European Disunion – The American Prospect

This article appears in the December 2022 issue of The American Prospect magazine. Subscribe here.

PARIS – The European Union faces its most severe challenges since it was formed in 1993. The near-term problems are bound up with Russia’s invasion of Ukraine and the fissures it has exacerbated, in terms of both energy and military policy. But the EU has always been something of a fair-weather confederation. When a crisis occurs, Europeans are reminded that despite brave talk of European solidarity, the real power remains with its member states, or more precisely its largest member states: Germany and to some extent France.

The last major crisis was the financial collapse and deep recession that began in 2008. Nations with more vulnerable economies, particularly the “PIIGS” countries of Portugal, Ireland, Italy, Greece, and Spain, needed fiscal relief. But they were powerless to resist the perverse austerity demands extracted by the European Central Bank and the European Commission, which were basically proxies for Germany’s extreme fiscal conservatism and the neoliberal bias of the EU generally.

In the current crisis, the fragmentation if anything is more severe. On the energy front, Europe, led by Germany, gambled that Russia, supposedly integrated into the West, would be a reliable supplier of cheap energy. That fantasy was exploded, but Germany maintains Russian energy ties. In terms of defense policy, Europe is split into frontline nations such as Poland and the Baltics, most threatened by and desiring the strongest possible resistance to Vladimir Putin, and the German bloc, with its long-standing trade links and anxieties about widened war.

More from Robert Kuttner

The precursor to the EU, beginning with the Common Market of 1957, was a customs union. Members were free to pursue national economic policies, often state-led. It was not until the creation of the European Union that free-market policies were imposed on member nations. The Maastricht Treaty, the EU’s founding charter, requires free movement of capital, goods, services, and persons throughout the union. This undercuts both regulation of finance and national public investment. When the EU was in formation, American conservatives worried about “fortress Europe” as a planned economy. But if anything, Europe has become a fortress and a vector of neoliberalism.

The ideological bent of the EU is deceptive, because it still has extensive universal social services such as national health systems and public preschools, and it has led the U.S. in regulating abuses of tech. But in terms of core economic policies, many of the policy instruments that had powered the postwar recovery, such as public ownership and national economic planning, are now prohibited or strongly discouraged by the EU charter. The EU has compelled market mechanisms even in realms where they are perverse: Well-functioning public systems such as postal and rail services have been privatized.

This bias has exacerbated Europe’s current energy crisis. The EU is too weak and divided to have its own coherent energy policy, but just strong enough to hobble the policies of its member states.

FRANCE DEMONSTRATES HOW EU PRESSURE on member nations to shift to market pricing, in an energy sector that is far from an efficient market, has caused volatility, supply problems, and price-gouging. France begins with two advantages. Its national electrical utility is a public entity. And France’s early shift to nuclear power, love it or hate it, gave it a relatively clean and reliable source of energy. (The government’s failure to invest adequately in maintenance, leading several power plants to go temporarily offline earlier this year, is a separate story.)

Higher electricity costs not only harm citizens; they have also exacerbated Europe’s slide into recession.

But in 2010, France succumbed to EU demands to introduce competition to its electricity sector. The form of competition was spurious and counterproductive. The national public utility, Electricité de France (EDF), was required to sell power—100 terawatt-hours, or 25 percent of France’s nuclear production—at wholesale rates to newly created “competitors,” who were merely resellers.

In principle, this was supposed to produce price competition; in practice, it produced manipulation and price-gouging. When energy shortages came with the Russian invasion of Ukraine, the pseudo-market system compounded the volatility of both price and supply.

As Anne Debrégeas, a researcher at EDF and a leader of the trade union there, explained in a published interview, “Talking about EDF’s competitors is a misnomer: They are mainly suppliers who produce nothing and whose activity consists of buying electricity at a discounted price … to resell it for a profit.” She added, “EDF’s competitors do not produce, store, or even choose electricity. They only trade and speculate and they put their logo on the invoice.”

Worse, under the European system, of which France is one variation, power suppliers buy energy on markets where price is set by the “marginal cost,” namely the most expensive source of supply at any moment. In the context of scarcity, such as the current shortage of natural gas, this just drives up retail prices to consumers and industrial users.

In January 2022, the conservative French government compounded the problem by requiring EDF to increase by 20 percent the electricity it must sell to its competitors. EDF, which produces the power, has been forced to go on the open market and buy electricity at 257 euros/MWh, and then resell to these competitors at 46/MWh. As Debrégeas points out, “There is no guarantee that they will pass these lower prices along to their customers.”

