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Can the EU be unscrambled?


On June 23 2016, two days after this is posted, British electors will make a historic decision, which will affect the peoples of Europe and America to a degree they do not yet appreciate.  The result of the UK referendum on whether to remain in the EU, or leave it, is still highly unpredictable; as are the consequences of either decision.

Here are nine questions to set the context:

  1. Can the EU be unscrambled?

Parag Khanna, the visionary futurist, has no doubt.  “EU countries,” he says, “are functionally inseparable, an egg that cannot be unscrambled.  Their monetary system, transportation routes, energy grids, financial networks, and manufacturing supply chains are all heavily integrated.”

In Khanna’s view, this is all part of a mainly benevolent global script, whereby cities and regions are becoming closer connected by all kinds of networks – digital, supply chains and other trade networks, gas and oil pipelines, high-speed railroads, electricity grids, new roads, bridges and tunnels, and flows of goods, capital, people, and  information.

I will explore the useful insights and implications of Khanna’s book Connectography in my next blog.  Broadly he is right – more connections and more trade increases the comparative advantage of different parts of the globe and their wealth.  This is hardly a new insight, derived as it is mainly from Adam Smith (1766) and David Ricardo (1817).  But Khanna shows in some ways I had not appreciated how this is playing out today, and who the winners and losers are.  I’ll cover this next time.

For the moment, however, I will pause and say that the trouble with Khanna’s broad sweep is that he gets a lot of the detail and implications wrong, and nowhere worse than when discussing – with a breath-taking combination of banality and false assertion – our dear old European Union.

According to Khanna, “EU countries are functionally inseparable, an egg that cannot be unscrambled.”  It’s a curious metaphor.  If anything is being scrambled, it is the nations of Europe, into one entity, a kind of United States of Europe.  If they are scrambled irrevocably, this implies that Europe exists, but the nation states that used to exist no longer do.  Some people might hope that will become true, and other people would fight it with all their strength.  But the idea that it is already true is nonsense.

If it were true, there would be no difference “functionally” between the French and the Germans, between Brits and Belgians, between the Portuguese and the Polish, and so on.  This is just not true.  Each of these peoples have their own cultures, traditions and values, and they are far from similar – as for example demonstrated by the work of the great Dutch sociologist Geert Hofstede.

While nobody has noticed it, have centuries-old democracies would have been abolished, to be replaced by a new dictatorship ruling the whole Continent?  Not yet.  If the EU was scrambled, then the electors of the United Kingdom could not be deciding whether to leave it.

What about the other “scrambling” cited by Khanna – the EU countries’ “monetary system, transportation routes, energy grids, financial networks, and manufacturing supply chains” which are “all heavily integrated”.  Leave aside the euro – I will come to that later.  The other elements are somewhat integrated, but still somewhat separate; and the integration, to the extent it exists, stretches beyond the EU countries too.  Norway and Switzerland, for example, which lie outside the EU, are integrated into these systems just as much as France and Germany, and rather more than certain EU countries such as Portugal, Malta, and Greece.

If the UK left the EU, it would be no less integrated into European transport routes, energy grids, financial markets, and supply chains.  The railways would continue to run.  The Channel Tunnel would not be closed.  The Portuguese factory making wooden toys for one of my British companies would carry on doing that.  Such connections flow from agreements between individual firms and other individual firms, or sometimes individual cities or countries and others, and not between countries and the EU.  If the latter were true, the EU would be even more tangled, ungovernable and moribund than the USSR just before it fell.

Global integration is a pluralistic matter, a patchwork quilt of literally millions of separate agreements between decentralized actors, not deals stitched up by governments.  Different EU nations have starkly contrasting degrees of connection, both within and outside the EU.

Germany is enormously connected, both within and outside the EU, to partners with whom it trades goods and supply chains to a prodigious extent.  According to the McKinsey Global Institute, Germany has a Connected Index score of 110, compared to China at 62, and the United States at 36.  But Portugal has relatively few good connections, either to other EU countries or beyond them.  Germany would flourish even if the EU was suddenly abolished; and Portugal, as I will argue later, would almost certainly be better off.  Connections do not come automatically because of the EU, and would not disappear if it did.

The EU has not been scrambled.  If nation states wish to leave or dismantle it, or reform it to take out its objectionable characteristics, they are free to do so.   In another ten or twenty years it may be a different matter.

