Marking the euro at 20: the eurozone is doomed to succeed

The single currency endures but significant adjustments are necessary

Martin Wolf

Like many people of 20, the European currency has experienced a traumatic adolescence. At some moments, many thought it would not reach this age of maturity at all. But it has. That is a success. Yet the experience has been so difficult that it necessarily raises big questions. In this birthday assessment, I will consider four.

First, was the euro a sensible idea? In a lucid speech last month, Mario Draghi, president of the European Central Bank — in my view, one of the two people (the other being German chancellor Angela Merkel) most responsible for the euro’s survival — explained the rationale for its creation. It would have been impossible, he argued, to maintain the deep integration of the single market without the single currency. Thus, “support for the single market would be undermined in the long run if firms that did invest in raising productivity could be deprived of some of the benefits by ‘beggar-thy-neighbour’ behaviour through competitive devaluations in other countries. Open markets would not have lasted.”

Yet it was also clear that the euro was very risky. A common monetary policy might drive cumulative divergence, with lower real interest rates in the high inflation countries (and so booms) and vice versa. By yoking together countries with such different economic institutions and behaviours, especially in the absence of a shared political process, the euro might pull the peoples of Europe apart, not together. Thus, in 1991, I argued that: “The effort to bind states together may lead, instead, to a huge increase in frictions among them. If so, the event would meet the classical definition of tragedy: hubris (arrogance), ate (folly); nemesis (destruction).”

Second, how has the euro performed? Most obviously, it has survived, despite big shocks and painful divisions. It has done so because the costs of break-up, or even departure by individual members, look terrifying. It has also done so because, in the depths of the crises, policymakers did enough to keep it alive. Think of the creation of the eurozone’s emergency financing facilities, of the “whatever it takes” statement by Mr Draghi in July 2012 and the willingness of the ECB to use the tools of a modern central bank. As Daniel Gros of the Centre for European Policy Studies remarks: “Ultimately, the euro survived because, when push came to shove, leaders of the eurozone’s member states expended political capital to implement needed reforms.”

Yet surviving is not the same as surviving well. The eurozone took an unconscionably long time to address the crisis. As the economist Ashoka Mody argues, that trauma inflicted deep and enduring economic, social and political wounds on vulnerable countries. Instead of generating convergence in living standards, the euro has allowed divergence. Intra-eurozone bank lending has collapsed. Inflation has been persistently too low, making adjustment of relative costs very difficult. The contractionary policies imposed on crisis-hit countries, together with the persistent current account surpluses of Germany and the Netherlands, have pushed the eurozone into large surpluses, so externalising a sizeable part of its post-crisis adjustment. (See charts.)

Third, will the eurozone survive? The answer is likely to be: yes. Three-quarters of the people in the eurozone are in favour of the euro, the highest since 2004. Some 40 per cent of the area’s adults have not known another currency. The number of eurozone members has also continued to expand, surely a vote of confidence.

Yet the biggest reason for optimism about survival must be the consequences of the alternative. Breaking up would be hugely traumatic, financially and economically. It would also threaten the survival of the EU itself, which has always been built on a foundation of economic integration. The single market would quite possibly collapse. So, then, might the possibility of co-operative relations. Some seem to think that Europe needs another bout of aggressive nationalism. Those with some historical knowledge know how lethal that bacillus is likely to be.

Yet, last, will the euro survive well? Mr Gros emphasises that the record is not too bad. In particular, he notes, “continental European labour markets have undergone an under-reported structural improvement, with the labour-force participation rate increasing every year, even during the crisis”. Today, a higher proportion of the adult population is economically active than in the US. Unemployment rates are also declining, even in the most crisis-hit countries. The euro has forced important reforms. All this is significant.

Nevertheless, the eurozone is not and is most unlikely ever to be an “optimal currency union”. Furthermore, any sort of federal union seems to be off the table. This guarantees that the fundamental political problem — the disjunction between eurozone responsibility for policy and national political accountability — will endure. What is needed, instead, are changes aimed at creating a “good enough” union. Risk-bearing must work through cross-border private finance. That is why the banking and capital market unions are important. It needs to be easier (and more acceptable) to restructure debt. Not least, macroeconomic adjustment needs to be far more symmetrical.

