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Rival and passive consumer of security: Why does U.S. undermine EU?

The European Parliament has recently introduced two brilliant initiatives. First, the concept of the EU army was approved. Second, lawmakers in France, Germany, Italy, and Luxembourg called for European “Federal Union.” Simultaneously, Brussels said U.K. could be forced to pay €60 billion (£52 billion) Brexit Bill. Actually, we are witnessing calls for “unification” and attempts to punish “deserters.”

For instance, Germany has confirmed its intention to increase military budget to 2% of GDP (i.e. to double it) and denies any suggestions that it was a decision under pressure of Washington over NATO European members. The increase of military spending will not be painful for Germany thanks to it record-breaking surplus budget. Meantime, the economies of southern Europe that experiencing recession and debt crisis will face additional problems, which will definitely not boost image of European and Transatlantic structures. The idea to establish European security system (including European Army) was an alternative to such unpopular measure as increase of military spending.

In addition, “federalist” ideas are shaping the Berlin-promoted idea of Europe’s “two gears” where periphery states do not need maximum integrated “core Europe.” There is a nuance i.e. the idea was deemed “heretic” yet not so long ago and was greatly opposed by Brussels and Berlin, which reflected the unwillingness of “latent Eurosceptics” to subsidize the extending periphery. In other words, the plans to build a super-state extending from the Atlantic to Narva have been shelved.

Second, “federalism” prospered amid growing Euroscepticism mainly in France and Italy. In France, almost half of the population has such sentiments. Marine Le Pen says the EU is dead but it does not know this yet, stating that the bloc has failed in economically, socially as well as security-wise. She says the recent economic growth, unemployment and poverty indicators prove the EU's failure, adding that the bloc is also incapable of protecting its own borders against what she called as "Islamic terrorism". Le Pen will hardly become the president, but her approval rating is impressive.

What we see now is ambivalence of the Brussels/pro-European elite - once master of the situation - suddenly turned into a potential group of the most prominent losers in history of European integration. Actually, it experiences an upheaval and double threat: a growth of Euroscepticism in Europe, on the one hand, and specific views on the other side of the Atlantic, on the other hand. Leader of Social Democratic Party of Germany Martin Schultz, the key rival of Angela Merkel at the upcoming elections, directly blamed Trump’s Administration for “attacking EU.” According to him, they seek to split EU and destroy the largest internal market.

Inherently, Schulz just stated the fact. Trump’s approval of Brexit and its mastermind Nigel Farage is just the top of the iceberg and reflect the general mood of the current team in Washington. While the vice president who is so far newcomer in that team shows commitment to traditional transatlantic “values,” fundamentally different signals are coming from the “cronies.” For instance, a week before the visit of Mike Pence to Munich, Donald Trump’s senior adviser Steve Bannon had a meeting with German Ambassador to U.S. Peter Wittig and presented Munich’s, to put it mildly, quite different stance. According to Reuters’ sources, the current U.S. Administration considers EU counterproductive, does not perceive it as a necessary element of European security and Germany needs to be ready to launch “enmity policy” towards Europe. Generally, the White House prefers building relations with European countries on the bilateral basis, without Brussels’ mediation.

Peter Navarro, the head of the U.S. National Trade Council, brought the specific reasons of such approach. He described the single currency as an “implicit Deutsche Mark” that gave Germany a competitive advantage over its trade partners. Besides, the leadership of Germany impedes possible trade deal between U.S. and EU.

Navarro’s message reflects rather an interesting situation in the U.S.-EU trade. In 2008-2015, the U.S. export to EU fell from $275.7 billion to $273.6 billion. Instead, the deficit in the trade with the EU climbed from $101.3 billion to $161.7 billion. The deficit accumulated in 2008-2015 totaled $925 billion. For comparison, U.S. export to Mexico and Canada that are in the North American free trade area (NAFTA) increased by almost $100 billion reaching $516.4 billion, which is twice as much as in EU.

Actually, trading with the EU in the current format is simply unfavorable for the United States, although the U.S. economy is much more competitive than the European one. Industrial costs in U.S. are much lower than in Germany. Energy is cheaper in U.S. and the agricultural sector is much efficient in U.S., with an average size of an agricultural firm exceeding a similar one in EU 13-fold (170 and 13 ha, respectively). As a result, 6 employees are hired per 1,000 ha of agricultural lands in U.S. as against 57 employees in EU.

