Europe: The end of an Em­pire

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Eco­nomic growth de­rives from one of two sources. Ei­ther it comes from a ra­tio­nal­i­sa­tion of tal­ent, which we call Ri­car­dian growth, or it comes from new in­ven­tions, which we call Schum­pete­rian growth. Of the two, Ri­car­dian growth is eas­ier to achieve. As bar­ri­ers to trade, to the move­ment of peo­ple, or to the free flow of cap­i­tal are dis­man­tled, in­ef­fi­cien­cies get squeezed out and growth can soar.

Bear­ing this in mind, it is ob­vi­ous that the pri­mary en­gine of growth across Europe over the past few decades has been the con­stant drive to­wards uni­fi­ca­tion. In fact, we would go as far as to ar­gue that be­tween 1980 and 2010, one of the most prom­i­nent macrotrends glob­ally was the in­ces­sant growth of what we came to call the “Euro­pean Em­pire”.

This search for em­pire took on many forms, from ter­ri­to­rial ex­pan­sion (mostly into Eastern Europe fol­low­ing the fall of the Ber­lin Wall), through ef­forts to es­tab­lish com­mon reg­u­la­tions for the tele­com, fi­nan­cial, healthcare in­dus­tries and other sec­tors, to the de­sire to forge an ever closer po­lit­i­cal union.

But build­ing busi­ness, which an em­pire is is why im­pe­rial a costly

projects al­ways need their own cur­ren­cies; no em­pire was ever built on some­one else’s dime. The dream of Euro­pean Em­pire there­fore gave birth to the eco­nomic fal­lacy of the euro. As long as the Euro­pean Em­pire re­mained in ex­pan­sion mode, the euro it­self—even though loaded with in­ter­nal con­tra­dic­tions—was a struc­turally strong cur­rency. As each new coun­try was ab­sorbed into the Em­pire, more com­pa­nies needed eu­ros for work­ing cap­i­tal, more in­di­vid­u­als saved in eu­ros, and more cen­tral banks padded their re­serves with the com­mon cur­rency.

For 30 years the struc­tural trend was to­wards in­creas­ing Euro­pean in­te­gra­tion, with Ri­car­dian growth as a con­se­quence. It is now ob­vi­ous, how­ever, that the best the Euro­pean Em­pire can hope for is to stall at its present borders. And even that seems to be be­yond the ca­pac­ity of Europe’s cur­rent lead­ers. Con­sider the fol­low­ing:

If noth­ing else, the Ukraine con­flict demon­strates that Rus­sia has drawn a clear line be­yond which it will not al­low the Euro­pean Em­pire to ex­pand. In the ab­sence of a po­lit­i­cal im­plo­sion in Rus­sia, it is hard to see where Europe can ex­pand ter­ri­to­ri­ally from here. Ice­land? Not much of a prize (and the Ice­landers have cooled to the idea). Tur­key? With civil wars and ISIS on its borders, hardly a com­pelling propo­si­tion.

The chal­lenge of ev­ery em­pire

- Ter­ri­tory:

- Pol­i­tics:

has al­ways been to keep its po­lit­i­cal in­sti­tu­tions flex­i­ble enough to adapt to dif­fer­ent cul­tures, yet solid enough to cre­ate a gen­uine union. The Greek de­ba­cle proves that Europe’s lead­ers have failed this test. Worse, a num­ber of Euro­pean lead­ers (Schauble, pos­si­bly Merkel, even Juncker?) now seem keener to em­brace a Gaullist-style de­coloni­sa­tion process, get­ting rid of awk­ward im­pe­rial pos­ses­sions as quickly as pos­si­ble, than to adopt gen­uine po­lit­i­cal re­forms in or­der to cure the Em­pire’s pe­riph­eral ills.

- Borders:

Surely the sad­dest sight in Europe this year has been the tens of thou­sands of African and Arab mi­grants risk­ing their lives to reach the Em­pire’s shores. Al­most as sad has been the in­abil­ity of Euro­pean gov­ern­ments to agree a com­mon pol­icy to deal with this hu­man­i­tar­ian tragedy. In­stead, France and Aus­tria have re-in­stated their borders with Italy and are re­fus­ing pas­sage to dark­skinned in­di­vid­u­als with­out pa­pers, in con­tra­ven­tion of the Schen­gen Agree­ment.

Be­neath the Greek, Ukraine, and Mediter­ranean refugee crises, the real prob­lem un­der­min­ing the foun­da­tions of the Euro­pean pro­ject is the dif­fer­ing vi­sions of what the Euro­pean Em­pire should look like. No two na­tions of­fer sim­i­lar vi­sions—from the UK threat­en­ing Brexit, to the Ger­mans who see in the EU the prom­ise of Euro­pean

- Vi­sion:

peace, to Poland which sees a guar­an­tee against Rus­sian in­ter­fer­ence. Even within na­tions, the idea of a Euro­pean Em­pire is los­ing its ap­peal—as shown by the rise of the Dansk Folkeparti, the French Front Na­tional, the Five Star move­ment and the North­ern League in Italy, UKIP, Pode­mos and oth­ers. There is no Euro­pean leader strong enough, or in­spir­ing enough, to unite his own coun­try, let alone the broader con­ti­nent, around a sin­gle bind­ing vi­sion.

So look­ing past all the de­bate about the sus­tain­abil­ity of Greece’s debt, and the con­se­quences for global mar­kets of another po­ten­tial “Lehman mo­ment”, per­haps we should sim­ply ac­knowl­edge the Greek cri­sis for what it is: the death-knell for the Euro­pean dream of em­pire. The grow­ing Euro­pean re­al­ity is the re­turn of borders, of na­tional pref­er­ences, and of opt-outs. At best, the Euro­pean Em­pire has stalled. At worst, it will start to shrink in a way that will jeop­ar­dise Ri­car­dian growth across the con­ti­nent. All else be­ing equal, this will mean slower growth in the use of the euro, which now has surely be­come a struc­turally weak cur­rency.

In the long run, peo­ple do not like to save in the struc­turally weak cur­rency of a shrink­ing em­pire, a re­al­ity which means that Euro­pean bonds are likely to un­der­per­form those of other, non-shrink­ing, em­pires—the US and China—for the fore­see­able fu­ture.

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