June 10, 2014 7:13 pm

Three events that shaped our world

If there is one lesson from the past 100 years it is that we are doomed to co-operate

Ingram Pinn illustration©Ingram Pinn

This year is the 100th anniversary of the start of the first world war, the 70th anniversary of D-Day and the 25th anniversaries of the collapse of the Soviet empire and the savage crackdown around Tiananmen Square. One hundred years ago, Europe’s fragile order fell apart. Seventy years ago, the democracies launched an assault on totalitarian Europe. Twenty-five years ago, Europe became whole and free, while China chose market economics and the party state. We have now lived for a quarter of a century in an era of global capitalism. But the political and economic pressures of such an era are also increasingly evident.

In 1913, western Europe was the economic and political centre of the world. It generated a third of world output (even measured at purchasing power parity, which raises the shares of poor countries above those at market exchange rates). European empires controlled most of the world, directly or indirectly. European business dominated world trade and finance. While the US already had the largest integrated national economy, it remained peripheral.

To enlarge graph click here

The rivalry among the European powers tore this world apart. The war led to the Russian (and so subsequent) communist revolutions. It shifted power across the Atlantic. It left global economic stability at the mercy of the US, by then the world’s principal creditor. It decisively weakened the old imperial powers. It destroyed European self-confidence. What the first world war had not done, the Great Depression, Nazism and the second world war did. By the time of D-Day, the world economy had disintegrated, Europe was prostrate and the abomination of the Holocaust was under way. Disaster was complete.

The success of the Allied D-Day landings on the Normandy beaches ensured victory in Europe would not lie solely with one of the totalitarian powers. A free and democratic western Europe would emerge under US protection. The postwar division of Europe was a tragedy, though an inevitable one: the US was not going to fight the Soviet Union immediately after its alliance with it. But a now engaged US did protect the freedom of western Europe through Nato and launched the reintegration of the European and transatlantic economies through the Marshall plan, the Organisation for European Economic Co-operation and the General Agreement on Tariffs and Trade. Meanwhile, the creation of the European Coal and Steel Community of six members in 1951 led in the course of time to the 28-member EU of today.

One of the most important fruits of the rise of the US and the moral and material collapse of Europe was the end of the great empires. Almost all of the newly independent countrieshostile to former colonial powers, scarred by the Great Depression and impressed by the apparent successes of Stalin’s Soviet Unionchose to pursue inward-looking industrialisation, driven by import substitution. China, which fell under Communist control in 1949 was particularly enthusiastic for self-sufficiency. But India, albeit democratic, also embraced planning and extensive nationalisation. So, too, did most Latin American developing countries.

While 1989 is not the only year marking the end of the post-1945 divided world, it marked the end of the cold war division of Europe and led swiftly to the collapse of the Soviet Union. Deng Xiaoping had already put China on the road to “reform and opening up” in 1978. But his repudiation of Soviet president Mikhail Gorbachev’s political reforms in the year of democratic revolutions determined the nature of China’s development: a synthesis between a bottom-up market economy and a top-down polity. China’s rise has drawn admiration yet the challenges of raising a country from destitution to middle-income status are different from those of creating a high-income economy.

The salient characteristic of the past quarter of a century is globalisation. Driven on by the worldwide acceptance of the market economy and turbocharged by the digital revolution, humanity has created an economy that is more highly integrated than in 1913, except for the migration of people, which is smaller. Moreover, this has happened not under empire but under the aegis of global institutions, both public (such as the International Monetary Fund, the World Trade Organisation and the EU) and private (transnational companies). 

It has also been an era of achievements, notably a rapid fall in the proportion of people in extreme poverty and the astonishing rise of China and India, with almost 40 per cent of the world’s population between them. In Europe, too, countries that embraced structural reform, such as Poland, have done extremely well (see charts).

This, then, is a world that has come full circle, albeit with big changes along the way. It is a world marked by some familiar stresses: history does not repeat itself but it rhymes.

The Great Recession, like the Great Depression, damaged globalisation, as the McKinsey Global Institute shows in a recent study. Affected by a collapse in cross-border finance, total flows of trade in goods and services, as well as of finance, fell sharply relative to world output. Trade has proved more robust than finance, but even it ceased to rise relative to world output between 2005 and 2012. It is not yet clear how deep-seated this slowdown in globalisation will prove. But given the damage done by the global financial crisis and evident concern about how the global market economy is operating, notably over the distribution of the gains, a bigger backlash than today’s is possible.

Possibly even more important are the political stresses, just as before 1914. The tension between economic integration and political division remain the Achilles heel of any globally integrated economy. Today, Russia defines itself as revanchist and China as assertive. Nuclear weapons reduce the chances of direct military conflict but they do not eliminate it. They would also make the consequences far worse.

