As careful readers of Your Humble Blogger know, I’ve long predicted the demise of the EU, suggesting that it would happen before 2050. But it now looks like the Union will crumble well before that date. While the European establishment has insisted that Britain made a terrible mistake and will suffer for it, the reality is that the worst consequences will hit the EU – which perhaps explains the Europeans’ panic.
There are two lines of reasoning that suggest the impending demise of the EU. The first goes like this: almost every nation in the world has experienced numerous and fundamental changes in its governance institutions over the years, as changing times, changing aspirations, and changing opportunities and constraints require that even fundamental “constitutional” level structures be amended or jettisoned. In the US we tend to be insensitive to this evolution because we ourselves haven’t experienced it. Since the US Constitution came into force in 1789 there have been no fundamental changes in how we govern ourselves. But we are the only country in the world about which that can be said – the US is, in fact, the world’s oldest persisting government.
Some nations have evolved slowly over time from one form of governance to another, ending up unrecognizably different from where they started. England was a more-or-less absolute monarchy for nearly a thousand years, but has gradually transformed itself into a parliamentary democracy with a monarch who is beloved-but-impotent. Just in the 20th century Germany has gone from a monarchical empire to Weimar to the Thousand Year Reich to a vigorous democracy. France is now on its Fifth Republic, dating back only to 1958. The Peoples Republic of China was organized only in 1949, India became independent in 1947, and the Russian Federation dates back only to 1991. And these are the most stable of the world’s countries.
The original rationale for the EU was to prevent Germany and France from going to war for a third time in the 20th century. A most worthy objective, but how quaint it sounds now! Germany and France won’t go to war, but not because of the EU – they won’t go to war because they have become military and economic Lilliputians relative to the countries that now matter in the world: the US, China, India, Japan, perhaps Russia. The combined population of Germany and France is well under 5% of the combined population of the US, China, and India, forget Russia and Japan. If Germany and France even thought about going to war, the US would squash them like bugs.
So the EU turned to a different rationale – helping these small European countries compete with the US and China by merging their economic output. 500 million Europeans, combined, would have an economy almost as big as that of the US. But the EU wasn’t a nation, it was 28 separate nations, and those underlying nations experienced very different economic outcomes.
The result was that the EU developed yet a third rationale for its existence: to be a transfer union wherein cash was transferred from the hardworking, productive nations of northern Europe to the lackadaisical nations of southern Europe. It worked as long as the north stayed healthy, but when the Financial Crisis hit the northern economies hard, the notion of Germany as the ATM for the south collapsed.
Thus, the unraveling of the EU began not with Brexit, but with Grexit. So determined were the EU elites to preserve their increasingly creaky dream of a united Europe that they insisted on bailing out Greece, rather than cutting that country loose from the Union (even though its people had voted to do just that). Citizens of the northern European countries got the message quickly: no matter how financially irresponsible a country became, it would be bailed out (by Germany) to preserve the dream. Who would be next? Portugal? Spain? Italy?
The departure of Britain leaves the EU as an impossible idea. The only reason the northern states have remained in the EU is because they have, for the most part, called the shots. But with the Brits gone, Germany finds itself isolated, its only allies being a few small northern nations that don’t much matter under EU rules. German advocacy of free market systems and fiscal discipline will fall flat without the UK’s voice behind it. The EU will now be controlled completely by the needy south, led by France and Italy.
Needless to say, the north will find this situation intolerable, and the northern nations will begin to leave the EU, probably starting with The Netherlands (where 88% of the Dutch want a “Nexit” vote). Once the EU cookie starts to crumble, it will crumble quickly. My sense is that Germany knows it is too small to thrive on its own, especially with France, Italy, Spain et al. arrayed against it in what remains of the EU. We’ll call that alliance the “Southern League.” The small northern countries and the countries in eastern Europe (Poland, the Czech Republic, Hungary, etc.) will be in the same boat.
So (you heard it here first), Germany will reach out to Britain and those two nations will form the core of a “Northern League:” Germany, Britain, the small northern nations, most of the eastern Europeans, several of the Baltic and Nordic countries. And that, folks, is how it will shake out.
Next up: [Back to] Getting Rich in a Poor Market, Part IV