Germany, Central Europe, and the EU after Brexit

The British referendum on leaving the EU (Brexit) is the most important event in the history of the EU since the great expansion in 2004. The United Kingdom is the second largest economy of the EU, responsible for about 15% of the GDP of the whole Union. Consequently, its leaving the EU increases the share of Germany in the EU GDP from 20% to 25%, while the share of the eurozone in the entire GDP of the union will go up from over two thirds (including Croatia and Denmark with their currency boards) to about 85%. The United Kingdom is also an EU member with the largest—besides France—military potential, including a nuclear arsenal.

Today the greatest responsibility (again) for the future shape of the EU lies with Germany, not only because of the fact that they are the largest economy with the most numerous population, but also because of their exceptional economic relations with EU members not belonging to the eurozone (Central Europe, Scandinavia). We should not expect crucial decisions on the shape of the European Union before the elections in France and Germany (2017). But even today, on the basis of discussions going on in Germany and Europe and the proposals emerging from them, we can perceive the possible directions of change. At the beginning of 2017, we hear from the European leaders more often than ever that the scenario of a “multispeed Europe” may be inevitable or even desirable; an idea which until recently used to be considered rather taboo. Indeed, the main message from the meeting in Versailles on March 7, 2017, among leaders of France, Germany, Italy, and Spain was clear: “differentiated cooperation” is increasingly seen as the way forward for the EU in order to avoid the risks of disintegration.

Security Policy without the United Kingdom

The process of Britain’s leaving the EU means the necessity of a profound reflection on the Common Security and Defence Policy (CSDP). According to the Stockholm International Peace Research Institute, the United Kingdom spends the biggest amount of money on defense in absolute terms out of all the EU countries (USD exchange rate from 2015) or comes second after France (constant exchange rate from 2014). Military expenditure of these two countries is at a very similar level. Their joint expenditure is only slightly lower than the contributions of all remaining EU countries taken together. What is more, France and United Kingdom are distinguished in the EU by a particularly close bilateral cooperation in the sphere of security and by possessing nuclear arsenals. Both countries spend more than 2% of their GDP on defense. Among other European Union countries only Estonia, Greece, and Poland are in this category.

So Britain’s leaving the EU means that the second biggest military spender after France will be Germany, but between Germany on the one hand, and France and United Kingdom on the other, there are fundamental differences regarding security policy. German defense spending constituted just 1.2% of the GDP in 2015 (which amounts to about three-fourths of the French expenditure). It has remained on a similar level for many years. Spain and Italy spend a similar share of their GDP on defense, although in the case of Italy in 2004 it was 1.9% of the GDP. In absolute terms, joint military expenditure of Italy and Spain is at the level of the German defense spending. More importantly, because of the legacy of the Second World War and pacifist social sentiments, Berlin is radically less ready for military interventions abroad compared to London and Paris. For the same reasons it is very difficult to imagine an increase of German military expenditure to the level of 2% of GDP or producing nuclear arms.

However, Germany became very much involved in preparing a CSDP reform taking Brexit into account. In mid-October 2016, defense ministers of France, Spain, Italy, and Germany presented a joint plan of reforming CSDP. They announced that should they not gain the support of the entire EU, they would promote a project within the so-called mechanism of enhanced cooperation included in the Lisbon Treaty (a coalition of the willing). The four ministers declared that their aim was neither “building a European army” nor “competing with NATO.” What they are after is making the Union capable of conducting independent military operations, including “of high-intensity,” in its neighborhood.

Serving as a model are to be such initiatives from the past as interventions in Mali or Somalia, although they were organized by particular Union countries (especially by France) rather than the entire EU. To make it possible, the EU countries would establish a separate military staff in Brussels. What is more, the meetings of EU defense ministers would be organized once a month. Now such consultations take place only occasionally during meetings of foreign ministers.

An integral part of the plan is the proposal to consolidate the arms industry of the member states and the development of the most modern military technologies. The plan assumes a major increase in the budget of the European Defence Agency (EDA) established in 2004. So far, the development of the EDA was blocked by the United Kingdom. The signatories also proposed creating a logistics center, where military equipment necessary for overseas operations would be kept. The EU would also coordinate protecting crucial institutions of the member states against cyber-attacks.

