American politics

The promise and the perils of impeachment

In America Nancy Pelosi has moved against President Donald Trump. It is not the moment to cheer

AMERICA ALMOST didn’t have a president. The men who arrived at the constitutional convention in 1787 brought with them a horror of monarchy. Absent a figure of George Washington’s stature, the young country might have adopted a parliamentary system of government. Yet having created the office, the founders had to devise a way to remove presidents who abuse their positions—not all people are Washingtons.

They defined the mechanism: an impeachment vote in the House, followed by a trial in the Senate. The question of what exactly a president should be impeached for—“treason, bribery or other high crimes and misdemeanours”—was deliberately left to Congress.

Hence, though impeachment is a constitutional provision, it is also a political campaign. That campaign began in earnest this week when Nancy Pelosi directed her Democratic colleagues in the House to begin impeachment hearings into President Donald Trump. This will not necessarily lead to impeachment. In the past, though, impeachment hearings have generated a momentum of their own. The process is fraught with risks on both sides. One thing seems certain: the process will further divide a country that is already set against itself. 
Ms Pelosi has taken such a momentous step because she believes the president’s behaviour towards Ukraine’s government crossed a line. If that seems an obscure reason to contemplate unseating a president, remember that impeachment proceedings against Richard Nixon had their origins in an office burglary and the ones against Bill Clinton began with an affair with an intern.

Mr Trump appears to have let Ukraine’s government know that relations with America, including the supply of aid, depended on it pursuing an investigation into the family of a political rival—that would be more serious than a break-in or a fling. It would mean the president had subverted the national interest to pursue a political vendetta.

The federal government often gives foreign powers promises of aid in exchange for doing something that America wants them to do. The Ukraine case is different. America has an interest in ensuring that Ukraine is able to defend itself against Russian aggression, which is why Congress came up with a package of $391m in military aid for its newly elected government.

Mr Trump acted against the national interest in putting that aid on hold, while pressing Volodymyr Zelensky, Ukraine’s president, to investigate Hunter Biden, who had business dealings in Ukraine and is the son of the Democratic front-runner, Joe Biden. If that were not clear enough, Mr Trump also sent his personal lawyer to meet an adviser to Mr Zelensky and repeat the message.

In a country as corrupt and vulnerable as Ukraine the link between American support and investigating the Bidens—you give us dirt on Joe and we’ll give you weapons and money—did not need to be explicit to be understood. “I also want to ensure you that we will be very serious about the case and will work on the investigation,” Mr Zelensky told Mr Trump in a call on July 25th.

You might have thought the Mueller investigation into his campaign’s dealings with Russia would have made Mr Trump wary of dallying with foreign governments. It seems not. His conduct looks a lot like bribery or extortion. And to use taxpayer funds and the might of the American state to pursue a political enemy would count as an abuse of power.

The founders wanted impeachment to be a practical option, not just a theoretical one. Otherwise the president would be above the law, a monarch sitting on a throne for four or eight years.

Declining to impeach Mr Trump would set a precedent for future presidents: anything up to and including what the 45th president has done to date would be fair game. Republican partisans should consider to what depths a future Democratic president, thus emboldened, could stoop.

It would also signal to America’s allies and foes that snooping on Americans who are influential or might become so was a fine way to curry favour with a president. There would be no need for the dirt even to be true. Russia and China, are you listening?

Such are the risks of ducking impeachment. Yet the risks on the other side—of pressing forward—are great, too. Voters expect impeachment to be a last resort, not a trick by one party to remove a president from the other, or a means for the losers of an election to frustrate its result. House Democrats risk looking self-indulgent as, rather than getting on with fixing infrastructure or health care, they obsess over the minutiae of internal White House communications.

The hearings may spin out of control and make Democratic politicians seem ineffectual and obsessive, as the stonewalling testimony of a former Trump aide, Corey Lewandowski, did last week. The hearings may also be too confusing and rancorous for the public to follow.

Even if the House did decide to impeach Mr Trump, it is highly unlikely that he would be found guilty by the two-thirds majority needed in the Senate, where Republicans hold 53 of 100 seats. Legally, Mr Biden junior’s sleazy dealings in Ukraine have no bearing on whether Mr Trump abused his office. Politically, though, the two are linked because they give Republican senators minded to defend Mr Trump a handy set of talking points.

A failed impeachment that leaves Mr Trump in office might not be much of a deterrent to this president or to a future one. In fact it might even help Mr Trump, who could argue that he had been found innocent after a partisan witch-hunt by loser-Democrats. Until this week that was the calculus of Ms Pelosi and House Democrats from competitive districts. It is not clear that public opinion has yet shifted enough to change the equation. Though it may be bravado, Mr Trump’s campaign team has always insisted that the more Democrats talk about impeachment the better it is for the president’s chances of re-election in 2020.

Cast the die

Faced with such a daunting choice, Ms Pelosi had until now held back. But Mr Trump appears to be becoming more brazen as re-election draws near. The president’s behaviour needs investigating, with the extra authority that the impeachment process confers. Better, therefore, to lean towards principle than pragmatism. But it is a risky and perilous path.

Lagarde’s Edge Is Europe’s Opportunity

The eurozone economy urgently needs a more comprehensive pro-growth policy approach at both the national and regional levels, or else a second lost decade will be all but assured. Hope for the continent now rests squarely on the shoulders of Christine Lagarde, the highly accomplished incoming president of the European Central Bank.

Mohamed A. El-Erian

elerian117_ALBERTO PIZZOLIAFPGetty Images_draghi lagarde

LONDON – A highly regarded doctor assumes the care of a chronically impaired patient who is growing weaker and more vulnerable. The patient’s longstanding treatment is not only becoming less effective; now it is also introducing harmful side effects. A better approach exists, but it is not available at the new doctor’s hospital. And in the facilities where it is available, the doctors are too distracted to take on the case.

The new doctor is Christine Lagarde, the widely admired former managing director of the International Monetary Fund who will soon succeed Mario Draghi as president of the European Central Bank (ECB). Her challenge will be to avoid a second lost decade of low, insufficiently inclusive eurozone growth. How the patient fares under her care – and whether she can get key eurozone governments to provide the necessary treatment – will define not just her own legacy, but also that of Draghi.

There is now little doubt that the European economy is losing momentum. The earlier, overly optimistic prognosis of a sustained growth pickup has finally given way to the grim reality that both structural and cyclical headwinds are bearing down on economic activity. The previous consensus growth forecast of around 2% for 2019 is now converging on around 1%; it could well go even lower.

Still to come is a broader realization that Europe is at risk of suffering what economists call “stall-speed growth.” Under such conditions, growth may remain positive, but it will be insufficient to accommodate the demands of other forces: pockets of excessive indebtedness, rising demand for social services, the need for better infrastructure, and deepening popular anger, political polarization, and alienation.

Moreover, previously unthinkable conditions that could undermine the very integrity of a market system will suddenly become possible – even likely. Negative interest rates in Europe, for example, do not look likely to be reversed any time soon.