Ultimately, the eurozone is doomed to succeed. A break-up would do huge damage to the fragile order built on the postwar wreckage. Whether or not it was a good idea, the costs of undoing it make that idea unthinkable. But it will not succeed — and might not even survive — if complacency sets in. The eurozone barely survived its near-death experience. To enjoy a long and healthy life, it needs to change substantially.

What Changes Will the EU See in 2019?

Wharton's Joao Gomes and Garret Martin from the American University’s School of International Service discuss what lies ahead for the European Union in 2019.

The European Union in 2019 faces multiple pressures, including the controversial Brexit, or the U.K. plan to leave the EU; trade issues between the union and its partners; the migration crisis; the growth of populism across the region; and a shaky relationship with the Trump administration. Wharton finance professor Joao Gomes and Garret Martin, a lecturer at the American University’s School of International Service, shared their perspectives on the challenges the European Union faces this year for a series titled “2019: A Look Ahead” on the Knowledge@Wharton radio show on Sirius XM.

The most urgent issue is Brexit, and on Tuesday, British Prime Minister Theresa May’s compromise proposal to leave the EU by March 29, 2019, all but collapsed as British MPs voted out her revised Brexit deal that aimed to smooth the exit process. It had already suffered a heavy defeat on Monday, when peers in the House of Lords rejected it in a 321-152 vote. May’s Brexit proposals have faced strong resistance from not just the opposition Labor Party but also within her own Conservative Party over the years, endangering the survival of her government on several occasions. Immediately following Tuesday’s vote, Labour Party leader Jeremy Corbyn tabled a no-confidence motion to debate the incompetence of May’s government on Wednesday. Meanwhile, May said that she will engage in talks with opposition parties about alternative Brexit solutions.

According to Martin, May’s government would not survive a no-confidence motion. “Now what happens is anybody’s guess, and [there are] many different scenarios,” he said. As for the larger ramifications of the vote, Gomes said the EU does not consider Brexit to be “an existential threat” anymore. “It is a little bit like a fire that has been contained,” he said. “It is a mess for the U.K., though. It is a mess they created, and they have to live with it.”
Top Issues the EU Faces

According to Gomes, 2019 will be “a year of transition” for the EU. “The Union has to come to grips with how it is going to work effectively with 27 countries at the table, or 28 maybe (if Brexit does not materialize) – who knows. Who exactly is in charge? What exactly are the competencies that it needs centrally and at the country level? It has to slowly evolve and figure out what’s the best way to deal with this and to delegate powers and decision-making. And, until somebody steps up and effectively assumes that mantle in a particular position, it’s not a well-functioning unit.”

Gomes said the biggest concerns for the EU in 2019 are its relationship with the U.S. and the elections to the European Parliament between May 23 and 26 that will see new leadership in the region, including new heads of the European Central Bank and the European Commission.

U.S.-EU ties are tense with indications that they could get worse. Trump called the EU a foe of the U.S. when it comes to trade, and his administration last week downgraded the EU delegation in the U.S. without informing them. He has also periodically threatened to levy tariffs on EU cars imported into the U.S., prompting EU officials to prepare for a trade war similar to the U.S.-China tariff conflicts of the past two years, although the two countries have agreed on a 90-day suspension through March 2019 of tit-for-tat import tariffs.
The EU also faces leadership challenges. German Chancellor Angela Merkel is on her way out and has announced that she will not run for political office after her current tenure ends in 2021. Expectations that French President Emmanuel Macron would fill the leadership void Merkel leaves also appear overstated. “Macron’s capital of goodwill has been exhausted,” Gomes said. “He’s no longer carrying that god-like status that made his presence and his speech so influential for the first year [after his May 2017 election win]; I think that’s over.”

Gomes pointed also to the impact on the EU of presidential elections in Ukraine on March 31, even if it is not part of the union. He added that the EU would prefer an election outcome in Ukraine that advances the case for Ukraine’s membership in the EU. “What will the EU do when the Russians almost surely step up pressure on the Ukraine?” Under the current circumstances, “there’s not much it can do.”

Trump and Trade

Martin was skeptical that the U.S. and China could strike “a major, comprehensive agreement,” although he admitted that he may be proven wrong. “The issues that separate the U.S. and China are very substantial,” he said. “When it comes to issues of access to Chinese markets or protection of intellectual property, we haven’t seen the Chinese very willing to make major concessions.” However, “if [a U.S.-China trade agreement] happens, that could put a bit of pressure on the EU’s trade negotiations with the U.S. as well as those with China.”
Meanwhile, the EU has of late attempted to grow its trade relationship with other countries, and it is close to striking a major free trade agreement with Japan, Martin noted. “They won’t make up for the U.S. in size, but nonetheless it shows to the EU and to others that it has alternatives that still have some commercial appeal.”

