All our yesterdays…

PPF“…have lighted fools the way to dusty death” We cannot know the future for sure but if we look at the past, the present, recent trends and current plans for the EU and our part in it we can make a fair guess. If we are guided by intended outcomes rather than actual ones our guesses are much less likely to be right. If peace and prosperity are the main intended outcomes, how has it gone so far, what is it like now and where will it end?

War and Peace

Europe has been at war, on and off, ever since the Romans withdrew their armies. Here are a few of its historic conflicts:

The Hundred Years War lasted from 1337 until 1453 (116 years) as English kings tried to assert their right, by bloodline, to rule France. Although they had some great victories (Crécy, Poitiers and Agincourt) they eventually lost the fight and withdrew to their island to battle each other for the kingdom of England (War of the Roses), yet they didn’t give up their claim to France until mid-Georgian times. This war was about royal succession, it wasn’t ended by a union.

The Thirty Years War, fought between central European catholic and protestant states within the Holy Roman Empire, lasted from1618 to 1648. Although started by the Hapsburgs against their German-prince underlings it managed to involve the national armies of Denmark, France, Sweden and Spain. This war was about religion, it ended by dissolving a union.  7 years war

The Seven Years War (1756 – 1763) could equally well be called World War Zero since it not only involved Britain, France and Spain but their colonies too in the Americas, India, the Philippines and West Africa. This war was about empire, it too wasn’t settled by union.

The Franco-German Wars between 1870 and 1945 did lead eventually to a union, the European Union, which began thirteen years later. The wars weren’t ended by that union though the vision of Monnet, Spinelli and others was that it would finally ensure peace. In fact the focus of the world had moved away from caring about Europe and its empires, which quickly dissolved anyway. The new confrontation was between the USA and USSR with the Union supported diplomatically by America and financially via the CIA as a bulwark against further Soviet imperialism.

The seventy five years of war followed by practically the same duration of peace between the formerly Great Powers of Europe is not exceptional in the history of our violent Continent. There is no compelling evidence that the EU has, or will, keep the peace. It neither created the peace nor is it possible to show that it has preserved it. Indeed it may be recreating the previous tribulations as nasty nationalisms re-emerge due to failing policies and by ignoring and overruling valid national identities and concerns.

Growth and Prosperity

UK GrowthHad the UK’s growth per head of population followed its trend of the previous two decades before joining the (then) EEC it would be considerably greater than it is now. Instead it declined somewhat and the post-war recovery of the EU6 proved to be a ‘return to the mean’, an accelerated growth rate that ended when sufficient ground was regained. From 1979 until this century’s big crash their growth was rather less that the UK’s on average – Germany’s was higher but partly at the expense of some of the other EU economies because of the Union’s unbalanced structures and processes, especially the common currency. [1]

The UK’s manufacturing sector has grown but is now a smaller proportion of the whole and the deficit in goods trade with its Union partners is now huge. The agricultural sector has been restricted by the unfavourable terms of the Common Agricultural Policy and our fisheries have been marginalised by the Common Fisheries Policy. Meanwhile the Single Market scarcely exists for our strong services sector and the Customs Union does far more to protect sectors important to our neighbours than our relatively free-trade tradition has demanded.

Excessive regulation by the EU has been the result of underemployed, over-eager bureaucrats and powerful lobbyists. Entrepreneurs like Dyson are handicapped by distorted standards designed to protect others. A well-known example is the efficiency rating of vacuum cleaners in artificial ‘laboratory’ conditions rather than everyday use but which the EU fails to rectify; Dyson lost a clear-cut case in the ECJ to change appliance labelling appropriately. Siemens and Bosch may act within the rules, unlike Volkswagen which cheated against the diesel emission standards, but the rules are there because German companies dominate the standards committees in their own interests.

BoilerA less well-known example is boiler efficiency which is typically overstated by about 10% because the tests, like with vacuums, don’t reflect how consumers heat their homes and also by massively overstating how much hot water they use. German manufacturers, Valliant and Bosch have seven members of the committee that designs the tests, which are more suited to a laundry business than a home. Then again they rate the boiler when operating at 35 degrees whereas a British home would run it at 70 degrees for the central heating. The high water usage and low temperature assumptions hugely affect boiler efficiency. The UK’s Building Research Establishment (BRE) believes “there is clearly an acute risk of the EU’s regulations permitting efficiency declarations to be exaggerated” (internal report revealed by The Times, 7 July 2018). This distortion costs consumers and the environment – wasting energy is not a useful form of growth. The BRE used to set British Standards and we have highlighted another example where our own superior standard (BS4814) has given way to an EU Directive with disastrous consequences for Grenfell Tower residents. [2]

Where we are now

Today things are rosy, there is absolutely no risk in buying Italian sovereign bonds for instance. On the surface that may look unlikely but the EU decrees that all national government bonds must be rated by banks at 0% risk. This makes them cheaper because banks do not need to raise extra capital to cover the contingency of default, obviously the Germans will pay if things go wrong, so no worries!

