A Tidal Wave of Parochialism

by George Hatjoullis

This was the title of a piece that I wrote during my tenure as head of Fixed Income Strategy at Morgan Stanley International. It was a response to developments in the attempt to achieve ratification of the Maastricht Treaty. After much horse trading it was ratified though not without a raft of opt-outs for various parishes. Today the heading should perhaps be a tidal wave of nationalism but the message is much the same. The EU is an ambitious programme to create a supranational entity by integrating a number of national states. It was understood from the start that this was an ambitious political project that would meet ferocious parochial resistance at every stage. It was sold as an economic project but it was always known to be a political project with economic consequences. The ultimate aim was a federal european state and anyone that now pretends otherwise is being disingenuous. The jig is up.

It is quite astonishing how far the project was able to progress before the forces of the parishes caught on to the real plan and were able to organise a serious resistance. I had been professionally involved for some years before I became fully aware. My awakening came in 1991 when my professional career became inextricable tied to the EU and, in particular, the eurozone. My last gig before I retired was specifically tied to the eurozone crisis and in particular the Greek crisis. The observed events had a certain inevitability and all that remained to be filled in was timing and response to the events. The response has been very disappointing if you are a fan of the project.

The flaw in the project was impatience. This seems to me to be a problem with all visionaries, revolutionaries, and radical reformers. Their vision is obviously better, so let us put it into place immediately. Even the pluralist project (aka political correctness movement) was hasty. You would think that a movement intent of being inclusive would recognise that it would need to allow time for those that resisted inclusiveness to adjust to new norms. Unfortunately, they moved quickly on, labelling anyone that resisted, sexist, misogynistic, homophobic,and racist. This left a trail of seething and resentful communities and has now come to bite them in the arse. The populist movements wreaking havoc globally are feeding off this seething resentment. The pluralist project is worthy but impatience has now put it in jeopardy. The EU, the ultimate pluralist project, is being directly impacted by this populist backlash.

Political, social, and economic forces are simultaneously at work, and interacting, and this perhaps confused the reductionist analysts. Two common characteristics of the resentful backlash stand out. The populists have tapped into resentment of the poorly educated and the older generation. These two variables almost certainly interact. In my generation , the older generation, education was the exception not the rule. I am the only one of 7 siblings to have gone to university but all but two of our offspring have done so, and the two were of the older children. It is no surprise therefore that these two variables explain 80% of the demographic variation in the Brexit vote. It is the poorly educated that have suffered most from the economic consequences of the many crisis of the last 10-15 years and are least able to adjust to new norms. It is the old that suffer most from nostalgia and ‘golden age syndrome’. The uneducated old are particularly vulnerable to these social psychological conditions.

The EU has only itself to blame in many ways. The Maastricht Treaty was poorly conceived and the result was a monetary union without an adequate fiscal plan. This might have worked had countries such as Greece been kept out of the monetary union until a (much) later date. They were not and the crisis was in the making from the moment they joined the eurozone. The problem is that once in it is hard to go into reverse. Moreover, to go forward with rapid fiscal integration is politically impossible, especially as the parishes could spin this as bailing out the Greeks. So the response to the eurozone crisis was a self-destructive fudge. Unemployment surged and mobile EU citizens wandered off to growing non-eurozone states like the UK in search of work. Well you would.

The problem was confounded by a number of variables. First, the EU, with full UK approval, proceeded to add new states. Secondly, the UK chose not to exercise its right to limit migration from these new states for 7 years. The result was even more people flocking to where the jobs were available. Finally, whilst the EU was distracted with its own eurozone crisis, the situation in Syria went from bad to beyond belief. A large flow of refugees and economic migrants set off on the long trek across Europe. The EU initially did nothing leaving bankrupt Greece and not-much-better-off Italy to take the strain. Eventually the EU was overwhelmed. The seething resentment of the parochialism was fed by scenes of refugees tramping across Europe. Add a bit of Islamophobia to this and you have the recipe for EU disintegration. But it gets worse!

Russia has nationalist ambitions. It covets and takes territory on the eastern border of the EU. It uses the excuse of the presence of ethnic Russians. There are EU states with ethnic Russians. The EU is a long way from a military capacity and is dependent on Nato. In the UK the parochialists achieve a small victory and leverage it into a crowbar and use it to prise the UK from the EU. In the US the parochialists elect one of their own as POTUS. The EU finds itself distracted by an unresolved eurozone crisis that is about to rear its head again, a tidal wave of parochialism at the polls, and two mighty military powers that seem eager to see it fail. And all this because of a lack of patience.

My concern in 1991 was the impact on European sovereign debt. Well I would not own any now. If France elects Le Pen and she takes France out of the eurozone what happens to France’s euro debt do you imagine? How much remains euro, and hence now foreign currency debt, and how much becomes French franc debt, and on what terms? What happens to the euro? Good luck with that! I am looking at this not from a bond market point of view but as a citizen of the UK. My inclination is to start filling sandbags and buying bottled water and canned goods.