In Europe today, the consequences of decisions made late in the 20th century continue to spin themselves out in this second decade of the 21st. Although on the one hand the euro as a currency is now well established, to the point where you’d have to work rather hard even to imagine its disappearance from the world financial scene, on the other hand the nations that use it are embroiled in a continuing series of banking and sovereign debt crises that test the patience of their interdependent electorates.
On the third hand, regulators and alpha hunters alike struggle with a range of questions, which we have discussed in detail in this blog in recent months. Today I’m thinking that they all come down to this: is ‘Europe’ coming apart? Or are we witnessing the birth pangs of a more perfect union?
A Hamiltonian Moment?
Probably not the latter. The February 2014 issue of HARPER’S featured the transcript of a panel discussion about “the euro and its discontents” featuring, among others Ulrike Guérot and James K. Galbraith. [Guérot is a German woman who advocates a vision of Europe as a single Republic. Galbraith, the son of the more famous John Kenneth Galbraith, is a professor at the LBJ School of Public Affairs at the University of Texas, Austin.] This exchange caught my eye:
Guérot: Europe is facing its Hamiltonian moment. Either we make it or we don’t. The United States was forged through a debt crisis after a war, and after a hundred years you made it and you have these automatic stabilizers in your system. So give us a hundred years’ time and then we’ll speak again.
Galbraith: I have sympathy for your project … but you haven’t got a hundred years to build it. You haven’t got three years to build it. It’s a question of steps that … need to be taken in the next six months to prevent a very serious decline toward social disorder in certain parts of Europe.
Two Events in Britain in February
Soon after I read those words, two events in Britain gave a quite different spin to the issues behind them. First, currency issues became a new flash-point in the long-running debates over Scottish independence, with some heated back-and-forth between Alex Salmond, the First Minister of Scotland, and George Osborne, Chancellor of the Exchequer. Osborne takes the view that Scottish independence would require a separate Scottish currency, and that Scotland is too small an economy for that to be realistic. Salmond believes that “in the event of a yes vote [in the planned September referendum] the campaigning will stop and the common-sense agreements will start,” and the soon-to-be-separated countries would agree to share the pound.
The very fact of such a referendum indicates that there are centrifugal forces at work in Europe, moving toward a greater dispersion of sovereignty. The strength of the Northern League Party in Italy is another index of centrifugal force.
The second event that struck me as bearing on the same tangle of issues was Angela Merkel’s speech to the UK’s Parliament, on February 27th. Matthew d’Ancona, writing in the Telegraph, called the German Chancellor the first occupant of her office “to approach British Euroskepticism with an open mind, not with disdain.”
Does this mean that she has to make nice with Britain because its engagement with Europe is critical to the success of her own policies? Is there then some room, both in Berlin and in Brussels, for a re-write of what Europe means in a way that will mollify British skepticism? And if so: how far will that go?
Looking for Some Insight
For some insight into such questions I turned recently to Steve Ruffley, chief market strategist at InterTrader. We spoke first about Scotland, and he took the long view. “The Romans crossed Europe, conquering as they went. They crossed the channel and conquered England. When they got to Scotland, they built a wall.”
In their hearts, the Scots prize their distinct character, and they would love independence. But Ruffley’s suspicion is that the head will prevail over the heart, and that the sorts of consideration of which Osborne spoke in February will dissuade them from going their own way.
Would an independent Scotland be a sensible place where international investors might want to put their money to work? Ruffley thinks not. It “doesn’t have the industry or exports to support a separate course in a sustainable way.” Scotland is analogous in some ways to Ireland, which had “some brief success” a decade ago, “attracting foreign capital but since 2008 it has all fallen apart, and six years later they’re still getting back on track.”
As for Merkel’s visit and its implications, the British public clearly has no appetite to abandon the pound for the euro, “and even continued membership in the EU is now an open question politically because we’ve come to understand that we pay quite a lot for the privilege considering the size of our population.”
Britain wants to cut a better deal, and Germany – which has been assisting the southern tier nations through their recent troubles on its own credit cards – needs British help to keep its own situation sustainable, so it may be helpful in the eventual cutting of that new deal. Ruffley thinks Merkel’s trip was a fact finding mission. Merkel “understands that Britain has good relations with the US on the one hand and with China on the other, and she knows how valuable this is for Europe.”
My own quite speculative view – one that I am not attributing to Ruffley – is that Europe as a project is coming apart, and some of the constituent nation states may split into their underlying parts in the process too – but that this is happening slowly and messily, so the world is as yet far from seeing any new equilibrium.