Nevertheless, the transatlantic trade is much more favorable to EU and even shale gale did not break the upward trends of the trade imbalance. What is the reason? First, but not the most important, the trade barriers of U.S. and EU are not formally equal. Average rate of taxes in the United States is 3.5%, in EU – 5.2%, in the agricultural sector the difference is even bigger (7% and 13%, respectively). The situation is almost similar in the car industry. Second, customs duties as such are the smallest obstacle to export to EU unlike non-tariff barriers – hypertrophied care for environment and mercantile regulation and standardization in the case of Brussels are a rational financial implication. Third, in fact, EU devaluated euro dramatically, more than dollar.

The agreement on transatlantic trade partnership Barack Obama’s Administration tried to push through was to tilt the balance through zeroing of taxes and lifting non-tariff barriers on the example of NAFTA, however, it faced opposition in Europe and was not signed. EU is really unable to compete with U.S. Look at Mexico, this is what a “fair” commodity exchange with U.S. results in for its economically less competitive partners.

Hence, there are no prospects of a transatlantic deal on the NAFTA model, and Brussels evidently seeks to maintain the current state of affairs. De-facto, they suggest Washington to subsidize EU, pay 70% of NATO’s spending and do not interfere (Schulz made such demand in a veiled manner). Actually, Berlin and Brussels did an impossible thing – they proved more impudent than Washington did.

Trump’s Administration sees no reasons for charity. Western Europe is under patronage of U.S. (its role in the post-war progress cannot be overestimated) not because of Washington’s abstract love for democracy. In the second half of 1940s, the United States anticipated the economically weaker USSR to lose the confrontation sooner or later, but Moscow’s control over Western Europe will turn it into an existential threat. Having more than half of the world’s industrial potential concentrated in its territory, U.S. could afford “charity” – and an epoch of “Marshal’s plans” and “economic miracles” started on the periphery of the Soviet Union. Collapse of the Soviet Union turned EU into a bridge and instrument for further expansion of the United States amid low competition for raw materials and market.

Time has changed. Now, for U.S. Europe is, first, a rival, second – a passive consumer of the U.S. security. And it is very hard to imagine a situation when Russian tanks appear on the Channel. Sentiments in U.S. have changed so that even Federica Mogherini, the head of the European diplomacy, forecasted a loss of leadership for U.S. after her recent visit to the United States. It was followed by an auto training on inviolability of EU that is “stronger than never before.”

Apparently, Washington managed to make Europe increase military budget, but to liquidate imbalance in trade it will need either access to the European market or protection for its own market. Refusal from “devaluated euro” policy potentially settles both the problems, but it is equal to direct withdrawal of 150 billion of dollars from the EU economy with all the consequences it will have for the periphery. Meantime, anti-Brussels sentiments have grown even there. Poland has joined the always “insurgent” Hungary recently. From the viewpoint of the problematic economies of the south and not only, euro is excessively strong. In fact, such scenario is fraught with collapse of Eurozone, since even quite safe countries weigh an exit from it (for instance the Netherlands, the traditional ally of U.S.).

Destruction of Eurozone and EU is in favor of Washington. At present, it has to interact with the economic block having even higher GDP than the American one. Euro competes with dollar as a reserve currency and means of payment. However, European countries taken by one are incomparable with the United States (which creates opportunities for more beneficial agreements) like the national currencies of the EU countries cannot withstand competition with dollar due to “unequal” economies.

As a result, Brussels and Berlin that dominates in EU have faced a simple dilemma: either to yield part of “occupied” European markets to U.S. and agree that “The Fourth Reich” should turn into a looser formation, or float more or less freely. The supporters of the last option evidently dominate in France and less evidently – in EU core (see stance of SDPG). Merkel’s Administration apparently tends to partial concessions. They will reach a compromise sooner or later, but it will cost high to Europe and increase skepticism towards Brussels. Perhaps, EU is going to face hard times.

As for Russia, the events of the recent years demonstrated evidently that the pro-European illusions of the Kremlin are cloud-built and the sympathy towards Berlin is groundless. Yet in the middle of 2000s European commissioners said in an interview with Russian press that Russia should be admitted to EU in parts. The idea to split Russia was voiced openly then. Decades later, Brussels and Berlin still see no other ways to cooperate with Moscow, unless it is a semi-colony. There are objective reasons to think so. Russia’s full reindustrialization will result in loss of a significant part of raw materials base for EU, and Germany, first. That dilemma existed for centuries and is irresolvable. Besides, EU will hardly turn into a full counterbalance to U.S. The looser and more incapable is the state formation in the west of Brest, the better.

EADaily’s Economic Bureau

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