Great Britain and the Nature of Europe

Since 2008, the pound has lagged the euro.
Image credit: Yahoo! Finance

Among the bystanders caught up in the Eurozone crisis is the United Kingdom of Great Britain. As the NY Times correctly notes, the UK is stuck between a rock and a hard place.

While the Brits are a party to the European Union, they are not a member of the Eurozone--they kept the British pound instead of transitioning to the euro note. As such, their monetary security should not be immediately affected by a collapse of the European currency. The British pat themselves on the back for this decision, especially (but not limited to) PM David Cameron and his ruling Conservative Party. But should they be so self-satisfied?

In a previous era, staying on the pound would have guaranteed a buffer against continental woes. But Britain's membership in the European Common Market--and the simple matter of their geographically-defined exposure to the European economy--guarantees that the UK would be hit hard by the disruption in trade and finance that would likely follow the euro's implosion.

Moreover, one need only glance at the performance of three major currencies since 2008 to take a bit of polish off of the pound sterling: Britain's independent currency has underperformed both the US$ and the euro since the onset of the financial crisis (see top right).

The simple fact of the matter is that, ideology aside, Europe's collapse would be bad for all the major economies of the world: Britain's, America's, Japan's, China's, etc... But anti-European sentiment and the illogical structure of patchwork European institutions are getting in the way of possible solutions.

UK PM David Cameron
Photo credit: Wikipedia

For instance, while only a portion of the EU countries are in the Eurozone, the various European treaties dictate that any intergovernmental solution for the Eurozone--short of signing a new treaty--is subject to veto by EU members outside of the currency zone (like the UK). Not surprisingly, Cameron has threatened to put any EU action to a domestic referendum, at a time when anti-European sentiment in Great Britain is higher than it has been in some time. His would not be the only EU government to do so should it come to this.

On the other hand, any separate treaty between euro traders is likely to run up against similar sentiment among debtor states in the currency zone, as well as opposition to any loss of sovereignty over fiscal policy that would almost certainly be a part of said treaty.*

*Some argue that this would create a multiple tier EU, with some countries less "European" than others. I say, look at the EU countries within the currency zone and those without, then take a closer look at the divide between debtor and creditor states in the Eurozone. Now tell me that we don't already have a multi-tier Europe.

As major crises tend to do, uncertainty in Europe raises questions about the fundamental structure of the institutions at hand. While serious proclamations of the birth of a United States of Europe date back to the end of WWII, there are fundamental difference between European and American institutions that are crucial in explaining why the EU seems so unstable of late.

First, American states tend not to borrow beyond their means--they are constrained from doing so by their own constitutions--while European states do and (obviously) have.

Second, migration between American states is easy. Labor can flow to where it is in most demand, relieving political and social pressure on states where it is not. While the EU legally guarantees worker mobility, migration within Europe is complicated by cultural (and some legal) barriers. And so we see millions of Greeks protesting austerity measures while unemployment remains high and treasuries run dry.

Third, and perhaps most importantly, the United States' earliest priorities were not economic unity and common markets; proto-capitalist confederacies didn't have to concern themselves with such things. Sure, economic concerns have molded American federalism since inception, but interstate commerce played less of a role in uniting pre-Civil War America than did existential threats from Britain (and Spain), the shared goals of western expansion (and the conflict with indigenous peoples that it engendered), and ethno-linguistic homogeneity.

Heck, except for a brief interruption, we got by without a central bank until 1913.

On the other hand, the EU arose out of economic institutions built initially on economic priorities.* Only later have subsequent treaties tacked on institutions that deal with international and domestic security. There is little in the way of ethno-linguistic unity in Europe, nor should one hope for any. There are no longer any frontiers. The great Sleeping Bear of Russia--once the West's main security concern--is hibernating for the foreseeable future. Quite simply, the EU is founded on the principle of economic unity. If economic unity is unsustainable, then Project: Europe is essentially a failure, at least for the time being.

*That the European Steel and Coal Community also bore security justifications is moot in light of NATO's security umbrella, with or without French participation.

In 1588, England's navy defeated Spain's,
signaling her rise to great power status.
Image credit: Wikipedia

Which brings me back to Britain. Essentially, the UK has been able to keep one foot on the continent and one foot back home with its dual EU/pound policy. This makes less and less sense for both sides as the British exposure to European markets increases, and as British economic and military influence wanes (leading the rest of Europe to reconsider the bargain).

Given time, the situation will demand a resolution: either the UK will shelter itself from European storms by building barriers against torrents of trade and capital--essentially exiting the EU--or Brittania will go "all in" with the Continent.

The latter won't happen under Cameron, although his partners in government, the insurgent Liberal Democrats and their Europhile leader Nick Clegg, would find this option appealing. Conversely, the former seems unthinkable--let alone economically disastrous--in an age of interdependence. Assuming Europe gets its act together--and everyone who likes making money and buying things should be praying it does--the time may well come for France and Germany to press the issue.

And so they should ask, fair Brittania, are you in or are you out? If you're in, then you might just preserve what little influence you retain as a major player in the world's largest economic unit and a potential superpower.

And if you're out? Well, that's simple: you return to the impotence and obscurity that prevailed before 1588, when an upstart naval power sank the Spanish Armada and first compelled the princes of Christendom to take notice of a little island across the Channel.