The 90-day tariff cease-fire between the U.S. and China will ensure against any major developments on that front in the early part of 2019, said Martin. However, it is possible that Trump might resume his trade attacks on the EU, he cautioned. “The downgrading of the status of the E.U. ambassador certainly showed that Trump has not a lot of warm feelings toward the EU, and that is unlikely to change in 2019.”

As Gomes saw it, “The U.S. and Russia have the same interest – to weaken the EU to make it ineffective, and ultimately to destroy it.” He said Trump is in favor of Brexit “because that weakens the union, separates and divides it, and ultimately has him deal with maybe the French leader or maybe the German leader, one-on-one, and not the whole 300 or so million consumers, citizens and voters.”

Gomes noted that European leaders do not have the ability to oppose either Trump or Vladimir Putin. The European economy’s weak economic performance in 2018 “just renders the European Union completely unable to oppose in any significant way whatever the U.S. president wants,” he said. “They absolutely need some sort of trade deal or reassurance that there’s not going to be any tariffs, that the deal between the U.S. and China is going to somehow remove uncertainty about global value chains, and that it will eliminate whatever threats we have to German exports and European exports.”

Much of how strongly Trump will go after the EU depends on what he considers important for his presidential accomplishments, according to Gomes. “It could be that Donald Trump feels that two victories – NAFTA (rechristened as the U.S.-Mexico-Canada Agreement) and China – are enough of a statement.

“Whatever separates the U.S. from Europe is small potatoes by itself, and there’s not going to be much of a push because its relationship with Europe is not asymmetric in terms of trade – we don’t have a particularly large imbalance,” Gomes added. The U.S. trade deficit with the EU was just short of $140 billion between January and October last year, while it was $344 billion with China. He noted that the EU’s vulnerabilities lie in areas like agricultural subsidies and the opening up of its financial markets, and that it could have “a little bit of a problem” if Trump decides to target those.

Leadership Challenges

Gomes laid out the key issues EU leadership must address going forward. “The No. 1 thing the European Union needs to decide is whether it wants to be a separate power on its own or it needs allies,” he said. “It needs to align itself with one particular block. They’ve operated as if this is about creating a separate pillar of power in the world that can stand up to the [U.S.] and ultimately to China and to Russia. I don’t think that’s realistic anymore. They just need to come to grips with that.”

“One of the great challenges for the EU is the impression or the risk of appearing rudderless, of lacking a clear leader,” said Martin. “Angela Merkel was very much the face of the EU for the last 10 years. Macron was viewed as a possible candidate to take over that mantle – someone who has campaigned and positioned himself as pro-EU, pro-integration. Now, unfortunately for Macron, some of [his] shine has been taken away [by France’s] internal problems.”
As a consequence of that power vacuum, “the EU will remain navel-gazing and inward-looking,” said Martin. “It will not be able to take a more active role on the international stage at a time when [it faces] very serious challenges and very serious changes, whether it comes from the U.S., which shows a deep-seated ambivalence towards Europe and the EU under Trump, a more aggressive Russia and China flexing its muscles. The EU needs to be able to walk and chew gum at the same time, but that has been the big challenge.”

Populism Across the EU

The populism evident across the EU “reflects dissatisfaction with the way the European Union has delivered for its citizenship,” said Gomes. “Europe is run electively by some bureaucracy in Brussels and a series of treaties that so tightly regulate business activity, political speech or connections between the states that [the European Commission] almost does not matter too much.”

Gomes pointed to populist parties winning the elections in Italy last March as “a clear manifestation” of the frustration of Europeans with the economic performance within the EU. “It is very important that the people in Brussels and in Paris and Frankfurt and Berlin listened to it and pay attention and say, ‘We need to do better; we just need to create more jobs and we need to deliver economic growth.”

According to Martin, populism has always been a part of the European politics. “It’s now become maybe more prevalent across a variety of countries, but we have to be careful of assuming that it’s a transient or a new phenomenon,” he added. “The bigger problem is this broader trend across Western Europe of a fragmentation of the political landscape.” He explained that many European countries are moving in the same direction as the Netherlands, “where multiple, small niche parties that represent a tiny part of the electorate are already struggling to govern.”