Between 2007 and 2020, the price of electricity for French consumers increased by about 50 percent, while production costs rose by less than 15 percent. The difference was the increased costs of speculation and profit. And this was before the Ukraine crisis.

EDF is a regulated monopoly with network efficiencies. It would be far better to end the pretend competition and take advantage of EDF’s public, not-for-profit status, which also facilitates planning for a green transition far more effectively than a fragmented system with multiple players. This strategy, however, falls afoul of EU rules that mandate competition. No question competition can be a good thing, but not fake competition that feeds speculation when nationalized, strictly regulated public utilities work just fine.

France, with a conservative, market-friendly government under President Emmanuel Macron, has not pushed back against the EU as aggressively as it might have. By contrast, Spain and Portugal, the only two EU member states currently led by majority-socialist governments, have gone their own way on energy policy. After months of wrangling, they finally got the European Commission, the union’s executive branch, to carve out an Iberian exception to EU rules on energy pricing.

The work-around is complex, but basically Spain and Portugal are permitted to decouple the price of gas from that of other energy sources, so that the general price of electricity is not set by the most expensive marginal source of supply. A prime reason why the Commission had to give in was that Spain and Portugal have a far higher use of renewables than most European countries. Wind, solar, and hydro generate nearly half their electricity.

The larger point here is that the policy of the EU, despite its general neoliberal bias, is whatever its member states say it is. If there were more than two socialist governments (out of 27), the EU could have drastically different policies, with more public planning and public ownership and less fantasy about markets.

ACCORDING TO A COMPREHENSIVE STUDY by the Bruegel Institute, well before Russia’s invasion of Ukraine in February 2022, Russia was manipulating European natural gas markets. Russia began to cut gas exports in the summer of 2021, and deliberately failed to refill Gazprom-owned storage sites in the EU. “By the beginning of July 2022, Russia was sending one-third of previously anticipated volumes, leading to a more than tenfold increase in EU gas prices,” according to Bruegel.

EU nations have been severely divided over whether and how to mitigate the affordability crisis for ratepayers. The European Commission, heavily influenced by its most influential member states, has been unable to agree on a common formula, and each nation is going its own way. Unlike the Commission, national governments have to directly face voters, who are justifiably angry about energy costs, so member states have come up with a crazy quilt of subsidy and price cap systems. Subsidies to energy consumers, according to Breugel, range from 3.6 percent of national GDP in Greece to just 0.1 percent in Denmark.

France has capped electricity and natural gas price increases at 15 percent for consumers and small businesses for 2023, and has budgeted €16 billion to make up the difference between the market price and what users pay. In Belgium, the government has cut various taxes to compensate consumers for higher energy costs. Denmark has introduced price controls and special subsidies for low-income people. The European Commission, under its respected president, Ursula von der Leyen, has sought to bring some order out of this chaos, so far to no avail.

All told, between the start of the European energy crisis in September 2021 and late October 2022, European nations have spent a total of €573 billion to shield consumers from rising energy costs. And of that sum, more than 40 percent, or €264, has been expended by Germany (whose GDP is only about 25 percent of the EU’s GDP).

But higher electricity costs not only harm citizens, especially low-income ones. They have also exacerbated Europe’s slide into recession. According to a survey by Le Monde, the most energy-intensive sectors, such as fertilizers, glass, aluminum, cement, ceramics, and steel, have closed factories or reduced production. In Germany, steel production has fallen by 5 percent since the start of the energy crisis; ArcelorMittal, a leading steel producer, shut down a blast furnace in Bremen and curtailed production in Hamburg. In the Netherlands, Nyrstar decided in August to temporarily shut down its zinc smelting complex. A report by the trade paper Chemical and Engineering News quotes Mariana Moreira of the consulting firm Wood Mackenzie, warning that some sectors of the chemical industry have seen operating rates fall to 40–50 percent of capacity. The SKW Piesteritz fertilizer plant in Germany had to suspend production in mid-September, and overall the country is seeing as much as a 70 percent decline for fertilizers, where natural gas is an important input.

IN EUROPE’S INTERCONNECTED THREE-WAY CRISIS of energy, inflation/recession, and military policy against Russia, Germany continues to be both a leading player and an outlier, which has bred resentment. On September 29, on the eve of an emergency meeting in Brussels of energy ministers looking to fashion a common approach to energy pricing, German Chancellor Olaf Scholz unilaterally announced a €200 billion subsidy program for German households and industries. Germany has also resisted the idea of a common price cap, which is supported by more than half of the EU member states and by von der Leyen.