Worse, in what is already a structurally impaired economy, Europeans have yet to deal fully with the detrimental impact of global trade tensions, which have hit export-dependent industries in Germany – the region’s powerhouse – especially hard.

Despite all of these negative developments, European authorities continue to rely on just one response: unconventional monetary policy involving negative interest rates and large-scale purchases of securities (quantitative easing, or QE).

To be sure, this approach was effective in containing a debt crisis that was threatening both the monetary union and the single currency earlier in the decade. But it has proven increasingly ineffective in promoting sustainable economic growth.

Concerns over the ECB’s protracted reliance on the same old medicine have been increasing, even within the ECB, owing to a growing awareness of the detrimental effects of negative interest rates. Negative rates can curtail the provision of long-term financial-protection services (such as life insurance and retirement products) to European households, thereby undermining economic security.

They encourage excessive risk-taking, which can lead to financial instability down the road.

And they promote an inefficient allocation of resources across the broader economy.

To the extent that these risks are real and mounting (which I believe they are), the ECB will find it increasingly difficult to continue pursuing the same policy in the face of growing complaints and political pressure. But it cannot simply stand still, given the deterioration in the European economy. And it can scarcely even consider the option of unwinding the unconventional policies of the past decade, as that would raise the risk of immediate economic and financial disruptions.

The ECB’s lose-lose-lose trilemma can be resolved only through a comprehensive pro-growth approach at both the national and regional levels, involving measures that are not available to central banks. European countries need deeper structural reforms – including infrastructure modernization and worker retooling and retraining – to boost the productivity of both capital and labor.

Where possible, they should be pursuing fiscal stimulus, and resolving persistent debt overhangs that are stifling existing growth engines and impeding the emergence of new ones.

And at the regional level, Europe needs to expand and improve its policy architecture, not least by completing the banking union and resolving long-standing differences over fiscal integration.

The hope now is that Lagarde – with her exceptional mix of interpersonal skills, professional networks, and national and international policy experience – will jump-start the pivot that Europe needs. The challenge is one of political will, not engineering, and Lagarde’s recent accomplishments at the IMF – where she put a spotlight on the economic implications of gender bias and climate change – show that she is capable of ushering in the necessary changes.

This is not to downplay the scale and complexity of the challenges Draghi has faced. They are real, and they have become deeply embedded in the structure of Europe’s political economy. Still, they are not insurmountable. Lagarde brings a uniquely well-suited skillset to her new position, and she is taking the reins at precisely the right moment for Europe to make the changes needed to avoid a second lost decade. Her legacy will now be bound up with that of Draghi, whose courageous promise in 2012 to do “whatever it takes” to save the euro has since been overshadowed by the renewed threat of recession and financial instability.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Housing Is Still a Has-Been

Lower mortgage rates and a benign economic backdrop have helped boost the housing market recently, but the gains are hardly impressive

By Justin Lahart

The housing market is a bit better lately. But considering the overall economic environment, the improvement still counts as underwhelming.

On Thursday, the National Association of Realtors reported that its index of pending home sales—sales of previously owned homes that are under contract but haven’t been finalized—bounced back in August, putting it 2.5% above its year-earlier level. That follows Wednesday’s Commerce Department report showing that new-home sales jumped last month and last week’s report that existing-home sales firmed in August.

The biggest factor behind the pickup in housing has probably been the decline in interest rates. Earlier this month, the average rate on a 30-year fixed mortgage slipped to 3.49%, according to Freddie Mac. That compared with 4.54% a year earlier. It was the lowest rate since 2016, and one of the lowest in history.

Meanwhile, the job market continues to do well, with the unemployment rate near a 50-year low and wages picking up. Home-price gains have moderated over the past year and are now rising more slowly than per capita after-tax income, helping affordability.

But welcome as the pickup has been, it must be kept in perspective. Combined new- and existing-home sales have gotten back only to where they were in the beginning of last year. And they are about level with where they were in 2000, when the U.S. population was significantly lower than it is now.

Housing could show some further improvement in the months ahead, of course—all of the drop in mortgage rates probably hasn’t shown up in the sales data yet (though rates have bounced higher since earlier this month). Still, that such an apparently benign environment isn’t driving significantly higher sales shows what stiff headwinds the sector faces.

Since the financial crisis, more Americans question the value of owning a home, while the 2017 tax cuts reduced the financial incentives for homeownership, especially in high-tax states. Many millennials are saddled with high levels of student debt, making the prospect of taking on additional debt to buy a home worrisome.

So for now, housing looks as if it is going to provide only modest support for the economy. For it to really take off, it seems like the environment would somehow have to become even more benign, with mortgage rates slipping to new historic lows while the job market continues to run strong. That seems like an unlikely combination.

The US is losing its birds and must act before it is too late

Since 1970, the avian population in North America has dropped by almost 30 per cent

Henry Paulson

B1XJAW Indigo Bunting Perched in Thistle Blossoms
An indigo bunting. We are fast approaching a tipping point of irreversible loss to naturally functioning ecosystems that will cause catastrophic economic losses © Alamy

For some, it is easy to treat stories about cascading losses in global biodiversity as other people’s worries. Rainforest destruction in the Amazon, savage poaching and plummeting large mammal populations in Africa — those problems can seem so far away.

Last week, however, headlines about biodiversity loss pierced hearts in America. Just as Rachel Carson feared more than half a century ago in her book Silent Spring, we are losing our birds.

New research published in the journal Science shows that, since 1970, wild bird populations in the US and Canada have dropped by almost 30 per cent, a loss of nearly 3bn breeding birds.

The numbers read like Black Monday in the stock market: a 53 per cent loss among our grassland birds, a billion birds lost from our forests, 862m sparrows and 618m warblers and 440m blackbirds — all gone.

A report for the G7 prepared in May by the OECD offered a grim synopsis of all the varied measures of ecosystem loss across our planet. Overall, more than half of all the vertebrates in the world have disappeared since 1970, and today’s rate of species extinction is 1,000 times higher than prehuman times. The report also calculated the global economic costs of biodiversity loss to be on the scale of $10tn-$31tn a year.

We are fast approaching a tipping point of irreversible loss to naturally functioning ecosystems that will cause catastrophic — and frustratingly avoidable — economic losses at an enormous global scale.

Back in 1992 the UN proposed bold action through the Convention on Biological Diversity, a treaty joined by 196 member nations to launch global efforts for land and water conservation in order to protect worldwide biodiversity. The convention inspired Canada to pledge $1.35bn towards doubling its total protected area. That money launched an ambitious effort that has already conserved 1.66m square kilometres of Canadian land and ocean habitats, an area almost the size of Quebec. China, likewise, has made bold conservation moves, with its recent moratorium on development and World Heritage Site listing along the Yellow Sea coast, the world’s largest intertidal mudflat system and a critical habitat for more than 50 migratory shorebird species.

One member of the UN did not ratify the convention: the US. A century ago, the US was a global leader in conservation. It pioneered an international migratory bird treaty with Canada that protected hundreds of bird species shared across the two nations. This treaty and related laws rescued dozens of bird species that were being hunted into extinction. An American president, Woodrow Wilson, signed the treaty, and the Senate ratified the Migratory Bird Treaty Act in 1918 — even while the horrors of the first world war were monopolising lawmakers’ attention.

