Crisis After Brexit: Let Us Put An End to the Old Europe of Denigrators

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Yves here. This article gives a high-level view of why the EU’s pursuit of “naive globalization” has caused real problems, including “control freaks” in Brussels and an overbearing Germany.

By Thomas Fricke, Chief Economist and a member of the ECF leadership team and previously the Chief Economist of Financial Times Deutschland. Originally published by SpiegelOnline. Translated from German by the Institute of New Economic Thinking and crossposted from their website

The verdict seems to be clear. Brussels backroom diplomacy must be a thing of the past. Of course. And there must be fewer rules and standardizations. More democracy instead. Except when it comes to getting the public finances back in order. In that case there can never be enough everlasting pacts and irrevocable laws.

Opinions like these or similar ones have been put forward in Germany since the British voted to leave the EU last week. The question is whether all this gets to the core of the matter. After all, in the US populists have had success at elite-bashing as well. Although some of them only have a faint notion of Brussels. And neither do they have the Euro nor a stability and growth pact which may be tightened.

If Europe is on the brink of a crisis this may have less to do with the typical Brussels bureaucracy or with the incompatibilities of European cultures. The cause could lie at a much deeper level. It could be because of the mix of naïve liberalization and depoliticized globalization which Europeans (as well as Americans) have pushed since the 1980s, the consequential damage of which have become palpable everywhere these days. Which now lead into politically senseless disasters like Brexit as populists exploit the discontent without being able to offer a smarter solution. The Boris Johnson effect.

Of course, there are a great many benefits as well: Borders are more open now, there is more extensive trade, bank transfers across borders are easier and travels across Europe are possible without constant border controls.

If only it weren’t for the fact that the liberal idea has been exploited for creating tax evasion havens praised as neat expressions of free competition and for liberalizing the financial markets to such an extent that the crash in 2008 was inevitable. As a result, Europe’s banks in particular are close to the brink to this today.

All the while the gap took on a more breathtaking dynamic, the gap between the rich who benefited from the financial liberalization, and those whose pensions were cut because the governments subsequently needed the money to rescue the banks. Madness.

The Curiosities of German Perception of the European Union

The dogma of the good-for-all liberalization served as a knockout explanation as to why the EU could never get big enough. True to the motto: If free markets render more economic prosperity, large free markets render even more. Hence, there cannot be such as too many countries joining in – regardless of whether or not the union eventually will be politically overwhelmed because in the end it has to deal with too many diverse notions. Case in point: refugee crisis.

One of the curiosities of Germany’s perception of the EU includes complaining about Brussels’ standardization mania three times a day – straight vs. bent cucumbers – yet failing to mention that it was German politicians and lobbies that once declared this standardization as absolutely necessary from an economic, free-market liberal point of view. To ensure that no government can protect its domestic industry against foreign competitors through national rules and idiosyncrasies any longer. And so that exporters do not have to provide variations of their products with differing specifications for each domestic market.

That is why French automobile manufacturers were no longer permitted to install yellow, prettier low beams. That is why lobbyists from the export nation Germany were particularly eager to demand single standards in Brussels – only to then complain in Sunday speeches about Brussels’ frenzy of regulation. Sure.

The Europe of Control Freaks and Denigrators

The tricky thing is that under this decade-long motto the European Union has developed into a club whose seeming primary concern is to standardize, control, and discipline one another, rather than solving major problems in unison. It’s in the motto, after all: Those who think that markets and competition are better options for regulating things and that government must withdraw (or delegate tasks to Brussels), shouldn’t be surprised if governments eventually seem to be hopelessly muddling along – when it turns out that markets obviously fail to regulate everything.

There is a touch of absurdity in the stoic manner of responding to these developments with more and more proposals for ever stricter pacts and provisions for meeting national deficit goals – a German specialty: setting rules. This, on the one hand, is futile, as history shows that state finances cannot be restored by manic short-term regulation of annual budgets (but mainly through a great deal of economic dynamism).

