls, too—58 percent of Italians wanted a referendum on EU membership, and 48 percent would have voted to leave the EU. 

In France, one of the twin pillars of the EU, 55 percent of survey respondents agreed a referendum should be called, and 41 percent said they would vote to leave.

Brexit debate adds fuel to the fire

Most debates over Brexit have revolved around potential consequences for Britain—whether Scotland might push for another independence referendum and join the EU on its own terms, or whether and how much (in terms of money and jobs) the UK would lose as a result of a decision to exit.

What was less addressed, however, is how Britain’s stand against the EU and the public debate is dividing the rest of Europe. Prime Minister David Cameron negotiated a series of exceptions early this year. Even if the UK remains, it will have a new set of understandings with Brussels, and other countries may follow its lead.

If Britain leaves and doesn’t undergo an apocalyptic depression, poll numbers might begin to trend upward—and they don’t have a long way to go to become the majority in some of the EU’s most influential states.

Germany is a ticking bomb

At the center of the European Union is Germany whose export-dependent economy is gradually falling apart. (Geopolitical Futures, in partnership with Mauldin Economics, has published a detailed study of the German economy. Click here to claim your free copy). 

The German economy has thus far been able to avoid the crisis of the exporters that has affected every other major exporting country in the world—from the producers of manufactured goods like China and South Korea to commodity exporters like Russia and Saudi Arabia.

The US Treasury Department recently announced that the US would monitor China, Japan, Korea, Taiwan, and Germany for potential currency manipulation. The report noted that Germany has built up a significant bilateral trade surplus with the US, in addition to holding the second-largest current account surplus in the world, at approximately 8.3 percent of GDP.

It isn’t currency manipulation that has put Germany on this monitoring list. It is the fact that European and Chinese demand for German products has fallen. As a result, the US has become the destination for Germany’s exports in order to make up the difference. Export to the US, however, is a Band-Aid on a deeper wound.

There are a number of factors besides exports that go into Germany’s current account surplus. Germany has become a significant creditor. Its net foreign assets rose from almost zero in the 1990s to around 40 percent of GDP by the end of 2010, according to economic scholar Jörg Bibow.

Interest rates are low, and German banks are viewed as a safe haven in the European Union for stashing money. But since Germany is a creditor, many of the assets on German books are the unpaid debts of other eurozone countries. That means Germany is deeply exposed to a eurozone that still has not meaningfully recovered from the 2008 crisis.

Account surplus is usually seen as a positive. But if Germany has a surplus of 8.3 percent of GDP, why not use that surplus to stimulate domestic demand? Germany must be either unwilling or unable to use the surplus to stimulate domestic demand. This is in part because Germany is a creditor and invests abroad and in its own banks and companies. 

And this gets at the root of the entire problem. Germany exports almost half of its GDP. Germany imposed austerity on the EU after 2008, which has resulted in stratospherically high unemployment rates in southern Europe. 

Demand has not returned to pre-financial crisis levels. Germany has been able to skirt the crisis while most of Europe is either still suffering or is in the doldrums. There are limits to US demand and its tolerance of German exports. 

All of this offers different unique prisms through which to see how the European Union’s connective tissue is fraying as the bloc’s economic logic becomes increasingly illogical.

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