The Eurozone and Its EU Neighbors

The countries from outside the eurozone to a large extent constitute a coherent geographic area within the EU. The countries not belonging to the eurozone (cut across by Slovakia, which does use the common currency) stretch from the north to the south from Sweden to Bulgaria. Their societies and governments present varying attitudes towards adopting the common currency. A Eurobarometer poll from December 2016 showed that the majority of Croats, Romanians, and Hungarians had a positive attitude towards eurozone accession, while most Bulgarians were against it (50% against, 38% for, 12% undecided).

Staunch opponents of joining the eurozone are Czechs (almost 75% against), Swedes and Danes (about 65–70% against), and Poles (more than 55% against, in domestic polls more than 66%). These social sentiments to a large extent translate into the approach of the governments to the euro. Bulgaria, Croatia, and Romania declare their willingness or conduct and economic policy subordinated to the aim of joining the eurozone in the near future. Denmark has an opt-out clause. Czechia, Poland, Sweden, and Hungary, although under the terms of the accession treaty obligated to join the eurozone, do not take any action in this direction.

Even in the geographic aspect, Germany is connected in a special way with the EU members from outside the eurozone. Within the EU, the German border is the longest border between euro and non-euro countries (Denmark, Poland, Czechia). Beside Slovakia, Germany is also the only eurozone country bordering with so many non-members. Analyzing the economic relations of Germany with the non-euro EU countries, it should be emphasized that the German economy is generally globalizing and becoming less and less “European.” The share of the EU in the German trade balance declined from 63% in 1995 to 57% in 2015.

The importance of the current eurozone countries for the German trade has decreased much more. In mid-1990s, 47% of German trade was with these countries, by 2015 their share had shrunk to 37%. In 2000, for comparison, 15–20% of German foreign trade was with the non-euro EU countries. What is more, the share of these countries in the German trade balance significantly increased in the last two decades. As a result, even after Britain’s leaving of the EU, almost 30% of German EU trade involves countries not belonging to the eurozone.
The share of these countries in German foreign direct investments within the EU is very similar. (Meanwhile, foreign direct investments of Germany in the EU countries constitute more than 40% of all German FDI stocks). Germany is the most important trade partner for all countries not belonging to the eurozone. Its share is often very high: 25–30% in the case of Poland, Czechia, and Hungary, 20% in the case of Romania and Denmark, and about 15% in the case of Bulgaria, Croatia, and Sweden. Germany is a crucial and often most important foreign direct investor in these countries (especially in Poland, Czechia, and Hungary). To sum up, no other big eurozone country is so strongly connected with those EU states which do not use the common currency.

The German Visions of Europe

The referendum on the United Kingdom’s leaving of the EU sparked a debate in Germany on the future of the union. This debate revealed marked differences of positions between Christian Democracy and Social Democracy. The former supports further informal integration (a coalition of the willing in situations when the European Commission is incapable of solving problems) and with greater emphasis on cooperation with countries from outside the eurozone. More important for the Social Democrats is institutional integration (federalism) and the focus on the hard core of the eurozone.

Soon after the British vote, the then German Foreign Minister Frank Walter Steinmeier, one of the leaders of Social Democracy (SPD), alongside with the French foreign minister announced a document “Strong Europe in the world of uncertainty.” They declared that their countries would “keep moving towards a political union in Europe” and invited the rest of Europeans to participate in this undertaking. In their opinion, the EU must create an economic and currency union. They claim that introducing a common fiscal policy constitutes the “missing milestone of the European Monetary Union,” and in the “long perspective it should ensure macroeconomic stability on the eurozone level and limit one-way transfers.” In the same period, Steinmeier organized meetings with foreign ministers of EU founding members (Belgium, France, Holland, Luxembourg, Italy), who represent left-wing parties and generally supported the ideas put forward in the document “Strong Europe.”