A hundred years later, the US has yet to join the convention on biological diversity because the Senate has been unwilling to ratify the treaty. American NGOs have valiantly stepped in and made great progress towards the conservation of wildlife and habitats, but we need more. The next big opportunity for the US to engage on this issue will be the COP15 convention on biodviersity in China next year.

One only need look to the skies to see why the US must take a leadership role. The loss of nearly a third of our wild birds — during my own lifetime — is deeply troubling to me. It took nature millions of years to fill our continent with its living rainbow of scarlet tanagers, Baltimore orioles, yellow warblers, blue jays, and indigo buntings. Now all these species, and hundreds more, are suffering steep population declines.

Failure to act in the past cannot be an excuse for the future. The US must engage in the global biodiversity crisis, and it starts with participating in a meaningful way at COP15.

The writer, a former US Treasury secretary, chairs the Paulson Institute. He is also an avid birdwatcher.

The European Central Bank may have done too little, too late

Policymakers may not have gone far enough in staving off an economic downturn

Katie Martin in London

Monetary hawks have been up in arms ever since the European Central Bank unleashed its latest volley of monetary easing earlier this month. But the more pressing danger may be that policymakers have not gone far enough in staving off a potentially severe economic downturn, leaving those hawks shrieking into a void.

The euro took a lurch lower on Monday and government bonds sprang higher yet again, after research provider IHS Markit said the eurozone economy was “close to stalling”. A “deepening manufacturing recession” is running alongside a slowdown in the service sector, it said, based on its regular survey of business executives.

One shred of comfort was that IHS Markit’s combined purchasing managers’ index for the manufacturing and service sectors spat out a reading of 50.4 in September. That was down from August, but still a nose above the 50 line that points towards economic expansion rather than contraction.

The manufacturing-specific index, however, fell far beyond market expectations to 45.6, and the Germany-focused report was especially grim. There, the manufacturing PMI dropped to 41.4, the lowest since mid-2009. Phil Smith, principal economist at IHS Markit, summed up the manufacturing data as “simply awful”.

The German data were “dismal”, said Rosie Colthorpe, European economist at Oxford Economics. “The reading shows that the industrial sector continues to be hammered by the uncertain outlook. And the outlook does not look much brighter . . . [The] data clearly raises the risk of a German recession in the third quarter.”

This is music to the ears of those hoping to see new lows in the euro before the year is out. At under $1.10 on Monday, the currency is already close to that point.

With no small irony, this all coincides with more signs that dissenters are not backing down in their assault on the flagship policy of outgoing ECB president Mario Draghi, who hands over to Christine Lagarde at the end of October.

On Monday, Klaas Knot, the Dutch central bank president, described the ECB’s triple whammy of lower deposit rates, fresh bond purchases and tweaked lending operations as “disproportionate”. The debate on the governing council about this latest package had been “heated”, he said.

But the data on Monday serve to push that analysis further to the sidelines. They provided “some vindication for Mario Draghi’s decision to go out with a bang”, said Hugh Gimber, global market strategist at JPMorgan Asset Management. “The task facing Christine Lagarde is a big one: slowing growth in an economy particularly vulnerable to global trade disputes, muted inflation expectations and limited policy headroom.”

If anything, the ECB is at risk of going down in history as having done too little too late — and failing in its vigorous efforts to convince politicians to play their part with fiscal policy.

Here Comes The Deluge Of Meaningless “Good News”

Today’s relief rally is brought to you by chastened US and Chinese trade negotiators who are now working on a “mini” trade deal that will apparently include a reduction in US tariffs in return for some minor Chinese concessions on things like mandatory joint venture partners for foreign companies wanting to set up shop in China. In other words, it’s a face-saving exercise.

Yet stocks are soaring as investors focus on the above while ignoring the potentially much bigger deal of last night’s missile attack on an Iranian oil tanker.

But wait, there’s more. The Fed just promised to start buying Treasury bills at the rate of $60 billion a month and will keep it up through mid-2020. Just don’t call it QE – though in every mathematical way it is exactly QE.

And Brexit, that thing you stopped paying attention to last year, is suddenly looking like a non-catastrophe. From today’s Wall Street Journal:
“Yesterday the Irish Taoiseach and the U.K. Prime Minister both saw – for the first time – a pathway to a deal,” said European Council President Donald Tusk during a news conference in Cyprus on Friday morning, using the Irish moniker for the leader. “I have received promising signals from the Taoiseach that a deal is still possible.”
On Friday, [UK Prime Minister] Johnson also sounded cautiously optimistic. “There is a joint feeling that there is a way forward that we can see a pathway to a deal” Mr. Johnson said to reporters.
What do these seemingly-unrelated pieces of modestly positive news have in common? They all indicate that policy makers have gotten the markets’ message, which is that easy money is mandatory and anything that gets in its way will be met with a financial meltdown.

It’s also worth noting that the markets’ ultimatum – and policymakers’ capitulation – are happening during a time of already extraordinarily easy money. Interest rates, of course, are at historically low levels (most sovereign bonds – including those of Greece – now trade with negative yields) and most major central banks are committed to even lower rates in the year ahead. In addition:

US government spending is rising twice as fast as tax revenues (7% versus 3.4% currently), which is another way of saying Washington is pumping hundreds of billions of new dollars into the economy each year. The Japanese central bank is talking about overshooting its inflation targets while both the outgoing and incoming heads of the European Central Bank are promising all kinds of exotic new QE to go with even more steeply negative rates. US corporate and student debt are both breaking records with each new update. The list of late cycle credit excesses just keeps going.

student loan debt good news

Yet this torrent of new credit isn’t enough to keep Germany out of recession (see German August export slump amplifies recession alarm), or the US from slowing down (see Second-quarter U.S. GDP left at 2%, slower economic growth seen persisting).

The implication?

The current batch of tepidly positive announcements will not do the trick and will therefore be followed by ever bigger and better ones, until easy money, massive government deficits, and soaring private sector credit stop working.

Then the only news that will matter is the fact that “good” news no longer matters.

Enchantment and Geopolitics

By George Friedman

The fundamental problem of geopolitical theory is simple: Why do soldiers choose to die for their country? Gen. George Patton famously told his troops that he didn’t want them to die for their country. He wanted the other poor bastards to die for theirs. He and his troops knew that as solicitous as Patton appeared to be of their health, many of them would die in the course of killing their enemy.

Thomas Hobbes wrote that the passion of men was to avoid pain and achieve pleasure. It is out of this concept that much of modern utilitarian philosophy arose. Utilitarianism argued for the greatest good for the greatest number. It never settled, from my point of view, why I should care about the happiness of the majority. Out of this came Adam Smith, the father of modern economics, who argued that the greatest good came from everyone selfishly pursuing their own ends. Smith was trying to square the circle, solving the problem that Hobbes posed (the passionate pursuit of one’s own pleasure) and that John Stuart Mill (the father of utilitarianism) argued for: the pursuit of the good of the many. Thus was born Smith’s economic man, feeling virtuous about being selfish.

