THE EUROPEAN UNION IS SHIFTING AND TAKING ON FUTURE RISKS. IS THE REWARD PEACE?

by | Nov 1, 2023

We don’t have to cast our minds back too far to understand that Europe has been through a very challenging last few years both politically, socially and economically.

  • Politically, like many countries in “the west” they are fighting ideological battles along “libertarian” or “conservative” view, which have created heated and likely unsustainable dynamics within the region. The last decade has had more of a liberal slant to the political decision making. We are seeing a swing back to conservative or alternative views in the face of the arising challenges.
  • Socially, there is unrest in many places in Europe for different reasons. The southern European states are dealing with massive migrant influx from Africa and the middle east which is causing frustrations across the board. This is also taxing the European economic system and driving wedges in political views, creating strong points on the “left” and “right” with less middle ground being found among voters.
  • Economically the war has taken its toll. Trying to transition to renewable energy to quickly and high inflation have caused economic pressure on the middle to lower class of Europe which also disrupts political and social patterns even further.

Old concerns, fresh twist:

The European union has been a zone where certain countries that contribute more economically than others. This is coupled with (not so popular) decision making happening in Brussels which then affects sovereign states (think Brexit). This has been a volatile alliance from the start, but now things are kicking into another gear off the back of the Russian war. The European union is thinking of expanding for greater Euro security, but it comes as a large cost.

The current members of the zone have formed an economic grouping so they can be a bigger power on the world stage. They’re starting to discover that economics without military power brings certain dynamics into the region. Russia and its expansionist ambitions highlighted this.

Global Geopolitical strategist, Peter Zeihan, goes on to explain it as follows.

“The union is looking to their east, and they see a whole lot of states that are either directly threatened by the Russians are at war with them, like, say, Ukraine, and they’re coming to the conclusion very quickly that if they don’t let these countries into the EU, it’s going to actually cost them more the long run. So, on the 5th of October, they are meeting with all of these governments to see what they can do.

And then on the following day, all the Europeans are meeting without the potential new members to figure out what they need to change about the EU in order to let these countries in. The issue is the identity of the European Union has always been a peace project in the aftermath of World War Two. They tried to create a Europe that was United, free and at peace, and it broadly worked.

But that environment is now gone, and things need to change. So, the biggest problems they have, or there’s two big ones. Number one, a lot of these states have weak rule of law and are fairly corrupt. And number two, a lot of them are heavily agrarian and courtesy of some of the evolutions of the EU early in its development.

Until very recently, over half of all EU funds were given as agricultural subsidies. That’s down to about a third now, but still a huge chunk of the budget. And all these countries would basically absorb every scrap of cash that the EU would have. In addition, EU decision making is founded on national vetoes for any sort of big issue like enlargement or taxes.

So tiny little Greece can veto, for example, Greek bailout terms that they don’t like, which has led to the organization kind of being an institutional pygmy when anything real is involved and they tend to squabble about the most irrelevant things, such as, say, cheese policy. So, if this is going to work, if the EU is going to matter, if the EU is going to survive, a lot of this needs to change and it’s not necessarily the countries that they’re looking to admit that need to do most of the changes.

They need to get rid of a single member veto, which means countries like France can’t shape the union to their liking anymore. They probably do get a little bit softer and things like rule of law and corruption, which is going to be of a problem because there are already countries in the EU that are backsliding quite a bit with Poland and Hungary being at the top of that list.

And they have to change the financial system so that it’s not just all going to relatively nonproductive of farmers or to big conglomerate farmers in places like Ukraine. So, this is one of those situations where the world that the EU was built for doesn’t exist any longer, and they’ve got to decide if the EU can change in order to adapt to that world and shape it on the other side”.

Brave new world emerging:

About a year ago I started chatting to fund managers about my concerns about the falsification of Chinese data and the collapse of their housing expansion alongside toughening Chinese consumer savings.

A year later, we are starting to see fractures in the Chinese story. Their social fabric is thinning and the model they currently have applied is unsustainable. I will write about this in a future article. Essentially China tried to build their way to a successful future. They tried to force modernise their rural community, whilst putting draconian laws in place for social security, child limiting, aggressive communism and harsh covid measures. Their housing projects have created a mountain of debt, and the Chinese people don’t seem to be able to work their way out of it. In other words, the state spent too much money and the people can’t pay the cheques. The issue is that China is not a transparent system and so the real data is not readily available. Watch this space.

India is the new China:

India is playing the kingmaker in the global power struggle. They have come a long way in the last 20 years and represent a much more sustainable third world rising superpower. They have played the last 5 years out brilliantly by being a part of the BRICS, but at the same time strengthening ties with the west. Out of all of the BRICS, India is likely to emerge the leading power as time goes by. I’ll write more on this in coming articles.

Lack of accountability hurts credibility:

The United States and Canada (recently France but for different reasons), are battling political legitimacy with their voter base due to lack of prosecution on acts of criminality and also accountability to overuse to missteps of power. This is polarising the voting base even further to the left and right and creating an “us and them” type of situation. The age old saying of a house divided can’t stand, seems to be an oncoming reality for certain part of the States and Canada.

This also creates tension in global terms where America and Canada lack credibility to speak into volatile and sensitive matters globally because of the hypocrisy they display in their own home nations.

Where too from here and what’s likely?

This starts to create a consolidation period where the world actually moves into a period of some form of de-globalisation and new trade blocks possibly forming.

Countries become a bit more self-autonomist and try to “inhouse” things that were previously outsourced. The world found out the hard way that when a country you rely on goes to war, all bets are off and you are left with a gapping hole in your energy plan, which drives industry, which drives the economy. (Germany and Russia).  Other different examples exist.

The BRICS want to form a new trade block and get away from the Dollar. I have serious reservations of if they can actually pull this off. Most of the BRICS can’t manage their own counties very effectively, and they collectively need precisely that set of skills to function at a higher level as a collaborative economic power. Are they going to just suddenly start governing well? Or who is going to rule the roost? Will China play second fiddle to Africa or the Middle east? You need more than wanting to rival a currency to keep an alliance of volatile nations together. Until they have a credible plan to determine how to put the “horse before the cart” I can’t see anything major happening here.

If they actually wanted to form a new trade block, they would do well to provide incentives in joining the new trade block. If all the nations that want to join BRICS do join, BRICS will have the vast majority of oil production within the world. So, for example, getting preferential oil prices may be a great draw card. Reduction on tax and trade agreements will help provide security etc. A currency is a measure of value of the underlying country at some level. If you want something else that rivals the Dollar, you better have a solid value offering to support this. Until such a thing emerges, this is mainly talk.

The world is dynamic and there are shifts coming that may challenge the order of things. I’m keeping an eye on them and will report back any opinions and findings I have.

The world is not a boring place, that’s for sure. Go well and until next time.