The E.U.’s Hungary Overreaching on Sovereignty: International Trade

Sovereignty is not a word to be casually used, especially if in overreaching. In both the E.U. and U.S., state governments have overreached at the expense of the delegated competencies or enumerated powers of the respective Unions of states. The Nullification Crisis in the U.S. and de facto unilateral refusal of the E.U. state of Hungary to observe E.U. law both demonstrate how the overreaching by state governments can compromise a federal system.[1] In the E.U. the refusal to do away with the principle of unanimity in the European Council and the Council of the E.U. enable and even invite such overreaches at the expense of the E.U. itself, and its distinctly federal officials. Even a state government’s pursuit of it’s state’s economic interests does not justify holding the E.U. hostage. The case of supporting Ukraine in the midst of the invasion by Russia is a case in point.

The full essay is at "The E.U.'s Hungary Overreaching on Sovereignty."

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1, In 1832-1833, the government of South Carolina held that the U.S. tariffs of 1828 and 1832 were null and void within the state. “The resolution of the Nullification Crisis in favor of the federal government helped to undermine the nullification doctrine,” which holds that states have the right “to nullify federal acts within their boundaries.” Britannica.com (accessed August 25, 2025). I submit that the European Court of Justice could do worse than declare the same with regard to state laws, including the refusal of a governor or state legislature to implement federal directives, that are in violation of E.U. law and regulations. Monetary sanctions by the European Commission have not been a sufficient deterrent. If either de facto or de jure nullification becomes the norm, then it would only be a matter of time before the Union dissolves and the states could once again take up arms against each other.

Anticipating a Recession: Economic and Political Indicators in the E.U.

Anticipation in August, 2019, at least among bond purchasers on Wall Street, of an impending recession in 2020 had at least in part to do with the E.U. In particular, a large state, Germany, had a disappointing second quarter in terms of contracting economic output, and the increasing prospect of Britain seceding from the Union was thought to result in the E.U. economy turning recessionary. I contend that both of these baleful indicators were over-emphasized. Additionally, adding the increasing political polarization in the E.U. as another contributor to an upcoming recession would be too much.

Germany’s economy contracted just 0.1% from the 0.4% growth rate of the first quarter.[1] Placing such emphasis on a change from 0.4 to 0.3 might strike some people as being petty. Yet Carsten Brzeski, chief economist in Germany of the Dutch bank ING said at the time, “Today’s GDP report definitely marks the end of a golden decade for the German economy.”[2] A 0.1% change ends a golden decade. How fragile golden decades must be!

To be sure, “industrial output for June dropped over 5% compared to the previous year. And the ZEW indicator of economic sentiment for August plunged sharply, hitting its lowest level since December 2011.”[3] Brzeski pointed to increased uncertainty from a large state seceding from the E.U. and the U.S.-China trade negotiations as the main culprit. Whereas the British economy would likely be negatively affected in the scenario of secession without coordination, the argument that the E.U. economy would contract as a result is more tenuous. Even if the British economy of a fully sovereign U.K. were to falter, the E.U. economy, being, like that of the U.S., made up of state economies, would hopefully be able to absorb interruptions in trade with Britain. Moreover, the empire-scale of the E.U. (and U.S.) is, as a cluster, much larger than the state-scale of political entities within the empire-scale union.[4]  Baleful economic predictions in 2019 for the E.U. post-secession may have been exaggerated in part due to conflating the two political scales. References to Britain’s “divorce” from the E.U. serve as perfect examples of the category-mistake. No, Virginia, the U.K. is not another E.U.; rather, pre-secession Britain was/is a political sub-unit in the E.U., whose laws and court (ECJ) trump(ed) British law and courts.

The pre-secession trend of business moving from the state of the U.K. to other states may suggest that the E.U. economy would actually benefit from a “no deal” secession. Furthermore, the E.U. trades with other countries, so disruption in trade with a former state could be viewed relatively and thus seen as less baleful for the Union than some economic forecasters were predicting in 2019.

More crucial to the E.U., and less to its economy, were “insurgent movements from the anticapitalist far-left to the nativist far-right,” which have “made inroads” amid “eroding public confidence in mainstream conservative and social-democratic parties that for decades” had dominated at the state level.[5] Although it is tempting to label all this as political instability, the political institutions have funneled even parties like the 5 Star party, which came out of anti-corruption protests, into the nitty-gritty of coalition talks.

