Can the crisis between US and Germany wreck the euro?

by Cesare Sacchetti

US-German friendship is “at shreds”. This was the expression used by Daniel Broessler on the German newspaper Süddeutsche Zeitung, to describe the actual condition of the relationship between Berlin and Washington. Despite the dramatic tone, it’s not too far-fetched to say that the USA and Germany are really at loggerheads, a situation not seen since the end of WW2.

The recent delay of the meeting between Mr. Pompeo, US Secretary of State, and the German chancellor, Angela Merkel, is just the latest chapter of a deteriorating diplomatic course between the two countries. Tensions arose since the first steps of Trump’s administration in 2017, when Peter Navarro, assistant to the President and director of the National Trade Council, stated that Germany was taking advantage of a “grossly undervalued currency”, the euro.

The spat between Washington and Berlin went on with the explicit threat by the White House to impose tariffs on EU automotive exports, a measure expected to severely hit the German car exports to the USA. The relations between the two countries dramatically worsened when Trump became president, and it is not by chance. Until the end of the Obama administration, Washington had never changed its main course of foreign policy which started after the end of WW2. At that time, the White House was the guarantor of the so-called “international liberal order”, a political doctrine founded on the supremacy of international organizations above the nation states.

But Trump’s America First policy reversed this course.

By focusing first and foremost on the protection of American interests, Washington clearly set itself on a collision path against all the international organizations, especially the EU. Since the outbreak of the Cold War, America had heavily backed the European integration project. This decision was made to better control the European continent and to contain a possible expansion of the Warsaw Pact in Western Europe.

However, Germany’s predominance over the European continent increased dramatically with the foundation of the EU and especially with the establishment of the euro, the European single currency. By exploiting a real exchange rate lower than the other EMU members, Germany accumulated huge trade surpluses. Washington had tolerated the German economic supremacy over Europe until Mr. Trump became president. As a result, this change of US foreign policy priorities has created an escalation of clashes and unprecedented mutual accusations between the two sides of the Atlantic.

Interestingly, as Washington-Berlin relations have worsened, Italy-US relations have asymmetrically improved. The reason is simple. While Germany has clearly emerged as the winner of the European single currency, Italy has emerged as the loser. A recent study published by a German economic institute, the CEP, remarked on this economical asymmetry. According to this research, Italy has lost 4.3 trillion euro since it joined the EU, while Germany has gained 1.9 trillion euro. Consequently, the foreign policy objectives of the two countries, Italy and the USA, are matching in this case because both countries seek allies to wreck the German dominance in the EU.

Tariffs on EU could come after European elections

Therefore, after the recent tariff raises on Chinese exports, the possibilities of US tariffs on EU imported goods are increasing too. Most probably, Mr. Trump is just waiting for the best moment to strike, which could be after the EU elections on May 26. It is certainly true that until this moment, a general atmosphere of apathy and indifference has surrounded the EU elections. However, this time, the situation is apparently set on a different path. Although the EU Parliament powers are limited, a possible stalemate could lead to an unprecedented paralysis in Brussels.

This scenario could take place especially if the populists of different political backgrounds would reach the 33% of the EU parliament seats. As the ECFR, the European Council of Foreign Relations, pointed out in its recent analysis “How anti-Europeans plan to wreck Europe,  the EU and the euro’s survival would be severely at risk if this were to happen. In this scenario, if the US would choose to strike the EU with tariffs, Brussels and Berlin will face a test hardly manageable to overcome. Then Italy will have a unique opportunity to break the German supremacy in the Eurozone. The question is if it will be able to get this chance considering that there are forces inside the Italian government, which do not want to defy the present status quo. Consequently, Italy is the most important geopolitical player in this moment.

Rome is a game changer and both Washington and Brussels know it. Just note the EU bureaucrats’ recent efforts to overthrow the Italian government. Therefore, the destiny of Europe is in Rome’s hands. The destiny of Rome lies solely in its own hands and not at the mercy of the EU.