Unlike in years past, the clout of the traditional center-right and center-left parties that dominated European politics has declined, said Martin. “That means that we have more coalitions or we will have more situations like in Sweden, where the election results weren’t conclusive and there’s an inability to form governments. That is the outcome I anticipate we’ll see in the European Parliament elections in May — a messy outcome where the populists show some inroads but not enough to gain a majority.”

Martin said that if populist agendas prevail in the EU elections in May, “they could shape the policies and the agenda of the EU for years to come.” Added Gomes: “The populists have never been able to work well across borders. They’ve been successful on a country-by-country basis, but they just have not been able to cooperate with populists in other countries in effective ways.” Therefore, the European Commission could continue to operate as it has thus far, “but that could change if the populous bloc becomes very large in the European Parliament to the point that it actually affects who gets picked as a commissioner,” he added.

Migrant Crisis Persists

The issue of migration continues to be “very toxic and very divisive,” said Martin. He noted that the United Nations last month pushed ahead with a pact to deal with migration without the support of the U.S. and several European countries. “It shows the issue is still alive and kicking. It’s still an issue that populists and others will try to mobilize.” He noted that although the EU has managed to contain the migrants problem over the last two years by working with a variety of partners including Turkey and some North African countries, it continues to be a crisis “in the sense that the EU is no better prepared [to deal with it] than it was in 2016,” when the migrants issue was at its height.
“The crisis made it clear that there is no will amongst the citizens of Europe to absorb large numbers of migrants at this stage,” said Gomes, adding that that sentiment persists. At the same time, he didn’t expect it to be “as acute” as it was in 2016, partly because the civil war in Syria that drove out many migrants is relatively less daunting than it was at that time. Last month, in a move that was widely criticized at home and abroad, Trump announced he would withdraw American forces from Syria after declaring victory over ISIS, the militant Islamic group active in that country.

Why Economic Performance is Key

Over the longer term, the rise of disenchantment over the lackluster economic performance of the EU could propel member countries to want to go their own ways, as with Brexit, according to Gomes. “A lot depends on how economically successful this union is,” he said. “This entire edifice was built on the idea of economic prosperity – ‘Join us, be part of this union; we’re going to make you rich and successful.’ It hasn’t delivered for a lot of [EU member] countries. That’s a question that will be asked again if we don’t see meaningful economic growth in the next couple of years. This is a serious threat – the world economy is slowing down, and Europe is slowing down dramatically.”

It is possible that “the memory and the experience of the Brexit negotiations will act as a deterrent for future countries that might consider the same path,” said Martin. “Five to 10 years from now, let’s say the U.K. has recovered and it is economically thriving, and we have a sclerotic EU, then it is possible that we might have more whispers of a country wanting to leave.”

If Brexit eventually happens, the EU has to contend with a smaller budget and will therefore be less effective in many ways than it is currently, said Martin. He pointed out that the EU has a seven-year budget cycle, and the next cycle will be from 2021 to 2027. “With the U.K. out of the EU, you will have a budgetary shortfall. It will be interesting to see if other countries agree to chip in and compensate – which is unlikely – or if we will we have a smaller EU and a smaller EU budget that some countries are pushing for. That might make it less likely for the EU to be effective — if it has fewer resources.”

The UK and France: A Less Cordial Entente?

Despite the bumpy road to Brexit, we haven’t seen the end of French and British defense cooperation.

By Ryan Bridges

Can a single public vote undermine a century of cooperation and friendly rivalry? Was the Brexit referendum indicative of a long-running shift in the United Kingdom’s relationship with the Continent, and especially with allies like France? Britain and France were competitors, and even enemies, for almost a millennium before they allied, first to contain Russia in World War I and then to prevent German dominance of Europe in World War II. But now, France is taking the hardest line among European Union members in Brexit talks. French President Emmanuel Macron has called Brexiteers “liars,” while the British press has accused France of trying to inflict maximum pain on British citizens and trap the U.K. in its orbit.