Even the political tensions in 2018 between the state government of Italy and the federal E.U. level, which “upset investors in Italian bonds and banks, hurting the flow of credit,” and the collapse of the governing coalition in 2019, which drive some investors into bonds, were not economic crises for the E.U. economy as a whole. Politically, however, Matteo Salvini of the League Party in Italy, could already be viewed as potentially damaging the E.U. federal system. He “challenged” the E.U. law on fiscal discipline for state governments, accusing the states of Germany and France of hypocritically getting away with exceeding the limits on state debt and deficits while the E.U. imposed austerity on the Italian government. His complaint was valid enough. On August 20, 2019, he repeated he would defy federal authorities on the tax-increase (rather than a decrease!) part of the austerity fiscal-discipline federal mandate.

In the early 1830’s, U.S. President Andrew Jackson was forced to deal with South Carolina’s Nullification Acts, which stipulated that the state government could defy federal law regarding laws that the state deems are detrimental to South Carolina. Jackson was aware that a federal system in which governmental sovereignty is split, as in the U.S. and E.U., cannot long survive when even just one state government can decide to defy federal law. So the political uncertainty regarding the growing power of the political extremes in the E.U. has primarily political implications. To put the economics before the political in such a case represents yet another over-statement of the economic. Politics does not reduce to economics. Although the former can obviously affect the latter, one of the domains should not be put foremost in the domain of the other. My thinking on political uncertainty is that its economic effects tend to be overstated. Even in political terms, political institutions have shown a remarkable ability to funnel, or normalize, what was once raw political conflict.

Related: Skip Worden, Essays on the E.U. Political Economy: Federalism and the Debt Crisis. Available at Amazon.

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[1] Julia Horowitz, “German Economy Shrinks as ‘Golden Decade’ Comes to an End,” CNN.com, August 14, 2019.

[2] Ibid.

[3] Ibid.

[4] Skip Worden, British Colonies Forge an American Empire: A Basis for Trans-Atlantic Comparisons. Available at Amazon.

[5] Marcus Walker, “Italy’s Government Collapse Sets Up a Power Struggle,” The Wall Street Journal, August 21, 2019.

Political Risk Exaggerated on Catexit

On the day the Catalan parliament voted in favor of “Catexit” from Spain, the IBEX-35 stock-market index dropped 1.4 percent while the Stoxx Europe 600 gained 0.3 percent.[1] The IBEX-35 is an stock-index of companies based in Spain. Investors also sold state bonds; yields on 10-year bonds rose to 1.574% from 1.558. Even though these changes were hardly earth-shattering in magnitude, their directionality points to investor-anxiety. I submit that it was overblown, which suggests that investors generally tend to over-react to political events.

Analysts said at the time that the state of Spain and the E.U. were unlikely to recognize the validity of the legislative vote, so the possibility of social unrest accounted for the drop in the index and rise in bond-yields. The prospect of a Catexit was indeed still bleak; in fact, the state government had redoubled its control in the problematic, wealthy region, so even the prospect that social unrest would even ruffle the feathers of business could be said to be bleak. Uncertainty itself was the alleged culprit. The Wall Street Journal observed at the time that the “market selloff reflects fears that uncertainty will be harmful for [the state’s] economy.”[2] The fear of fear itself, I submit, can as in this instance be overblown, given the haziness of the future negative scenarios.

Generally speaking, political risk can be overstated if a political event occurs on a day rather than strung out over weeks or months even though the eventual possible outcomes are far from clear. The publicity from the sheer dramatic flair of an event can magnify the perception of uncertainty, prompting investors not just to stay away, but even to sell.  

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[1] Jon Sindreu, “Stocks, Bonds Hit by Political Unrest,” The Wall Street Journal, October 28-29, 2017.

[2] Ibid.

Business CEO’s Overstating Political Uncertainty in the United States

The impact on business of political uncertainty in countries that are seized by revolution can be substantial—so much so in fact that CEO’s and board directors are motivated to avoid the uncertainty itself. I submit that business analysts of political risk tend unwittingly to routinely overstate the uncertainty arising from incoming U.S. presidential administrations. If I am correct in this claim, CEO’s and board directors pay too much heed to political uncertainty itself in the making of major strategic decisions involving operations in the American context.

Although American culture welcomes and even encourages leaps in technological development capable of transforming daily life, another sort of change—one more subject to societal control—is tolerated only if made incrementally. Otherwise, the change is dubbed as radical, which is a charge made more out of fear than according to any objective measure. Clutching at the status quo unduly translates politically into the tyranny of the status quo as powers both in business and government that profit as things are hold back all but incremental change that does not threaten the current basis of benefits. The many points of access into the federal legislative and executive machinery enable the stultifying influence a virtual veto over proposals of serious, or “real,” change. Such change tends to be pulled back until only the tolerated incremental change remains.

