Q19 What systemic trends do you see for the EU? Pulling apart or growing together?

New Year’s Eve 2019 Forecast (What’s this?)

I think what’s obvious, and overstated, is the downside risks to the European Union. It’s easy to be bombarded by Brexit news, as well as other separatist and Eurosceptic movements in France, Spain, Hungary and others and think that the EU is struggling or has a dim future.

That’s overstating the case however barring a specific contingency I mention below. England, as a part of the United Kingdom, may be locked in cacophony “f— yo couch!” to one another over the EU, but that’s the exception within the State.  Scotland and Northern Ireland have indicated they actually prefer the EU over England, to the point that another independence referendum post-Brexit may occur in Scotland and Northern Ireland is eying the concept of United Ireland with a “hey…how you doing?”

Because my sense is that the European Union has moved from a new experiment that just began a few years ago to an increasing sense of “this is what it is now and how can we continue to improve it.” This doesn’t mean people won’t still complain constantly at its forms of governance. #SpoilerAlert: Complaining about government is a healthy and normal mode of human behavior. I think what’s going on is like the Churchill effect, members of the EU may see it as the worst possible form of state-to-state cooperation, until they look at all other options.

It’s not like this is the first time the EU will have to adapt to an abrupt departure of an erstwhile dance-partner, Trump has already trained for them that. Germany and France remain vocal advocates, with significant economic heft, and Eastern Europe is going through a bit of an economic revival. Even Hungary, which is like the Alabama of EU (sorry Glas!) with a populist/nationalist ruling party has come out to confirm that leaving the EU is not a serious consideration for them.

This is important to understand when we hear the EU is in trouble, the conflicts are now increasingly occurring within the framework of the EU – with the actual departure of the UK being the exception to the norm.  I don’t see this trend of continuing to grow together changing in the upcoming year subject to two contingencies, both of which would accelerate the trend of growing together.

Both of contingencies have to do with the quasi-state apparatus of the EU. It’s very much still a treaty of sovereign states, much like the original States under the Articles of Confederation after the Revolutionary War.  Notably there is no Federal structure for the use of the military. Crisis management and military activities are governed by a complicated treaty and plan, rather than a unified command similar to the United States. And this works well in the current and recent past situations where between NATO, and within NATO to the United States, to secure Europe.  But NATO doesn’t perfectly overlap the EU, and Trump has left the dance floor. This is at the same time a regional hegemon in Russia has been rising strongly on its eastern borders. I think for years the consensus was that Russia would collapse before the EU would have to deal with it, and what temporary humiliations (like annual natural gas negotiations) were worth the transactional cost of not having to afford a major standing force or open the negotiations up to form a more cohesive force. Fortunately for now Russia may be licking its lips at the Baltics, where a massive buildup forces on either side of Estonia’s borders has occurred. But the near strategy of Russia assimilates non-EU members who were formerly part of the USSR through a Chinese like slow-approach over time. While focusing more kinetic attention southwards into Ukraine, the Black Sea and beyond that opening up a footprint into the Mediterranean I have discussed elsewhere. I don’t see the EU tackling this security issue directly unless President Trump wins another term and then there’s the prospect of four more years, and whatever long tails he builds upon to consider.

The second contingency is that the EU is still not federalized fiscally, even though it has free trade economically. This was brought into clear focus with the crisis of the PIIGS (Portugal, Italy, Iceland, Greece & Spain) that were caught with their pants down by the Great Recession.  Without getting into economics 250, when a common currency is used but independent states are allowed to set their own fiscal policies (e.g. taxation, borrowing & debt) and regional economies vary badness can result. Greece has a much weaker economy than Germany and were it not in the EU it could adjust its currency to reflect a favorable exchange rate to account for such weakness. Tied to the common EU it struggles (much like Puerto Rico struggles with inflexible policies designed for the mainland US).  This causes Greece to borrow, and as it borrows it creates systemic risk across the EU. The PIIGS crisis was resolved through some fancy footwork by EU governors at the time, but not without risk. Germany still feels it got the raw end of the deal, but fortunately economic fortunes have been strong giving some time for countries to get their books in order, and more importantly electorates to forget. When the tide is high it’s hard to see who’s skinny dipping. But another economic crisis, which I am not forecasting to happen in 2020 (see Q9) could cause another reckoning. Again however, I see that as an accelerant for further federalization because one way to solve the fiscal problems I described under Economics 250 is a more federalized structure of with common fiscal policy as well as currency.

Bottom line the EU is strong and cohering and will continue on that trend in 2020. The two contingencies that risk this, both unlikely to manifest, also have a possibility of accelerating federalization and centralization. My mental model of the EU remains as being similar to the United States under the Articles of Confederation. They are struggling with the very problems that existed before the Constitution: no common fiscal policy, no unified security mechanisms. And the evolution of the United States into a federal republic in the Constitution provides a road-map to the EU. And what might have been unthinkable even ten years ago, as people become more accustomed to the reality and benefits of unification – especially in a world where the EU is increasingly on its own, may push it that way.