The fall of the Berlin Wall was a moment of triumph but also of catharsis, an outpouring of pent-up energy that signified a break with the past but failed to define a clear future. Europe had a supreme chance to take a path towards stability, peace and prosperity. Instead leaders took what is now clear were many wrong turns.
In the four decades leading up to 1989, Europe got the big questions mainly right – on defence, fiscal economics, money, trade and social cohesion. In the almost four decades since, it’s got many of them wrong.
The ending of the cold war signalled by the events of 1989-91 ushered in what we can now see as the fifth great crisis in the European balance of power since the end of the 18th century. This comes after the upsets wrought by Napoleon’s France, Kaiser Wilhelm II and Adolf Hitler in Germany, and finally by Josef Stalin with 1945-era Soviet expansionism.
The first reaction to the fall of the wall was, without doubt, joy and relief – mixed with some of the predicted foreboding about the prospect of a larger, united Germany that might be tempted once again to throw its weight around. In the end the US profited more than any other nation (including Germany) from the ebbing of east-west tensions and the equally unexpected collapse of the Soviet Union in 1991. For all western nations, the fall of the Berlin Wall signified both triumph and tribulation.
Yet the post-1989 tumult placed on trial a world order that was never fully settled; that’s now giving way to a far more diffuse and unpredictable set of structures. The ‘old continent’ is singularly ill-prepared for the onslaught of two presidents – Donald Trump and Vladimir Putin – on fundamental precepts of the post-1945 order.
Today’s reality is painful and paradoxical. In 40 years of recovery after the second world war, Europe, together with the US, won most arguments over the supremacy of capitalism and the failures of communism. Since 1989 it has lost many of the new arguments, lost its leadership and lost its way. The results can be seen in four vital spheres of political economy: energy, defence, industry and money. In each area, Europe’s relative weakness against and dependence on the US have increased significantly. Europeans end up facing most of the fallout. But they’re not entirely to blame.
Epic shortcomings
Europe and the US have been unable to find an acceptable common denominator in key strategic areas, particularly over defence. They’ve made numerous miscalculations in handling a renascent, frayed and psychologically unstable Russia. Understanding between Germany and France has unravelled. Europeans and Americans have been unsteady and irresolute in dealing with China, whose globalisation drive added to economic competition at just the time when eastern European nations emerged on to world markets. China has now started a new phase of forcible industrial expansion – combined with a Russia-leaning stance on the war in Ukraine and in geopolitics more generally – that confronts the West with important threats to security as well as economic well-being.
Germany has displayed epic shortcomings over energy policies, especially the buildup of dependence on Russia – one of the reasons for the German economic slump in 2023 and 2024 that has cast a pall over the continent. At the time of the full-scale invasion of Ukraine in February 2022, Germany imported 55% of its overseas gas from Russia; back in 1969-70 the West German government regarded 20% as the absolute maximum. After February 2022, Germany needed to negotiate new and much more expensive gas deals with other countries (including the US), deals that they’d cold-shouldered during years of apparent Russian abundance.
All sides also made mistakes that led, via contorted routes, to the UK’s vote for Brexit in 2016 and its eventual exit from the European Union in 2020. Prime Minister David Cameron’s six-year premiership ended with the biggest failed gamble in modern UK political history. Whatever the precise long-term effects on Britain, this break has deepened and accelerated the stream of bad news for Europe.
EMU has been a disappointment
Closely linked is the flagship project of European economic and monetary union. It’s taken a series of wrong turns since it was introduced in 1999 – earlier and with a greater number of higher-risk early joiners than was advisable. The project was accelerated because of German unification, and West Germany’s currency – both the prize and instrument of the country’s post-1945 revival – was sacrificed in the process.
The aim was to prevent a Franco-German rupture, reinforce trade and investment links among member nations, counterbalance US monetary supremacy and nurture a European zone of prosperity and stability. Although there’s always hope of future improvement, none of these objectives has been satisfactorily accomplished.