Those in favor of Brexit saw the vote as an opportunity to escape what they perceived to be an increasingly authoritarian, German- and French-dominated bloc – one that they believe is determined to punish the U.K. for the trouble it’s caused on the way out. The pro-Europe French perspective, on the other hand, sees the British departure as opening avenues for deeper Continental integration, especially in foreign policy and defense, in which Paris will be the leading voice. But beneath the daily scuffles over the backstop or backdoors into the EU single market, France and the U.K. have remained close on foreign policy and defense. They have too much strategic overlap, and too few alternatives, to drift apart.

This Deep Dive will consider the forces that pushed the two nations together and kept them close. Despite the U.K.’s effort to redefine its relationship with the Continent and secure its autonomy from Europe, and despite European efforts to deepen integration historically blocked by the U.K., Franco-British strategic cooperation will continue, mostly uninterrupted.
British Solitude
The United Kingdom is an archipelago of thousands of islands off the northeast coast of the European peninsula. It boasts an impressive population (66 million people in 2017), wealth (a gross national income of $2.58 trillion), nuclear weapons and one of the strongest armed forces in the region. These assets, paired with the advantage of physical separation from Continental challengers, once allowed the British Empire to rule the seas – and a quarter of the Earth’s land, too.

Yet, even at the height of its power, Britain had to stay abreast of developments across the narrow English Channel. It needed to maintain allies and a military able to prevent any single power from consolidating control of Europe and marshaling the Continent’s superior resources to threaten the British Isles. Its alliances shifted to balance whoever was most powerful, from Napoleon Bonaparte’s France to the Russian Empire. Containment of Germany has been the center of this balance of power strategy since 1870, when the German states unified (with a brief interlude during the Cold War). Germany’s population was larger than those of France and Britain. Its economic capacity outstripped France’s. And its geographic insecurity pushed it to expansionism.

But in the days after World War II – in the beginnings of the Cold War – something interesting happened. The largest Western European powers, France and Germany, and four other states decided to experiment with pooling their resources. Though initially surprised, British Prime Minister Clement Attlee welcomed the news. He saw it as a way to solve the German problem and help Western Europe’s economies rebuild from years of war. But over the next few years, as the European project trudged along, Britain’s economic interests and its concerns that it was being left out of important decision-making in Europe prompted it to reconsider its relationship with the European bloc. The United Kingdom decided it needed a seat at the table.

French President Charles de Gaulle thought otherwise. In 1963, and again in 1967, de Gaulle blocked British accession to the newly formed European Economic Community. For the French president, the EEC was designed in part to liberate Europe from Atlanticist hegemony. He would not open the gates to an American Trojan horse draped in a Union Jack.

The U.K. would eventually get its seat in 1973 – a few years after de Gaulle’s resignation. But the U.K. never fit comfortably at the table. And, realizing both de Gaulle’s fears and Britain’s grand strategy, the U.K. was able to disrupt European integration, to an extent. (A study by a group at King’s College London found that the U.K. voted against the majority on foreign and security policy more than any other member state. It blocked efforts to increase the European Defense Agency’s Budget and, even after the Brexit vote, threatened to veto various initiatives.) The U.K. held a referendum on its European Community membership just two years after joining, and it always strove to keep one foot in and one foot out. The beginning of the end came in the early 1990s. The U.K. accepted an opt-out from the Economic and Monetary Union in exchange for signing the Maastricht Treaty, which established the European Union. Two decades later, London was left out of key decisions on the eurozone and Europe’s future. A major argument for British membership in the European project had evaporated; the union increasingly belonged to Berlin and Paris.

So, Prime Minister David Cameron called the vote, and a slight majority of voters expressed a desire to leave. Selling a vision of life after Brexit was easy. The U.K. would re-emphasize its “special relationship” with the United States, deepen ties with NATO and expand its global presence through new military bases and trade agreements with the world’s most dynamic economies. Besides, it wasn’t certain that the EU would survive the U.K.’s departure, especially once other euroskeptic countries saw what life could be like on the outside.