On the other hand, the deficit goal fetish has turned the European Union into a club where some members are concerned only about denigrating other members for not meeting those more or less unrealistic goals yet again – until the tables turn and the others have a go at you (although nobody rivals us Germans at this, for sure). A club in which it is quite okay to demonstrate how the administration of colleague so-and-so is even worse off so that the financial markets don’t even think of attacking the own country. A club in which a German Finance Minister twists another’s arm to implement austerity which he himself would not even dream of carrying out in the slightest in his own country.
Where are the fans?

What an exquisite club. This is an economic and democratic disaster. Intent on passing the buck. Tattletales. Where are the fans?

In a tranquil world free of crises, some may be easily convinced into delegating the majority of their business operations and business problems to the healing powers of the global market. The only problem is that these days it’s all about solving rather pressing problems some of which have emerged as a direct side effect of an all too naive pursuit of globalization – ranging from the repercussions of the financial debacle to the refugee crisis to the wealth gap. Except that the same globalization has sharply reduced the room for maneuver of our elected representatives. Doubly stupid. Even Brexit nostalgia with a return to the old world order of national solutions is of no help here.

It makes sense, of course, to look into whether some decisions better be made locally in the respective states and regions instead of in Brussels. Of course not everything has to be standardized allegedly for the sake of free competition.

The spur of growth that one or the other economics pope had prophesied in the wake of a unified single market never occurred. A great deal of scorn for little prosperity. But that won’t do.

We Need a Union

What Europeans need is a new philosophy that will not blindly reverse everything: a Leitmotiv that, especially where catastrophes loom across borders, strives on finding big answers in a mutual effort and making decisions democratically which will affect as many as possible in a positive way. Be it in the battle against tax evasion, terrorism, climate change or the fading middle class.

Those who want to achieve something in all this must wave the naive liberal dogma good-bye, whereby the EU by all means will not need a larger mutual budget. This would be a tremendous contribution in facilitating a swifter response to crises. It would also be necessary to launch a major investment initiative through Europe-wide incentives. Or a common financial transactions tax against all too reckless speculation. And why not aim at a common unemployment insurance, which also the Germans would profit from in the next downswing – yet whose common logic ensures that governments, which in times of crisis already are low on funds, are spared from spending additional money for unemployment benefits.

It would be coo-coo to wish for the expansion or deepening of an inadequate Europe of control freaks and denigrators, that’s clear. What is called for is a union so good that people will want more of it.

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  1. Bimbo

    Wishful thinking doesn’t help to understand what is going on.

    Pay attention and notice this piece of news:

    Danes’ support of EU skyrockets after Brexit

    The unintended consequences of the Brexit is having the Brexiters isolated and wishful thinking.

    Doesnt matter how do you rationalize the facts but they are clear. EU became stronger with the Brexit vote and UK isolated.

    Is very clear that we are seeing modern Luddites like this:

    And there must be fewer rules and standardizations.

    As the global economy is more integrated today think for a while when you want to sell in all those markets and cultures. Without more supranational institutions trade is more difficult and more the power of the big international corporations on small countries and less developed.

    You can wish a lot of things and even rationalize the facts in front of you but people is, more or less, split between the “cosmopolitans” and the “isolationists“. European Union represents the Cosmopolitans even without a lot of defects and problems. The others, Isolationists are split between the xenophobes and the open secessionists.

    The xenophobes are represented by the UKIP in the UK and Trump in the USA. The open secessionists are represented by the SNP in Scotland or JxS in Catalonia, Spain. These open secessionists are not against foreigners and they believe that EU will help them to secede from theirs current political constraints and get theirs Independence inside the EU where as minorities they are protected by the EU Legislation and Courts.

    Bear in mind that the Open Secessionists are aware that Globalization means that they need to share their sovereignty in one Institution or political system to support the “forces of globalization” and even external menaces, specially from theirs neighbors that are now linked. The EU is the best tool to protect them from big corporations and even troubled neighbors. The EU can avoid “civil wars” like the last one in Spain. As the EU is a strong help to avoid wars inside their borders, they aim to secede without wars and with theirs rights recognized, no matter theirs size and even economic power.

