Andrew Sheng, Distinguished Fellow of Asia Global Institute, stresses the need for Germany to take the lead in keeping the European Union together.
Global financial markets were relieved when centrist French presidential candidate Emmanuel Macron led in the first round over his right-wing rival Marine Le Pen, with a run-off set for May 7. The populist tide of Brexit and Trump has yet to sweep through Europe, as the French followed Austrian and Dutch voters in saying no to radical change.
But a populist swing is doubtless on, driven by high unemployment, terrorist attacks, immigration concerns and depression in southern Europe.
France is the second-largest economy in the EU after Germany, and their partnership is still the core of European stability. Le Pen has pledged to have France exit the euro and maybe even the European Union. Since French voters are deeply divided and many remain undecided, the risk of Frexit are not zero.
The EU is a project of political union through monetary union, a dream which arose out of the ashes of the second world war. But, as Nobel-Prize-winning economist Joseph Stiglitz said, the EU made a "fatal decision" in 1992, to "adopt a single currency without providing for the institutions that would make it work".
The euro zone did create the second-largest reserve currency, and the early years did witness a period of great trade and economic integration.
But, by 2007, when the US subprime crisis triggered the European debt crisis, the euro zone's flaws and institutional inadequacies were all brutally exposed. First, although there was a single central bank, there was neither a fiscal nor a banking union, meaning there was no centralized tax and banking policy to deal with failing national banks.
Secondly, it was impossible to devalue the currency to stimulate exports, so each crisis country was forced into deflation and painful bank restructuring, sparking huge rises in unemployment and social unrest. Italian jobless figures are at 11.5 per cent today, with over double that rate among youth.
Europe is today in an existential crisis between the north and south. The north, including Germany, is doing relatively well, whereas the southern members are just beginning to emerge from recession. Germany has a current account trade surplus of more than 8 per cent of GDP but, for its own historical reasons, is unwilling to accept the mutualization (co-sharing) of European debt. So the debt burden of the southern economies remains particularly high.
In 2016, average non-performing loans of eight (mostly southern) EU members was 22.8 per cent of total loans, with Italy in a banking crisis. Austerity without hope for quick relief has political costs.
The divisions between Germany and the southern economies grew because, from 1989 to 2002, Germany was burdened by the integration of East Germany - undergoing an extremely painful productivity adjustment when average wages fell. Over this period, unit labour costs in France and Italy rose, without corresponding increases in productivity. Post-2002, German industry roared ahead, whereas the southern economies could not match it in terms of labour costs or productivity.
Since the 2007 crisis cut global demand, the southern economies survived through running higher debts, which have now come home to roost.
Fortunately, France has managed to keep its deficits at a reasonable level, but its economic position relative to Germany has weakened. After Brexit, Germany is even more important politically within the European Union, but militarily, France remains the sole EU member with nuclear weapons.
All in all, Frexit would be destabilizing for the EU and global security, so many hope and pray that it will not happen. But the politics is not completely predictable if the economics and job security continues to deteriorate.
German economist Hans-Werner Sinn, in his 2014 book, The Euro Trap, argues that the euro zone cannot carry on in its current form without major reforms. These reforms are made more difficult since German elections this year will follow the French congressional elections, followed by Italian elections next year.
My visit to Italy this month revealed to me that if the Italian economy does not recover, a populist government could emerge, threatening an Italian exit from the union.
For those of us in Asia who are used to dealing with a rich and stable Europe that plays an important role in global trade and stability, a break-up of the euro zone seems remote. But we are not living in normal times. To me, the future of the EU lies in clearer German thinking on its future role as the leading economic power within Europe. The head of a family must be seen to be more generous to the other members, but not so much as to hurt the family finances. Getting that balance right will be key to whether the EU fragments or not.
This article first appeared in the South China Morning Post on April 28, 2017. The views expressed in the reports featured are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.