EU Top Dog: Germany's fade and the French ascendance.

• Author: Rostowski, Jacek

At first blush, the result of the European Parliament election in May, and the subsequent nomination of the European Union's new leadership team, augur continuity and not disruption for the bloc. Nationalist parties failed to make any significant gains in the election, and then large Western European status quo powers hand-picked federalists for the top EU jobs. In particular, the choice of Ursula von der Leyen to be the next president of the European Commission-making her the first German to hold the post in a half-century-seemed to confirm Germany's continued dominance in Europe.

Yet undercurrents frequently diverge from the surface flow. History suggests that hegemons often assume formal leadership as their power wanes, not when it is strengthening. Today, several factors threaten Germany's status as the EU top dog-and France stands to be the main beneficiary.

Until now, German dominance has rested on two main pillars: seemingly permanent American defense guarantees, and the country's world-leading manufacturing firms and massive net-creditor position. But as these foundations start to crumble, the era of "peak Germany" may be passing.

One reason for this is the prevalence of ultra-low interest rates globally, and particularly in the eurozone, reflected by the fact that Italian and even Greek ten-year bonds have recently been yielding less than their U.S. equivalents. Such shrinking risk premia imply that the risk of another eurozone sovereign debt crisis is receding. This, in turn, is weakening the "semi-soft" sway that Germany has held over the eurozone by offering financial support in exchange for fiscal austerity and structural reform.

In addition, the balance of political power within the European Union is once again shifting. Most important, Brexit-although it has yet to occur-is helping France to reprise its pre-1990 role as the bloc's swing voter.

In those days, West Germany, Italy, and Spain generally favored more EU integration; Britain was against; and France had the deciding vote. This explains the modus operandi of the Franco-German "locomotive": because major EU initiatives hinged on agreement between the two countries, France could choose a path of European integration that best suited its national interests.

German reunification and the eurozone crisis changed this. Britain became ever more Euroskeptic, rejecting the political and fiscal union that it saw as essential for the euro, yet politically unacceptable for itself...