    So these are some facts and we can rationalize as we can. Each one can pick and chose sides. But we need to recognize the facts and do not wishful thinking. In fact are the small countries and Nations who are more prone to adhere to the EU spirits and Institutions and Laws. Not the opposite.

    The consequences of the Brexit are so painful that the Danes are more overenthusiastics about the EU now than in countries like Spain, who benefited a lot in economic terms along these years, since they got inside the EU. So the UK is more isolated and the EU is strengthening with the UK political and economic implosion.


    1. Synoia

      First, there is no sharing soverignity. One has it or one does not.

      Second the EU is the best tool to protect from large corporations. Obviously all those who discuss the loss of protections from regulation harmonization and ISDS are imagining the perils.

      Someone here is a fool. Which of us is it?

    2. Alex morfesis

      Woolworth and sears; singer and underwood, royal, smith-corona.

      light happens in a world dominated by fools and their attempts at monopoly

      They end up like nokia and BlackBerry…

      the brand known as schaeuble is well past its sell by date…just as the kmarts and their resurfaced parking lots hang on so that eddie lambo does not have a taxable event for the pensions he keeps milking from the carcass of what was once a dominant pair of retailers…

      Dr strange-luv-aeuble too is showing signs of the spackle cracking…

      The eu protects from big corporations and war ??…

      depends on how one defines war…

      the spanish “civil” war was an odd duck that had less to do with regional linguistic differences and a little bit more with economic interference by european royals trying to hold on to the last of their direct dominion and “adoration” of/by their happy little serfs…

      The world would be better served if we call out noisemakers and let them get their noses bloodied a bit every once in a while…

      Perfect example is the korean peninsula…remove all troops and barriers and watch one dim sun complain that it must all be a trick…it is…it takes more than bluster to march an army…gasoline helps…but the myth of this “risk of war” must continue…

      and one always needs an enemy…

      as the documents were being prepared for signature the next day in korea, there was fidel @ moncado…

      and the wheel goes round & round…

      The LMU (latin monetary union) is not much mentioned by the eu…it too came to pass…

      1. optimader

        Perfect example is the korean peninsula…remove all troops and barriers and watch one dim sun complain that it must all be a trick…it is…it takes more than bluster to march an army…gasoline helps…but the myth of this “risk of war” must continue…

        and one always needs an enemy…

        A corollary simple truth. What if all the soldiers on the south side of the DMZ packed kit and went home?

    3. reslez

      The EU is a staggering failure and a betrayal of everything pro-Europeans said it would be. It will continue to fail as long as fiscal transfers are unimplemented. “Europeans” certainly don’t act like Europeans, they act like Germans, Spaniards, Frenchmen, etc. who can’t resist kicking neighbors when they’re down. The half-baked euro is a pill of poison that doomed the continent. Nobody can walk down a street in Thessaloniki and not see the timer ticking down. If people have to be poor they will be poor and free without bureaucrats from Brussels waggling fingers in their faces.

    4. digi_owl

      From personal experience i have found Thelocal to be a crap source of “local” news. The level of spin and distortion they put on articles are staggering.

  2. Jamie

    Which now lead into politically senseless disasters like Brexit as populists exploit the discontent without being able to offer a smarter solution.

    I almost stopped reading at this point. What an excellent example of uninformative low-rhetoric, prejudice, name-calling and a TINA variant all wrapped up in one execrable sentence. I don’t know who the “populists” referred to are supposed to be (other than Johnson, who is specified only as an example), but we have many, many smarter solutions… we simply lack the political power to implement them. And don’t blame the lack of political power on us… it is not a weakness in either our characters or our numbers (or our “smarts”), it is a design feature of the current political system.

    I’m glad I held my nose and continued reading, because I do think Mr. Fricke has got a bit right about the current Union not being the Union that everyone perhaps would want. But I see no “smarter solutions” on offer by Mr. Fricke. Just some hand waving about a change in philosophy and a few lame reforms. A financial transaction tax, a “major investment initiative” and common unemployment insurance, while “nice” ideas, are not going to change anything significant. Apparently Mr. Fricke’s “smarter solutions” are those which leave the anti-democratic plutocracy untouched.

