Angela Merkel and David Cameron meet in Berlin: the making of a nascent alliance?

The Cameron-Merkel relationship is very good news. Europe is in dire straits, and the Euro is part of the problem.That leaves the EU, whose objective remains the fostering of peace and prosperity among the peoples of our region of the world.

Europe, the EU, and the Euro are three distinct realities.

Europe is a mosaic of highly interdependent states, stretching from the Atlantic, into the Ukraine, and in a broader definition, inclusive of Russia and Turkey. Its millenial politics has taken various shapes, from papal supranationalism, to the balance of power between the greater states, through to diplomacy in what Voltaire called the great European Republic.

The EU holds 28 members, incorporating all the traditional features of Europe, but distributing them within its complex institutions, which we call “Brussels”. “Brussels” stands first and foremost for the Commission, the European Parliament, the Council of Ministers and the Court of Justice, but is also equated with the intricacies of an essentially inter-state arrangement with pretensions to become a sovereign state. In terms of economic policy, the EU is about ensuring open access to markets among the member states, and between them and the rest of the world.

The Euro was negotiated in the years 1989-1992 around an agreement by Chancellor Kohl that monetary policy had to be collectivized, and could no longer be a German prerogative. There were two major deficiencies in the project: the first was the the expanding membership of the currency never came close to meeting the conditions for an optimal currency union. The second was that the history of monetary unions suggest that currencies survive on condition that they fall under the authority of a single sovereign.

Since the beginning of the EU, there has been a never-ending debate as to what political form Europe should take to achieve its aspirations. There were, and are, two camps to that debate: those who consider that the EU’s destiny must be federal, implying the creation of a new, supra-national sovereign on a continental scale, a new pope; and those who consider that the states and nations of Europe can co-operate together very effectively, while retaining their local roots. The struggle for the EU project has always been between these two: federal Europe as a destination or a Europe of the states as it is.

Since 1951, at the latest, Germany’s European policy has titled to the federal camp, while its economic behaviour has had a strong national flavour. Since 2008, and as the Euro crisis has developed, German European policy has moved to champion in effect a Europe of the states, despite the continued rhetoric about a federal future.

How has this significant change come about? The first reason is that Germany is the European leader but too small to be the Europayer. It just cannot, and its population emphatically will not, bail out France or the Club Med countries. That sounds and is very harsh, but it is rooted in a realization that German politicians have a bounden duty to protect and promote their own Republic, and that they also -along with business and trade unions–have a duty to preserve StandortDeutschland-Germany as a location for doing business. Germany, in short, cannot afford to pay say 15% gdp per annum to finance southern Europe, and remain competitive in the global economy.

What this implies is that Germany can get out of implicit Euro obligations, but cannot get out of the world economy. For Germany, the world economy comes first, and the EU and Euro second.

The second reason is that the federal dimension of German European policy has not achieved its objective. Chancellor Kohl championed the creation of the Euro,but he repeatedly declared that for the Euro to prosper, a federal currency such as the Euro had to be flanked by a federal polity.

The Lisbon Treaty has not delivered a federal Europe. Indeed, Germany’s Constitutional Court in its judgement on the compatibility of the Treaty to the Basic Law has stated that the Treaty is indeed compatible. But the Court added some very significant provisos. One of these is that the EU does not have the characteristics of statehood, and is not a democratic polity. The word that the Court uses to describe the EU is that it is a “Staatenbund”,an alliance of states, by contrast to being a Bundesstaat, a federal state. The Court, it is worth noting does not rule out that the EU may one day move to become a fully fledged federal entity. But it does set a very high benchmark to judge whether or not the eventual federal EU proposal meets the criteria of being a democratic state under the rule of law. And it adds that the hypothetical EU federal and democratic Constitution would have to be voted on by the German electorate, alongside the calling of a German Constitutional Assembly to rewrite the Basic Law, and make it compatible with the new federal EU constitution.

What has this to do with David Cameron and Angela Merkel’s meeting in the beautiful Prussian countryside? Simply, Germany has become de facto a champion of a Europe of the states. The other champion of a Europe of the states has always been the UK. We are watching the creation of the new kernel alliance in the EU.