  1. Is the European Single Market a good thing?

Free trade is good.  It is the basis of the enormous expansion of wealth since the eighteenth century.  It is wonderful, marvellous, and priceless.  It conquers poverty, and enriches everybody.

The EU encourages free trade within Europe, but is less generous to other regions.   Virtually the only goods many African countries can trade are agricultural, and these goods are competitive with European farmers.  The EU hands enormous subsidies to French farmers and others within its borders; and keeps cheap food from Africa and elsewhere out.

On balance, though, the single European market increases the flows of free or relatively free trade – and is therefore a very good thing.

The Common Market existed before the EU, and would probably continue to exist after its demise.  The Common Market is in every European country’s interests, and if Britain left the EU, it would be able to negotiate access to the single market, as Switzerland and Norway have done without joining the EU.

  1. Does the EU’s inexorable expansion plan make sense?

The EU is behaving like an old-fashioned empire, which is highly ironical.  The institutions which later morphed into the EU were set up after the Second World War, as a way of overcoming the historic enmity between France and Germany.  Under Hitler, Germany had tried to conquer the whole of Europe, and very nearly succeeded.  The European experiment was a wonderful way of reconstructing Europe so that common prosperity could bury the enmities that had nearly destroyed the world.

In the first thirty or so years, the European experiment was an enormous success.  Without any question, it was a very good thing.

But then – the EU went mad, almost as though it was infected by the plague it had destroyed.  The EU’s leaders now believe that the more territory it absorbs, the better.  Thus already countries quite unlike Western Europe, such as Bulgaria and Romania, have already been taken into the EU.  The latest plan is to bring in Turkey, a huge nation which is half-European and half-Asiatic.  The EU has also seen fit to try to influence events in Ukraine, where corruption is rampant and which has always been a Russian satellite.

There are two fundamental issues with the EU’s imperialism.  One is that the countries that are already absorbed, and proposed to be absorbed, are quite unlike Western Europe – in the state of their economies, in their democratic maturity, in the standards of their public life, in their degree of corruption, and in their lack of equality between citizens.  The second issue is that all the inhabitants of these countries, once they enter the EU, qualify for residence in all other EU countries.  I will discuss below whether this is a good or bad thing.

  1. Does the quest for Ever-Closer Union between EU countries make sense?

The leaders of the EU are committed to seeking “ever closer union” between its member states.  If this means anything, it means that there will eventually be a common economic policy, to which the euro with its common interest rate regime across the twenty-eight current members – with the single exception of the United Kingdom – is already a half-way house.  The other half of a common economic policy is a common taxation regime, which would imply that the member states give up the ability to direct their economies separately.  If there is ever a common economic policy, this would be the end of the democracy of sovereign states, with annual budgets enshrining the principle of “no taxation without representation”.  Representation within an amalgam of twenty-eight – or by that stage perhaps thirty or forty – separate countries would be no representation at all, since everything would be decided at the central level, or by horse-trading within an artificial and ungovernable “European Parliament”.

The result would be that no individual nation would get what it wanted, and the individual citizen in every country would be effectively disenfranchised.  This would be particularly true because of the activities of the European Central Bank, which has already forced one member state – Greece – to effectively cancel its democracy and impose an economic policy dictated by the central bureaucracy of the EU, speaking with a heavy German accent.

It should be apparent that the powers-that-be within the EU are remorselessly trying to pursue two policies that are totally incompatible – ever-greater expansion, and ever-closer union.  As the EU expands into countries that are at an earlier stage of economic development – including some countries that are scarcely viable economically, according to Western European standards – the task of ever-closer union becomes ever more impossible, socially, culturally, and economically.   Even with the current size of the EU, ever-closer union would mean the death of democracy.  With expansion beyond its current size, the EU risks becoming ungovernable and/or forcing the richer countries of the North and West of Europe to secede, as their electorates baulk at the ever-greater cost of subsidizing the newer entrants to the EU as well as the existing problem-children of Italy, Spain, and Greece.

  1. Is the euro a good thing?

For the traveller and the business-person, a common currency is certainly convenient.

But it comes at an immense cost – making the economies of the weaker countries unviable, and causing huge unemployment there.