Other leaders were furious at Germany, both at the undercutting of a common energy policy and the risk that this strategy would increase energy demand, raise prices, and divert scarce resources from less-affluent member nations. There was also annoyance at the hypocrisy of Germany, ordinarily a crusader for fiscal discipline. Scholz plans to pay for the subsidies by reactivating an emergency off-budget borrowing scheme that was created in 2020 to help German companies survive the COVID emergency.

Germany was the prime sponsor of the idea that Europe could rely on Russia as the main long-term supplier of the continent’s energy needs. Germany sponsored the Nord Stream pipeline projects, which have been widely criticized on sustainability as well as security grounds. Nord Stream 1 was heavily promoted by former German Social Democratic chancellor Gerhard Schröder. Right after leaving office in 2005, Schröder became chairman of the Nord Stream construction company and subsequently served as chairman of the boards of both Rosneft and Gazprom. The German parliament stripped him of his subsidized office for these conflicts of interest, though he was allowed to keep his pension.

Increasing German trade with Russia and China undercuts the common Western stance.

Schröder’s personal corruption is extreme, but Germany’s amicable stance toward Russia transcends party. The policy of reliance on Russia for energy was solidified under the long chancellorship of Angela Merkel. In February 2022, as the West was retaliating against Russian actions in Ukraine, Scholz did agree to suspend the certification of Nord Stream 2. And in September, Scholz seized control of three refineries in Germany owned by Rosneft.

With his three-party coalition and pacifist sentiment within his own SPD, Scholz has had to walk a tightrope on the issue of military support for Ukraine. Germany has increased its own military outlay for its own defense and its provision of weapons systems to Ukraine such as howitzers and rocket launchers—but not the systems that Ukraine needs the most.

In September, several SPD representatives in the Bundestag and SPD members of the European Parliament issued a public letter warning of escalation and calling for diplomatic negotiations with Putin. Unlike a similar (and far more cautious) letter by members of the U.S. Congressional Progressive Caucus, the German one was not ignominiously withdrawn but contributed to Scholz’s temporizing.

Scholz is somewhat more hawkish than many in his party, but he has had to be pushed hard by his own coalition partners, the Greens and the Liberals, as well as by Washington, Kyiv, and other EU member states. In April, Scholz came up with a needlessly convoluted scheme, in which NATO members that still have outdated Soviet tanks, such as the Czech Republic, Slovenia, and Slovakia, would send these to Ukraine, and Germany would replace them with German tanks. Even this commitment has not yet been carried out.

But Ukraine needs modern battle tanks, such as the Leopards and Marders that are made in Germany. Scholz has refused to provide these. In September, Ukraine’s foreign minister, Dmytro Kuleba, publicly chastised Scholz, declaring that there was “not a single rational argument on why these weapons cannot be supplied, only abstract fears and excuses.”

OTHER EUROPEAN NATIONS ARE ALSO WARY of Germany’s increasingly close courtship of China. Over the past six years, China has been Germany’s largest trading partner, with volumes increasing to €245 billion in 2021. Some in Scholz’s Cabinet, such his economics minister Robert Habeck, have criticized China’s protectionism and human rights violations. But Scholz is pursuing an even closer relationship.

Scholz’s coalition partners and many in his own party were appalled by his decision to ignore the critics and go forward with a sale of 25 percent of the Port of Hamburg’s container terminal to shipping giant Cosco, which is closely tied to the Chinese government and Communist Party. Six ministers in Scholz’s own Cabinet formally opposed the sale.

On the eve of Scholz’s trip to Beijing on November 2, the first by a G7 leader since the beginning of the pandemic, the foreign minister in his coalition government, Green Party leader Annalena Baerbock, pointedly warned, “We clearly stated in the coalition agreement that China is our partner on global issues, that we cannot decouple in a globalized world, but that China is also a competitor and increasingly a systemic rival; and that we will base our China policy on this strategic understanding and also align our cooperation with other regions in the world.”

Scholz went ahead with the trip, which was plainly aimed at enhanced trade with China, and brought with him the CEOs of 12 major German companies, including Volkswagen, Siemens, and Merck. In Beijing with Xi Jinping, Scholz deliberately annoyed his hosts by calling for respect for universal human rights, but emphasized his interest in expanded trade. Beijing reciprocated by opening the door to imports of BioNTech COVID vaccines, but only for foreign residents, at least for now.

German flirtations with China stand in direct contrast to EU strategy. For example, European trade officials have been promoting supply chain policies where democracies committed to renewable energy function as a kind of soft trading bloc. This common effort is directed not so subtly against China, which is neither a democracy nor a reliable source of supply and presents a mixed picture at best on the renewable-energy transition.

