Opinion - Europe Economy

European elites mistake nation states for populist demagoguery

Key Points
  • Nation states are back at center stage as a unifying European idea.
  • That means political forces pejoratively branded as nationalists and populists could have a fair showing in European parliamentary elections next May.
  • Meanwhile, Germany could do a lot to calm the European political scene by leading the continent out of an incipient recession.
French President Emmanuel Macron
Gonzalo Fuentes | AFP | Getty Images

"L'Europe! L'Europe! L'Europe!" was how an irritated French President Charles de Gaulle decried, in December 1965, the idea that a European integration was the answer to all of the continent's problems.

De Gaulle approved of the European customs union and an economic and political cooperation of nation states. He thought that closer economic relations could eventually lead to some sort of European confederation, but he rejected the idea of Europe's federal super state.

That means that, in today's post-modern Europe, de Gaulle — voted by the French in 2005 as the "greatest Frenchman of all time" — could be considered a nationalist and a populist demagogue.

When I recently mentioned that to a French political commentator, he uncomfortably skirted the question with a cop out that the idea of a united Europe has changed since de Gaulle's time.

Brexit, however, is a vivid example of the opposite: The majority of British voters cast their ballots in a 2016 referendum that the United Kingdom should not cede its sovereignty to an unelected European Commission, and that it should not have to defend its political governance with opt-outs from an increasingly federalist European Union. But the U.K. is quite willing to participate in a European free trade area that does not infringe upon its own sovereign decisions as a nation state.

Don't divide Europe

And that is not the proverbial Europe "à la carte" ridiculed by the governing elites in France and Germany, who bear an enormous responsibility for mismanaging the European Union they now see as the only way of clinging to power.

The British, for example, refused to join the euro because they did not want to give up their monetary sovereignty for the sake of being part of a genuine European customs union and its single market. A reminder: Any exchange rate change violates the customs union because it is technically equivalent to an import tariff and an export subsidy.

Another example is the Czech Republic's steadfast decision to manage its own monetary policy, even though Prague's budget deficit of 1.3 percent of GDP, gross public debt of 42 percent of GDP and an inflation rate of about 2 percent would make it a stellar member of the monetary union. And, just like the British, the Czechs fully realize that by maintaining their own currency (the koruna) they are missing some trade and investment advantages of the European single market.

The Czechs are being left alone, but the Brexiters and the Italian, Hungarian and Polish governments are attacked as nationalists and populists.

Predictably, French President Emmanuel Macron is leading the charge against the nationalists and their alleged populist deceptions. He recently proposed a "European renaissance," no less, around three main themes: freedom, protection and progress.

The sad truth is that Macron's appeal to EU audiences is just his own party's electoral platform for the next European parliamentary elections on May 23-26, 2019. Unable to calm down the social unrest in France, and fighting low opinion polls, Macron is using Europe to attack his domestic opponents — all branded as nationalists and populists — by extolling the protective power of "European sovereignty," a mysterious constitutional category of his own invention.

Germany should keep EU out of recession

Macron's appeal, like his earlier reform proposals, is dead on arrival in Germany — a country he needs to reconcile different national interests within the European Union.

Some German Social Democrats are politely suggesting that Macron's latest effort merits attention, but Germany's center-right circles are less inclined to listen to his ideas.

In the article "Making Europe Right," the leader of Germany's governing center-right Christian Democratic Party, Annegret Kramp-Karrenbauer, roundly rejected most of Macron's reform ideas. She argued that Europe should be less centralized and more market driven, with no European minimum wage and no collective European responsibility for individual countries' public debts. Instead of the French fetish of a euro-area common budget, she wants a European fund to invest in development projects and new technologies.

All that is music to the ears of Macron's political opponents. They will now be exulting at the idea that he got nothing in return for what they see as an excessive rapprochement with Germany.

Meanwhile, as a practical matter, immigration policy remains the EU's main bone of contention. That is where Germany stands on thin ice in its strained relations with Hungary, Italy, Poland, the Czech Republic and Slovakia.

Those countries are rejecting mandatory immigration quotas Germany wants to use to get rid of migrants/refugees it cannot handle. And, quite unfairly, that seems to be the complaint Germany is using to attack those countries' alleged failure to live up to European values.

Investment thoughts

The nation state is back at center stage as a unifying European idea.

Expect agreements to complete the banking union within the euro zone, and to build firmer borders to protect the intra-European visa-free area (Schengen countries). Apart from that, further EU integration reforms will be on the back burner for the foreseeable future.

Kramp-Karrenbauer is on her way to head Germany's current governing coalition. In France, Macron will remain in office, but he will most probably have to run the country with a hostile government after the European parliamentary elections next May.

Those political changes will calm down the elites versus nationalists and populists squabbles, but the economic policy clashes will remain as vivid as ever. Germany, for example, with its gigantic trade surpluses and overflowing public sector coffers, should be leading the euro area out of an incipient recession. But, true to form, Berlin is deaf even to the idea of a self-interested European solidarity.

Those German economic policies are what the European Central Bank is fighting with its ultra-loose credit stance and a large bank lending.

Washington and the International Monetary Fund should take a closer look at German trade and economic policies. For the U.S., it's a question of protecting nearly one-fourth of American exports destined to Europe.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.