A few examples reveal the pattern. In 1986, amid large budget deficits caused in part by the tax cuts of the early 80’s, Ronald Reagan pushed for a wholesale change in the federal income tax, ridding it of its myriad of deductions. Yet as the U.S. Senate debated the tax code, individual senators came forward with rationales for all of the major deductions. The “powers that be” were exercising their prerogatives to continue their respective benefits, which Reagan’s vision for change would put at risk. Business practitioners anxiously pointing to the political uncertainty of a revised tax code were in retrospect overreacting, and thus putting too much emphasis on the uncertainty itself.

In 2008, Barak Obama campaigned under the slogan of “real change.” After his election, political risk analysts were doubtlessly impressed with the sheer uncertainty latent in the very notion of real change. Yet when Congress was considering the Affordable Care Act, Obama dropped his proposal for a public option, which would be useful should private insurers leave the planned exchanges. The president gave into pressure from the insurance industry lobby, the members of which stood to lose benefits should Obama’s healthcare plan instantiate real change even just in terms of there being a public health-insurance option. The resulting law was incremental because the private health-insurance companies were still to be relied on. The anticipated uncertainty regarding the American health insurance system turned out to be much less. The analyses of CEO’s making strategic decisions based in part on avoiding the American context due to the uncertainty would have been distorted, and thus not optimal.

In 2016, when Donald Trump was elected president, the uncertainty in terms of political risk must have been palpable in corporate boardrooms. Trump’s proposal of a substantial tax, or tariff, on American companies that take advantage of lower labor-cost countries and import the resulting products back into the large U.S. domestic market undoubtedly stocked the uncertainty without much thinking-through of how political compromise could take its toll on the proposal as it moves through Congress. Similarly, fears of trade wars resulting from the proposed tariff may have been overblown. That American companies would be subject to the penalty means that foreign companies manufacturing outside of the U.S. and importing into the large domestic market would have a competitive advantage. Pressure from Chinese companies could mitigate the likelihood of a Chinese-stoked trade war even though the pulling out of American companies (i.e., the loss of some manufacturing plants) would have a detrimental impact on the Chinese economy. Of course, such a scenario assumes that the actual tariff is enough to motivate American CEO’s to return their manufacturing to America; the political compromise that may be needed to pass such a tariff might reduce it to an insufficient level and thus effectively discredit the very idea of using public policy to alter the financial calculus of American companies such that they have a financial incentive to return voluntarily in line with maximizing profit.

The American preference for incremental over systemic change puts any genuinely new political proposal at risk of being shrunk to fit through the contours of the status quo, which is so dear to the vested interests. The uncertainty typically thought to exist in the advent of a new presidential administration tends to be overblown in retrospect. The American economy suffers from this bloated condition to the extent that CEO’s and corporate board directors move operations away from the geographically delimited hyper-uncertainty.

Americans Can Sue Saudi Arabia over 9/11 and the Saudis Accept Lower Oil Production by OPEC: The Unraveling of a Deal?

On Wednesday, September 28, 2016, the U.S. Congress voted overwhelmingly—97-1 in the Senate and 348-77 in the House of Representatives—to override President Obama’s veto of a bill that allows the families of the September 11, 2001 World Trade Center bombings.[1] As a result, American courts can seize Saudi assets to pay for any judgment obtained by the families. Saudi officials in turn warned that their government might need to sell off hundreds of billions of dollars in holdings in the United States to avoid such an outcome. In another place in the world, Saudi officials were dropping their resistance to OPEC—an oil cartel—cutting production. Even though positive correlation does not in itself indicate causation, the timing may point to the impact of political calculations by Obama. That is to say, the timing may suggest a political deal gone bad.

Generally speaking, low gas prices and the related fall in the prices of foodstuffs favor the reelection of the party in power. Such economics play well with the American electorate voting for U.S. President. So President Obama, being in favor of Hillary Clinton, another Democrat-centrist, may have told Saudi officials that he would make sure a law allowing U.S. citizens to sue the Saudi Government over 9/11 would not be enacted, and in return the Saudis would continue to pressure OPEC to keep oil supply at the high level. Keeping such a deal from falling apart may have been why the White House proffered “fierce objections” to Congress overriding the president’s veto. To be sure, the override could pose a danger in that the Saudis could sue the U.S. Government on matters related to the U.S. military presence in the kingdom, but would Obama have been so “fierce” just for that possibility when a more pressing concern was likely keeping the White House in Democratic hands to insure his legacy (e.g., Obamacare).

Sure enough, OPEC’s 14 oil-producing nations, including Saudi Arabia, agreed on Wednesday, September 28, 2016, “to modestly cut their collective oil output later this year in an effort to bolster sagging prices.”[2] Although the cuts probably would not take place until after the U.S. presidential election in early November, the “decision sent global oil prices soaring by more than 5 percent.”[3] The question for Obama might have been: How long will it take for the increase to be reflected “at the pump” and in grocery stores? Perhaps he might have considered opening up more of the U.S.’s strategic reserves, though he might have felt that the override itself was close enough to the election that any price-implications by election day would not diminish Clinton’s chances.

