European integration doesn’t lead to convergence. It leads to financial crises.

Nick Hubble here. I wasn’t quite finished with you on Monday, so Boaz Shoshan let me elbow back in with more today.

Two days ago I showed you how the high priests of Europe’s monetary experiment are abandoning ship. The European Central Bank’s founding chief economist and another former economist both criticised the euro. Even the ECB’s current president has had to admit the project has failed some countries.

Their solution was simple. The rest of Europe needs to catch up with its currency. The EU needs to integrate on things like banking and taxation to make the euro work. After all, if something isn’t working, you just need to do more of it.

The European project has caused so many problems it is now presented to us as an all or nothing choice. Integration or disintegration.

And, as bad as the euro may be, abandoning it would supposedly be worse. “Dystopia” is what former Greek finance minister Yanis Varoufakis called a Europe with many currencies. This from the man who had plans to reintroduce the drachma…

Now, unlike most mainstream economists, I don’t think broader integration would solve many of the problems created by the euro. One exchange rate for Greece and Germany is a very bad idea. One interest rate for Cyprus and Finland leads to a mess in both countries. One bailout policy for Italian and Dutch banks is morbidly amusing. These problems cannot be papered over with law.

And integration of policy other than the currency would only bring up even more problems. One banking law for Luxembourg and Spain would be bizarre. One tax rate for Ireland and France would be problematic. One industrial policy for Belgium and Portugal would lead to strife.

In the end, all this leads to an economic crisis. And that leads to social unrest. Which begets political dramas. The very sort that the leaders of the European project claim to be preventing. The sort you can find on the news after almost two decades of monetary integration.

Which leaves us where we are in realty, not just the hypothetical. A Europe that must integrate to survive, but a Europe where integration causes disruption. Political and economic disruption.

Today, I want to explore what happens if I’m wrong about what happens next. What if the euro doesn’t fail?

What if Europe’s democratically elected national leaders decide their future careers at the EU level are more important than the welfare of the nation they lead? What if the European project continues in the face of all the trouble it’s causing?

It seems unlikely, I know.

One EU political party leader recently told French President Emmanuel Macron to “listen” to the yellow vest protestors. This is a bit ironic given what the protests against Macron are about. They’re against his policies designed to bring France into compliance with EU laws. In other words, it’s the EU that needs to listen. If Macron listened he’d have to turn eurosceptic…

Funnily enough, Macron’s critic at the EU was Manfred Weber, who is set to become the next EU Commission president… The man whose job it is not to listen.

Italy’s Deputy Prime Minister Matteo Salvini also backed the yellow vest protestors of France.

Meanwhile, the French are considering banning protests altogether and a former minister suggested using live ammunition on protestors.

Which begs the question,

Do you hear the people sing?

Singing a song of angry men?

It is the music of a people

Who will not be slaves again!

Things are not going well in Europe when the news is so similar to Les Misérables. Not to mention reminders of the past.

Historically speaking, European currency unions fail when the political movements against them gain traction. It only takes someone to point out that the euro is the cause of Europe’s ills and the people cotton on pretty quickly.

That got the Italian government elected. And handed British euroscepticism legitimacy in 1992 when the European Exchange Rate Mechanism (ERM) failed.

I think that moment is very very close for the rest of Europe. And the team at Capital & Conflict’s publisher Southbank Investment Research are working on bringing you more on that in coming months.

But what if I am wrong?

An integrated Europe would be totally wacko

You’d think sharing monetary policy and exchange rates would be bad enough. A bad enough experience to give up on more integration. But the European project’s leaders have barely started.

A few years ago they tagged on immigration policy and got a political crisis for the ages when refugees stormed in.

What’s next? A joint military?

I can’t really think of a military campaign that Europe’s nations have ever agreed on. Except when they fought each other. So what happens if the EU goes to war? Imagine a nation sending its young to die in conflicts it doesn’t agree with under an EU flag.

Without that capability, the EU military would be meaningless. Someone in the EU is always bound to veto any given conflict.

But an EU capable of deploying its military against a member state’s wishes would create quite a kerfuffle. I can just imagine the drama of some nation’s soldiers boycotting the campaign, creating a logistical and strategic nightmare.

Imagine fighting alongside soldiers whose government doesn’t want to go to war. “I’m right behind you. About 300 miles behind you.”

Perhaps the Europeans will have more luck integrating the banking systems of Europe. But I doubt it.

Before the financial crisis, the main savings bank in my birth state Nordrhein-Westfalen was undermined by the EU’s rules and a court case. Apparently, state subsidies were illegal under EU law, so the bank (not the state government) had to pay a whopping fine for past government support. The bank went on to fail shortly before the Nordrhein-Westfalian taxpayer was asked to bail out Greek banks…

Banking integration does not work across banking systems that are fundamentally different. Applying the same rules to all of them would lead to divergence, not convergence, over time.

Perhaps the EU will do better in its effort to harmonise taxes?

Heh.

What would happen to the Irish economy if it had to implement France’s corporate tax rate? What would happen to the Scandinavian welfare states if they had to harmonise their tax rates with Malta?

What would happen to Italian industry if it had to implement German style union participation in business decisions? The Mafia can’t even collect rubbish in Rome.

The more the EU tries to integrate, the more Europe’s differences will stand out. The more the EU succeeds in integrating policy, the more its economies will diverge in performance. The more divergence Europe sees, the more unrest will break out.

And when that unrest reaches fever pitch, and the European project threatens to end in crisis, your investments will get slammed.

The only question is, when?

It’s easy to label me as pessimistic. But you might also notice I try to make you aware of plenty of alternative ways to make money. And something called the Predictable Profits Summit is the most promising yet. You can sign up here to express your interest and receive two free reports before the summit begins.

If you’re sceptical of the idea of predictable profits, don’t let that stop you. When you sign up to our hotlist, you’ll also receive a third report which explains what we mean and provides the evidence for our claims.

Until next time,

Nick Hubble
Capital & Conflict

Category: Geopolitics

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