That requires some explanation, not so much from a German, as from a UK perspective. The UK public, according to the EU’s own Eurobarometer on public opinions, has always been massively in favour of co-operation between European states, with a view to promoting our region’s peace and prosperity. That support for co-operation has been consistent around 80% of those polled. But it is also true that since the negotiations for entry to the European Communities, the insiders who manage the relationship and a broad swathe of the UK media, have been liberal internationalists, quite at home with the idea of a “pooling” of sovereignty in an EU tending towards federal structures. UK liberal internationalists, like the EU federalists, hope to overcome Europe’s inherited diversity and fragmentation by engaging in the process of European “construction”.

As with the continental federalists, their foes have been nationalists, on the grounds that nationalism was an invented myth sprung on the peoples of Europe sometime in the late nineteenth century, and that led directly to the world wars of the first part of the twentieth century. Their reasoning was that because every stone had to be turned to prevent any repetition of such a disaster, the source of wars-nationalism-had figuratively to be laid to rest. Any signs of nationalist revival had therefore to be endured, if necessary; suffocated or isolated if possible; but definitely not tolerated as a barrier on the road to building a European peace system.

Charles de Gaulle, in this liberal internationalist/EU federalist perspective was a throwback, who had at least been on the right side in 1940, and then brought an end to the Algerian conflict in 1962. Come Mrs Thatcher, the lady did not have the legitimacy in their view of being a participant in the world war. She was a nineteenth century throwback, harking to the days of Lord Salisbury and “splendid isolation”. Marie-Anne Slaughter from the State Department Policy Planning staff, spelt out this position with admirable lucidity in the FT yesterday(“Thatcher’s legacy is British isolation”, FT, April 12, 2013. http://www.ft.com/cms/s/0/aebdce1c-a295-11e2-9b70-00144feabdc0.html).

In short, the UK public which believes in a Europe of the states cooperating together has been led by a liberal internationalist élite in favour of “ever closer union”. Those who argued  that the UK should promote unambiguously what its population consent to were blackballed as nationalist, racist, little Englanders.

This dichotomy at the heart of UK European policy has now outlived its usefulness, if it ever was useful. The great failure of UK liberal internationalists is to have confused consent with what they labelled as narrow nationalism. No doubt, there were many in the UK who considered that wogs began at Calais; but you would have to go on a well equipped safari to find any examples left. The UK is, despite the present hard times, essentially at ease with itself as a multi-racial society, but clearly where an overwhelming majority have sufficient trust in our institutions to consider that the UK is perfectly capable of governing itself, and co-operating wherever possible or necessary with European neighbours.

And that is where, after long detours over the last century, we find that Germany is our like-minded friend in Europe. The German public, too, trust their institutions to cleave to the peace formula of Konrad Adenauer, and the two Helmuts, Schmidt and Kohl. Germany has struggled to become more open to other peoples, and since the turn of this millenia, its nationality laws have begun to change. Most importantly, the German leadership sets overwhelming store by the defense of their constitutional state and to the rule of law. They do not want that constitutional state or rule of law to be gradually hollowed out by a futuristic EU project.

The paradox is that the Euro crisis has elevated Germany to the position of hegemon in Europe, larger than any contender but too small to bail out France or the Club Med countries. To defend its own constitution and its own position in the global economy, Germany is finding itself doing unto others what it does not want to do to itself. Defenestrating elected officials in Greece and Italy or strangling the mini economy of Cyprus has revived passionate anti-German sentiment. The embers of Europe, which we all hoped were becoming extinct, are glowing again.

That is why this Cameron-Merkel meeting is so important. The UK, however much our liberal internationalists protest, has always consented to a Europe of the states. That is where we meet Germany today. The UK has also had excellent reasons to  be skeptical about the Euro. That is very different from being skeptical about Europe, and is in turn quite distinct from support of the EU. Merkel clearly appreciates that as descriptive of David Cameron.

In the UK, the EU will always get strong support when presented as favourable to open markets within and without Europe, and when it remains modest in its activities as a diplomatic arrangement to help the states negotiate and settle their differences. Germany  looks at the EU in similar light: indeed, since unification in 1990, enthusiasm for a federal Europe has waned, as Germany has adapted to unification and to the global economy.

The problem is the Euro. The nascent alliance between the UK and Germany for a Europe of the states points towards either the UK joining the Euro or Germany leaving it. There is no chance of the first, and the hurdles to achieving the second look very hazardous. Keeping the Euro is a third option,  and fraught with difficulties.

As the traveller on the road to Dublin reached a fork in the road, he asked a stranger which way to the great city. The answer came: “I wouldn’t be starting from here”. All the more reason for David Cameron and Angela Merkel to take this nascent alliance seriously, and for us to back it.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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