Commentary: Europe Can't Afford to Stay Mad for Long

It didn't take long for the thunderbolt to be hurled from the Elysées Palace. Less than 12 hours after President George W. Bush declared diplomacy dead in resolving the Iraq crisis, France's President Jacques Chirac declared Bush's ultimatum to Saddam Hussein "contrary to the wishes of the Security Council and of the international community.... To shrug off the legitimacy of the United Nations, and to choose force over justice, is to take on a heavy responsibility."

Tough words, indeed. But Chirac's take-no-prisoners rhetoric disguises a pressing need for France and its fellow Europeans: the need to reconcile with America -- and, just as important, with one another. The damage done by this diplomatic fracas could be as great for the European Union as for the U.S.

That sounds odd at first. Isn't it the Americans who need to mend fences? Of course. But dig down a little and you see how deep the wound to the European body politic is, and why the Europeans have to heal it.

Start with the European economy. It's no stretch to say that the Old World could suffer major collateral damage from the Iraq crisis. Of course, economic activity will pick up if the war is quickly resolved. But no feel-good factor is likely to be big enough to solve the serious problems facing Europe. Thanks to the crisis and the split it has triggered with the U.S. and within Europe, the Continent is facing a massive collective identity crisis just as it is grappling with severe economic shocks. Germany's banking industry may require a bailout. The accounting scandal at Royal Ahold raises the possibility that Enron-scale time bombs are lurking in the corporate landscape. European equities have imploded far more severely than stocks in the U.S. Some of Europe's proudest corporate names are in deep trouble, from Italy's Fiat to France's Alstom and Germany's ThyssenKrupp. Unemployment is steadily rising and the region is flirting with recession again.

How does the uproar over Iraq affect this parlous state of affairs? For one, the last thing that Europe Inc. needs is more knocks on the transatlantic alliance, NATO, the EU, or the U.N. "Europeans are more concerned about the breakdown of world order than Americans generally are, and that could be reflected in their confidence and their willingness to invest," says Michael Hume, who is chief European economist at Lehman Brothers Inc. Blowback from the U.S. is feared, too. In a recent poll of German engineering companies, 20% feel their business has been negatively affected by anti-German feeling in America.

Second, the Iraq crisis has proved a dangerous distraction for European leaders just as they are focusing on key institutional questions, such as whether the EU can become a true political federation. Thanks to the showdown over Iraq, the EU's political unity is in tatters and its future shape uncertain.

For that, Chirac and his energetic foreign minister, Dominique de Villepin, must bear much of the responsibility. "The situation in Europe has been terrifically set back, and we are a bit responsible," admits Jacques Andreani, a former French Ambassador in Washington and one of the most senior members of the country's foreign policy Establishment. "Clearly, we need to repair relations with the British, the Spanish, the Italians, and the Poles."

Indeed, many European leaders are fuming with France. Spain is on the U.S. side and has been almost as irked with the French as the British are. The Italians fear the fracas will make it much more difficult to establish good relations between existing EU members and newcomers from the East, whom Chirac undiplomatically attacked in February for their pro-American stance. A smooth integration of the East was supposed to boost growth.

These concerns don't just come from eurocrats looking to expand their turf. The EU badly needs to advance from its role as a sophisticated customs union to a real political entity with a common policy on vital issues like foreign affairs, taxes, investments, and labor laws. But the Iraq crisis has graphically, even brutally, demonstrated that when push comes to shove, the EU's individual countries have very different interests and agendas despite the lip service that is given to community ideals. Now, building a common security policy, expansion to the East, and writing a European Constitution could be set back, possibly by years.

Clearly it's in Europe's interests to patch up relations with Washington and restore civility to its own house. Is that possible? No move is likely from the French, who are in no hurry to make up with the governments of Spain, Britain, and Italy, let alone the U.S.

But openings are there. Surprisingly, the Germans may prove to be the key to restoring some harmony. True, Chirac and Chancellor Gerhard Schröder have been tightly linked on the issue of Iraq. But Berlin is already looking at ways to repair the rift. Even as he warned on Mar. 18 that war "will mean certain death for thousands of innocent children, women, and men," Schröder boosted the number of German troops guarding U.S. bases. He vowed to honor treaties that let the U.S. use Germany as a staging area, and he made no move to withdraw German air force specialists aboard NATO AWACS planes over Turkey. The Germans are keeping their anti-chemical warfare unit in Kuwait. And relations between Foreign Minister Joschka Fischer and U.S. Secretary of State Colin Powell are good, as are ties between Interior Minister Otto Schily and Attorney General John Ashcroft and Homeland Security Secretary Tom Ridge. "There is a much bigger group of politicians who realize that Germany cannot support the French way of looking at transatlantic relations," says Bernhard May of Berlin's German Council on Foreign Relations. That extends to Germany Inc., too. In May, a group of about 40 business leaders will travel to the U.S. Economics Minister Wolfgang Clement promises to take part.

If the Germans could find a way to patch things up with America, then France eventually might feel the need to reconcile as well. Healing the transatlantic rift would help heal intra-European wounds. The damage is great. The need to reconcile is even greater.

By John Rossant

    Before it's here, it's on the Bloomberg Terminal.