Why the markets are hesitant.
The US, Roosevelt and Bretton Woods vision of global free trade and freedom on the high seas has been one of the three major US contributors to economic prosperity*. Without them Europe would hace collapsed.
Since the early 1800’s Europe had been an increasingly tribal bunch of war zones. Since 1945, apart from Germany and London, No one had the drive, skills, scale or stamina to compete on the world stage. The European Union was created to meet the need for greater scale and mutual self help. Today this experiment is on the verge of collapse and, as we have for the last 18 months, this column has been advocating readers to “Sell” the UK and “Sell” Europe.
Why has the experiment failed?
In many ways it has been a success. Either the US or the EU is today the largest trading partner for most of the other nations on the globe. The US and EU are their own best customers – total trade exceeds $1.3 trillion p.a. – the EU has a slight surplus of $90 billion. Far from a casus belli, and contrary to the ill briefed American administration, this is barely an error factor in so vast an arena of statistics.
In recent years there have been economic green shoots. Half of member states were enjoying annual growth rates exceeding 3%. But in the last 18 months there has been a disastrous turnabout. It has been fuelled by the slothful failure of Europe’s politicians to confront the reality of their history and their economic imperatives. They have failed to act adequately to the immediate and present threat of poverty and immigration.
The turn about has not been helped by the reckless and unthinking foreign policies of the US.
1. The immediate danger was posed in part by the refugees from the wars in north Africa. But it’s real threat is as a first harbinger of the geopolitical fall out of Climate Change. EU leaders should have realised that as desertification increased across North Africa so there would be an inevitable exodus north and into Europe. They knew of their own poverty and joblessness especially in the South and East – the obvious first landing places for the immigrants. They knew how racist was the tribal history of their nations. They knew that Poland, Romania, and Hungary were virtually monoracial following the purges by Nazi Germany and then the continuing pogroms of the 1950’s and 1960’s – they did nothing.
2. Adapting policies earlier would have helped. Poverty was already their challenge. Climate Change and the African Wars were never someone else’s problem – they would lead to trouble. Letting in foreign looking, foreign speaking, and desperate new faces always needed sensitive preparation – there was none.
And in all these challenges, Europe needed not so much a bale out as the most sophisticated, thoughtful and long term support of its major western all – the United states.
3. US Foreign Policy has however been destabilising. It has questioned the very alliance that enabled Europe’s survival over the last 75 years. It has revelled in taking down democratically elected leaders. Indeed as many of the more polarised nations and their despots have emerged, so this administration has gone out of its way to approve the bad actors. At the point where world trade, Europe and the US were talking up a “Goldilocks” economy about a year ago, they have introduced or threatened tarriffs on trade with Europe and with China – the other great trading force. Finally adding insult to injury, this administration has stolidly refused to recognise Climate Change, despite the evident chaos it is already having here in our own backyard. Europe and China were at a tipping point. Both needed more years of “Goldilocks” to cement the transition from war torn continent** on the one hand and from a backward nation on the other.
So the UK is just 2 weeks away from the catastrophe of Brexit. Germany is threatened with recession. France has lost political coherence. Most of the other nations are in trouble. 9 of them have national debts above 80% of gdp. Climate change is waiting for no man – and – Politics has reverted to the polarised tribalism of the 1930’s.
In all this , the US alone has the economic good fortune to survive as a very large and self sufficient island. It had the farm land, the rivers and oceans, and it owns the world’s currency, at a push it can print its way along the path it is on. But that path is one of unnecessary peril and cost:
– the world provides the US with massive trade at the margin – we benefit from other countries.
– the challenge of Climate Change will not be resolved by any one country alone – we need the collaboration of all.
– we already have treasure and economic ties invested in Europe – we do not want to write thhis off.
– full on collaboration with our two largest trading partners could lead to a new “Goldilocks” world economy. We could help Africa and South America and benefit as the lead superpower.
But we are not doing this.I believe the Market knows this. That is why it has been range bound around a declining trend for most of the last 18 months. There are too many political issues, too many mistaken paths being taken as well as too little trust. Soexpect doubt, caution and delay in the market and expect a hesitant market dithering around a gradual correction.
My next note will explain how this will unfold and what you should do about it.
Have a good day, James.
*The US defence capability gave it the role of ultimate arbiter – it was the judge. The success of its economy showed the way for others to follow – it set a standard.
** The last soviet sodier left Eastern Europe in 1992.