The Sinking E.U. Economy Needs No Trade Wars

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

By selling last year $485.8 billion more than it was buying, the European Union acted as a huge drag on global economy. And with a $2.2 trillion in net foreign trade income over the last five years, the Europeans showed they could live well off their trade partners.

But that’s only part of the damage the E.U. causes to the global welfare with tariff and non-tariff barriers on its trade and financial transactions with the outside world.

Apart from that, the E.U.’s trade bonanza is not equally shared by all its members, because the single market creates production dislocations with job and income losses. Some of that has to be offset with “regional development funds,” “cohesion policy” payments, etc.

Being aware of all those problems, a Cambridge University economist, Nicholas Kaldor, opposed Britain’s entry into the European free trade area by questioning the promise of “dynamic effects:” stronger growth through productivity gains and efficient resource allocations in competitive economic systems.

To illustrate that, Kaldor’s discussion had vignettes showing a perfectly tailored British gentleman, with top hat and a finely trimmed moustache crossing the Channel to be greeted by a French peasant with a menacing pitchfork. By the time he arrived in the south of Italy, he lost all his cloths, and an Italian tailor was taking his measurements.

British politicians did not listen to Kaldor’s warnings. They joined the European Economic Community in 1973, and immediately engaged in a long struggle to amend their European terms of endearment, culminating in a contentious divorce consummated in January 2020.

The peace project is in trouble

The E.U.’s founding fathers paid no attention to economics either. But their rationale was entirely different.

In the aftermath of WWII, their priority was to keep the French and Germans off each other’s throats by merging their instruments of war – coal and steel -- into a European Coal and Steel Community in 1952. The success of that venture then led to the European Economic Community enshrined in the Treaty of Rome on March 25, 1957.

The E.U., therefore, came into being as a peace project, where the French-German partnership was to drive progress toward a treaty provision of an “ever closer union.”

It did not take long to realize that France and Germany held very different views of the role they were supposed to play. The French ardors in original drafts of the Franco-German Treaty of Friendship were rebuffed by the time the final version was adopted in 1963.

And that’s the way things still are. The just re-elected French President Emmanuel Macron has met with Germany’s constant obstruction of his E.U. reform efforts.

Macron’s proposals were DOAs (dead on arrival) in Germany even though they were meant to irrevocably anchor France to the project of the European economic and political union, because he feared strong nation state undercurrents in the French society.

Last Sunday’s elections (April 24) showed again that about half of the French popular vote went to parties strongly attached to national sovereignty. The largest and the most prominent among them is the National Rally, whose vote -- on Macron’s watch -- went from 34% in 2017 elections to 42% in the latest poll.

Scaling back the European project

Those existing political fault lines will become more important in the French parliamentary elections next month -- June 12 and 19. Macron will then have to govern with a prime minister from opposition parties advocating (1) a stop to sovereignty transfers to E.U. Commission, (2) exit from NATO’s allied military command, (3) a more assertive French attitude toward Germany and (4) a review of E.U. sanctions harming French interests.

In the middle of all that, Macron has to deliver on his promises of rising living standards and better business conditions.

That’s a tough call. With a budget deficit of 8% of GDP and a huge public debt of 146% of GDP, France has no room for tax cuts or higher government spending. On the monetary side, the “magic money” is gone, and the outlook is for rapidly rising interest rates that will depress household consumption and business investments.

What’s left is foreign trade. With an open economy where the external sector accounts for two-thirds of GDP, France needs a broad and unfettered access to world markets. But that is impossible with a sanctions-infested European trading system and proxy wars that are firing up soaring inflation with food and energy shortages.

A strong foreign trade is also the answer to E.U.’s faltering growth at a time when binding fiscal and monetary constraints are depressing domestic demand. The E.U.’s real disposable personal incomes have been falling since the middle of last year, while retail sales and industrial production in the first two months of this year were flat or declining.

Macron cannot change the course of events that has led to E.U. economy’s tailspin. And the French elections are a watershed event that will scale back the European project to a single market with an incomplete monetary union.