    1. Yves Smith Post author

      I hate to tell you but this is more reality based than 90% of what UK and European pundits are writing right now. Take this as a counterexample. The UK fantasizes that it has leverage against the EU:

      The reality is:

      UK already is a tax haven, has a 20% corp rate going into effect soon or already

      UK tax haven depends on there being no withholding at EU borders, which depends on EU directive and EU/EEA membership. That’s why Ireland’s haven works.

      So much for that supposed nuclear weapon. It’s more like a water pistol.

      1. Bimbo

        Probably they believe they will compete against the Swiss taxes.

        But one thing is wishing, other is achieving the desired results.

        Switzerland is a federal country with low levels of taxation already and has a balanced budget. UK do not have a balanced budget and the real estate implosion will help to wide the fiscal gap and rising the public debt at higher speed. Bear in mind that the rise in current public debt in the UK is the fastest of the developed world.

        They can lower the corp taxes but who will pay the funds needed to avoid an huge rise in the public debt and unfunded public vaults? The poor again? That can be dangerous and trigger a popular revolt against the establishment.

        It seems that, as you pointed well, the UK has water pistols and outside the EU can not compete against the Swiss tax system. But as the Brexiters always kick the can down the road they can believe in the political propaganda. Wishful thinking helps a little to face the facts but do not change them.


        1. Tony Wright

          Hmm, a Swiss financial type told me that the Swiss business model, starting with Nazi gold after WW2, is basically “we will take your money, we don’t care how you got it, and we will keep it safe for you. But we won’t pay you any interest, we will let you remain anonymous, and we will use your money as we see fit to make money for us”.
          Forget Swatches and Swiss Army knives, it is basically an upmarket money laundering operation, with patent protected pharmaceuticals and agrochemicals on the side. Nice.

      2. Mark P.

        ‘The UK fantasizes that it has leverage against the EU.’

        It’s naive to imagine that the UK doesn’t, I’m afraid.

        The EU already has a banking crisis it’s barely sitting on, while the UK doesn’t have to pull the trigger on Article 50 till it’s ready. Whose side is time on?

        Arguably, neither side, you may say. Granted, too, the UK doesn’t have leverage in the areas that Daily Telegraph readers fantasize it does. But as this thing drags on and both sides take damage, further up the escalation ladder the British will start to think about MAD-type strategies.

  3. vidimi

    i too think that a stronger union is needed, one that is much more than about just making europe a common market. it has to be a fiscal union, where the tax code is uniform throughout; a financial union, where budgets are shared and money is printed; and, yes, even political union where decisions about a shared future are made together. even though this contradicts my belief that democracy doesn’t scale, it’s the best option for breaking away from the current version crippled by its neoliberal design.

    1. a different chris

      Yes! specifically where everybody faces the fact that Greece is a sh*thole where you just flush money down the drain and that’s just the way it is – it’s the EU’s Mississippi. Accept it and concentrate on the bigger picture and maybe the EU survives.

    2. vlade

      Impossible right now. The generation that would accept this are in their (at most) 30s, and demographically it’s too weak a force – not to mention, they often don’t bother to turn up at the elections (see UK referendum turnout by age – sub 30s have the lowest turnout ex Oxbridge) – even if usually their are the ones most affected long term.

    3. Tony Wright

      I agree. What we need in financial terms is to stop this ‘race to the bottom’ re. Corporate taxation. This, along with the increased use of tax havens by the wealthy, is castrating and eviscerating the capacity of most governments to govern effectively on behalf of the people who elect them. So we end up with multinationals controlling governments rather than the other way around.
      This also serves to seriously limit the ability of governments to constrain the increasingly destructive exploitation of the fundamental ‘wealth’ of the planet, both the renewable resources, I.e. natural biota – 30 percent of species extinct in the last 40 years according to WWF, and the non renewables, i.e. Fossil fuels and minerals.
      “We’ll all be rooned ,said Hanrahan”
      The rats and cockroaches will inherit the earth after we dumb humans have finished defaecating in our own nest.