In a ‘looking glass’ world things are seen as the opposite of things in the real world. On the Italian side the risk in buying German or Italian bonds is the same (zero risk), on the financial markets side Banca d’Italia pays more to borrow than the Bundesbank. On which sides of the mirror do the EU and financial markets stand?

Pope FThis reminds us of Papal Infallibility. In this case the dogma of the EU is preserved from the possibility of error when, in the exercise of its offices as the shepherd of peace and prosperity, it defines a doctrine. The main difference is that it may be found out if a state defaults, which indeed cannot happen in EU-heaven. Popes can change their doctrines but only God can prove them wrong, not mortals.

Italy is on a knife edge. [3] The Greeks face perpetual penury within the eurozone. The European Central Bank is virtually out of financial ammo with negative real interest rates and few willing buyers of its troubled members’ sovereign bonds (QE). But that’s just the economics.

On the political side there is Brexit threatening further breakup; immigration fuelling aggressive nationalism in France, The Netherlands, Germany, Sweden, Austria, Poland, Hungary, Italy (though not so much in the UK despite attempts to bracket UKIP with the rest, and anyway its appeal has withered); and the EU is unsure whether deeper union or multi-speed is the solution to the coming crisis, but it’s too late for either to work now.

Trends

The EU has long been a relatively low-growth area and not only because it consists largely of already well-developed economies, as comparison with America shows. The UK currently wobbles above and below the EU average, it was generally higher for about three decades until the 2008 crash and can credibly blame Brexit nerves for its current reduced business investment. Employment, and especially youth employment, is higher both here and in the US. End is nearThere is no reason to believe the EU’s malaise is temporary since the dangers are plain to see, unlike the prospects for improvement. Britain’s prospects can be argued either way but there are reasons to distrust the doom-sayers’ hype. [4]

Meanwhile economic divergence between members continues. Ratings agencies grade Portuguese and Italian bonds as borderline junk while Greek and Cypriot bonds are junk. The ECB currently owns €1.34trillion of Government bonds, much of it wouldn’t be touched by any other buyer.

Politically the EU is not much loved by a large proportion of its population. [5] Rising nationalism, external threats and economic divergence all challenge the stability of the EU and therefore its survival. [6]        

Reading the Tea Leaves

Regrettably we can’t tell you what things will be like fifteen years on, only Philip Hammond and the UK Treasury know that, and then only for the economy. They can’t say whether the EU will exist by then but they do know we’ll be borrowing £80 billion more a year if we don’t do a deal with it now. Still, it’s impressive given the Treasury boffins can’t predict what UK growth will be like six months ahead as we’ve often seen.Forecast-actualThis is why:

Like weather forecasts, economic models are sometimes very wrong. They have a better record of predicting the impact of small changes in the near-term than large “unpredictable” events that break with the immediate past. … Models look at the past to predict the future. It follows that they are most likely to be accurate when it is reasonable to think that the future might unfold pretty much like the past … And like weather forecasts, different models and different institutions make different predictions about what’s going to happen.” [7]  EU ?

The EU may fall apart dramatically if it cannot be seen to enrich its citizens. The political threats may slumber while its national economies are fine but many are not fine and their citizens are revolting – some of them in both senses. Even where the economies are in fair shape voters can see the dangers, especially of having to rescue the unfortunates.

Despite their relative prosperity and liberal traditions anti-EU parties like Sweden Democrats and Alternative for Germany have become significant in their respective countries. Their rise is also a response to loss of control over migration that threatens to dilute or overwhelm their communities’ sense of identity. These fears are now widespread in many countries.

Nelson 1We don’t know what will happen but if we were to place a bet it would be that the EU will be massively changed or even disbanded before we reach the horizon that Philip Hammond thinks he can see so clearly, and if Brexit is bodged this time it will have to be repeated. Unlike Lord Nelson, it might be better if he put his good eye to his spyglass, if he has one.

__________________________________________________

 

[1]       Did the EU Bring Us Growth?

[2]       Shorties-10: Distributed Culpability

[3]       Italy Missing the Target

[4]       Economic Forecasts are wrong

[5]       Spinning Past the Point

[6]       Collapse: Europe After the European Union-2

[7]       https://fullfact.org/economy/budget-forecasts/

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