If nations were simply economic systems, there might be some way to support this. But nations also go to war, and in war, the principles of passionate pursuit of pleasure or the selfish creation of the greatest good dissolve the logic of all of this. The avoidance of pain and the pursuit of pleasure are subsumed in a universe in which death is common and the only alternative is killing. It is not the state of nature – the war of all against all – that Hobbes wanted to erase. It is a world where the nation exists but rejects the passionate pursuit of pleasure in place of something else: duty.

Duty grows out of the love of one’s own, a point I have made many times. It is the love of the things to which you were born, from which you derived language, faith, indeed your very self. It is the thing that you cannot escape and cannot imagine living without, regardless of your passing whims. But this is insufficient to explain duty. After all, your death in a war will savage those you were born to. You may be defending your own, but you are engaged in a vaster enterprise. Armies are impersonal entities, in which death is a mathematical abstraction, and in which whether a soldier lives or dies rarely makes any difference except as a decimal point in a vast equation. No one who has fought in a war believes his death will be decisive. Yet most soldiers in most armies fight nonetheless.

The duty we are speaking of is patriotism, and patriotism represents a vast entity, the nation, in which each soldier disappears into insignificance. The love of one’s own doesn’t easily translate into love of the nation. The principles on which the nation was founded are too abstract and distant from everyday life. The history they draw on is too old to bear meaning when a machine gun opens fire. Even your buddies, the men on whom you depend and whom you will love forever, are not enough to bind you to the vast enterprise of war. It gives you a tactical bond, but the meaning becomes apparent only later.

When you go to a cemetery to say farewell to someone you once loved, and hear the rifles report three times, and the bugler play taps, tears that were never there before come easily. Those mourning know that they have lost something of themselves but have lived the moments of their lives that really mattered. These were the moments that they could not bear to remember for a long time, and the moments at which things they did were the worst they could imagine. Only later, when taps plays, do they realize that the moment at which they did the worst was also the moment they did the best. They don’t think of it themselves. They instead recall every fear and every act of brutality they committed. They know they are lost, but they also know that the one who is being buried has redeemed them and everyone else, because he had been righteous and without fault. It is an enchanted moment, terrible and great, but a moment in which their memories permit them to forgive themselves.

We are now addressing enchantment in a very practical way. Enchantment begins with the fantasy of being a soldier, of being strong, of being brave, of belonging to the few who stand between your home and war’s desolation. It continues in remembrance. There is pride in coming out of basic training, in joining a unit going into combat, in living through the combat. Enchantment is like the owl of Minerva, the owl who spreads its wings at dusk. Enchantment is remembrance of things that never were.

This binds an army together, but what binds the soldier to his nation? Plato saw poetry as less than philosophy but essentially as political. Beauty was essential to being enchanted by the political. The poem tells the tale of a past that never was and tells the tale so beautifully that the citizen is seduced. Indeed, it is that tale that seduces him. In geopolitics, the glue that binds a nation together, and the nation to its warriors, is the poem.

One of the most poetic moments for an American soldier (my apologies to all sailors, airmen and Marines) is a piece of poetry, the oath millions have taken:

I, (state name of enlistee), do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God.

It is an ugly piece of writing, I agree, but it takes a young man or woman and confronts them with the enormity of what they have become. They are no longer a child, and the love of their own has expanded dramatically to defending the Constitution from all enemies, foreign and domestic, and to obeying the orders of the president and, through him, the American people. The one taking the oath never understands it in that moment. It is only after a long time that they understand what it says. But the moment they take it, they understand that they are no longer what they had been but something else, something mysterious, dangerous, with new loves and hates. They know this, and later discover that that moment brought enchantment to their life. But even before that, they realized that their life was no longer simply their own. They are seduced into sacrifice.

This is true in different ways in all countries. For me, there is little more moving than the Russian national anthem, which I urge you to listen to if you have never heard it. It is the song of our former enemy. But if you listen to it, you can understand why the Russians stood their ground at Stalingrad, when it was said there is no land behind the Don. The United States had better logistics and air superiority and owned the electromagnetic sphere. But we didn’t have this song and I always envied the Soviets and the Russians for their national anthem.

But it was never mine and never could be. I do not like our national anthem, but it is my anthem and when it plays in the appropriate time and place, I know that it is my song, a song about war, courage and defiance. I far prefer “America the Beautiful,” but I can envision the rockets bursting in air and the price that was paid for being an American.

Enchantment is the essence of the nation and therefore a foundation of geopolitics. Without enchantment, all that holds the nation together is interest, and interest can divide as easily as it can unite. A divided platoon is a dead platoon, except when drinking on Saturday night. A nation so divided by interest that it cannot find common ground is a nation that Lincoln spoke of. The poem that held the country together – “We hold these truths to be self-evident, that all men are created equal” – was also a poem that tore the country apart until one army crushed the other. And as powerful as the poem was, the two sides never quite forgave each other. For enchantment to work, it has to be the right poem for the right people. Still, for me, for all the faults I felt when I was young, and that I feel now in my country, it is a superb and enchanting poem.

And with this, it is time to take a break and turn to the other reality of geopolitics: the love of the ordinary.

Doug Casey on How to Profit from the Most Politically Incorrect Industry

by Doug Casey

International Man: What are your thoughts on the mining business?

Doug Casey: Gold mining was once an excellent business. For example, take the Homestake Mine in Deadwood, South Dakota, discovered in 1876, about the time of Custer’s Last Stand actually. After they went into production— selling shares in local saloons to raise capital—their dividend was something like 100% of the initial share price, per month. It was, as the phrase goes, "like having a gold mine." Today, however, a gold mine can be as much a liability as an asset. The world has changed since that phrase was coined.

Even though the technology was very primitive and inefficient in those days, labor costs were low.

You didn’t have to worry about environmental problems. There were no taxes on everything you earned. You didn’t have to pay mountains of money to lawyers. NGOs and native groups weren’t hanging around, looking to perform a shakedown. Today, you probably pay your lawyers more than you pay your geologists and engineers.

Gold mining is unfortunately no longer a business in which, like in the movie The Treasure of the Sierra Madre, you can get a couple of guys, some picks, and mules and go out and find the mother lode. Now, it’s a large-scale, industrial earth-moving operation next to a chemical plant.

Worse, mining is now one of the most politically incorrect of all industries. The public hates it.

They think miners rape the land, displace native people, and burn up Mother Earth’s natural resources. And sometimes they do; development necessarily upsets some apple carts. But mining—believe it or not—is now usually more eco-friendly than most agriculture and a lot of manufacturing.

Not only that, but since people have looked for mineral deposits for thousands of years, the earth’s surface is pretty well picked over. Prospectors have been looking for valuable deposits basically forever, and the low-hanging fruit is gone. Remaining high-grade large-volume deposits are typically in unstable, undeveloped countries—places where you really don’t want to invest perhaps a billion dollars in an immovable asset.

