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.
[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.
