The political history of Europe since Bismarck's unification of Germany in 1871 has been the struggle of the European nations to contain the military, political and economic might of Germany. Germany has fought three wars in two centuries, the Franco-Prussian in 1870, and the First and Second World Wars to prevent what its leaders perceived as the dangers inherent in its central strategic position between France on the West and Russia on the East. The desperate desire of the continent's leaders to avoid a repeat of the disasters of the first half of the 20th has dictated the purpose and structure of every major European international system since 1945.

Beginning with the European Coal and Steel Pact in 1951, running through the Treaty of Rome in 1957 that created the common market, the Maastricht Treaty in 1992 which brought about the euro and European Union, and culminating with the Lisbon Treaty three years ago which binds the 27 nations of the EU into the world's only supra-national entity, Germany has been woven ever closer into the communal life of the continent.

The European Union, even in its original incarnation of the European Economic Community in the late 1950s, was the economic side of German containment. Perhaps the purpose of the community is more generously stated by saying its goal was to align the economic interests of all of its members so that economic predation and conflict would be unthinkable.

In its goal of remaking of European politics the economic union has been completely successful. A war between the members of the EU is currently inconceivable. No one can imagine German aggression on Europe for economic or political gain. As Robert Schuman, the French Foreign Minister and Prime Minister, said in 1950 in the speech in which he proposed the union project any war between France and Germany would be not merely unthinkable but materially impossible. The goal and process of the union was to bind Germany within strong European institutions that treated all members the same, minimizing historical grievances and eliminating the temptation for the stronger to take advantage of their superiority.

The military side of German containment was subsumed within the Cold War through NATO and the bi-polar post war political world. Even the need to defend Germany itself was under NATO command, an arrangement accepted without demur by the Germans. The front line of the confrontation between the United States and the Soviet Union between NATO and the Warsaw Pact ran through the middle of a divided Germany.

However, these strategic adaptations did not change the essential nature of Germany, the German people or its position as the largest, most productive and richest nation in Old Europe, and now in the new European Union. Until last month, German was the world's first exporter by value of goods, a remarkable achievement for a nation of 82 million people. China, which surpassed it, has sixteen times its population.

The German engineering, productivity and efficiency that have made its products some of the highest value in the world are an example and a burden for its partners in the EMU. The other euro-zone members must compete with the Germans within the straightjacket of the EU and the ECB. The euro and the its single interest rate have welded all of the countries of the EMU to the economy of Germany.

The relationship of the past 60 years between Germany and Europe has been reversed. Instead of Germany binding itself to the political fates of its neighbors, her neighbors have bound themselves to the German economic standard.

For France, the Netherlands, Belgium, Sweden, Austria, the Czechs and others, whose economies and workers are not much less efficient than Germany, the benefits of the union in transactional efficiency and competition have probably drawn their economies closer to the German standard.

But for the southern countries, Greece Spain, Portugal and perhaps Italy membership in the euro provided access to credit at German rates. The temptation proved irresistible. Combine cheap money with budgetary indiscipline and the results were predictable and unsustainable. The fiscal deficits of several EMU members threaten to overthrow the discipline of the 3% and 60% deficit and debt to GDP limits of the Maastricht treaty. For these countries, with the exception of Italy, their exports do not have the high value added qualities of German goods. They have traditionally resorted to currency devaluations to restore competitive productivity and export efficiency to their economies.

The currency devaluation route is closed. The European bailout route has been shut by Angel Merkel and a German public that does not want to pay for the profligacy of their euro partners. There was no disguising the fact that an EU rescue for Greece would be paid for by German taxpayers. German resistance has forced the rest of the EMU into line with its wishes. The IMF will dictate terms to Greece.

This was not the denouement that many thought would happen when the crisis blew up last year. A few weeks of public punishment for Greece and then the EU would come to the rescue, was the common opinion on the continent at the time.

Europe cannot have the benefits of the euro and the ECB without German cooperation. In the past Germany has accepted its role as the guarantor of last resort for the European Union without public reservation. Germans were the foremost Europeans. That day has passed. German national interest is diverging from unquestioning allegiance to the European project. The economic logic of the euro and the European Union will force reformation on the union; it will be led by Germany.

Joseph Trevisani

Chief Market Analyst

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