Most so-called mining companies are really exploration companies. They usually have neither an asset nor a source of income. Instead, they spend money looking for viable deposits—which is quite literally like looking for a needle in a haystack. Finding some gold is one thing. Finding an economic deposit of gold is something else entirely.

And even if you do find an economic gold deposit, it’s exceptionally difficult to make money mining it. Most of your capital costs are upfront. The regulatory environment today is onerous in the extreme. Labor costs are far above what they used to be. It’s a really tough business.

International Man: How can the mining business be a terrible business to operate and invest in, while at the same time being an excellent place for speculations that can offer life-changing profits?

Doug Casey: I’m not sure how many thousands of gold mining stocks there are in the world today.

Let’s say about 2,000, though most of them are junk. If they have any gold, it’s mainly a word written on their stock certificates.

So why are we interested in this area? It’s because more than any other area, mining in general, and gold mining in particular, is driven by fear and greed.

Let’s say it costs $1,000 to mine an ounce of gold. If the price of gold drops to $900, you’re losing money hand over fist. If it’s at $1,100, you’re making a modest return. But if the price of gold rises by only 9%, from $1100 to $1,200, your profits double.

If the price of gold doubles, from $1,000 to $2,000, your profits go up at least tenfold. They don’t just double like the price of gold has. And of course, everybody hopes that their little company, which might have a market cap of a few million, will stumble on a deposit worth a few billion. Maybe your stock goes 100-to-1 or more. Unusual, but it happens.

International Man: Doug, you’ve been involved in the space for over 40 years and made huge profits. You’ve seen numerous market cycles. Where are we in the cycle right now?

Doug Casey: I think this is the end of a long bear market cycle that started in 2011.

Until recently some mining stocks were selling for less than the cash they had in the bank. So, you got the property, the technology, the management, all these things for free. That stage has past, but it’s unimportant. The big gains are still ahead.

Mining stocks have been poking their heads up above water now over the last year and have done quite well recently.

I’ve been in this business since Nixon devalued the dollar in 1971 and gold rose from $35. Since then there have been about five gold mining bull markets where the market as a whole for these stocks went up ten to one and then subsequently crashed about 95%. In other words, it went down more than it went up in all these cases. Right now, we’re once again at a cyclical bottom.

With all the money that’s been created by governments and central banks, and as cheap as these mining stocks are right now, the chances are excellent we’re going to have a gigantic bull market. Maybe the last one, since I expect the world is going back to using gold as money—at which point we’ll have a stable gold price.

In the meantime, I think mining stocks could go absolutely insane. The prices will have no relation to fundamentals, because everybody will want to own them.

Now’s the time to get into these stocks. It’s possible to make life-changing returns in them in the course of a 3–5-year cycle.

International Man: Recently, the price of gold broke through a 6-year trading range and has kept rising. What does this tell you?

Doug Casey: We’re in a new gold bull market. You’ve got to remember that gold’s last peak—actually this is true of most commodities—was back in 2011.

Over the last several years, they’ve bottomed, and now they’re headed up again. At least gold and silver are. The others—grains, tropicals, meats—will follow.

So, I’m very bullish and optimistic.

International Man: How are you positioned right now in the mining space? How do you sift through all the noise?

Doug Casey: Well, at this point you can throw a dart at a list of gold stocks and you’ll probably make money. That’s what happens in bull markets, but that’s certainly not the best way to do it.

Most of the investment letters that follow mining stocks seem to have gone out of business during the last bear market, but there are a few that I follow.

I used to make a trip to a mining project someplace in the world at least seven or eight times a year when I was doing this very actively.

I don’t do that so much anymore. Partially because I’ve been there and done that. The idea of crawling around hundreds of feet underground in dark, wet, cold tunnels, or helicoptering to mining camps in the middle of the jungle has less appeal for me than was once the case.

These were great adventures while I did it. But there are a few guys in the business who are competent and honest and still do that. I let them sort out the wheat from the chaff.

When possible I buy stocks in the form of private placements. That’s because, for the reasons I indicated earlier, mining companies are constantly raising money, at least while they’re in the exploration and development stage.

International Man: What are your thoughts on Marin Katusa?

Doug Casey: I’ve known Marin for 15 years. Over the years, I’ve known scores of guys in this business, and I think Marin is at the top of the pyramid.

The fact of the matter is that Marin is unique. He knows how a mine works, having actually built a successful mine himself. He understands the markets for the metals and the details of both exploring and producing. He has as good or better a grip on those things than anybody in the investment business today.

But equally important, Marin has the street smarts to size up the character of people who run these companies—which is absolutely critical. And he knows how to structure deals that are investor-friendly.

I pretty much reflexively buy all of the deals that Marin gets involved in.

Out with the Arab-style

China’s repression of Islam is spreading beyond Xinjiang

Millions more Muslims are being targeted by the Communist Party

AS DARKNESS BEGINS to settle on Duanjiaping village, a few men in white skullcaps head towards a large mosque. It is time for the Maghrib, the fourth of the five daily prayers of devout Muslims. It is clear even before they reach the building’s high yellow walls that all is not right. The prayer-hall’s four minarets, topped by golden crescent moons, are still a towering landmark. But they are covered in scaffolding and green netting (see picture), and they are not due for repair.

It is less than six years since hundreds of Muslim men gathered in the mosque’s courtyard to celebrate the completion of its new Arab-style prayer hall. It had cost 9.8m yuan ($1.37m)—a tidy sum in a county that is officially classified as impoverished. The festivities had official blessing. The imam of one of the most important mosques in Lanzhou, the provincial capital, was there. So too was a senior leader of the government-backed Islamic Association of China.

Much has changed. A chill political wind has been blowing over Duanjiaping and hundreds of other villages and towns in Linxia, a majority-Muslim prefecture in Gansu province, which borders on the Tibetan plateau and the far western region of Xinjiang. Many villages in Linxia have at least one mosque, with minarets visible far and wide.

The one with the scaffolding in Duanjiaping can accommodate 3,000 worshippers. Its grandeur is not unusual. In recent decades rural communities in Linxia—China’s “little Mecca”, as it is often called—have vied to outdo each other in mosque-building. Now the government is not only reining them in. It is tightening controls on their faith as well.

The horrors of China’s campaign against Islam in Xinjiang are well-known. About two years ago reports began to emerge of the building of a vast gulag there. Hundreds of thousands of ethnic Uighurs have been thrown into it—many simply for seeming too pious. There are about 10m Uighurs in China. But they form only about half of the country’s Muslim population. Linxia is home to more than 1.1m Muslims mainly belonging to two ethnic groups: the Hui and the Dongxiang.

There are Muslim communities scattered widely across the rest of China (see map). Most are made up of Huis. Because of Xinjiang’s history of separatism and terrorism, Uighurs are suffering by far the harshest clampdown experienced by any of these Muslim groups. Outside Xinjiang, however, other believers are starting to feel the effects, too.

The government’s attitude towards Muslims in the interior began to change in 2016 after China’s leader, Xi Jinping, set out plans for the “sinicisation” of the country’s religions.

Christianity and Islam, having strong overseas connections, became the main targets. Officials set out to purge them of foreign influences deemed threatening to the Communist Party. In the case of Islam the aim was partly to prevent the spread of radicalism and with it, terrorism.