That post-Brexit vision was flawed for two reasons. First, the EU has maintained a more-or-less united front in the Brexit negotiations. And the EU’s demise doesn’t appear imminent, especially not as a result of Brexit: The bloc’s remaining euroskeptics have, at least for now, almost unanimously ditched the idea of leaving the EU in favor of trying to reform it from within.
Second, and more important, complications arose in the special relationship. For example, the U.K., like the U.S., has an interest in fighting jihadist groups in the Middle East and Africa and maintaining Mideast stability. But as the U.S. is withdrawing from Syria and adopting a more hawkish policy toward Iran, the U.K. has special operations forces deployed in Syria, has said the fight against the Islamic State is not over and, along with the EU, is working to keep the Iran nuclear deal alive. And in some ways, the Iraq War altered the U.K.’s ability to follow America’s lead in the Middle East. Afraid to repeat the mistakes of that war, and wary of being seen as too obedient and eager to do Washington’s bidding, the House of Commons in 2013 voted against joining U.S.-led strikes in Syria.

The more fundamental problem with London’s shift toward Washington is that the U.K. is seeking deeper ties with the U.S. just as the latter is urging Europe to take responsibility for its own defense so that the U.S. can turn its attention to Asia. NATO is losing its purpose, and just this week, The New York Times reported that U.S. President Donald Trump privately discussed withdrawing from the alliance several times in 2018. NATO or not, the U.K. and U.S. still share concerns over Russian revanchism, and the U.K. will be a vital American partner in the region. But what the U.S. really wants is to convince the rest of Europe, especially the Germans, to build up their defenses on the Continent so the U.S. can reduce its own contributions. It’s doubtful whether the U.S. or U.K. could change minds in Berlin, but this painful separation between the U.K. and EU is unlikely to improve their prospects of doing so.

The U.K. also faces the challenge of being able to afford a military designed to fight America’s wars. When Cameron announced an 8 percent cut to the military budget in 2010, he described a force that was “overstretched, under-equipped and deployed too often” and “ill-prepared for the challenges of the future.” It’s one thing for the U.K. to fight terrorism alongside the U.S. in the Middle East or Africa; it’s quite another to increase engagement in Pacific theaters, especially for a navy that went seven years without an aircraft carrier in service and that has only 19 destroyers and frigates in service, a historic low for the Royal Navy. (Budget aside, it would be awkward for a post-Brexit U.K. to seek a free trade agreement with China while the U.S. is ramping up its activity in the South China Sea.) The National Audit Office warned last year that the Defense Ministry’s long-term spending plan was “unaffordable” and that the armed forces had serious personnel shortages. It also cautioned that the equipment program could face a 14.8 billion-pound ($19 billion) funding gap – roughly the cost of five Queen Elizabeth-class aircraft carriers. And the country’s former chief of defense staff said in June that the government had “slightly deluded the public” with a defense program it can’t afford. Notably, the NAO’s latest report makes no mention of Brexit or its potential effect on the U.K.’s economic situation.


These issues aside, part of the value of the U.S.-U.K. relationship for Washington was that London provided a trans-Atlantic bridge to the EU. The U.K. served as a de facto representative of U.S. interests in Brussels, helping to keep the EU economy open and shape foreign policy objectives. Long before the Obama administration opposed a move toward Brexit, former U.S. Secretary of State Dean Acheson remarked that Britain’s “attempt to play a separate power role apart from Europe, a role based on a ‘special relationship’ with the U.S. and on being the head of a ‘commonwealth’ which has no political structure, unity, or strength” was “about played out.”

The notion that the United Kingdom can expand its global influence outside the structures of Europe is flawed. And, ironically, the nation with whom the U.K. is perhaps best aligned, the country best positioned to be a partner post-Brexit, may not be the U.S., but rather the new undisputed leader of European defense: France.
France and European Integration
France is not isolated the way the United Kingdom is. But its geography – walled in by mountains to the south and oceans to the southeast, north and west – affords it a semblance of protection on several sides. Its greatest strategic threats, therefore, come from the east. From its perch at the end of the North European Plain, France would be the last stop of any European force seeking to threaten the British Isles. Germany’s unification, then, was a natural boon to the Franco-British relationship.

After World War I, France tried (and failed) to cripple the German state. After the second world war, they opted instead to tie their futures together. French Foreign Minister Robert Schuman and diplomat Jean Monnet proposed the European Coal and Steel Community, binding together the coal and steel sectors of France and West Germany. The rest is history.
Almost 70 years later, a war threatening France along the North European Plain is unthinkable. France’s greatest strategic threat today is Russia. Russia’s recent moves in the Black Sea (and to a lesser extent in North Africa) and the threat that the Russian navy could break out into the Mediterranean demand France’s attention. Beyond Russia, France’s national security priorities are concentrated on the Levant and Sahel-Sahara regions. While Paris knows it can’t be everywhere at once, it is the de facto military leader of a supranational entity with well over 1 million troops at its disposal. (Though in 2016, the European Defense Agency estimated that barely 400,000 EU troops were deployable, and it’s up to member states if and when to deploy them.)

