Europe ignores its decline—the UK’s future could be different

A new strain of gormlessness is now infecting the continent, with all of the recent problems besetting both America and the BRICS being gleefully and noisily recounted in European newspapers on a daily basis. The stories of these significant difficulties are true, but the reason for their prominent placement belies the current new, intellectual blind alley besetting European analysts. By focusing on other’s problems, Europeans can claim everything is quite ok; as everyone is failing, things are staying the same. And so the continent’s cheerleaders continue to whistle past the graveyard, deluding no one but themselves.

For power, since the days of Pericles, is always relative rather than absolute. Unlike the BRICS and America, the euro-zone has yet to collectively get back to the level of economic output generated in 2008 as the Great Recession hit. Even this hides the extent of Europe’s calamity, as the euro crisis has morphed into a chronic ailment, with Italy, Spain, Portugal, and Greece locked in what can only be described as a Depression. And that is where the debate about the UK’s future in the EU must start, with a sober reckoning of what Europe’s coming trajectory looks like.

Militarily, only two European powers–Britain and France—have full spectrum military capabilities. This—given the existential economic crisis still going on—is highly unlikely to change over the next few decades. While others such as the Dutch have significant add-on capabilities, none is a major military player, amounting to a genuine force multiplier for the UK. Indeed, the only country with the economic wherewithal to theoretically join the club, Germany, will never do so. A common joke at my political risk firm is that defense spending will always be the 16th German priority in any poll…out of 15 choices.

Likewise, politically the place is a mess, and will remain so. France and the Latin countries want less austerity and more solidarity (translation: Germany to pay more without placing onerous conditions on them) while Germany wants exactly the opposite. The euro-elites are pressing for greater integration, even as the UK wants far less. The French are spending their time trying to derail new, ambitious trade talks with the US, while Berlin (despite Snowden) is desperate along with the UK for the talks to succeed. In other words, we couldn’t get the major leaders of Europe to agree on a common ice cream flavor, let alone something important.

Lastly, more than anything else, it is the future health of Europe’s economy that must be gauged. There are only three macroeconomic ways (or a combination thereof) out of the euro mess–predicated as it is on a competitiveness misalignment between north and south–all of them ugly. The first is for the debtor countries to leave the euro, externally devalue their currencies, and return to economic competitiveness. Of course whatever currency Germany was using would soar, devastating its export-driven economy. The bad feelings that would be bound to politically ensue would hobble Europe, quite possibly forever.

The second is for the debtor states to stay in the euro, and initiate a massive internal devaluation, through decreasing prices and wages, enduring further wrenching pain, all the while hoping for future gains down the road. It is an open question as to whether there is the political will to do much more of this.

The third is for the debtor states to stay in the euro, and benefit from a significant increase in prices in the euro-core, one Goldman Sachs reckons would amount to Germany enduring 4-5% higher rates of inflation than the depressed periphery for a generation. And that just does not sound like a policy any Germans I know are ever going to embrace.

There is a fourth option, one recognized by historians, if not by Europe’s many cheerleaders: Europe will not solve its basic problems, and will increasingly become less important as time progresses. Given the military, political, and economic tour we’ve just taken, this is by far the likeliest outcome. Historically states do not always solve their own problems, or we would be living in the world of the Minoans and the Hittites.

Given Europe’s present importance to the UK, the Prime Minister is quite right to try to coax meaningful reforms out of Angela Merkel. However, given Europe’s likely future unimportance, he is also minded not to accept a deal that does not significantly change the future trajectory of a Europe presently on course for absolute decline. 

By Dr. John C. Hulsman, November 8, 2013, City AM London

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