If there is one lesson from the past 100 years it is that we are doomed to co-operate. Yet we remain tribal. This tension between co-operation and conflict is permanent. In the past century humanity experienced extremes of both. The history of the next century will be shaped by how we approach very similar choices.

Copyright The Financial Times Limited 2014.

There is life after Europe, but let us stop the triumphalism

By Ambrose Evans-Pritchard

Last updated: June 10th, 2014

(Photo: AP)

The case for British withdrawal from the EU if you are so inclined – is to ensure the Parliamentary self-government of these islands.

It is to uphold democracy at its natural and optimal level, in a nation state forged over the centuries by wars, shared institutions, and the ancestral chords of memory, with a single dominant language.

It is to advance by Burkean steps – or as Confucians would say, by crossing the river through feeling the stones – and to resist vaulting leaps towards Hegelian or Utopian structures that usually end in horror.

It is to protect the English Common Law and the broad principle that anything is permitted unless specifically forbidden (the rest regulated by the constraints of custom and manners), in contrast to a Napoleonic code that loosely starts from the opposite premise and is alien to our way of living.

It is to protect Habeas Corpus against political magistrates. It is to keep the political judges of the European Court at a very safe distance.

Brexit should not be reduced to squalid arguments about a pound of flesh, or quibbling over British payments into the EU budget. Net flows to Brussels are £7bn to £8bn a year, or about 0.5pc of GDP

This is an irritant. One does not cheerfully pay the salaries of EU officials, as well as their tax-free hardship allowances, and the university fees for their children until the age of 26 (unless it has changed since my wife’s day, when she worked for the Commission). But it is not central.

Nor should Brexit be about the alleged suffocation of Britain by EU regulation. As the Centre for European Reform argues in its new report, this is greatly overblown. These rules have not yet prevented Britain from retaining some of the developed world’s least regulated product and labour markets on the OECD index, just as Anglo-Saxon in this respect as the US, Australia, or Canada.

Nor has it prevented Sweden from being one of the world’s most successful economies, nor prevented Germany from conquering global markets with panache (helped of course by an undervalued currency).

Many of Britain’s regulations are tougher than the EU benchmark. The UK’s bank ratios are far stricter. Britain’s land use rules are among the least free-market in the world, and are the key reason why half as many houses are built today as in the 1960s and why great numbers of people live in broom cupboards. It is why British transport infrastructure is always struggling to catch up.

As the CER argues, Britain would not be emancipated from the dead hand of the Acquis Communautaire on leaving the EU, if it wished to carry on trading broadly as before. Switzerland drafts its laws with one eye constantly on compliance with EU norms. “The regulatory sovereignty that would supposedly flow from leaving would be largely illusory,” it said.

There would be no bonfire of the diktats unless Britain were willing to withdraw to scorched-earth defensive lines, a minimalist WTO trade status with 15pc average tariffs that would kill foreign investment in the UK overnight.

Britain would not inherit the EU’s trading treaties with China, the US, Brazil, Russia, Turkey, or anywhere else by some kind of natural rightquite apart from our trading treaty with the EU itself. Each one would have to be negotiated again, from a position of relative weakness.

So let us stop this triumphalism and disregard for what Brexit might entail. Britain has let itself become deeply enmeshed in the European system. If the British people wish to embark on such a drastic course of action, they must not delude themselves about the implications.

Some readers have taken umbrage at the headline on my news piece last night. The term Wise Men has prompted fury.

Just to be clear, the report was written under the guidance of a commission that included Sir Nigel Wicks from the British Bankers’ Association, Simon Walker from the IoD, ex-MPC member Kate Barker, Prof Kevin O’Rourke from Oxford, Prof Wendy Carlin from UCL, Profs Nicholas Crafts and Andrew Oswald from Warwick University, Profs Paul De Grauwe and John Paulson from the LSE, Blackstone’s chief Gérard Errera, BT chairman Sir Michael Rake, and Jonathan Portes from NIESR, among others.

As for my own view, I am broadly in favour of the Brexit as matters currently stand. This is on the grounds that the EU has slipped its democratic leash and cannot be trusted after repeatedly overriding the verdict of voters, culminating in the suppression of the Dutch and French No votes on the European Constitution and the repackaging of the same text as the Lisbon Treaty (which I regard as illegitimate, to be defied on principle).

Monetary union has put the EU and Britain on irreconcilable paths. The logic of EMU is further fiscal union that must acquire the features of a unitary European state over time if it is to hold together. There is no conceivable place for Britain in this destiny, so the sooner we clear this up the better.

Yet let there be no mistake, withdrawal from the EU would be traumatic and fraught with risk, though just how traumatic would depend on the civility and statesmanship of British leaders at the time, and the tone of Parliament and the press in this country. Do we leave in sorrow and a hope of friendship, or do we leave in anger amid a mood of tub-thumping, beer hall, nationalist hysteria? Therein lies a great difference.