If a global Britain is the U.K.’s unrealizable dream for life after Brexit, France’s might be a European army. The fulfillment of a Gaullist vision of a France-led European foreign policy and of Europe as an amplifier of French influence has not been this close in decades, but it’s still far away.
EU defense cooperation started, ironically, with a Franco-British summit. Frustrated with Europe’s inability to keep the peace in the Balkans without the United States, London and Paris signed the St. Malo declaration in 1998, which stated the EU “must have the capacity for autonomous action, backed up by credible military forces, the means to decide to use them, and a readiness to do so, in order to respond to international crises.” Out of St. Malo came the Common Security and Defense Policy, the framework for all the integration that followed. Throughout the process, however, the U.K. stressed that European cooperation could not conflict with NATO.

Brexit prevents the U.K. from blocking initiatives it doesn’t like, including the one it fears most of all: a European army. To be clear, the challenges to creating an EU army are so immense that it is frankly an impossibility for at least decades – and probably longer. But it’s also true that common defense initiatives that the U.K. had blocked are now getting off the ground. And it’s reasonable to conclude that, should the U.S. ever leave NATO, the infrastructure it left behind could be absorbed under the umbrella of the EU. It wouldn’t even have to move its headquarters.

In June 2017, the EU set up a small military headquarters, the Military Planning and Conduct Capability, responsible for planning and executing missions. It has training missions underway in Mali, Somalia and the Central African Republic. In November 2018, the European Union agreed to expand the MPCC’s force size and mission scope. In June 2017, the EU established the European Defense Fund to coordinate and boost member states’ investments in defense research, development and acquisition. (The fund is still small: Its 13 billion-euro, or $15 billion, budget in the EU’s next seven-year budget is roughly a quarter what France spends on defense in a single year.) The initiative that has generated the most buzz, the Permanent Structured Cooperation, or PESCO, was launched in December 2017, enabling member states to voluntarily participate in joint projects ranging from development of a new armored infantry fighting vehicle to a school for intelligence personnel. This is a far cry from an EU army, but it was close enough that the U.K. had resisted before Brexit.

These initiatives are attractive to France, especially the ability to share the costs of weapons R&D and manufacturing and to use Europe’s economy of scale afforded by PESCO and the EDF. France’s defense companies stand to benefit, especially since Brexit, in theory, disadvantages a primary competitor. This is why the French have resisted calls to permit third parties to participate in PESCO. While they finally acquiesced, the limits of participation have not yet been decided. For the U.K., joint weapons research and development would help overcome the country’s budget constraints. Some have speculated, for example, that the Future Air Combat System under development by France and Germany within the PESCO framework could eventually be combined with the U.K.’s Tempest project.

But on operational effectiveness, European cooperation is no substitute for what the British can provide. In June 2018, France, the U.K. and seven other European countries signed a letter of intent to set up a common intervention force, the European Intervention Initiative. (Finland became the 10th member in November.) In addition, the Franco-British Combined Joint Expeditionary Force, founded in 2010 with the Lancaster House treaties, is forging ahead despite Brexit and is expected to be combat capable by 2020. The U.K. is also moving forward with another joint expeditionary force involving Denmark, Estonia, Latvia, Lithuania, Norway, the Netherlands, Finland and Sweden. France agreed to send troops to support the force in exchange for British help transporting French soldiers in Mali.

A hiccup in Franco-British strategic relations in the next few months leading up to and after the U.K.’s official departure date from the EU would not be a surprise. Indeed, last spring the U.K. withdrew its pledge to lead an EU battlegroup in 2019. But Franco-British relations have survived serious disagreements in the past, such as when France refused to join the invasion of Iraq. At the same time that was happening, Paris and London were working on plans for a European rapid reaction force, which became the EU battlegroups, and working to jointly manufacture an aircraft carrier, an ambitious effort that ultimately failed.

