By Stuart Fleming

At a meeting in Frankfurt to mark the end of Jean-Claude Trichet's presidency of the European Central Bank, Helmut Schmidt offered perhaps the clearest geopolitical perspective on the currency crisis from a leading German politician.

"For 200 years we Europeans made up over 20 per cent of the world's population; we now account for no more than 9 per cent, and in 40 years time we will account for just 7 per cent. Each individual EU member state will then represent only a fraction of 1 per cent. And in the same year, 2050, all of Europe together will account for just one tenth of global value added."

He predicted that "perhaps in less than two decades, we will have three global currencies: the US dollar, the euro and the Chinese renminbi."

When German officials speak in private, they leave no doubt that Berlin shares Schmidt's perspective on the diminishing weight in the world of individual European nation states, even their own, although it is arguably the one EU country able to survive in an increasingly competitive global economy.

They are also well aware of the central place of the single currency in the argument. A Europe and a Germany without the euro would be much weaker.

In Britain, this sense of vulnerability is largely absent. Like France, Britain has yet to accept that, before too long, it will be at best a nation state with a medium-sized economy in a world of giants. As a result, British observers have consistently under-estimated the depth of Germany's political commitment to the eurozone.

Seen from Berlin and Paris - but not from London - European integration has always been primarily a political, not an economic, project. Since the spring of 2010, the threat of a contagious European sovereign debt crisis has been viewed largely from the perspective of economists and financial market participants. As a result, too little attention has been paid to the far-reaching initiatives which have been launched in the European Union and the euro area. These include the fiscal treaty which is now moving towards member state approval.

All the steps are aimed, at least in part, at strengthening and deepening the European Union as well as stabilising the single currency. The political opportunities the sovereign debt crisis has presented have not been wasted, although it is still too early to be confident their ambitions will be fulfilled.

Overlooked too, especially in Britain, has been the geopolitical perspective, which Germany, by far Europe's strongest economy, has brought to the crisis-management strategy. This lack of understanding is not surprising: Germany is wary of advertising its longer-term perspective.

Chancellor Angela Merkel knows full well that too much apparent enthusiasm for bailing out eurozone countries will tend to alienate domestic voters. It will also encourage debtors such as Greece to take even more risks at the negotiating table and demand more money for less economic reform.

The efforts made to capitalise on the crisis include initiatives to strengthen the fiscal discipline of the Stability and Growth Pact, especially for eurozone members, and the establishment of minimum standards for national fiscal frameworks including the introduction of national debt brakes.

A new euro area crisis management regime has been created with the European Financial Stability Facility and the European Stability Mechanism, the latter due to be operational in July of this year.

Finally, a far-reaching reform of financial market oversight has been introduced, and is now operational.

Some of these initiatives will prove less convincing in practice than on paper.

There are, moreover, as there have been since the 1970s, continuing and very deep fissures between France and Germany on the functioning of European economic co-operation.

Germany remains under global, not just European, pressure, to boost economic growth and share more of its hard won gains in competitiveness with its frailer neighbours, including France.

On this score, critics of Germany should note that, driven finally by domestic consumption, the German economy could be heading for a boom once the cyclically weak first half of 2012 is over - a silver lining on an otherwise dark horizon.

(Stewart Fleming is an associate fellow, International Economics, Chatham House.)


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