It can be done, but it means acquiring a new business model. Much of the FDI investment flowing into Britain is contingent on EU market access. The Japanese and European car factories in Britain are designed to supply the European market, and even fixed plants are more footloose than you may think.

The City flourishes in part because global banks and funds can use London as a regional hub to branch out across Europe. There is a long list of great financial centres that have disappeared almost overnight due to political error, like Antwerp in the 1550s.

The question for the City is whether Brexit is the greater risk, or whether it is even worse to stay in the EU as it seizes on the Lehman aftermath to force through a much more restrictive regime for the future.

It is an article of faith in Europe’s political circles that “speculatorscaused the EMU debt debacle. This is of course a canard. The origin of the crisis lies in massive current account imbalances and an EMU-induced flood of capital into southern Europe, all made worse by contractionary policies ever since. But that is what they believe.

The CER report glosses over the systematic assault on areas of the City, an attack launched under the guise of making finance safer. It began with rules for hedge funds that are almost entirely based in London (80pc of the EU total) and which were falsely blamed for causing the crisis.

Three new bodies have been created to control banking, securities, and insurance. They have powers to overrule a national veto when push comes to shove, ending 300 years of British control over the City. We are suddenly in a new dispensation.

The attacks on the City violate the long-established rules of the game in EU affairs, that no country is ever overruled on an industry where it has a dominant stake and is Europe’s leader, whether cars for Germany, farms for France, or finance for Britain.

The CER argues that the City is intricately woven into EMU bond markets and the mechanics of monetary union, and therefore has as strong interest in remaining in the EU. But this is double-edged. If you think that EMU is a trap that must ultimately drive debt ratios through the roof and lead to a chain of sovereign defaults on a colossal scale, then the sooner the City extricates itself, the better.

There is no doubt that Brexit would amount to a trade shock. The UK would be in chaos until the dust settled. Yet this cannot be the end of the matter. Nations have to take a large view of events. It is surely not the beyond wit of a future UK government to sort out Britain’s trading relations with North America and the biggest economies of Asia within a couple of years.

“If we left the EU we would be like Canada or New Zealand or any other trading country. The idea that we have to be locked into the EU because we are geographically close is absurd,” said Tim Congdon from International Monetary Research.

The EU might be vindictive but it strikes me that pro-Europeans are on a losing wicket hinting at any such behaviour, for that is to argue from fear. The more likely outcome is that they would strive to minimise the damage and avoid any course of action that might push a string of Northern states closer to the exit.

My chief objection to the CER report is the implicit assumption that the EU would carry on as before after Britain left, as if nothing had happened. This is implausible. The EU is already in existential crisis. The Front National won the French elections with calls for an immediate restoration of the franc and a referendum on Frexit. The Franco-German axis that has held the project together for 50 years has broken down.

By launching the euro before the EMU states were ready or able to withstand the rigours of monetary union, and then letting the North-South chasm widen each year, they have led the region into depression and mass unemployment. There is no way out of this under any of the policies being advanced. The Fiscal Compact ensures that it will go on for another decade or more. This is an intolerable situation. Italy’s Matteo Renzi is already spoiling for a fight.

It is far from clear what the EU will look like in 2017 when Britain holds its referendum (unless Labour wins). By then the global cycle of economic expansion might be over, with Europe back in another deep recession before it had ever really shaken off the last one.

British withdrawal would not only puncture the EU Project’s aura of historic inevitability but would also change the internal chemistry of the Union. Germany would be placed in a position of hegemony that it does not want, and that would subvert EU cohesion. It would make France’s subordination even harder to endure, and embolden the Souverainiste camp to look for other solutions. The pro-market states of northern and eastern Europe that tuck in behind Britain would lose their footing.

The whole enterprise would become even more unstable at a time when it has already lost its charisma as a motivating idea for the European peoples. I reject the premise that the EU would be calling the political shots in such circumstances, or that Britain would necessarily be a supplicant pleading for terms. The residual EU would be in such crisis that it too would have to tread with extreme care, assuming it was able to come up any coherent terms at all.

If Britain were to throw open its commercial borders and relaunch itself as a free-trade island with no tariffs against anybody, the tables might be turned over time. It might even be the catalyst for a great national renewal over the next quarter century.

When the Tudors lost Calais in 1558 and finally relinquished all claims on their French possessions six years later at the Treaty of Troyes, it was viewed as an English calamity. It proved to be a Godsend.

The English people ceased to waste their energies on endless entanglements in Europe and embarked on an entirely different course as a seafaring nation with trading ties across the world. The 1570s and 1580s saw an explosion of worldwide expansion by Raleigh, Drake, Gilbert, and Frobisher. Of course there is life after Europe.