Where is Europe going?
An old joke from the ‘90s stated that the most boring headline of the time was, “Whither NATO: Canadian Proposal has Merit.” Europe has been struggling with its identity for as long as I can remember. During the Cold War, it was at the center of the ideological struggle between communism and democratic capitalism; since then it has tried to define itself economically, politically, and culturally. Is Europe simply an accident of geography? Or is it something more?
The question has real investment implications. Ever since the financial crisis, the Euro has been under duress. The common currency is at the heart of the European project. A few nations – notably the UK and Sweden – have maintained their own national money. But of the 28 member states in the European Union, 19 of them are in the Eurozone.
What began in 1952 as the European Coal and Steel Coal and Steel Community eventually became a currency union with a supra-national central bank. But the internal contradictions of the Euro have created significant problems: disparate national productivity levels means that some countries do better, economically, than others. This creates labor shortages in some areas and chronic unemployment elsewhere. When this happens in the US, people to or from the affected regions. But in Europe, linguistic and cultural divisions make this less feasible.
Language map of Europe. Source: The Dockyards
The financial crisis also exposed another fault-line. The large institutions that benefit the most from the integrated European markets were the ones that need bailouts in order to avoid a global Great Depression. These bailouts came, ultimately from smaller companies, depositors, and pensioners – the constituents that an integrated Europe depends on in order to survive.
Finally, the Syrian refugee crisis has placed social and economic pressures on the countries that have been the most generous. There is some evidence that mass immigration pushes wages down for low-skilled labor and puts upward pressure on housing prices in both working class and middle class neighborhoods. This only increases people’s economic anxiety – and their skepticism about greater integration.
Photo: Georgios Giannopoulos. Source: Wikipedia
Not surprisingly, then, the EU has suffered a number of setbacks, most notably in last year’s Brexit vote. And it faces further elections, in France, Holland, Germany, and Italy this year. While integration has boosted national economies, the fruits of freer trade have been unevenly distributed. A global trend towards greater inequality has been exacerbated by national policies, which has undermined support for the Euro and the EU. A government that doesn’t have the consent of the governed cannot be effective.
Europe and the Eurozone remain a political project, albeit one with significant economic consequences. The Eurozone is – as a common area – the second largest economy in the world, producing and consuming $12 trillion of goods and services. It matters a lot how the European project turns out.
Douglas R. Tengdin, CFA