Because trade unions naturally protect their existing – older – members, it becomes very hard for young people in Southern Europe to get a decent job.  Youth unemployment in Greece and Spain approaches half of all people under twenty-five, and Portugal is not far behind.  Poverty amongst young people and less skilled older people in Greece and southern Italy has to be seen to be believed.  Crime, prostitution, and emigration are the only options for many.

Before the euro was introduced in 1999, countries with weak economies could stay afloat by allowing their currencies to depreciate, causing exports to become cheaper and imports more expensive. With the advent of the euro, this price mechanism, which is central to trade between weaker economies and stronger ones, ceased to operate.  Rising unemployment and national indebtedness was the inevitable consequence for the weaker countries.

The current system has huge benefits for the stronger countries within the euro – principally Germany, Austria, and the Netherlands.  Germany in particular, which has competitive advantage in many engineering-based industries such as car manufacture, is able to export its goods at prices that are attractive, because of the euro.  If the mark was still its currency, Germany would have a steadily appreciating currency and its exports would fall.  Effectively Germany has zero unemployment as a result; its natural level of unemployment is being exported to Southern Europe along with its cars.

Not all the economic ills of Greece, Italy, Spain or Portugal flow from the euro.  There are structural problems because of entrenched union power, inflexible labor markets, lack of competitive advantage in growth markets, lack of a high customer service culture, the dead hand of massive state and regional bureaucracies, and a dearth of experienced entrepreneurs.  All of these disqualifications applied before the euro; and they apply still.  But the euro removed the safety valve of currency depreciation, the crucial mechanism for allowing trade between strong and weak economies and therefore keeping the latter alive.

  1. Will Southern European countries leave the euro?

Sooner or later, they will have to.

The problem is that they are bullied into staying in the euro, for fear that leaving it will trigger expulsion from the EU.  This is because the strong countries within the euro benefit massively – for weak countries, staying in the euro is the price for being subsidized by massive grants, loans, and other hand-outs from Brussels; and for freedom to move to the rich countries.

Ultimately the price will prove too high.

  1. Is freedom to migrate within the EU a good thing?

Yes.  Ultimately, freedom to move to richer countries is a form of economic development, as well as a precious right for energetic people determined to better their lives.  And history shows that economies always benefit from large-scale immigration.  This was why the United States became such a powerhouse in the nineteenth and early twentieth centuries.

Free trade in people makes as much sense as free trade in products and services.

But there is a problem of absorption.  Migration within the EU is not random.  The migrants come from the poorer countries and go the richer ones.

And here we come to the nub of the problem.  For centuries, national states have defended their borders against invaders.  In the last century or so, nation states have retained control over immigration, as the necessary precaution to avoid social unrest and hostility to new arrivals.  It is a delicate balance between an economic good, the economic benefit to both immigrants and the existing population, on the one hand; and a social and political reaction if immigration is too great or of people too diverse and different from the host population.  Experience shows that cultural problems can be overcome, and the host nation ends up richer socially and culturally as well as economically.

But to require nations to give up control over immigration, as the EU has long done, is contentious when the numbers rise dramatically, as they have recently.

What seems to me sensible is to give EU countries the freedom to determine their own immigration policy, but with a points-based system giving a large but not necessarily decisive advantage to applicants from other EU countries.

If the EU were serious about reform, it would have implemented such a policy already, instead of trying to foist a large number of migrants on individual member-states by compulsion.

This will end in tears.

  1. Is national sovereignty an outdated concept?

Nation states are not everything.  As Parag Khanna has shown, cities in particular are becoming as important as nations, at least economically.

But Europe is one of the most diverse places on earth, culturally, historically, and politically.  Each country has its own culture, values, and identity.

Politically, Europeans are united on one thing only – that they will never give up the central role of their own national parliaments.  If they have to leave the EU to retain control, they will do so.

  1. Should the UK leave the EU?


For the sake of Europe – to jolt the EU into serious reform and a recognition that the existing “deal” between richer and poorer European nations is unsustainable.  The euro must go, to allow Southern European countries to recover and employ their own young people.  Freedom of movement must be a qualified right, as it is everywhere else on earth between sovereign nations.  The budget and the power of EU leader-bureaucrats must be clipped.  The sovereignty of individual states must be respected in perpetuity.  And the EU must stop behaving like an old-fashioned imperialist, greedy to expand its reach into unsuitable countries.

 Image credit – Pixabay