A major difference separates the motive of not wanting to open the U.S. Government up to being sued in Saudi Arabia on the one hand and not wanting Clinton to lose the upcoming election; whereas the former is acting in the interest of these United States, the latter desire is partisan and personal. Making a deal with a foreign government for the latter motive would essentially put the United States second, as well as having the sordid taste of trying to manipulate the American People—the popular sovereign to which the government and its elected and appointed officials are agents rather than principals.

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1. Jennifer Steinhauer, Mark Mazzetti, and Julie H. Davis, ,“Congress Allows Saudis to Be Sued Over 9/11 Attacks,“ The New York Times, September 29, 2016.

2. Clifford Krauss and Stanley Reed, “Oil Prices Rise 5% on OPEC’s Tentative Deal to Cut Production,” The New York Times, September 29, 2016.

3. Ibid.

Global Markets and London Overreact to the British Vote to Secede from the E.U.: Missing the Bright Spots

The world’s financial sector may be excessively sensitive to increasing uncertainty associated with major changes—that is, changes that impact how large institutions, including governments, relate to each other. In such cases, so much is at stake that forces (i.e., the major powers) tend to manage the large-scale change with a minimum of disturbance. In short, the status quo has too much at stake for the market’s feared uncertainty to actualize. The British referendum on whether the E.U. state should secede is a case in point.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Global Geopolitical Risks: Is Wall Street Hypersensitive and Reductionistic?

The Dow dropped 140 points in August 5, 2014 on a rumor that the Russian military is about to invade eastern Ukraine. Three days later, amid hints of de-escalation and the end of troop “exercises” on the Ukraine border, the Dow gained 186 points. Three days later, as Russia’s president approves a deal wherein the Russian OAO Rosneft and the American ExxonMobil can begin drilling a $700 million well in the Arctic Ocean, the Dow gains 16 points.[1] Are stock analysts and Wall Street investors really so hypersensitive to day-to-day changes in geopolitical risk? It may be simply that such news sells.

Just because to events are correlated in that they both occur at the same time does not necessarily mean that one caused the other.  According to the eighteenth-century philosopher David Hume, we think we have a better grasp on causation than we actually do. In the case of positive correlation between two events, a third one could be behind both—rather than one of the correlated events causing the other. In general terms, causation may be much more complex than the human brain is naturally inclined to accept.

In the case of the changes in the Dow cited above, many analysts held at the time that a “plunge in geopolitical risks related to the Ukraine-Russia crisis leads to a rally in U.S. stock prices.” Yet how “micro” can we take such a change to be? Do rumors and hints coming out of Moscow really have such power to reverberate throughout Wall Street? If so, stock analysts and investors may have a proclivity to minimize or simply not see the tremendous inertia that the geopolitical status quo enjoys. To be sure, significant events do happen. A century before, on August 4, 1914, Britain entered World War I, the war to end all wars only to prompt Adolf Hitler into political action.

Additionally, analysts may be inclined to develop an “either/or” perceptual framework that ignores the gray areas in sizing up the relative importance of multiple geopolitical hot spots around the world. Some analysts dismissed the negative impact of the escalating fighting in Iraq and Israel even as the American press was full-blown into yet another obsession on them. The Markets in New York and Illinois may indeed have been “shrugging off” the detrimental impacts of the American bombing in Iraq and Israel’s in Gaza because the Middle East as USA Today reported at the time. Yet even though Russia can have a clear economic impact on Europe, which in turn could hamper the American economy, neither the E.U. nor U.S. is indifferent to possible impediments to oil coming out of the Middle East. Russ Koesterich, the chief investment strategist at BlackRock, said as much in maintaining that the American markets would be higher if it weren’t for the increase in geopolitical risk in the Middle East.

Interestingly, however, Koesterich also stressed that “other issues are also weighing on stocks, including elevated valuations in the U.S. market, renewed economic weakness in Europe, concerns about an earlier-than-expected interest rate hike by the Federal Reserve and recent weakness in the high-yield bond market.” It is easier to reduce the cause to one, and point the finger squarely at the particular military conflagration having the most direct line, or seemingly so, to the economies in the West, than to go back to the hackneyed, even banal, myriad of domestic usual suspects. The human brain yearns for simplicity even when the actual causation process is more complicated, and the media dutifully comply.

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[1] All quotes are from Adam Shell, “If Russia Sneezes, Wall St. Gets a Cold,” USA Today, August 12, 2014.