One of the first fruits of this common strategy was the Green Steel Deal, first negotiated in November 2021 between the EU and the U.S. and expanded this past November. The deal, negotiated on the eve of the Glasgow climate summit, gives tariff preferences to steel made with less carbon-intensive manufacturing processes, which both keeps out dirtier Chinese and Russian steel and rewards cleaner steel made in the U.S. and EU. Since then, Biden has hardened the U.S. stance toward China. Increasing German trade with Russia and China undercuts the common Western stance.

Beyond differences over support to Ukraine and energy, Germany is an outlier when it comes to economic policy. The strong German economy is somewhat better bolstered against recession than the rest of Europe. German unemployment is currently 5.3 percent, better than that of the next largest economies—France, Italy, and Spain—and well below the EU average.

Germany’s generally better employment picture reinforces its chronic preference for fiscal austerity, which it has imposed on the rest of Europe. When the terms of conversion of the European Community (an internal free-trade area) into the more cohesive European Union were being negotiated in the early 1990s, Germany’s price for giving up its cherished deutsche mark was that EU member nations accept mandatory German-style limits on both budgets and national debts. Germany did not allow these to be suspended even during the prolonged recession after the collapse of 2007-2008. And the European Central Bank, successor to the Bundesbank of the deutsche mark era, has taken on Germany’s views on interest rates and borrowing. Price stability takes priority over economic expansion.

This stance is a strain on EU unity in normal times, but lately that strain is at a breaking point. EU inflation is now running at a ruinous 10.7 percent, and most economists predict recession. To an even greater degree than in the U.S., the tight-money policy of the European Central Bank makes no sense. Europe did not have the extra public spending during the pandemic that the U.S. had; and Europe’s price increases are even more purely driven by supply shocks, notably energy, than by increased demand.

But the ECB has hiked rates almost in lockstep with the Fed, partly to defend the euro, which has sunk roughly to parity with the dollar, and partly because tight money is in the institution’s DNA. A break with Fed policy could be coming, however. The current ECB president, Christine Lagarde, is French and a shade more dovish than past ECB presidents. In announcing the ECB’s latest three-quarter-point rate hike in October, Lagarde hinted that it was now time for the ECB to start easing.

AS THE LARGEST AND MOST POLITICALLY POWERFUL nation in the EU, Germany seemingly has a responsibility for the union as a whole. For the most part, however, Germany has interpreted that responsibility in the narrowest terms of fiscal and monetary conservatism, not as concern for Europe’s general economic well-being.

During the long European post-crash recession, for example, Germany opposed the idea of Europe-wide recovery bonds and insisted that each nation was basically on its own. In integrating the former DDR into an enlarged Federal Republic, Berlin spent something like €1.3–2 trillion to promote economic development of its East. It has opposed any such policies on a pan-European scale. Expansive policies stop at the German frontiers.

The role of Germany in Europe recalls a famous book and theory by the economist and economic historian Charles Kindleberger. In his monumental 1973 study The World in Depression, Kindleberger pointed out that one major reason why the global economic and financial system collapsed in the 1920s was that no nation took responsibility for it. Before World War I, Britain had a system-maintaining role as a money center and via its open domestic markets and management of the gold standard. After World War II, the U.S. stepped into the hegemonic role, both for economic and for geopolitical motives. But in the interwar period, Britain had become too weak to play that role and the U.S. was isolationist. There was no hegemonic power as each nation looked to its own narrow self-interests, and the whole system descended into depression. This insight came to be known as the theory of hegemonic stability.

In the absence of strong policies to battle recession, neoliberalism remains Europe’s default setting.

Looking at Europe as a miniature global economic system through that lens, it’s evident that Germany has largely defaulted on the role of hegemonic stabilizer, and there is no one else to play it. Despite its dominant status, Germany looks to its own self-interest, at the expense of both the European system and other European nations.

The Commission of the European Union, ostensibly its executive branch, is far too weak to play that role, because the real power player is the so-called European Council, which is comprised of the leadership of each individual nation. Under the EU constitution, major decisions require unanimity. In practice, that means consensus among the major powers, who can press others into going along. But there is no such consensus on major energy issues.

Another core tension in European energy policy is the contradiction between short-term and long-term goals. For the long term, which turns out to be alarmingly short, the remedy both for dependence on Russia and for global climate change is an accelerated shift to renewables. This is the stated goal of the EU and all of its member states, sketched out in proposals by relatively centrist think tanks such as Bruegel as well as by progressive parties and environmentalists. The social democratic research organization FEPS proposes “A Green Deal for All,” with much more rapid progress toward a carbon-free Europe, financed by new EU-wide public investments.

