Tag: European Union
Bi-Weekly Geopolitical Podcast – #18 “Europe’s New, Right-Wing Leaders” (Posted 10/10/22)
Weekly Geopolitical Report – Irish Border Revisited (April 26, 2021)
by Thomas Wash | PDF
It has been more than a year since the U.K. and European Union (EU) came to terms with the Withdrawal Agreement, yet questions remain on how it will impact Northern Ireland, which was granted an exception to remain in the EU. Having decisively voted 56% to 44% to remain a part of the EU during the Brexit referendum, it is unclear whether Northern Ireland allegiance lies with the U.K. or the EU.
The exception, which went into effect earlier this year, keeps the Northern Ireland economy in the EU to prevent a hard border between Northern Ireland and the Republic of Ireland. This has angered pro-British Unionists who believe that the exception ostracizes Northern Ireland from the U.K. and draws it closer to Ireland. As a result, the Unionists have protested the decision and violence has erupted between competing factions in Northern Ireland. However, demographic trends have shown that the pro-British faction seems to be slowly dwindling, likely heightening concerns.
In this report, we will focus on the current relationship between Northern Ireland, the U.K., and the EU, and summarize the Good Friday Agreement. Next, we will discuss the impact of demographic changes on reunification efforts and what we expect to happen going forward. As usual, we will conclude with potential market ramifications.
Weekly Geopolitical Report – The Geopolitics of the Eurobond (June 29, 2020)
by Bill O’Grady | PDF
(N.B. Due to the Independence Day holiday, the next report will be published on July 13.)
A global hegemon provides two broad categories of public goods. The first is security. A successful hegemon enforces some degree of global security as it has the ability to project power globally. This power projection ostensibly prevents regional wars from becoming world wars. Another way of thinking about hegemony is that if a world war occurs, it is evidence of hegemonic failure. In addition to war suppression, the hegemon’s global reach gives it the capability to secure sea lanes, which facilitates global trade.
The second public good is financial. The hegemon provides the reserve currency which enables global trade and investment. The reserve currency nation must have two characteristics to be a successful provider of the reserve currency. First, it must be willing to run persistent current account deficits. It is through trade that the rest of the world acquires the reserve currency. Persistent current account deficits put great strain on the labor markets of the hegemon and require a strong commitment from the reserve currency nation to absorb these imports. Second, it must have deep financial markets and an instrument that is considered safe and widely available so nations that accumulate the reserve currency can use this instrument to hold this saving until it is needed for trade or direct investment.
If the U.S. is going to be replaced as a hegemon, the successor will need to fill these two roles. Currently, there is no nation that is capable or willing to fully provide these public goods. However, it is not impossible to consider a situation where a partial replacement occurs. Such outcomes have occurred before. By the late 1800s, Britain realized that it could not defend any of its colonies in the Western Hemisphere from a determined American attack. The U.S. economy was too well developed and its navy and army too large; the costs of defending Canada, for example, would have been excessive. So, quietly, the British ceded regional hegemony, at least in terms of security, to the U.S. That allowed Westminster to focus on the other growing threat, Germany. In the current environment, the U.S. could cede a sphere of influence to China. It is arguable that the U.S. would like to see a regional hegemon arise in the Middle East to allow America to reduce its security burden there as well.
Something similar could occur on the reserve currency front as well. Some economists, notably Barry Eichengreen, have argued that there is the potential for multiple reserve currencies. Although we have had doubts about this possibility, recent developments have led us to consider the possibility that the euro could become a serious competitor for the dollar as a reserve asset. That doesn’t mean the euro would replace the dollar as the reserve currency, but it would mean the euro could be a parallel reserve currency and offer competition to the dollar.
The most recent development that could create potential competition for the dollar’s reserve status is the proposed new financial instrument designed to fund Europe’s recovery from the pandemic. The proposal evolved from a plan developed by Germany and France to create a €500 billion recovery fund. European Commission President Ursula von der Leyen expanded the proposal, increasing it to €750 billion. But the key element of the proposal is a specific bond backed by the full faith and credit of the European Union. The bond service would be tied to several EU-wide revenue sources, including a proposed digital tax, a carbon border tax and fees on transportation.
The proposed plan still requires approval by all members of the EU. The “frugal four”—Austria, Denmark, the Netherlands and Sweden—could still scuttle the proposal. But, Germany’s support is a reversal of its longstanding opposition to EU debt mutualization and will probably be enough to sway the opposition toward accepting the program.
The prospect of debt mutualization creates competition for the dollar’s reserve status. The EU doesn’t fulfill the other requirements for hegemony; its military strength has atrophied, and it has not shown a willingness to run persistent current account deficits. Nevertheless, a mutualized debt instrument does make the euro a much more attractive currency for reserve purposes.
