Europe Reconsidering Itself


2015-07-23  By Harald Malmgren

In parallel to the Eurogroup-Greece imbroglio Europe has also found itself torn by other conflicting political and security priorities.

Paramount for some European nations are the growing tensions with Russia.

President Putin’s aggressive behavior in the Ukraine continues, and there are signs of intention to extend Russian intervention in Moldova. The Russian military posted in Kaliningrad, accessible through Lithuania, has been substantially enhanced. Putin announced an Arctic military initiative involving establishment of as many as 13 new operational stations.

Under longstanding navigational agreements Russia has access to Norway’s Spitsbergen archipelago, and is now setting up a major electronic surveillance outpost on Norway’s Svalbard Island, which sits between Greenland and the Arctic.

All militaries routinely probe the responses, especially response times, of neighboring militaries.

However, the Russians have recently gone well beyond the kinds of border routines routinely experienced throughout the world, by flying into areas which are traditionally within recognized airspace of other nations.

Russia has not only been having close engagements with neighbors, but also in faraway locations such as in proximity to the Western coast of the United States.  Russian submarines have been spotted in Scandinavian waters. Russian vessels have harassed Baltic cable-laying vessels in the Baltic Sea.

Although not much covered in public news and media, Russians have also experimented with electronic probes of US Naval vessels.

At least one serious electronic disablement probe was applied to a US Navy ship in the Black Sea recently.

For Northern European neighbors of Russia, including the Baltic nations, Poland, Finland, Sweden, Norway, and Denmark, there are centuries of history which encourage inordinate fears of physical altercations with Russia.

For its part, Putin seems determined to continue and perhaps intensify actions, which appear to threaten its neighbors.

For example, about 10 months ago Russian military crossed the border into NATO member Estonia and abducted an Estonian military officer who has not yet been released.

This raised a question about what constitutes an “attack” on a NATO member:

Does one cross-border abduction constitutes an attack within the meaning of NATO Article V?

Would cross-border abduction of 10, or perhaps 100 Estonians constitute activation of a NATO military response?

Most NATO member governments do not want to be forced to address explicitly any military probe by Russia, especially if such a probe does not directly affect their own  nation.

Activation of NATO ArticleV would be politically challenging.

This leaves Russia’s closest neighbors apprehensive.

When President Obama visited Tallinn and declared the US stood behind Estonia, more than a few Estonians wondered how far behind Obama considered himself to be standing.

Apprehension among Nordics rose to near fever pitch this summer, as Russia staged a  “mock invasion” of Finland and the Swedish island of Gotland.

It should not be surprising that the Baltics, Nordics and Poland might be preoccupied with their own security, and might worry about having to put more of their own resources at the disposal of Greece when they needed greater funding for their own defense systems.

Looking southward, the growing volume of North African and other Arab refugees threaten to overwhelm political stability in Mediterranean Europe.

This poses serious challenges to internal EU freedom of movement laws.

Potential systemic fragmentation increasingly afflicts politics in such disparate nations as Belgium, Spain, Italy, the UK and now France.

These essentially domestic strains often have European links as poor domestic economic performance is frequently blamed on austerity economic policies imposed by the foreign, non-locally elected officials and political leaders of the Eurozone and/or the European Union bureaucracy.

For example, the Front Nationale in France continues to gain popularity as it impugns authority and rectitude of the European Commission and the Eurosystem in its entirety, posing an existential threat to the entire European Project.

The apparent popular and political divisions within the UK on membership in the European Union have in recent years opened the possibility of British exit from the EU (popularly dubbed Brexit).

There is a complex intertwining of interests between Berlin and London in limiting the authorities of the Brussels EU bureaucracy, the European Court of Justice, and other EU related institutions.

Both Berlin and London are wary of the seemingly limitless expansion of EU Commission regulatory decisions, which are converted into Europe-wide law by the ratification, or approval of the European Court of Justice.

