…It’s Germany. There, I said it. And no, this isn’t some anti-Germanic rant that seems customary for the British, because I actually quite like the Germans. Sure, their sense of humour is a tad bizarre and their diet seems to exclusively be sausages and beer, but they make fantastic cars, have a great handle on their economic policy and I actually quite like beer and sausages.

So why then, is it, that I think that they’re going to be the architects of destruction for their own obsession; Europe? Well for starters, the title of this post is somewhat misleading; the current debt problem (I don’t think we’re at crisis levels yet, given that Italian and Spanish bond yields have fallen significantly over the past few weeks) definitely comes into play, though not as the sole doombringer. As it stands, Europe remains fairly strong as a politcal and economic entity; their currency is strong, the current roster of political leaders both supranationally and internationally seem to broadly agree and collaborate without too much in-fighting and, for the moment at least, fears of sovereign debt defaults have been abated. But I fear this scenario is merely temporary and sometime soon a number of factors will come to critical mass, at which point one of the European nations in particular will have a great deal of tough choices to make with regards to their ongoing role within the European Union.

I don’t have some inside information or some revelatory bombshell to drop upon you that will totally warp the way you perceive the European Union, my view is formed from all the available evidence out there. In fact, the chances are that after reading this your opinion of the EU probably won’t be changed; if you’re a fan of the Union you’ll likely see me as some bearish scare-mongerer propagating his right-wing lunacy (I’m an economic liberal, actually, just to clear up the confusion) whilst those of you who are already sceptical of the institution will probably just chuck this argument in your sack of “this is why Europe sucks” for the next time one of your friends foolishly mentions the EU down the pub and is forced to listen to you rant and rave for the next three hours, rather than play darts, sink pints and talk utter rubbish.

As things are at the moment, the only economy in Europe (and one of a select few in the whole world) that is in remotely good shape is the German one. No matter how many times the British body politik reguritates quotes from the International Monetary Fund or the World Bank about how well our government is doing to put the country back on track to health via the gruelling road of fiscal austerity, I don’t believe we’re in anywhere near as good shape as Germany right now. Tax hikes and spending cuts are simply not enough to begin making any serious headway on eliminating the national debt, let alone the budget deficit. Taxes are simply too high to be effective and spending cuts are not nearly as deep as they should, by rights, be. If it were me, I’d be tearing up the UK Tax Code and the Budget, taking a good hard look at the likes of Hong Kong, Singapore and China and doing my darndest to emulate their economic management, because frankly it works far better than any system we’ve ever had in place. But I digress somewhat. Germany, on the other hand, is inherently strong due to its enormous industrial clout and the fact that even when the DAX is approaching bear market territory, the country’s industry is still creating real goods; anything from flat-head screws to £120,000 Mercedes-Benz. The country is producing, producing, producing – tangible goods for which there are quantifiable consumers. Germany managed to deviate from the majority of the Western world’s economic development cycles; instead of switching out of industry in favour of services, they fused the two, moving from basic, low overhead cost heavy industry to highly specialised, highly efficient knowledge-driven heavy industry. The best of both worlds.

But they were alone in doing this. And as the other European economies fell behind at increasing rates, muddling along the path to economic development, Germany continued to grow not only in economic dominance but also political. Now, Germany is likely the most influential country in all of Europe, controlling the European Central Bank and hogging all the political airtime with France. But here is the problem: Germany controls the European Central Bank in a way that is conducive to Germany’s best interests. The setting of interest rates and the determination of monetary policy are done in German. As a result Germany thrives, whilst the PIIGS (Portugal, Ireland, Italy and Spain) strain under the weight of oppressive monetary management that their economies simply are not developed or strong enough to cope with. The result? A European debt crisis, out of control and unable to be significantly remedied by the central bank.

I often think that there are only a few great moments for Britain in Europe since Prime Minister Ted Heath led us into the European Community. Several of those involve Margaret Thatcher making an utter pain in the arse of herself and successfully securing us several hundred million pounds in fiscal rebates but the other one is due mainly to a Greek man, whom I hold in the highest professional regard; George Soros. His hedge fund’s betting against Sterling remaining in the European Exchange Rate Mechanism saved us from decades of pain and a descent into the folly that is the European Single Currency. Many saw our ignominious exit from the mechanism as a political and economic failure of Britain, I see it as a blessing in disguise. The Euro is just another fiat currency that has no logical reason to be so obscenely overvalued and as a result it has caused unchecked financial damage to the weaker (yet largest) economies in Europe.

So when these European financial problems come to the surface again – and mark my words, they will do – and the European people begin to realise that all is not actually so rosy in the garden – and again, they will do – Germany will be faced with some very difficult questions. For the Germans to jump ship and leave the common currency would economically mean nothing for them. Reinstating the Deutschmarks, weathering the political fallout, etc are minor inconveniences, sure, but nothing that would seriously damage the long-term trajectory of the nation. For the weaker economies to bail however, would be disastrous to them. It would be akin to jumping out of a plane, only to realise that the rucksack they grabbed before leaping out was not a parachute, but was in fact full of camping gear. To reinstate their old currencies (Lira, Peseta, Punt etc) would be crippling as they would face incredibly tough exchange rate pressures, not least from the Euro and would find that their debt problems would only be exacerbated by this. It would be like Cows deciding to graze in slaughterhouses.

Germany’s economic strength makes it the weak link in Europe and I’m under no illusions that the German leadership are aware of this. The only way in which they could not be is through blind arrogance and for all my dislike of Chancellor Merkel, I do not believe she is that. But sooner or later either she or her successor will have some difficult decisions to face in order to keep that dream of European integration and supranational harmony alive enough to become a credible reality. Personally, I’ve always thought it was folly, but I could be proved wrong.