In this report, we will examine why an alternative reserve currency might be attractive for several countries. An analysis of why Germany has changed its position on debt mutualization will follow. As always, we will conclude with market ramifications.
Weekly Geopolitical Report – Reflections on Nationalism: Part III (September 11, 2017)
by Bill O’Grady
Three weeks ago, we began our series on nationalism. In Part I, we discussed social contract theory before and after the Enlightenment. We examined three social contract theorists, Thomas Hobbes, John Locke and Jean-Jacques Rousseau. In Part II, we recounted Western history from the American and French Revolutions into WWII. From there, we examined America’s exercise of hegemony and the key lessons learned from the interwar period. This week, we will begin with an historical analysis of the end of the Cold War and the difficulties that have developed in terms of the post-WWII consensus and current problems. We will discuss the tensions between the U.S. superpower role and the domestic problems we face. Next, we will analyze populism, including its rise and the dangers inherent in it. As always, we will conclude with market ramifications.
Weekly Geopolitical Report – Reflections on Nationalism: Part II (August 28, 2017)
by Bill O’Grady
(Due to the Labor Day holiday, the next report will be published on September 11.)
Last week, we began our series on nationalism. In Part I of this report, we discussed social contract theory before and after the Enlightenment. We examined three social contract theorists, Thomas Hobbes, John Locke and Jean-Jacques Rousseau. This week, in Part II, we will recount Western history from the American and French Revolutions into WWII. From there, we will analyze America’s exercise of hegemony and the key lessons learned from the interwar period.
In two weeks, in Part III, we will begin with an historical analysis of the end of the Cold War and the difficulties that have developed in terms of the post-WWII consensus and current problems. We will discuss the tensions between the U.S. superpower role and the domestic problems we face. From there, an analysis of populism will follow, including its rise and the dangers inherent in it. As always, we will conclude with market ramifications.
Weekly Geopolitical Report – Between a Rock and a Hard Place: The Gibraltar Dilemma (April 24, 2017)
by Thomas Wash
Days after Theresa May triggered Article 50 of the Lisbon Treaty, Brussels issued a nine-page document outlining its guidelines for Brexit negotiations. One of the guidelines gave Spain the authority to veto any deal between Gibraltar and the European Union (EU). The U.K. is currently recognized as holding sovereignty over Gibraltar and thus took exception to this provision, vowing to defend the will of the people of Gibraltar.
The provision is likely the result of heavy lobbying by the Spanish government, who would like to end this 300-year dispute once and for all. A war of words between Spain and the U.K. has already started in response to the announcement. Former Tory leader Michael Howard stated that the U.K. is willing to fight for Gibraltar. Although not responding to the threat, Spain has hinted that it would not block Scotland if it were to apply to the European Union upon a potential Scexit.
Despite the bravado, it is likely that the two countries will come to some sort of agreement as they have deep trade ties. In fact, Spain has been the most vocal backer of a soft Brexit. That being said, the people of Gibraltar are stuck at a crossroads regarding the dispute. On the one hand, they voted 96% to remain in the EU, but on the other hand, they voted 99% against joint sovereignty with Spain. The situation becomes even murkier when its economy is taken into account. Gibraltar is dependent upon the U.K. for trade and Spain for labor. Nevertheless, it is unlikely that Gibraltar would have emerged from Brexit unscathed as its labor force is dependent on the free movement of immigrants permitted under the EU. Ironically, it was the free movement of immigrants that mostly caused British voters to leave the EU.
In this report, we will focus on the significance of Gibraltar, its historical context and the impact of the current dispute. We will conclude with possible market ramifications.
 During the run-up to the Scottish referendum, it was believed that Spain would oppose any immediate transition by Scotland into the EU if it decided to leave the U.K. because it could encourage Catalonia to move toward independence as well.
Weekly Geopolitical Report – Future of the Euro (January 30, 2017)
by Thomas Wash
January 1, 2017, marked the 18th anniversary of the induction of the euro, the European single currency. Once praised as the uniting force among European countries, the euro has become a source of populist backlash. From Greece to France, populist politicians have increased their political clout to the chagrin of the establishment.
The primary motivation of the European Union was to create a unified European identity so that countries would not be tempted to fight wars with one another. Special attention was paid to Germany, which had tried to dominate Europe in the past. Ensuring peace throughout Europe meant Germany had to be subdued. In order for this to happen, Germany had to become dependent on its neighbors such that waging war would be against its own interests. Although this worked in the beginning, the 2008 financial crisis exposed the flaws in this plan. Germany’s excess savings and fiscal discipline led to it assuming the dual role as creditor and lender of last resort within the European Union. This gave Germany unparalleled leverage to dictate fiscal and foreign policies over other European countries.
In this report, we will take a deeper look into the factors that contributed to the formation of the European Union, as well as the negative effects the single currency has had on certain countries, particularly those located in southern Europe. As always, we will conclude with ramifications on the financial markets.