Among Muslims elsewhere in China, however, there have been no reports of terrorist links. The Huis were once China’s model Muslims, quite unlike the Uighurs in Xinjiang who have chafed at Chinese rule for decades. A few of them have occasionally used violence to vent their grievances. The Huis have no separatist ambitions or known terrorist connections. They claim descendancy from Arab and Persian traders who settled more than a millennium ago.

After centuries of intermarriage they have become ethnically assimilated with Han Chinese, who make up more than 90% of the population. Huis in Linxia have historically played an important role as middlemen in trade between Tibetan and Han communities. Many have grown rich by trading a Chinese medicine that is often used as an aphrodisiac, known as caterpillar fungus. It is harvested from the Tibetan hills. Linxia is home to one of the country’s biggest caterpillar-fungus wholesale markets; its traders are mostly Muslims.

But as the scaffolding in Duanjiaping shows, the government worries that Muslims in Linxia are absorbing the same influences from Islam abroad that it says have fuelled strife in Xinjiang. “Right now, work related to Islam is even more complicated than it has ever been before,” Gansu’s party chief, Lin Duo, told a meeting of senior officials in July last year.

Off with their domes

One aim of the sinicisation campaign is to reduce visible links between Islam in China and that in the Arab world. China fears that Saudi Arabia in particular—as much a draw to Muslim pilgrims in China as to those elsewhere—will poison Chinese Islam with Wahhabism, a puritanical strain that is often linked with extremism.

But its efforts to prevent this are affecting many Muslims who have no truck with militancy. In March officials in the southern city of Guangzhou announced rewards of up to 10,000 yuan for reporting on “illegal religious activities”, including organising private trips to Mecca. China’s Muslims can only join officially arranged ones.

The mosque in Duanjiaping is a casualty. Officials have ordered it to remove its Arab-style minarets and replace them with Chinese-looking ones. A picture of what the mosque will eventually look like is displayed in the entrance. The minarets will have green-tiled upturned eaves in Chinese style. The central bulbous dome will be replaced by a pavilion-like structure, also classically Chinese.

“The government says we have to do it, so we’re doing it,” says a caretaker. The work will not offend religious sensibilities and will be done at the government’s expense, he claims. That contrasts with reports from other places where similar work is being carried out. In a nearby town, Kangle, a nervous Hui man surveys another mosque with scaffolding on its minarets.

He says “trouble” broke out there a few days earlier when local religious-affairs officials ordered their demolition. They were erected in 2014. The following year the mosque was named a “model religious site” by Linxia’s government. No longer, it seems.

In August last year there was trouble on a much bigger scale in Ningxia Hui Autonomous Region, a province bordering on Gansu that is home to about one-fifth of China’s Hui people.

For three days thousands of Muslims in the town of Weizhou staged protests at a massive mosque—initially over a government order that the entire building be knocked down because it had not received planning permission, and subsequently over a revised proposal that only the domes be removed. Remarkably, the local government backed down. But it was clearly worried about the turmoil.

In November the party chief of Ningxia visited Xinjiang where he signed counter-terrorism “co-operation agreements”. He noted religious similarities between the two provinces and said, ominously: “That’s why Ningxia went to learn from Xinjiang.”

In Gansu the official Islamic Association has circulated 20 recommended designs for mosque roofs “with Chinese characteristics”. Officials say they want no more “Saudi-isation” or “Arab-isation” of buildings. The association has instructed Muslims to forsake the common practice of building or expanding mosques without government permission and to make them less “vast and extravagant”.

It has also tried to tighten its control over the religion itself. It has ordered Gansu’s teachers of Islam to reject any new doctrine from outsiders. “Anything that does not already exist at home should not be accepted from abroad,” said the association’s annual report, published in March. “If something does not exist locally then it should not be approved if it is introduced from elsewhere.”

Part of the sinicisation effort is called the “four-enter” campaign. This means ensuring that four things are introduced into every mosque: the Chinese flag, propaganda concerning China’s laws on religion, “core socialist values” and the country’s “outstanding traditional culture”. In Linxia, the impact is clear.

The flag flies over many mosques. Billboards proclaiming socialism’s importance to Islam fill their courtyards. Preachers have been being told to incorporate these values in their scriptural teachings. And they must undergo regular testing on such matters to retain their permits to teach.

Linxia’s party chief, Guo Heli, tried to put a positive spin on the clampdown during a visit to local mosques in June. “We must reduce the frequency, duration and scale of religious activities,” he said, suggesting this would “lessen the burden” on the faithful.

The authorities are also trying to reduce Islam’s influence in society. In Linxia this involves curbing the “proliferation” of the use of the term “halal”. Provincial officials have accused Linxia’s main city of “giving too much prominence to religious aspects” in its plans to expand the local halal-products industry.

As part of the de-Arabisation campaign, officials have ordered restaurants to stop using the word “halal” in Arabic on their signs, as many once commonly did. Only traces now remain.

On many Muslim restaurants across China, including recently in Beijing, such lettering has been painted over or prised out.

By changing the design of Duanjiaping’s mosque officials may hope to reduce Islam’s profile, just as officials on the coast have been trying to make Christianity less visible by removing hundreds of large crosses from the tops of churches. In line with regulations issued last year forbidding the building of mosques that are “overly tall”, the new minarets in Duanjiaping will be much lower. Mosques have also been ordered to install less-powerful loudspeakers. Officials have stepped up efforts to keep children out of them and bar minors from religious instruction.

The government’s controls over Islam are still relatively relaxed in Linxia compared with those in Xinjiang, where Muslims, if they are not thrown into “vocational training centres” (ie, prison camps), are subject to intense digital surveillance, a heavy police presence and intrusions into their homes by prying officials.

Many of Linxia’s mosques retain their Arab-style minarets (locals say they are cheaper to build than Chinese-style ones, which require skilled carpenters and expensive wood). Only a handful of mosques have so far been told to rebuild theirs, says a local Hui-culture expert. Extremism, he says, “has not become a trend” locally.

But the authorities insist it is spreading. In July the leader of a central-government inspection team said that in some parts of Gansu “religious extremist forces” were already “dominating and corroding” grassroots political bodies. This was, she said, “a problem worth attention”. Extremist is a word that trips lightly off officials’ tongues.

It is often used to describe behaviour that in many other countries would be regarded simply as devout. Muslims in the rest of China may not suffer the Uighurs’ terrible fate, but they have reason to be nervous.

Life, fate and the assault on liberalism

Both the right and the left are in thrall to identity politics

Gideon Rachman

The liberal tradition is weak in Russia. But I recently came across one of the most inspiring statements of the liberal ideal that I have ever read, in the work of a great Russian novelist, Vasily Grossman. At a time when both the right and left are increasingly obsessed by group rights, Grossman’s argument for the primacy of the individual still feels vital and urgent, 60 years after it was written.

