European Union Juggles Its Problem Children

http://www.nytimes.com/2014/07/08/business/european-union-juggles-its-problem-children.html

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ROME — NATO’S first secretary general, Gen. Hastings Ismay, once said that the Western defense alliance was created “to keep the Americans in, the Russians out and the Germans down.”

The task facing the European Union now might be similarly described: to keep the British in, the Russians out and the Germans down.

Prime Minister David Cameron’s demand to redraw Britain’s relationship with the European Union and put the result to a referendum in 2017 means that the next few years are bound to be dogged by haggling over the powers of Brussels and ways for London to opt out of the union’s constraints.

Britain has the third-largest economy in Europe, behind those of Germany and France, and is the region’s financial hub. If it were to leave the bloc, the European Union’s global standing would take a hit. But that’s not all — Britain’s pulling out of the union would also have consequences for the country itself.

The confrontation last month between Britain and other European Union members over the nomination of Jean-Claude Juncker for president of the European Commission gave a taste of the kind of disputes to come if Mr. Cameron is re-elected next year.

Under fierce pressure from euro-skeptics at home, the British leader risks overplaying his hand by misreading and alienating his main allies, as he did with the German chancellor, Angela Merkel, over Mr. Juncker.

Exasperated by 40 years of Britain’s hardball tactics in blocking European efforts to adopt a more federal structure, many European leaders are tempted to cut Britain loose.

Yet keeping Britain in the bloc, provided the country does not obstruct closer economic and political integration in the euro zone, remains preferable.

Russia is another matter entirely. Russia’s annexation of Crimea and its decision to cut off natural gas supplies to Ukraine and destabilize the country’s east have made it urgent for Europe to cut its dependency on Russian gas.

Officials in Brussels fear Moscow may do more to economically punish Ukraine and other ex-Soviet republics like Georgia and Moldova for signing trade and cooperation pacts with the European Union.

Member states differ on how far to go in sanctioning Russia, whether to give Ukraine a long-term path to membership and what incentives to offer Moscow for changing course.

The Germans are reluctant to jeopardize their energy and trade interests, the French to cancel the sale of helicopter carriers and the British to endanger London’s role as an offshore banking center and playground for rich Russians. While former Soviet bloc states like Poland and Estonia favor a tougher line with Moscow, others — such as Slovakia, Romania and Bulgaria — are wary of putting energy supplies and business ties at risk.

Preventing Russia from destabilizing the European Union’s eastern flank is a common interest, but the union will continue to struggle with how and where to draw lines.

Yes, but why the desire to keep the Germans down? Germany is in many ways a beacon of economic success and stable democracy, in the bosom of Europe and NATO.

But its growing political clout in the European Union in the wake of the debt crisis has stirred unease in many capitals, ensuring that a tug of war with Berlin over economic and fiscal policy is likely to escalate.

A lack of leadership in France, British detachment and an increasingly muscular German constitutional court have all contributed to thrusting Germany uncomfortably into the spotlight. So too have impending changes in voting rules among European Union states that give more weight to population size, and the growing power of the European Parliament, where Germans make up the largest contingent.

Long underrepresented, Germans have secured an unprecedented grip on Europe’s main institutions that is raising concern in London and Paris. A former aide to Ms. Merkel, Uwe Corsepius, is secretary general of the bloc’s Council of Ministers; Klaus Welle is secretary general of the European Parliament; Johannes Laitenberger, chief of staff of the outgoing commission president, is to be deputy head of the legal service; Martin Selmayr is leading Mr. Juncker’s transition team at the commission and is likely to be his chief of staff. In addition, Klaus Regling heads the euro zone’s financial rescue fund, and Werner Hoyer, a former German minister for Europe, is chief of the European Investment Bank.

The fact that these trained lawyers and economists all hold German passports does not make them pawns of Ms. Merkel. As European Union civil servants, they are loyal to a vision of a federal Europe rather than to the Federal Republic of Germany.

But the dominance of German economic thinking, with its emphasis on austerity and a deep-seated culture of saving rather than spending or investing, needs to be tempered if Europe is to avoid losing a decade to stagnation and high unemployment. Just last week, the German government congratulated itself on approving the first balanced budget since 1969, at a time when many economists say Berlin should be cutting taxes to bolster domestic demand and investing more in infrastructure.

The Italian prime minister, Matteo Renzi, who is trying to shake up a highly indebted country often seen as an economic and political basket case, is challenging Berlin’s policy prescription, using the rotating European Union presidency to try to change the debate.

His offensive, supported by France and other southern states desperate for fiscal leeway to revive growth, has drawn limited concessions from Ms. Merkel and offers Mr. Juncker a chance to make the union’s economic policy mix a bit less German.