I haven’t written about Brexit in months now, largely because it has become so unpredictable that I have had nothing to say. After we saw the delay that I predicted in December, the whole affair has just had too many moving parts to know what would happen next.
But, as you know, I was in Germany and the UK just over a week ago. And while I was there, I had a very interesting conversation with Philipp Vorndran, the Chief Investment Officer at Flossbach von Storck, a Cologne-based money management company with some $40 billion under management. The tenor of his comments regarding the EU were very much in line with my thinking — that a ‘United States of Europe’ won’t work, and that this is where things seem to be heading because of the euro.
Philipp also said something interesting about the UK that I hadn’t considered. He said the ‘variable geometry’ idea, in which you have a two- or three-speed Europe of various levels of integration, didn’t help keep the UK in the EU. It helped to push it out. I want to wrestle with these two ideas briefly in today’s column.
Euroscepticism
Last October I wrote a trilogy of posts on the Eurobarometers, the twice-yearly poll published by the European Commission to gauge sentiment on various social and economic issues in the European Union. And the conclusion I reached was that among non-founding member states, euroscepticsm was mostly tame among the poorer entrants but rife among the richer entrants to the EU like Denmark, the UK, Sweden, Finland and Austria. See the posts here, here and here. Interestingly, amongst the founding EU nations, euroscepticism is highest in Germany.
I think a lot of this goes to national identity because the concern for the richer countries and Germany is about ‘free riders’. In Germany’s case, resistance to the euro or EU-wide deposit insurance schemes or Eurobonds goes to (a lack of) trust of other EU member states who they think will free ride on German financial largesse. For countries like the UK, which has numerous opt-outs, it goes to sovereignty, something I will come to shortly.
When Germany reunified, there was disquiet about the potential for German hegemony given the events of the early 20th century. Many feel that the introduction of the euro was a quid pro quo for reunification. Germany had to sublimate its monetary independence and mutualize its currency with those of the Italians, Belgians, and the French as a gesture to anchor it within Europe, lest it dominate the continent again.
Variable Geometry
But, the euro introduction – along with the expansion from 15 to 27 members – was the fatal blow that has created the untenable situation about which Philipp was talking. First, monetary union almost by definition requires a level of political integration – ever closer union – with which many feel uncomfortable, especially in Germany. And to address that discomfort and keep the European Project alive, politicians came up with this concept of ‘variable geometry’ or ‘multiple speeds’. Here’s a description by Fabio Ghironi via VoxEU thatI ran on Credit Writedowns in 2015.
Mr. Schäuble was Minister of the Interior of the Federal Republic of Germany between 1989 and 1991. In this capacity, he played a central role in the negotiations that led to German reunification. The same period saw the negotiations leading up to the Maastricht Treaty, which established the foundation for the Eurozone.
A widely held view at the time was that Germany agreeing to give up the deutschmark and to participate in a European monetary union was the quid pro quo for British and French acquiescence to German reunification – an event of monumental implications, given Europe’s history.
Germans were understandably reluctant to give up a very successful currency for the uncertainty of monetary union with less rigorous partners. Thus, at their insistence, the Maastricht Treaty included convergence criteria that would have to be fulfilled for euro membership. In effect, those conditions were intended to keep unreliable Southern European countries out of the monetary union.
In those years, Mr. Schäuble – heir apparent to Chancellor Helmut Kohl at the time – championed a ‘variable geometry’ approach to the Eurozone. A key implication of this ‘variable geometry’ was that that monetary unification should be restricted to a set of ‘core’ countries that shared Germany’s preference for austerity.
Mr. Schäuble originally made his argument explicit in a blueprint for the Eurozone co-authored with Karl Lamers and released by Germany’s Christian Democratic Union in the late summer of 1994 (Lamers and Schäuble 2014). Responding to critics less than two weeks later, Mr. Schäuble stated that “We cannot set the pace of European integration according to the slowest ship in the convoy.” Speed was clearly defined relative to the German benchmark, as enshrined in the Maastricht convergence criteria. Chancellor Kohl described the Schäuble-Lamers document as a ‘discussion paper,’ but he did not explicitly distance himself from it, and he defended the plan of a ‘core’ Europe.
This allowed eurosceptic countries like the UK, Denmark and Sweden to keep their own currencies and some level of political autonomy as well, the famous opt-outs.
But, as Philipp explained it to me, this actually became a problem rather than a boon for the UK because it left the UK out of critical decision-making as the euro area countries created a legal framework to complement their integration. Moreover, with the expansion to 27 members, these votes were achieved more and more by majority decision, not unanimous vote. So, the UK had no veto over the integration process that was imperative to make the euro sustainable. The result was that many in the UK felt that its sovereignty was being usurped because of the multiple speeds framework — not despite that setup. This led almost inevitably to Brexit.
Boris Johnson
I was thinking about all of this as I woke up to the news of the day, as I subscribe to a number of British newspapers. At some point this morning, I read Boris Johnson’s originally unpublished pro-Remain article that was subsequently published in the Evening Standard in October, well after the Brexit vote. I thought it ironic that, as Prime Minister, he is doing his best to thwart efforts from parliament to prevent a no-deal Brexit, the only thing upon which parliament can agree it definitely doesn’t want.
But, the article that triggered this post was this one titled, “PM is fighting to save, not wreck, democracy” in the Times of London by Robert Colville. And, as you can imagine, this piece argues that Boris Johnson’s strongman tactics in trying to achieve no deal will result in more democracy, not less, once Britain is freed from the yoke of Brussels.
My view
Reflecting back on what is going on in the UK in the context of what Philipp said, I have a sense of fatalism about all of this, frankly. I don’t think the euro can work without an ‘ever closer union’ political environment that mutualizes debt, risk, and banking systems. It simply leads to a crisis that radicalizes electorates. But this ‘ever closer union’ stuff can’t work either since national identities are very entrenched and many will feel centralization of power in Brussels means a lack of sovereignty.
In essence, over the long-term, the euro project is doomed. Eventually, I believe it will break apart. But, over what time frame? And will it happen because the EU breaks apart or will we go back to Schäuble’s variable geometries paradigm?
We are living in a very tumultuous political period right now. Norms and conventions are being challenged at every step. And Donald Trump has a lot to do with that. But, let’s not kid ourselves; he is a symptom of the problem. Western governmental legitimacy has eroded with its electorate. And when Donald Trump leaves the political stage, this will still be the case. Europe is actually at the center of a lot of this because of the euro. And, in the end, despite the UK’s not being in the euro, Brexit is as much a result of the euro as of anything else. That’s my view.