If you have never read Grossman’s Life and Fate, you should. The book, set in Russia and eastern Europe at the time of the battle of Stalingrad during the second world war, was completed in 1960. But it was suppressed by Soviet functionaries, alarmed by its unsparing depiction of Stalinism. Grossman’s magnum opus only appeared in 1980, 16 years after his death, and its reputation has been growing ever since.

The frequent comparisons between Life and Fate and Tolstoy’s War and Peace are apt. The novels are similar in scale and subject matter; and in the way in which fictional characters mingle on the page with historical figures such as Stalin and Napoleon. Both Grossman and Tolstoy also combine their storytelling with broader philosophical thoughts.

At the end of a chapter describing a Russian army tank unit preparing for battle, Grossman reflects that, “Human groupings have one main purpose: to assert everyone’s right to be different, to be special, to think, feel and live in his or her own way. People join together in order to win or defend this right.” But this gives rise to a “terrible, fateful error”. “The belief that these groupings in the name of a race, a God, a party or a State are the very purpose of life and not simply a means to an end.” For Grossman, individual liberty was the only valid goal of war or politics.

Life and Fate depicts the terrible evils that Stalinism and Nazism inflicted on individuals in the name of a wider group — the proletariat or the “Aryan race”. But Grossman’s words struck me as still applicable to our own, much milder age. That is because political ideas that emphasise group identity, rather than individual rights, are back in fashion — as both the nationalist right and the progressive left slide towards identity politics.

In the US, President Donald Trump has roused his base by flirting with ethno-nationalism and denouncing Muslim and Mexican immigrants. The far right in Europe has travelled in the same direction. Influential thinkers like the French writer Renaud Camus have popularised conspiracy theories about “the great replacement”, which is said to place white Europeans at risk of cultural annihilation at the hands of millions of Muslim immigrants.

Paranoia about “white genocide” and “cultural Marxism” has also resurfaced in the garbled manifestos of far-right terrorists such as the Norwegian Anders Breivik, or Brenton Tarrant, who staged a murderous attack on a mosque in New Zealand, earlier this year.

The left’s version of identity politics has nothing to do with terrorism. Increasingly, however, progressive politics in America and Britain has moved away from the liberal insistence on equal rights for individuals to an illiberal emphasis on group rights. The motive for this shift is usually a laudable effort to achieve social justice. But the outcomes are, to use one of the left’s favourite terms, “problematic”.

An interesting example of the kinds of problems that are thrown up by group-based thinking is a current lawsuit brought against Harvard University for alleged discrimination against Asian-Americans. The complainants argue that Asian-Americans have to achieve better test scores, on average, to get into Harvard and are often marked down on vague measures of personality. This, it is argued, allows Harvard to boost student numbers from other more favoured groups, such as African-Americans, Hispanics and the children of Harvard graduates.

Harvard contests the charges. Even if discrimination is proved, it will have stemmed largely from a well-meaning motive — to increase diversity on campus. The trouble is that it seems logically impossible to discriminate in favour of one group without discriminating against another. The controversy is uncomfortably reminiscent of an earlier era, when Harvard deliberately restricted the number of Jews. That is now regarded as a disgraceful episode; but it is hard to see why it is much different from discriminating against Asian-Americans.

The whole miserable tangle is an example of the knots that organisations get tied in when they treat people as representatives of a group rather than as individuals with their own multi-faceted identities.

The questions of group rights, anti-Semitism and discrimination are important themes in Life and Fate. One of the main characters, Viktor Shtrum, is a prominent Jewish physicist who finds that his efforts to hire highly qualified Jewish colleagues are blocked because the authorities favour ethnic Russians. Throughout the book other characters run into problems because the Soviet system deems them to have the wrong class background.

It is the achievement of a great novel, such as Life and Fate, to show each character as an individual whose identity should never be reduced to that of a representative of a class, nation or ethnic group. As Grossman insisted: “The only true and lasting meaning of the struggle for life lies in the individual.”

World Bank boss warns global growth could disappoint

David Malpass blames Brexit, Europe’s recession and trade uncertainty

James Politi in Washington

David Malpass, the president of the World Bank, has warned that global growth could fall short of the 2.6 per cent rate it predicted in June, in the latest sign of concern in multilateral institutions about the direction of the world economy.

In a speech in Montreal, ahead of the World Bank and IMF’s annual meetings next week, Mr Malpass warned that global growth was “slowing” and said he expected it to be even lower than the forecast from four months ago due to “Brexit, Europe’s recession, and trade uncertainty”.

“Moreover, in much of the developing world, investment growth is too sluggish for future incomes to rise in a meaningful way,” Mr Malpass said.

Mr Malpass, a former senior Trump administration official, sounded the alarm as he laid out the main goals of his tenure at the World Bank, which began in April this year after he replaced Jim Yong Kim, the previous president appointed by Barack Obama, who resigned to take a job in private equity.

Mr Malpass said he was encouraged by the potential of digital cash transfers as an important boost to development policy. “We’re almost at the point of having secure systems that would allow poor people to electronically receive remittances, foreign aid, and social safety-net payments as well as their earnings, and then be allowed to save and transact freely. That would be revolutionary because it allows people the freedom and opportunity they need to improve their living conditions,” he said.

In an environment of slowing growth, Mr Malpass said it was essential for countries to have “well-designed structural reforms”, including beefing up the rule of law so private companies can compete with state-owned enterprises.

“For many countries, this means opening up their closed and protected markets, allowing prices to be determined by market forces, and liberalising capital flows. The pay-off is that countries that make this step attract more investment, both foreign and domestic, and can generate growth that benefits a broader part of the population,” he said.

Mr Malpass’s preoccupation with the European economy echoes broad fears about stagnant and even shrinking growth in Germany and Italy. However, the IMF, in its latest forecast in July, predicted growth of 1.3 per cent for the eurozone in 2019, rebounding to 1.6 per cent in 2020.

China’s central bank continues to load up on gold

Reserves managers around the world are trying to trim exposure to the US dollar

Harry Dempsey in London

China has added more than 100 tonnes of gold to its reserves over the last ten months, underlining its position as one of the leading central bank buyers of the precious metal.

The People’s Bank of China announced over the weekend that its holdings of the yellow metal rose to 62.64m ounces in September, an increase of 190,000 ounces from August.

The increase of nearly 5.4 tonnes of gold to China’s holdings — bringing the total additions since December to more than 105 tonnes — comes at a time when central banks across the world have been trying to diversify their reserve assets away from the US dollar as trade tensions continue to simmer.

Gold is considered a haven asset and a store of value in times of uncertainty.

Last year central banks, led by Russia, bought more gold last year than at any time since America decided to move off the gold standard in 1971, with around $27bn worth of purchases.

So far this year a total of 14 central banks, primarily from emerging markets, have bolstered their gold reserves, according to data from the World Gold Council. That has helped support the gold price, which touched a six-year high last month. On Monday it was trading a fraction below $1,500 a troy ounce, up about 17 per cent for the year.

“China hasn’t said what its gold policy is but it would need to buy two years worth of global production to achieve diversification,” said Suki Cooper, precious metals analyst at Standard Chartered Bank. “It looks like it is on track to add 150 tonnes for the whole year. The desire to add gold is there.”

