Toynbee’s Europe
John Mauldin
In today’s Outside the Box, Charles Gave offers an incisive and absolutely scathing indictment of the latter-day European project. Harking back to the historian Arnold Toynbee, Charles reminds us that “the role of ‘elites’ in any society is to handle challenges that allow the group to survive and move on to the next phase of their shared journey. If bad solutions are offered up then problems will intensify and pressure will arise for a change in the elite.”
In the postwar era, Charles asserts, European leaders have time and again responded to new challenges with old solutions, chief among them being the forced integration of Europe into a single political and economic construct.
And the interesting thing, Charles notes, is that members of the elite are starting to openly admit that they have been making Europe’s problems worse. He gives the example of Mervyn King, the former governor of the Bank of England, who recently wrote that European leaders pushed for the adoption of the euro as a single currency knowing that it would result in economic disaster in Southern Europe.
And then just last week we saw the IMF unleash a torrent of self-criticism about its handling of the eurozone crisis.
“So where does this leave us?” Charles asks. There are two options available when an “unelected mafia” has seized control, he says: elections and revolution. The Brits opted for an election, but what if Italy, Portugal, and/or the Netherlands do the same, with the same outcome?
At this point Charles’ indictment morphs into a warning; but rather than spilling the beans, I’ll let you dig into this brief but important piece.
I am in the air on the way to NYC, and then to catch a flight to Bangor tomorrow.
Trey and I are both pretty excited to get back to Leen’s Lodge for what will be our 10th year at Camp Kotok. There will be no end of topics to chew on, some of them economic and some just catching up with old friends. Looking forward to learning from the debates, which given the composition of the group are a nearly continuous feature of the gathering. If there’s not a debate in progress, you can always just start one up. It’s a good place to toss out new ideas and see who squawks.
Now let me hit the send button and send you on your way to Charles.
Your ready to relax a little analyst,
John Mauldin, Editor
Outside the Box
Toynbee’s Europe
By Charles Gave, Chairman, Gavekal
In A Study of History the great Arnold
Toynbee explained that the role of “elites” in any society is to handle
challenges that allow the group to survive and move on to the next phase of
their shared journey. If bad solutions are offered up then problems will
intensify and pressure will arise for a change in the elite. This can happen in
various ways: through elections in a best case scenario, a change of regime as
with France’s forth Republic which failed to properly handle decolonization, a
collapse in the political structure such as befell the Austrian empire at the
end of WWI, or, most dramatically, the overthrow of a civilization as in South
America with the arrival of the Spaniards or in Egypt when the Muslims took
over.
In Europe, the main problem for a century or more
was the internecine rivalry between Germany and France which led to three wars
that became progressively more destructive. By the time Europe’s exhausted
elites reached 1945, it was obvious that war was not going to solve anything
and hence a new solution was tried in the shape of “political” Europe. The
plan worked to such an extent that new challenges were spawned such as the
handling of Germany's reunification, managing the effects of an aging
population and integrating lots of immigrants from a genuinely different
civilization.
New problems, old solutions
These new challenges required new
solutions, and yet the elites responded with solutions used to handle the
previous challenge, with the forced integration of Europe into a single
political and economic construct. Unsurprisingly, the old solutions have not
worked and indeed their application is making Europe’s various problems worse.
The interesting thing is that members of the elite are starting to openly admit
this:
- Mervyn King, the former
governor of the Bank of England, wrote in his recent book The End of
Alchemy that European leaders pushed for the adoption of the euro as
a single currency knowing that it would cause an economic disaster in
Southern Europe. The idea was that the impact of weakened economies would
force national politicians to accept “reforms” imposed by Brussels. Put
simply, Lord King argues that these elites consciously organized a huge
decline in living standards in the expectation that it would undermine the
legitimacy of local politicians. The problem is that most regular people
(rightly) believe that their state is the best guarantor of their society
being able to “live together”, which is the basic contract binding a
nation.
- Last week the
International Monetary Fund’s independent watchdog offered a scathing
assessment of the agency’s handling of the eurozone crisis with the
allegation that staffers willfully ignored fatal flaws in the euro project
due to an emotional attachment. It became a totem of IMF thinking that in
a common payment area, there could not be a solvency crisis. Moreover, the
“solutions” imposed on Greece hurt the most vulnerable part of society,
causing a collapse in living standards. In an indictment of the IMF’s
competence, its assessments (forecasts) about the impact its policies
would have on the Greek economy were shown to border on the ridiculous. To
boot, the processes followed by IMF staff were shown to be unprofessional
with decisions being taken without proper discussion and documentation.
Our “experts” (the brilliant men of Davos) have
thus been shown to protect their own particular tribal interests, rather than
the common good. These testimonies are part of an revelatory exercise in Europe
which must accelerate a collapse in the legitimacy of both know-better
technocrats and the trans-national institutions, which have been all over the
European project since 2011 with such deleterious effects. As such, not only
the IMF but the European Commission and the European Central Bank have all seen
their credibility decimated.
The really worrying thing with these demonstrably
incompetent institutions is their continued power grab without any proper
authority. Such hubris has seen them break pretty much every agreed rule of
national economic management that existed prior to the crisis (it seems a
quaint detail now that the ECB was not supposed to buy government bonds) in a
bid to sustain a project which is manifestly pushing European economies toward
a disaster. So where does this leave us?
Historically, when an unelected “mafia” has seized
control of the political domain, the two remedial options available to the
citizenry have been elections, and failing that a revolution. As usual, the
British moved first— through an election (England’s last revolution was in
1688). The Brits’ decision to break free should not have been that surprising,
given that in the normal course of events the EU system had been rigged to stop
the genius “elites” from being fired democratically.
Yet for all the significance of the Brexit vote,
the UK is not part of the eurozone and so could leave without dooming the
system. Italy, Greece, the Netherlands, Portugal and Finland, by contrast, are
subjected to that straitjacket. And getting out of the euro implies exiting the
EU. For this reason, the next exit (Italy looks like a prime candidate) is
going to be far more momentous, with very clear investment implications.
The savings of the problematic countries will
likely move to Frankfurt (in expectation of the deutschemark coming back),
London or New York on the basis of a slightly revised Gresham’s law that bad
currency will chase out the good ones. The result will be a big rise in
German M1 and a banking crisis in the weak countries, with banks being bled dry
of their deposits. The value of the pound and the US dollar can be expected to
appreciate. Since it appears that Europe’s banking crisis is already under way,
my advice would be to watch these variables very closely. If the pound and
the dollar start to rise against the euro, it will probably mean that German M1
is rocketing upwards. And at that point the advice would be to adopt the brace
position.
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