* Europe Without The Union

01 March 2016

from STRATFOR -- this post authored by Mark Fleming-Williams

The European project was always bound to fail. Europe is a continent riven by geographic barriers. It has spent two millennia not only indulging in massive and constant internal wars, but also keeping written records of them, informing each generation of all the times their forebears were wronged. Over the centuries, great empires have risen and fallen, leaving behind distinct groups of people with different histories, languages and cultures.

Any project attempting to fuse these disparate cultures into one monolithic state over the course of just 70 years was by its very nature doomed. It would inevitably encounter insurmountable levels of nationalistic resistance, and eventually the project would stall. That is the point at which we now find ourselves.

Crises abound, and though they all have different facades, each stems from the same underlying issue: Citizens ultimately prize their national and regional identities over the supranational dream. The sovereign debt crisis and repeating Grexit scares, born of the introduction of the euro in 1999, have exposed Northern Europe's unwillingness to subsidize the south. The Brexit referendum, scheduled for June, can trace its roots to the 2004 enlargement of the European Union, and the ensuing wave of Polish migration to the United Kingdom. Meanwhile, amid the ongoing immigration crisis, national leaders are appeasing their populations by bypassing European rules and re-erecting border controls to stem the flow of refugees across their territory. In all of these situations, the same factors are at work: The driving forces within Europe are national in nature, and countries will ultimately put their own interests first.

Today's problems were both predictable and predicted. The next step, however, is harder to foresee. Having identified a system's inherent flaw, one can very well state that it is unsustainable, but unfortunately the flaw provides no guide as to the exact circumstances of the system's end. There are still many different ways that the demise of the European Union's current form could come about. For example, the project could unravel via market forces, as it nearly did in 2012 when investors tested the commitment of the core to save the periphery and found it to be (barely) willing to do so. Or a disaffected populace could elect a nationalist party such as France's National Front, which could either lead the country out of the European Union or make the bloc so unmanageable that it ceases to function. Perhaps the most likely scenario at this point would be for the European Union to survive as a ghost of its former self, with its laws ignored and stripped back to the extent that it holds only a loose grip on its members.

Where Integration Will Persist

The exact circumstances of the European project's end are not yet clear, but there are certain fixed, underlying truths that are sure to outlast the European Union's current form. With them, a forecast can still be made of the shape of things to come. These fundamental realities stem from deeper, unchanging forces that will bring countries together according to their most basic goals; they are the same forces that limited the European project's lifespan in the first place. By looking at these underlying factors, one can predict which countries will emerge from a weakened or collapsed European Union with close ties, and which are likely to drift apart in pursuit of their own interests once they are freed from the binding force of the European Union and its integrationist ideals.

The best place to start is the Benelux region. Belgium, the Netherlands and Luxembourg have long played a key role in European geopolitics, situated as they are on the flat and traversable land between Europe's two great Continental powers, France and Germany. Indeed, it was in the Benelux region that the European project began. Belgium and Luxembourg formed an economic union in 1921, and talks began for a customs union with the Netherlands in 1944, before the end of World War II. But it was World War II itself that really gave birth to the European Union as the Benelux countries combined with their two flanking giants and Italy to create a bloc that would prevent a reoccurrence of such destructive conflict. In the 70 years that had elapsed since German unification, France had endured three invasions, and all the members of the fledgling union suffered greatly as a result. Today, 70 years later and without a reoccurrence of catastrophic conflict, their strategy appears to have worked.

Thus the Benelux, France and Germany will be motivated to continue their integration efforts. Caught between two economic powers, the Benelux will want to secure their friendship. Meanwhile, France and Germany's rivalry will also draw them together. However, the fateful fact here is that the Franco-German relationship has been one of the major fault lines in the current European Union, meaning that a smaller version of the bloc will be similarly flawed.

Italy, for its part, will not be invited to the party this time around. For one, it lacks the same geopolitical circumstances, safely shielded as it is behind an Alpine wall. Moreover, the eurozone's third-largest economy has been at the center of both the sovereign debt and the immigration crises, and Germany in particular will be as reluctant to stay attached to the indebted Italy as it is to remain tied to Spain. The Franco-German-Benelux bloc is the likely heir to the euro, if the currency continues to exist, and it will maintain the European Union's integrationist ethos. It will adopt a more positive stance toward free trade than its predecessor, with the Netherlands and Germany outweighing the protectionist urges of Belgium and a France shorn of its traditional Mediterranean allies. This "core" bloc will be the Continent's center of gravity in the future. In the times that it has been whole since its unification in 1871, Germany has dominated the Continent, and it appears set to keep doing so for at least the next decade or two.

Germany's influence in Europe is not purely geopolitical. A large part of it is based on trade. The past two decades in particular have seen Germany assemble a powerful international goods factory. It takes unfinished products from its neighbors (eight of whom send Germany more than 20 percent of their exports) and transforms them into sophisticated mechanical goods before shipping them onward. In 2014, Germany was the number one export destination for 14 of its 27 EU peers, and the top source of imports for 15 of them. Access to this machine has especially benefited former communist states in Central and Eastern Europe, which have capitalized on high levels of investment from Germany (as well as the Netherlands and Austria) and capital inflows to achieve impressive GDP growth. European Union or no, the players in this network will all be highly motivated to keep it running.

