Money Matters

Trump, Italy and the threat to Germany

June 11, 2018
By Philip Stephens

Italy is ruled by Eurosceptic populists; Poland and Hungary by authoritarian nationalists. Britain limps towards an unhappy Brexit; a new governing coalition in Spain is confronted by Catalan separatists. No one could accuse Europeans of trying to hide the continent’s stresses and strains.

Italy is ruled by Eurosceptic populists; Poland and Hungary by authoritarian nationalists. Britain limps towards an unhappy Brexit; a new governing coalition in Spain is confronted by Catalan separatists. No one could accuse Europeans of trying to hide the continent’s stresses and strains.

Germany, of course, is the exception. Angela Merkel, that safest pair of hands, remains in charge at the chancellery, the economy is running at full employment, and federal and state governments are struggling to spend their surplus revenues. Now here’s the rub. The nation most vulnerable to the present geopolitical tumult is, well, Germany.

Europe views Donald Trump’s belligerent unilateralism with frustration and anger. How can even so dangerously absurd a president as Mr Trump present transatlantic trade relations as a threat to America’s national security? Europeans know there is nothing to gain from retaliation against US tariffs; but there is too much to lose from being bullied into submission. Everyone will be impoverished by a trade war.

No one has more to lose than Germany. The fracturing of the transatlantic alliance is existential for Berlin. Washington has been the vital guardian of German security, one of the two pillars of its postwar stability. There is no bigger winner from Nato. As the guarantor of the open trading system, the US likewise has been midwife to German prosperity. No other nation so depends on the rules-based international order that Mr Trump now disdains. To forfeit America’s protection is blow enough for Berlin. The splintering of political and economic cohesion in Europe represented by the rise of anti-EU populism threatens to demolish the second pillar of German success. The EU provided the essential political legitimacy that permitted German reunification at the end of the cold war. It still offers German industry the rich domestic markets that underwrite its global economic prowess.

It is too soon to say if the unholy coalition in Italy of the leftwing populists of Five Star and the far-right nationalists of the League could mark the demise of the eurozone. My Italian friends predict the coalition partners will break with each other long before they have had a chance to break the EU. Maybe. But it would be foolhardy to be complacent about the euro’s future.

During the last euro crisis it always seemed likely it would survive. Even as eminent economists lined up day by day to predict the single currency’s demise, the politics pointed in the opposite direction. Creditor and debtor nations were united in judging the cost of exit too high. Railing against Brussels and Berlin was one thing; the protesters who filled the streets of Athens were not demanding a return to the drachma.

More recently, the view in Berlin has been that the more serious danger to the EU comes from unchecked migration rather than an unbalanced monetary union. As France’s president, Emmanuel Macron, has pressed for a deepening of eurozone co-operation, Germany has sought to focus on an EU-wide approach to migrants.

Ms Merkel has not apologised for opening Germany’s borders to 1m refugees in 2015. But, after the success of the far-right Alternative for Germany in the 2017 election, she has absorbed the political consequences. She did the right thing, but this was a decision never to be repeated.

The danger now lies in the fusion in Italy of these two strands of public disaffection — deep resentment at stagnant living standards and austerity sits alongside rising anger at the numbers of migrants crossing the Mediterranean. The euro did not cause Italy’s economic ills, but it does close off the old escape route of devaluation. Throw in the accident of geography that makes Italy a landing point for migrants and an anti-establishment lurch to the extremes, left and right, is easily explained.

One of the lessons of the Brexit referendum was that there is a level of political disaffection at which voters are ready to disregard their assumed economic interests — they conclude instead they have nothing more to lose. At this point punishing the elites takes on a logic of its own, almost whatever the consequences. Falling out of the euro would devastate the savings and living standards of Italians. But what if their anger takes them beyond such calculation?

Germany should be worried. The federal republic has prospered as a status quo power. A robust transatlantic alliance and a cohesive EU provided the bulwarks that allowed an essentially passive foreign policy. In crude terms, Germany has been a “taker” — importing stability from neighbours and allies.

Now, Mr Trump’s disavowal of US leadership mirrors the open divisions within the EU. If Berlin wants to hold on to its gains it will have to make a positive contribution to refurbishing the rules and structures on which it depends. The risk lies in doing nothing.

In a recent interview with the Frankfurter Allgemeine Sonntagszeitung, Ms Merkel showed some recognition of this new responsibility. Her comments suggested Paris and Berlin may be closer than many have expected on the direction if not the speed of eurozone reform. But this can be only a start.

Germany cannot save Italy. It can, if it wishes, recast the EU as an ally instead of an enemy. Of course, there are always those in Berlin who will ask why they should pay? The answer is quite simple — German self-interest.