EMU has imparted an overall deflationary bias. Successive measures to prevent the euro from collapsing have generally sapped demand and not generated growth for both creditor and debtor countries. The European countries that have grown fastest over the past 30 years have been those that did not join the euro. North-south fault lines have hampered Europe’s ability to present a united front against the US and China. In May 2013, then-European Central Bank President Mario Draghi lamented that ‘no one ever imagined’ a division between ‘permanent creditors and permanent debtors’ within the union.
Draghi’s celebrated, myth-shrouded ‘whatever it takes’ speech in London in July 2012 signified that division while trying to heal it – setting the conditions for a bout of ECB government bond-buying to prop up weaker countries. The speech, in which he rightly called EMU ‘a mystery of nature’, was partly an off-the-cuff show of chutzpah to what Draghi believed was a eurosceptic audience and partly a finely balanced political operation.
According to Benoît Cœuré, a senior French finance official who served on the ECB board from 2012 to 2019 and often accompanied Draghi to Berlin, ‘Draghi didn’t want to “lose” the Germans’ — and so building up a personal bond with Chancellor Angela Merkel became increasingly important. The long game worked. As the central banker’s relationship with Merkel deepened, the once-all-powerful Bundesbank, which he saw as overburdened by orthodoxy, gradually became expendable.
In a characteristic foreshortening of the truth, Merkel writes in her memoir that ‘Draghi acted in his independent capacity’. In fact, Europe acted only after political intervention from the US – from which Europeans were supposed to be making themselves monetarily independent. Draghi’s speech was a product of many weeks of behind-the-scenes interactions with then-US Treasury Secretary Timothy Geithner.
The pattern is repeating today. The single largest European fiscal adjustment since German unification – Germany’s relaxation earlier this year of its notorious ‘debt brake’ restrictions on public borrowing – occurred not because of combined European action but as a result of Trump’s reelection and his ambivalence toward guaranteeing European security.
Cameron himself now casts an acerbic eye on the latest German experience. When interviewing him for my book, Can Europe Survive: The Story of a Continent in a Fractured World, he told me EMU ‘appeared to be working very strongly in favour of the German economy by effectively suppressing the price of exports, but now everything has turned against them: Putin, Ukraine, gas, China and Trump’.
Draghi gave a bleak, sweeping appraisal of the continent’s prospects in his report on European competitiveness for the European Commission in September 2024: ‘Over time we will inexorably become less prosperous, less equal, less secure and, as a result, less free to choose our destiny.’
Very few of the voluminous recommendations in the Draghi report have been acted upon. In a speech in Rimini in August in which he called for the continent to transform itself from a ‘spectator’ into a ‘protagonist’, Draghi urged Europe to recover ‘unity of action’ – and to do it ‘not when circumstances have become unsustainable, but now, when we still have the power to shape our future’.
Europe is in crisis
According to the dictum of French statesman Jean Monnet, ‘Europe will be forged in crisis’. Crisis is indeed where we find ourselves today. So can Europe harness the adrenaline burst to advance further on the path to unity? Hardly.
The succession of economic crises over the past 20 years has built in progressively higher obstacles towards any kind of state-like European structure. Stable political unions require mutual confidence among their members; crises, especially if their root causes remain unresolved, generate suspicion, not trust. Far from giving Europe a new lease on life, the present upsets and unrest appear to be unleashing debilitating centrifugal forces.
Europe faces a series of era-defining challenges: deglobalisation, demographics, decarbonisation, digitalisation, defence and, ominously, debt. The continued French political instability, raising memories of the pre-1958 Fourth Republic, is just the latest sign of the continent’s widening fissures.
Is decline already irreversible? Probably not. A better understanding of what has gone wrong since 1989 might provide some clues to discovering how to put things right in the future. But time is certainly running out.
David Marsh is Chairman of OMFIF.
This is an edited version of an article first published by Bloomberg.
Image source: Johnny El-Rady
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