Both are to varying degrees wary of evolution of French dirigisme into central economic planning of the entire EU economy, to the detriment of private businesses and banks and greater politicization of income  inequality policies at a time when European demographics shows imminent signs of  aging population.

There should be little doubt that Merkel and Schäuble want the UK to remain a member of the EU, as a counterweight to the far more Socialist-leaning governments of France, Italy, and Spain.

While the French think the center of the Euro area financial market should be in Paris, or Strasbourg, or somewhere else on the Continent, German pragmatic thinking recognizes that a UK outside the EU would most likely result in movement of the remainder of the European financial market to London, outside the reach of the Eurocracy, in a city far preferred by successful financiers to rainy, gray, insular Frankfurt or Strasbourg.

Continental governments privately recognize that many of their banks are still mired in nonperforming loans, zombie business relationships, and excessive leverage with which they achieve high rates of return in spite of pervasive management inefficiencies.

One reason for reluctance to transfer bank regulatory powers to the ECB or an ECB-linked agency is that regulators of other nations would be able to see the sickness of their own banks, and that cross national mergers would be encouraged which took from each government the ability to use their own banks for their own national political purposes.

In this connection, it must be kept in mind that European businesses are far more bank- dependent than businesses in North America, where direct access to capital markets is prevalent and the role of banks in specific businesses far more limited.

Again, these differences are essentially political, important to national and local autonomy in the management of large segments of their respective economies.

The European effort to develop a common financial market regulatory framework and a homogeneous banking system has also been a continuing source of fundamental disagreement. On its face, the disagreement is typical of regulators operating within different legal histories and juridical precedents.

However, behind these disagreements lie deep financial problems in various levels of banking in each EU nation, ranging from global megabanks through regional state-owned and private banks all the way to savings banks.

The political consequences of each type of bank differ, depending on their relative roles in local government financing and local projects of significance to local economies.

Moreover, geographic, national rivalries continue between London, a global financial market center, and aspirations of Frankfurt, Paris, and even lesser locations like Luxembourg.

In this context of aging societies, fragile banking systems, weakening pension systems, growing scope and scale of entitlements, and high dependence on world trade growth to propel their export-dependent economies, the Continental Europeans are confronted with powerful centrifugal political forces that will impede deeper political and economic integration.

That most of the EU is falling behind in spending on military defense and other security measures is understandable once the strong forces of economic and political disintegration are taken into account.

With almost all NATO members having fallen below their 2% of GDP defense spending targets, and afflicted with dysfunctional and  ill-equipped militaries, it should not be surprising that Putin has found this an  opportune moment in history to attempt reassertion of Russian hegemony among its neighbors as well as among select political factions within the larger members of the EU.

Russia is not in a position to cope with direct US military confrontation.

But Russia is in a strong position to exploit divisions and populist fears inside many of the EU member nations, including NATO members.

Apparent US reluctance to pose a meaningful deterrent posture in Europe, and a recent pattern of Washington temporizing when confronted with new security challenges leaves Russia with an expectation that although America is a vital segment of NATO, it is unlikely to react in a timely manner to Russian probes.

It would seem that Putin feels there is room for continuous probing of European responses to intrusions or provocations without falling into overt military confrontation.

Europe is likely to continue to be preoccupied with internal divisions and wariness of bearing expenses generated by their EU neighbors.

Germany seems stuck in an unresolvable dilemma, with a failing intimate Russian relationship on one side and on its other side an economically and politically faltering array of EU partners who will inevitably seek greater commitment of German wealth to the European Commonwealth.

The saga of Syriza’s confrontation with the giant Eurogroup has shown that the Eurogroup cannot function cohesively, and assert influence and authority consistent with its relative size and alleged economic power.

For the time being, all the Eurogroup can do is in the hands of the ECB. This means that the ECB has become the political instrument of a fraying band of European leaders.

The ECB in turn is now dependent on its experiment with a Euro-specific form of QE to rearrange or reconfigure Europe’s growing debts at a time of societal aging.

This may not end well.

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