The End of Western Europe?

October 24, 2011 Topic: Monetary Policy Region: Western Europe Blog Brand: Jacob Heilbrunn

The End of Western Europe?

If Merkel succeeds, she will be the hero from the East who saved the West. If she fails, the euro—and European unity—will never recover.


During the postwar era Western Europe was a cozy place. It was protected militarily by the United States. It shared, more or less, common cultural values. It didn't really have to deal much with the East. It was able to construct little social democracies that prided themselves on creating equality, or at least minimizing gross discrepancies of wealth.

Since then, several shocks have disrupted that world. The first shock came in 1989. The collapse of the Berlin Wall was heralded, in a spasm of triumphalism, as the ascension of the West. Though George H.W. Bush refrained from celebrating, jubilation was the common theme. In Europe the fall of the Wall meant that the East was back. Eastern Europeans could travel to the West. Trade increased. The continent was supposed to be unified. The Euro was created. One Germany was supposed to be the economic motor that pulled the entire continent to prosperity.


The next shock came in 2008. Europeans had already become disgruntled with the United States when the Bush administration went to war in Iraq. Even Germany, a longtime and faithful ally, refused to endorse the war. German Chancellor Gerhard Schroeder based his reelection campaign on opposition to the war. In 2008, Europeans blamed America for the world economic crisis.

Now the shoe is on the other foot. The third shock to Europe is internal, not external. Greece is going bankrupt. Italy, Spain and Portugal may follow. Apprehensions are mounting that the euro itself may fail. A rebellious German electorate views the idea of bailouts with increasing antipathy. German banks are balking at writing off Greek debt. French banks might not survive. And Italy is, well, Italy.

Which is why the negotiations this week over rescuing Greece may be the most important in the history of the European Union. German chancellor Angela Merkel, her vociferous critics to the contrary, is proceeding as quickly as she can, which means not very. Meanwhile, French president Nicolas Sarkozy has been flying to Frankfurt for desperate emergency meetings with Frau Merkel to try to prevent French banks from going belly-up. He has had to recede to Merkel's insistence that the European Central Bank not be the locus of rescuing Greece—in a sign of the new nationalism sweeping Europe, Merkel is being hailed in Germany for standing up to the French. "Merkel's Battle For Our Euro," read the title in the popular Bild newspaper; in other words, the German version of the euro, not the European one. How will that sit with Germany's neighbors as they have to adopt the sound money and stringent economic principles of Germany? Are we seeing the Teutonization of Europe—and the end of the French socialist model?

The forthcoming plan is three-fold—use the rescue fund as a kind of debt insurance; infuse more money into the European rescue fund; and pressure banks to write down more debt. Whether it can work is one question. Another is whether it will get approved. More democracy is coming to western Europe, which may unsettle the plans of the elites. To what must be Merkel's consternation, it now appears that the entire German Bundestag will vote yea or nay on the rescue package. Until now, it had been assumed that the package would simply be voted on by the federal parliament's budget committee. No longer. Now it will require another act of political will for Merkel to secure passage. No one should underestimate the Iron Chancelleress, who has ridden roughshod over her opponents over the years.

If the package is approved and investors are reassured, Merkel could go down in history as the woman from the East who rescued the West. It would be an ironic turn of events. But stranger things have happened in history. If Merkel fails, then the idea of the euro—and European unity—will suffer what could be a fatal blow. The Wall Street Journal reports that Merkel gave Sarkozy a new teddy bear for his birthday. Unless the new plan to be unveiled this week can save the day, Sarkozy may find himself needing more than a teddy bear for psychic solace.