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Press Release

29 June 2018

European (Dis)union

 How do you solve a problem like the Eurozone? Tom Dawson, Investment Manager, discusses the impact of Europe’s heavily divided political landscape.
Martin Wolf of the Financial Times wrote last month: “It is essential for westerners to realise that our biggest enemy has become our inability to run our own countries well. Meanwhile, the only future for an interdependent world has to be based on mutual respect and multilateral co-operation.” He was talking about the West dealing with the power of China, but it is particularly apt when viewing the current situation in Europe.
Political crisis has deepened in Italy and Spain. Italy has a far-right government in power, and Spain a heavily socialist one. The new Prime Minister of Spain, Pedro Sanchez, has never previously been a member of parliament and does not have a majority in Parliament. In Italy, vast swathes of the population voted for either the populist, anti-establishment, Eurosceptic Five Star Movement, or for the right wing, protectionist, anti-immigration, Eurosceptic League party.
France and Spain sit at the heart of the European project. They have political sway and are governed by seemingly true believers in democracy, freedom, capitalism and progress. Yet neither has tabled any credible solutions to address what are clearly widespread grievances with certain aspects of the European model, manifested in the Brexit vote, and now apparently in Italy and Spain.
Emmanuel Macron put himself forward with Gallic audacity as the man to right the ship, and made a set of proposals to the European Parliament. Angela Merkel has been criticised for her response to these proposals but the muted sounds emanating from the German Chancellery are understandable given that all Macron actually said was that there was a need for a road map for the EU to move towards a banking and fiscal union, and that a significantly larger EU budget and overarching finance minister were needed. Ambiguous suggestions at best.
There was, for example, no explanation of which common taxes would fund the budget and who would form the membership of the new Assembly tasked with exercising the new fiscal authority. Thomas Piketty, the controversial French economist, argues that such vague words from European leaders are unhelpful and create the sort of environment which anti-European discourses can easily oppose. The problem, as he sees it, is that Merkel’s reluctance is only a response to Macron’s timidity, and their conservatism and desire for the status quo, whatever the rhetoric, is born from a feeling that their countries are doing quite well, and the responsibility for the ups and downs of the southern European states is not theirs.
The reality is that Italy, Spain, France and Germany account for three quarters of the GDP and the population of the Eurozone. What happens in Italy and Spain will, if left unchecked, inevitably have a strong effect on France and Germany. The solution for the Eurozone appears to be a more substantive debate, and an appetite for change. Piketty is in favour of a transfer union, where taxes are collected on a pan-European basis and distributed from better-off countries to the worse off. However, to stop the populations of the better-off countries feeling aggrieved, this would be limited to a net transfer of 0.1% to 0.5% of national GDP. He feels this will reduce inequality and nullify much of the threat from the far left and the far right to the Eurozone project.
Notes to Editors

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European (Dis)union
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