The U.K. and France need to maintain good relations. They have some common interests, particularly in the fight against jihadist terrorism in places like Syria and North Africa.  (While the U.S. is drawing down its forces in Syria, France has said its special operations soldiers will stay, and the U.K., which also has special operations forces in the country, has said that “much remains to be done.”) For the U.K., giving France the help it needs would reduce Paris’ interest in fighting for more defense cooperation from EU partners. And it’s in the U.K.’s interest not to become too reliant on one ally, especially one going through the strategic rethink that Washington is currently in the midst of. For France, seeking out help from a military equal next door is much more hopeful than trying to change German domestic opinion about the armed forces. Despite the bumpy road to Brexit, we haven’t seen the end of French and British defense cooperation.

A Big, Fatty Opportunity for Big Pharma

The next multibillion-dollar therapeutic area for drug companies may be fatty liver disease, but there are a few practical hurdles to overcome first.

By Charley Grant
A Big, Fatty Opportunity for Big PharmaIllustration: Alan Witschonke 

The next big opportunity for pharmaceutical companies is in a disease many people don’t know about.

Investors and industry observers should expect to hear a lot about nonalcoholic steatohepatitis, or NASH, in the coming year. Treating this severe form of fatty liver disease is a massive business opportunity, but investors will need patience for promise to develop into profits.

Nearly a third of adults in the U.S. have fatty liver, while as many as 12% have NASH, according to Dr. Laurent Fischer, head of liver therapeutic development at Allergan .Many NASH patients don’t experience symptoms. The condition can be serious, though. Patients with NASH face inflammation and cell damage in the liver. Left untreated, NASH can lead to complications like cirrhosis, or liver scarring, which can be fatal. NASH is expected to be the primary cause of liver transplants by 2020.

The pipeline of potential patients is vast as obesity, closely associated with NASH, continues to be a major public health problem: A 2017 study from the National Institutes of Health found that nearly 40% of U.S. adults are obese—far more than a generation ago. Should that trend persist, there will be a deep pool of potential patients going forward.

The pharmaceutical industry has had big success treating liver ailments in the recent past.

Cures for hepatitis C that hit the market in the early part of this decade generated many billions in sales—and left a profit hole that needs to be filled after sales started to fall.

No surprise, then, that NASH is attracting a crowd willing to spend heavily. There are dozens of clinical trials under way. Several companies will reveal late-stage results in the coming year or early in 2020. That includes big companies like Allergan and Gilead Sciences, as well as smaller outfits like Intercept Pharmaceuticals . One estimate from pharmacy-benefits manager Optum put the potential peak market size as high as $40 billion in annual drug sales world-wide. 

That seems ambitious. Merck& Co sells about $40 billion of medicine a year from hundreds of treatments. But the drug industry will benefit even if the NASH market ends up a fraction of that size.

Years of scientific progress mean there are fewer diseases without viable treatments. For example, statins to treat high cholesterol were giant commercial successes in the previous two decades, but now are available as cheap generic drugs. And while efforts by regulators to rein in drug costs haven’t resulted in any formal price controls, manufacturers have lately been less aggressive in raising prices than they were in the first half of the decade.

Overall, industry returns on research-and-development spending fell to 1.9% in 2018, according to Deloitte, down from more than 10% at the start of the decade. Developing the next mega-blockbuster would help reverse that trend. Since there are no approved treatments for NASH currently on the market, first-mover advantage in this potentially lucrative market remains up for grabs.

Investors will need to be patient, though, because there are significant hurdles to making NASH treatments a viable business. For starters, since no drug is yet approved, manufacturers will need to show regulators that treatment to reduce liver inflammation helps lead to improved health outcomes. They also will need to convince health insurers that such a treatment is worth paying for.

That isn’t all. NASH can be tricky to diagnose because most patients don’t have symptoms in the earlier stages of the disease. What is more, doctors currently must perform a liver biopsy to give a diagnosis. That means that identifying patients isn’t currently possible from a typical physical exam.

“Everybody is getting into the swimming pool, but no one has built the diving board,” says Allergan CEO Brent Saunders.

Less invasive methods of diagnosing the disease are in development, and succeeding there will be just as important as developing an effective medicine. Such efforts could be several years away from bearing fruit, however.

Another hurdle is the significant overlap in the NASH patient base with other metabolic health issues, such as diabetes. A NASH patient is likely to have health issues that a physician might deem a higher priority to treat. On the other hand, since liver tissue can regenerate, unlike the heart, treating NASH may be an easier sell.

The path to profiting from the therapy may be tough but probably is worth the wait.