Eastern and Western Interests Diverge

Still, there are two catches. The first is immigration. The subject has hung over these relationships since at least the 2004 enlargement, when Germany was one of several countries to impose restrictions on the freedom of movement for new eastern members. The influx of refugees into Europe has recently rekindled this friction, with the Visegrad Group (Hungary, Slovakia, the Czech Republic and Poland) bonding over a mutual aversion to Germany's attempts to dole out quotas of newly arrived migrants. The relationship emerging to Germany's east and southeast is one in which the free movement of goods and capital is encouraged, but the free movement of people is restricted.

The second catch is Russia. Over the next decade, Russia will experience some significant changes in both its external relationships and its internal systems. The first half of this forecast has already come to pass, and Russia has grown increasingly belligerent in its periphery. Stratfor believes this will become more pronounced until the system designed by Russian President Vladimir Putin either adapts or collapses. This will clearly have a considerable effect on Russia's European neighbors, albeit to varying degrees. And so, geography will come into play once more. We have already seen the Russian military used to powerful effect in Ukraine, but its ability to push farther into Romania is somewhat tempered by the Carpathian Mountains, a natural barrier that snakes north and west, also providing protection to Hungary and Slovakia. Poland, by contrast, stands starkly exposed to Belarus,a close Russian ally, with no mountain range to shield it. Farther north, the similarly unprotected Baltic states lack Poland's bulk and thus have even less protection; a larger country like Poland could at least buy time to organize a defense.

This geographic divergence will divide Central and Eastern Europe into two groups, one focused on trade and the other on security. The Central Europeans (the Czechs, Hungarians, Romanians, Bulgarians and Slovaks) will be wary of antagonizing Russia. The Carpathians, though a barrier, are not insuperable. And yet these countries, sheltered by the mountains, will also be free to focus much of their energy toward pursuing continued prosperity through trade with the core. A shared interest in maintaining trade with Germany is not the foundation for a defined bloc, but more the makings of a loose grouping that becomes weaker with both distance from Germany and time, as Germany's strength begins to wane. Poland and the Baltics, by contrast, will not have the luxury of focusing primarily on their own enrichment. With Russia's presence looming, these countries will be bound closely together, focusing their energies on defense pacts and alliances - and especially on cultivating strong relationships with the United States. Trade will continue, of course, but the identity of this bloc will center on resisting the Russian threat. If and when internal challenges force Russia to turn its attention inward, Poland will have an opportunity, the likes of which it has not seen for several hundred years, to spread its influence east and south into the former territories of the old Polish-Lithuanian Commonwealth in Belarus and Ukraine.

In the north, Scandinavia will form its own bloc. Its members have a history of shared empires, free trade, freedom of movement agreements and a (failed) currency union; they are natural bedfellows. Indeed, an institution that has been somewhat dormant since the rise of the European Union - the Nordic Council - already exists to aid their international governance. This bloc is likely to be almost or equally as integrated as the French- and German-led core, with which it will have close trade and diplomatic relations.

Winners and Losers in a New Order

One of the countries most pleased with the new arrangements will be the United Kingdom, assuming it can hold itself together long enough to enjoy them. Having dedicated much of the last millennium to keeping the Continent divided and playing one side off another, the United Kingdom was forced to join the European Union once the organization's unity was truly unquestionable. With a Continent divided once more, the United Kingdom will be able to return to its preferred long-term strategy, maintaining a balance of power while at the same time attempting to develop a trade network that mixes regional with global. By contrast, Spain and Italy are likely to be left behind. Both will be struggling to stay whole, with Spain in particular danger of coming apart at the seams because of theinternal conflictsraging among its constituent parts. Both will attempt to remain as close as possible to the core, though protectionist tendencies in the southern countries may inhibit these trading relationships. Spain and Italy are also likely to enjoy the newly regained freedom of being able to devalue their own currencies to regain competitiveness. From the core bloc's perspective, the two countries are likely to represent a continuing point of tension, with France pushing for their inclusion as Germany and the Netherlands resist. But time will work in France's favor here, since its advantageous demographics compared with those of Germany point to it gaining increasing influence over the bloc as the years pass.

The picture that has been laid out here is not meant to be an exact representation of Europe at a specific date in the future. Even if the European Union does unravel suddenly, as it nearly did in 2012, it is unlikely that countries would move on and settle into their new roles as seamlessly as described. Events will move at different speeds, and there may be considerable strife involved in the transition. With countries such as Italy and Spain battling to avoid isolation, France will be put in the difficult position of having to choose between either remaining close to Germany or standing with its Mediterranean allies. Elements of the current system may persist, and links will continue to exist across the blocs. For example, if the euro does survive in the core bloc, it may also continue to be used in some of today's other eurozone countries that are deemed to be fiscally responsible, such as Finland, for want of a compelling reason to make a change. There are still many unknowns. However, the intention is to show the picture that exists beneath the tracing paper. The image that actually emerges will depend on where and how pressure is applied in the years ahead.

"Europe Without the Union" is republished with permission of Stratfor.

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