European Union and the limits of its capacity for expansion

The proper functioning of any economic union depends, to a large extent, on its gravitational capacity — that is, on the attractive force exerted by a large economy acting as the center of gravity for the union’s trade and financial flows. This idea is supported by the gravitational model of international trade developed by economists Elhanan Helpman and Paul Krugman. This model starts from the observation that the volume of trade between two countries tends to be greater the larger their economies are and the shorter the distance between them. In the case of the European Union, the gravitational center is the German economy, and the volume of trade transactions and capital flows between Germany and the other Member States is the fundamental element in maintaining the stability of the European area. Bilateral trade and financial flows among the remaining countries are also important for maintaining the cohesion of the European economic area, but they cannot fully compensate for a sharp decline in Germany’s gravitational pull, given that its share of the European Union’s GDP is close to 30%.After the Second World War, despite having been defeated and divided, Germany managed, in less than twenty years, to re-establish its economic dominance over the rest of Western Europe, and this happened for several reasons. First, because it had been the largest industrial economy in Europe since the nineteenth century. Second, because the Nazi regime, through its plundering behavior, allowed large German industry low-cost access to natural resources such as the coal and iron of Alsace-Lorraine — territories disputed with France since the nineteenth century — as well as to unpaid labor forcibly displaced from various European countries. Third, the production of armaments and related materials enabled major German companies in steelmaking, metallurgy, vehicle manufacturing, and other sectors to accumulate substantial profits, which they kept in safe places and later used to finance post-war reindustrialization, leveraged by Marshall Plan funds. Added to these conditions was the fact that, at the end of the Second World War, the victors did not impose war reparations on Germany. By contrast, after the First World War, the Treaty of Versailles had imposed reparations on Germany so punitive that the English economist John Maynard Keynes protested against them, arguing that they would drive the country to trigger a second war — which indeed came to pass.

In the post-war period, Eastern Europe was dominated by the Soviet Union, whose economy, due to its size and structure, had only a weak gravitational attraction over the countries within its sphere of influence until its collapse in the late 1980s. The change in the economic and political systems that then occurred in those countries paved the way for the enlargement of the European Union. Since this enlargement took place in territories that had belonged to another geopolitical sphere, it occurred under the protection of NATO, whose eastward expansion offered a new and significant market for the military industries of the United States, the United Kingdom, France, Germany, and other countries.

The eastward enlargement of the European Union, incorporating economies with differing levels of development and located in increasingly distant geographical areas, naturally affected the gravitational force within that space. Everything seemed to be progressing smoothly when, following the accession of countries such as Hungary and the Czech Republic to the European Union, not only European funds but also substantial direct and financial investments — mainly from Germany and Sweden — flowed into those countries, making possible a significant increase in their GDP growth rates. However, investment flows do not remain indefinitely at high levels, and disagreements between several Eastern European governments and the European Commission show that there is now a certain degree of dissatisfaction regarding the benefits of European Union membership. The reasons are varied and differ from country to country. Yet the common feature among these countries is that, in all of them, GDP per capita in purchasing power parity terms remains below the European Union average (index 100). With the exception of Greece, all the countries ranking below Portugal (82) are in Eastern Europe: Estonia, Poland, and Romania (79); Croatia and Hungary (77); Slovakia (75); Latvia (71); and Bulgaria (66). By contrast, all the economies of Central and Northern Europe have index values above 100.

This context is not unrelated to the difficulties of understanding between the institutions of the European Union and the governments of certain Eastern European countries, such as Hungary and Slovakia. The situation may even worsen when, after the end of the war in Ukraine, the question arises of how Ukraine’s integration and reconstruction are to be financed. The circumstances facing European institutions regarding Eastern Europe invite us to recall the attitude of Bismarck, Chancellor of Prussia and later of unified Germany in the second half of the nineteenth century, who believed that his country should avoid involvement with the Slavic countries of Eastern and Southeastern Europe. Whenever Germany abandoned Bismarckian prudence, the consequences were not favorable, as history teaches us.

With some optimism, perhaps we may believe that this time history will not repeat itself — contrary to Marx’s aphorism — and that problems in the East will not become a source of erosion and weakening for European institutions. Time will tell.