China’s central bank has continued to stock up on bullion as the trade war with the US shows little sign of easing and its domestic economy is slowing. Negotiators from the US and China are due to meet at the end of the week.

China’s foreign-exchange reserves have held fairly steady over the past couple of years, averaging $3.1tn. Beijing does not provide a full breakdown of its holdings, but officials have previously said that the currency mix is broadly in line with the composition of global reserves as indicated by IMF data collected from member countries. US dollar assets comprised 64 per cent of allocated reserves at the end of 2016, according to the latest data.

The Future of Europe: The Spanish Case

How would a collapse of the European Union affect its member states?

By Ryan Bridges

What happens to supranational organizations like the European Union that promise their members prosperity in exchange for surrendering some sovereignty once those bodies can no longer deliver on their promise?

We got glimpses at the answer in the previous decade, as crisis-wracked Greece, Italy, Spain, Portugal and Ireland. Anti-EU forces gained prominence across the bloc, and one country even voted to leave it altogether (though the U.K.’s reasons for doing so are complex and go far beyond the crisis of recent years). And for almost a year, Germany, the growth engine of Europe, has been straining to outrun recession. Whether this race ends in a Great Depression-like catastrophe or just a period of prolonged stagnation, Germany looks likely to lose, and it will inevitably drag the rest of Europe down with it. What does this portend for the EU as a whole? This is a question we’re going to investigate going forward.

First, it’s important to set some boundaries for this exercise. We know that European unity is in trouble, but we don’t know what form the crisis will take. The outcome hinges on questions like whether there is a complete, sudden breakup; a gradual, partial breakup that leaves a rump EU intact; or just a creeping irrelevance and loss of influence from Brussels. If there’s a breakup, it matters whether it is peaceful or violent.

Also critical is the settlement of debt obligations and questions like what happens to a state’s euro-denominated debt if it leaves. What if the euro is eliminated? These latter questions will be especially important for highly indebted states, but for brevity’s sake, we’ll have to leave them aside. We’re also going to assume for simplicity’s sake the most extreme scenario for the EU: total collapse.
The Case of Spain
We’ll focus here on Spain – an oft-overlooked but significant member state with a unique set of circumstances. Spain’s population and economy are both fifth-largest in the EU, with 47 million people and a gross domestic product of $1.4 trillion. Somewhat miraculously, it survived the past decade’s crash, bailouts and austerity, and in 2019 is one of the few Western European economies still experiencing moderate growth.

Setting aside the financial and economic questions, a post-EU Spain’s first challenge would be restoring domestic control. Domestic stability has never been Spain’s strong suit, even in the glory days of the Spanish Empire. Mountain ranges carve up the country, and none of its main rivers, save the Guadalquivir, are navigable (and they don’t link up anyway). This is a recipe for fractiousness, and Spain has its fair share, led by Catalonia and the Basque Country on the northeastern periphery.
When in the 1970s Madrid began the process of applying to join the European Communities, the EU’s forerunner, it hoped the move would dissipate tensions with the country’s periphery. The implication was that centralized authority would be spread simultaneously down to the Spanish regions and up to Brussels. Of course, as we now know, EC and later EU membership did not put Basque or Catalan nationalism to rest. So, an early challenge for the Spanish central government post-EU would be preventing separatists from capitalizing on the chaos and breaking away – which those regions might be more inclined to do if some sort of Western European bloc were to survive sans Spain. It’s especially important for Spain to hold on to Catalonia because it is the second-most populated Spanish autonomous community, it has the fourth-highest GDP per capita, it hosts Spain’s third-most important seaport at Barcelona, and like the Basque region, it borders a major military power in France.

The second priority for Spain would have to be restoring deep economic ties with Western Europe. Forty-two percent of Spanish trade is with France, Germany, Italy, Portugal and the United Kingdom. Spanish workers in France, Germany and the U.K. account for about 40 percent of remittances to Spain, which are an important source of funds for the country, and tourists from those three countries are the leading travelers to Spain. German and French car companies have poured investment into Spain, helping to make it Europe’s second-largest auto manufacturer. The agri-food sector is also a key source of exports, especially to the rest of Europe. Increasing trade with the U.S. would help, but even if Spain tripled its exports to the U.S., the numbers would pale in comparison to its trade with Western Europe. No matter how disruptive the EU’s breakup was, Europe would remain the primary focus of Spanish trade policy.

A close third priority, and the most important challenge for external security and defense, is in the Mediterranean and Maghreb. At the moment, all the challenges to Spain emanating from this region are unconventional – terrorism, militancy, migration and smuggling – and economic disruption would complicate Madrid’s ability to deal with them. EU missions in which Spain participates, like military training missions in parts of the Sahel and anti-piracy operations like Operation Atalanta off the Horn of Africa, would collapse. If France would have to scale back its anti-terrorism Operation Barkhane in the Sahel, it would have significant implications for the counterterrorism effort in the region. In other words, a region that is not a major threat to Spanish security at the moment could become more volatile and therefore pose more of a threat as European powers necessarily pull back.

In that case, Spanish defense cooperation with the United States (as well as France and the U.K.) would take on newfound urgency. With the collapse of the EU’s incipient military cooperation and integration, NATO would be an even greater priority. Located so far from Washington’s main concerns (namely, Russia) in Eurasia, Spain wouldn’t be a top priority for the United States, particularly at a time when there could be conflict elsewhere on the European continent, though it is important to note that southern Spain hosts an American naval station at Rota and air base at Moron. The U.S. and Spain do, however, have overlapping interests in keeping a lid on transnational terrorism in places like the Sahel and Maghreb. And economically, the U.S. is Spain’s sixth-largest trade partner and a major source of remittances to Spain.

The last area of importance would be Spanish relations with Latin America. The historical linkages are obvious, and in terms of trade, Latin America as a whole ranks as Spain’s fourth-largest trade partner, behind only France, Germany and Italy. Spain mostly exports machinery and vehicles to Latin America and imports mostly mineral ores and crude oil (Mexico is Spain’s fourth-largest source of petroleum, behind Nigeria, Algeria and Saudi Arabia). Moreover, Latin America is a launching pad for Spain to trade and build relations with East Asia.

The dissolution of the European Union would be devastating for all involved, but Spain is among that group of countries for which it would be especially traumatic. Spain’s economic and financial problems are well known, but we must also appreciate the political repercussions. More than 100 years ago, as Spain was still reeling from its 1898 defeat at the hands of the United States and from the loss of Cuba, the Philippine islands, Puerto Rico and Guam, the Spanish philosopher Jose Ortega y Gasset declared: “Spain is the problem, and Europe is the solution.”
After the Second World War, it spent decades seeking legitimation through membership in Western international organizations, but membership in the EC eluded Madrid until the death of longtime dictator Francisco Franco. For Spaniards, membership in the EC had a special symbolic significance, marking the end of authoritarianism and backwardness.
This attitude toward Europe goes a long way in explaining why Spanish support for membership and integration has remained so high even after the eurozone crisis. It’s hard to overstate the pain the EU’s breakup would inflict on Spaniards and the Spanish state.