Steinmeier’s actions were criticized by the finance minister Wolfgang Schäuble from Christian Democracy (CDU) in an interview for Welt am Sonntag. According to Schäuble, the EU countries which Steinmeier did not invite to the meeting justifiably “felt uncertain and excluded.” According to Schäuble, we should now avoid anything which could increase the rift between the old and the new EU members (he named the Baltic countries and Poland in this context). In the interview for Welt am Sonntag, Schäuble said that he had nothing against European Commission trying to solve problems, but when it fails, “we should act as fast and possible” and governments should intervene. Schäuble named the refugee crisis, military co-operation, and digitization as areas where fast EU action was necessary. The German finance minister said: “The time has come for pragmatism. Even if not all 27 states join at once, then at least some begin this process. And if the European
Commission does not join, then we will take matters into our own hands, we will solve problems in negotiations between governments.” Schäuble also declared himself against changes to Union treaties, for “we have no time for that.” At the Malta summit in February 2017, Chancellor Angela Merkel spoke in the same vein—she said she considered the concept of “multispeed Europe” as a necessary answer to challenges facing the EU. She believes that this project should be found in the declaration prepared for the 60th anniversary of the Rome Treaties celebrated in March.

The question of a common EU approach to the problem of refugees, mentioned by Schäuble, is important for the German left too, but also in this case the answer is the development of EU institutions. In “Strong Europe” the ministers decided that “Germany and France are convinced that it is time to introduce a truly integrated asylum, refugee, and migration policy.” In order to implement this policy they proposed establishing “the first multinational border guard and coastguard.”

Mainstream German parties (CDU, SPD, the Greens, the Liberals from the FDP) are united in their staunch support for stopping Euroskeptic
populism, nationalism, and authoritarian tendencies through introducing a new mechanism of control protecting democracy, fundamental rights, and the rule of law. The European Parliament adopted a resolution in this matter in late October 2016. It assumes an annual assessment of the functioning of the democratic systems and the rule of law in all EU countries through EU and national institutions. The resolution was supported by 405 MEPs, with 171 voting against and 39 abstaining. The opponents included all Euroskeptic parties being in opposition in their countries as well as the British Tories, the Polish Law and Justice, and the Hungarian Fidesz.

What Next?

The coming years will offer the most serious challenge for the German European policy since the world crisis in 2009 hitting the eurozone. Germany may again prove to be an island of stability among the largest EU countries. After the autumn parliamentary elections various scenarios are possible (CDU–the Greens–FDP, CDU–SPD, SPD–the Greens–Die Linke). When Martin Schultz took charge of the SPD election campaign, Social Democrats overtook Christian Democrats in the polls for the first time since 2006. Of crucial importance for German policy in the EU will be the spring presidential elections in France. If you can very hardly imagine the EU with Italy outside the eurozone, then French leaving the EU as proposed by Marie Le Pen, the leader of the extreme right, would mean most probably the end of this organization.

The victory of the center-right’s candidate Francois Fillon or—the more probable scenario—the center-left’s candidate Emanuel Macron because of their platform of deep economic reforms (more emphasized by Fillion) and an unambiguous support for a closer integration of the eurozone would be advantageous for Germany in the context of the eurozone’s future. In general, we must be prepared for an accelerated internal integration within the eurozone on a more institutional basis (if SPD wins) or on a more pragmatic basis (if CDU wins). A closer integration within the eurozone means that the EU countries from outside the zone will face fundamental decisions regarding their relations with the increasingly integrated common currency area.

Berlin will encourage them to adopt the common currency, perceiving this as a chance for strengthening its position in the EU. The main economic argument used by Germany will be that integration of the eurozone means de facto diversification of the common market and the EU budget. Germany will want to include these countries in common initiatives going beyond the eurozone (for example, monitoring of democracy and the rule of law, common defense policy, refugees, digitalization/innovative technologies). It seems that Sweden will be the most willing to cooperate with Germany, Hungary and Poland will be at the opposite pole, and the Balkan countries (Romania, Bulgaria, Croatia, their position significantly changed should they join the eurozone), Czechia, and Denmark in-between.

For Germany this situation means that Poland, the largest European economy not using the common currency and by far the most important political and economic EU partner of Berlin from outside the eurozone (after Brexit), will probably become an EU member most resistant to European integration. At the same time, the German side will even more decisively treat European integration as a top priority.