China to ‘Infiltrate’ Europe
This year, Germany will use the G20 summit to announce its support for a European ‘destiny’ (as described by Angela Merkel) independent of US preferences or fear of Russia.
In effect, a reunified Germany has finally emerged from the long shadows of World War II and the Cold War.
It will take its place on the world stage as an economic superpower with its own agenda.
Of course, Merkel will not announce an explicitly German agenda, only a European agenda, but Germany is the undoubted leader of the new Europe.
On the sidelines of the G20 meeting, it will be important to watch the ever closer relationship between France and Germany, in particular the growing cordiality between the new French President Emmanuel Macron and longstanding German Chancellor Angela Merkel.
Of course, there’s nothing new about Franco-German cooperation in post-World War II Europe.
France and Germany were among the original six members of the European Economic Community, or ‘Common Market’, created by the Treaty of Rome in 1957.
The Common Market was the direct predecessor to today’s European Union.
However, the degree of cooperation between these two major economic powers has waxed and waned over the years.
From 2012 to 2016, the Socialist French President Hollande was at odds with Merkel on issues such as Greek bailouts and budget austerity. Macron is much more in sync with Merkel on these and other issues.
One of the persistent criticisms of the EU from US and UK economists was that the EU had created a monetary union through the Eurozone and ECB, but had failed to create a fiscal union with a unified budget and bond issuing authority.
The criticism is valid, but the typical US or UK remedy was to break up the Eurozone.
That was never the intention of EU leaders.
Instead their solution was ‘More Europe’, which means unified banking regulation, a central fiscal authority and a Eurozone parliament to debate fiscal and monetary issues with a view to unified solutions.
Macron and Merkel (known to wags as ‘Mackerel’) are in accord on the More Europe approach and are already taking steps to implement that vision. G20 will be their first joint appearance on a world stage.
President Trump has picked fights with Europe about their financial contributions to NATO and their liberal immigration policies in the face of terrorism.
President Putin is isolated from Europe because of continuing sanctions related to his actions in Ukraine.
Merkel recognizes that Europe is increasingly on its own and needs to purse a destiny independent of the US and Russia. Macron has publicly voiced the same view.
Macron appears to be the strongest French leader since Charles de Gaulle. Merkel is undoubtedly the strongest German leader since Konrad Adenauer.
Together, their like-mindedness will deepen European integration and make the Eurozone and the euro stronger than ever.
The G20 meeting will be an ideal opportunity to put the new Franco-German alliance on display. This will signal to the US, China and Russia that EU policies will reflect EU priorities and not be mere accommodations to the preferences of the US.
China and Europe to form a strategic alliance
The likely beneficiary of this new European outlook will be China.
With Russia still subject to sanctions, and the US in a more confrontational mode, China will be met with open arms by the new Europe.
China is looking to diversify its reserve position away from dollars towards euros.
China is inherently cautious and was reluctant to invest heavily in euros while the European sovereign debt crisis rolled on from 2010 to 2015.
Now, the European crisis has passed, the economies of the periphery states of Spain, Portugal, Greece, and Ireland have stabilised, and Franco-German cooperation is growing.
China is ready to take the plunge with portfolio investment in European debt and direct foreign investment in ports, airports, highway systems and other critical infrastructure as well as large stakes in key European companies.
Even China’s ‘One Belt, One Road’ initiative envisions continuous transportation links from Shanghai to Rotterdam, and will need European participation.
While Trump and Putin are meeting privately, expect to see ‘Mackerel’ and China’s President Xi engaged in their own trilateral diplomacy.
This will be another one of the G20 sub-plots to watch closely for clues about the best investment opportunities.
This will be one of the most important G20 meetings ever.
It will facilitate a Trump-Putin pro-nationalist channel of communication, and will be a platform for the emergence of the new Europe under the joint leadership of Macron and Merkel.
for The Daily Reckoning Australia