But in the short run, Europe needs to get through this winter without its people having to choose between freezing and starving, and without exacerbating its incipient recession by shutting factories. This conundrum has required more reliance on fossil fuels. Europe has accelerated imports of liquefied natural gas and has even increased its reliance on coal. Germany has delayed the phaseout of nuclear plants, an expedient endorsed even by the Greens.

Mother Nature has taken pity on the continent. Europe had the warmest October on record, another ominous consequence of global warming, which in the short run is a paradoxical gift. If mild November weather continues, Europe could be spared the worst consequences of the Putin-induced gas shortage. That bit of perverse luck, of course, must not deter Europe’s progress toward a rapid carbon-free energy future.

THE EU’S NEOLIBERAL BENT UNDERCUTS its capacity both for economic recovery and for a cohesive energy policy. During the postwar boom, Europe was a stronghold of social democracy. Many of the institutions of social Europe were actually constructed under the auspices of Christian democratic rather than social democratic governments, in the spirit of the Catholic Church’s social encyclicals and as medicine to resist the working-class appeal of both communism and fascism. The strength of trade unions was another major factor.

After the disgrace of laissez-faire in the 1920s, and the further taint of the collaboration of many large corporations with fascism, there were literally no parties in the early postwar era that argued for free markets. British Tory “wets” like Prime Minister Harold Macmillan helped complete the Labour Party’s welfare state. Conservative French nationalists like Gen. Charles de Gaulle were statists in economic development and social welfare, a French tradition that dates back to Louis XIV’s economic-policy architect, Jean-Baptiste Colbert. In negotiating France’s role in the early European Economic Community, de Gaulle insisted on strong member states—a Europe des patries.

Those nations, rebuilding after World War II’s devastation, engaged in substantial public investment and public planning. All of this capacity has been upended by the neoliberal rules of the EU.

Joe Biden is able to dust off World War II–scale economic planning and industrial policies to pursue “Make it in America.” It would be illegal under EU rules for French President Macron to pursue “Make it in France.” For example, Paris has been exemplary in the rapid conversion of its bus fleet to all-electric. But RATP, which runs the Paris bus system, buys from several companies based in Spain, Italy, Germany, and Poland, as well as some from the French manufacturer Bolloré. It would be illegal under EU law for France either to favor domestic suppliers or to require content agreements (which are standard in much of the world) so that more of this production could be in France. American law, by contrast, has long had Buy American rules for transportation outlays.

It would be different if Europe pursued its own “Make it in Europe” industrial policy at a continental scale. There was a time, before the EU, when Europe went in for targeted industrial policy. A prime success story is the Airbus consortium, created in 1969 with state aid, explicitly to challenge U.S. dominance. But the current EU, with its free-market bias, has little enthusiasm for such a policy at an adequate scale.

With its weak governing structure and divisions among member nations, the EU has a long history of dealing with crises by muddling through. But muddle-through has not solved the challenges of steadily worsening living standards for increasing numbers of ordinary Europeans.

The unelected European Commission is remote from the lives of most Europeans. While the bureaucrats in Brussels work to fashion some kind of consensus among leaders of member states to keep the union from collapsing, the living standards and life horizons of most Europeans keep sinking. Neoliberalism has widened income and wealth gaps throughout Europe. And in the absence of strong policies to battle recession, neoliberalism remains Europe’s default setting.

The border-free travel and the use of the euro as a common currency have been great conveniences for the investing class and for those affluent enough to travel. It has also helped some poorer people, mainly from member states in Eastern Europe, to seek work in Paris, Berlin, or London. But in the absence of strong programs to increase good job opportunities for locals, this trend has intensified anti-immigrant sentiment and was a prime driver of the British working-class vote for Brexit.

During the postwar era, the social democratic national policies of Europe’s individual nations enhanced broad support for political democracy and the idea of a Europe that would never again go to war. But today, the EU is increasingly seen as an elite and cosmopolitan project that fails to address the plight of ordinary Europeans. That widespread sense, in turn, reinforces the turn to nationalism—not the salutary nation-rebuilding of the postwar era, but the ultranationalism of neofascism. The anti-democratic features of the EU and the crude neofascist contempt for democracy reinforce one another.

There is a policy in waiting, one that combines a more rapid shift to renewable energy with related job creation, and public investments underwritten by Europe’s more-affluent nations at adequate scale. Several such blueprints have been written, and the logic of such a strategy is overwhelming. But given national fragmentation, weak EU institutions, and a bias toward austerity and free markets, it’s hard to imagine how such a policy will come about.