  4. a different chris

    >nor a stability and growth pact

    Haha a pact that delivers neither…

    Anyway, although I inherently thought the whole “EU is going to crush Britain” thing was comical, I am also your generally stupid American and I did not realize how unlikely that was given the relative sizes. I went to Wikipedia and discovered that Britain and France are so close in size that in two out of three estimates Britain is slightly bigger, France taking the third evaluation. Germany is less than 20% larger than Britain. I mentally had Germany like 2x Britain and France in the middle!

    And the next biggest Euro country is… thoroughly p&ssed off Italy. Reading most of the hysteria you get the impression that Schauble could beat the UK up nearly as badly as Greece. Not so. Not even close, then you throw in the separate currency.

    Again, this is a mess, and I certainly have little clue how this is going to work out. But China, Japan and India have not (and will not) speak in public on the subject and they could if they wanted to easily replace the EU as a UK trading partner. They aren’t going to ignore the possibility of plucking that market right out from under German noses.

    Anyway the shorter different chris is that unlike Greece, anybody who thinks they know what is going to happen is guaranteed to be wrong in general and in specifics. I’m still sticking with my “no Brexit” bet because what the heck. This is just the first big fight in a bad marriage, it will be smoothed over but down the road….shrug.

    1. JustAnObserver

      I think the late, great, Wynn Godley dubbed it, in one of his critiques of the Euro, the (In)Stability and (Not much) Growth Pact.

      1. Massinissa

        Now that you mention it, I don’t remember Europe having this much instability since before the war. And the economy that has benefitted the most from the EU is probably, of course, Germany.

  5. IDG

    Nothing will change until the stupid and false axiom of “Ricardian equivalence” and pseudo-gold standard, zero-sum, “export-driven” economic thinking is dropped by the European elites.

    We can dream all we want, but until the obsession by Germany and Germans with all this stupid ideology ends the EU is just marching forwards towards the abyss and eventual implosion.

    1. Massinissa

      Agreed, if Germany wants to be a leader of Europe, they have to stop their behavior of what amounts to neo-mercantilism. They don’t seem to understand that what is best for Germany and what is best for Europe are not necessarily the same things.

  6. animalogic

    Real reform in the EU ? An actual shift away from austerity, “Brussels” and neo-liberalism, etc, etc ? It would take a HUGE bump in the road to shift the EU out of its rut…

    1. Massinissa

      Quite frankly I don’t think the EU is capable of changing away from austerity. Its anti-democratic, and even a push by anti-austerity elites in several countries may not be enough to sway them, much less any kind of democratic protest without allied European elites. The only way to oppose austerity, I am afraid, is to stop the EU, even though I am under no illusions how devastating to Europes economy that would be.

  7. VietnamVet

    There is a new world order. The European Union is in an existential crisis due to Brexit, austerity and the Muslim refugee influx from the forever wars. But the discussion of causes and how governance has changed is verboten. Corporate media never indicates that the European and Asian trade packs would negate local laws and rights. There is an elephant in the room and we are blindfolded. Having grown up in the 50’s and early 60’s I want a restoration of regulated capitalism, government jobs and progressive taxation. I have no idea how future governance will be constituted other than it is now everyone for themselves with battered remnants of past safety nets. But, with the elites’ admitted incompetence from Iraq to Servergate and with a choice for President between a corrupt warmonger or a bully oligarch; what happens next can’t be great.

    1. Massinissa

      “Having grown up in the 50’s and early 60’s I want a restoration of regulated capitalism, government jobs and progressive taxation.”

      Those things were only possible due to the specific circumstances of the time period, including that we were the biggest economy in the world because Europe was still rebuilding from the world war and Asia was yet to emerge. The capitalists had no choice but to give the working class concessions: They are now in the process of erasing those concessions, and they are not coming back. This ‘regulated capitalism’ you speak of was a historical anomaly.

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