Tusk misses the elephant in the room

Who said the following things? “My government is in no sense anti-Russian.” “I got into politics a little bit by chance.” “Politics itself is not sacred any more.” Nope, it wasn’t Donald Trump. Instead it was Donald Tusk, president of the European Council. In a recent letter to EU heads of state he sees threats everywhere. But, true to eurocrat form, the EU’s own Donald ducks the real issues.

Who is this European Donald T. and what is the European Council? In case you don’t know, bear with me for a minute while I explain.

The European Donald T. was previously the Polish prime minister. Since 1st December 2014 he’s been president of the European Council. That’s the committee that sets the overall strategy and political agenda of the 28 country European Union (EU), with its 508 million inhabitants (for now).

The council includes all the elected heads of state or government (not always the same thing) of the EU countries – who choose the council president – plus the president of the European Commission (currently Jean-Claude Juncker).

For its part, the European Commission is an unelected executive body that does the actual dirty work of drafting and implementing policy – once it’s been rubber stamped by the elected European Parliament (a giant waffle shop).

The European Council and the European Commission are completely different to the Council of the European Union and the Council of Europe. These exist to….

Oh, what’s the point…I give up. Life’s too short.

The structure of the EU is so surreal, arcane, convoluted and Kafkaesque that there’s no point wasting time really getting to grips with it. I suspect it’s supposed to be like that. The bureaucratic structures were deliberately designed to be impenetrable, and therefore less at risk of challenge. If the masses can’t understand who or what controls them then they’re less likely to make a fuss.

All you need to know is that Tusk is one of the top dogs in the European Union’s power pyramid. An influencer…agenda setter…ego massager…part of the inner establishment…the deep state…one of the boys from Brussels.

And he’s just written a letter to 27 members of his committee ahead of an “informal” meeting that they’re having in Malta tomorrow (3rd February).

Only 27? Surely there’s one missing?

Ah yes. The United Kingdom is on its way out of the EU. Depending on your point of view it’s either about to forge a bright new independent future or to charge blindly towards its doom and irrelevance.

But either way it’s doing it. Just yesterday the British House of Commons gave overwhelming approval to start the formal process of divorce. All that’s left is the detail.

So prime minister Theresa May wasn’t invited to the afternoon session in Malta to discuss the EU’s future. And it was to this part of the meeting that the letter in question refers.

“The challenges facing the European Union are more dangerous than ever before in the time since the signature of the Treaty of Rome.” So said Tusk from his ivory tower.

Hmm. That treaty was signed in March 1957, just shy of 60 years ago. According to Tusk the threats to the EU today are the worst in six decades.

Call me old fashioned if you like, but I would have thought that the ever-present risk of nuclear holocaust, during the long cold war with the USSR, was considerably more perturbing. I grew up in Britain in the 1970s and 1980s, a time when we all learned about “mutually assured destruction”, the “three minute warning” and “nuclear winter”.

But anyway, let’s see what these giant new dangers are. These worse-than-nuclear-annihilation existential threats.

First off there are the “external threats”. As Tusk puts it China is “increasingly, let us call it, assertive”. Russia is “aggressive”. Then there’s radical Islam. And to cap it off “worrying declarations by the new American administration”.

Second is an “internal threat”. Here he cites “the rise in anti-EU, nationalist, increasingly xenophobic sentiment in the EU itself.”

The third threat is categorised as neither “internal” nor “external”, which presumably leaves it in the realms of the transcendental or metaphysical. And so it appears to be…

“A decline of faith in political integration, submission to populist arguments as well as doubt in the fundamental values of liberal democracy are all increasingly visible.” Put another way, Tusk thinks the EU elites suffering a spiritual crisis. They’re losing their religion.

Is he right or wrong with this diagnosis? In my view, sort of right, but ultimately wrong.

Each item Tusk lists is probably some sort of threat to the EU – or at least to certain vested interests within it. For example, right on cue the US government’s trade advisor Peter Navarro has accused Germany – with its massive trade surplus – of exploiting an undervalued euro. (Which, of course, it does. But the Germans aren’t used to be told as much by powerful people.)

Ultimately though, Tusk is just highlighting various visible symptoms. He’s missing the underlying cause of the real threat to the EU.

Put simply, the EU is an economic failure for a huge number of its inhabitants.

Part of this failure is due to being dealt a dud demographic hand. Too many countries have stagnant and ageing populations. There’s little that can be done about this – at least little that’s politically or morally realistic (such as mass immigration from Africa and the Middle East, or forced breeding).

But that aside, much of the rest of the EU’s malaise is self inflicted.

First the EU grew too big, with a vast gulf between the cultures and standards of living of many of the 28 countries. The current arrangement throws together rich countries – such as Denmark, Sweden, the UK, Germany – with poor ones like Bulgaria and Romania.

To put that into perspective, it would be like the USA and Canada deciding to throw in their lot with Brazil, Ecuador, Peru, Colombia and most of the rest of Central and South America.

A new bureaucracy would be set up somewhere in a suitably uncontroversial location. Once a month the whole circus would move to another country for four days, so that another government got its share of the gravy. All documents would be translated into all official languages of member countries (English, French, Spanish, Portuguese, Quechua, Aymara, Guarani, Dutch).

The richer countries would pour tens of billions of dollars each year into the arrangement. Those billions would be spent on building infrastructure and art galleries in the poor countries.

In the meantime there would be unlimited movement of people between all the countries (no walls here!). Wages would be held down in rich countries by a flood of cheap labour, and poor countries would lose much of their brightest youth.

All countries – rich or poor – would get a veto on trade deals with other regions, and a say in most of the new laws enacted in any country across the bloc. And the highest court of appeal would be outside the jurisdiction of any individual country.

If that sounds ridiculous then it’s because it is. But it’s basically what the EU is today. If you try to design “one-size-fits-all” clothing for enough people then you end up with “one-size-fits-no-one”. That’s the poorly cut nature of too much EU policy and law today.

As if that wasn’t bad enough, it’s then been made even worse by bringing in a common currency, the euro. Of the 28 EU countries, 19 signed up for the experiment.

The euro is a bit like the bowls of porridge in the story of Goldilocks and the three bears. Usually it’s either “too hot” or “too cold” for most countries. Rarely is it “just right”.

Which brings me back to the economic failures. A reader – I think from the Netherlands – wrote to me a while back to tell me I was out of touch, having lived in South America for too long. He reckoned all was well and good in the EU.

But I beg to differ. And there’s only one place I need to look for evidence. The horribly high unemployment rates in too many EU countries. Even more specifically, the sky high youth unemployment rates. If you’ve got a lot of bored and angry youth then you’ve got a problem.

The unemployment rate is 11% in the euro area and over 9% in the full EU. Youth unemployment is 22% in the euro area and 20% in the full EU. These figures are simply too high. After all, it’s very nearly a decade since the global financial crisis got started.

Is it any wonder, after Europe’s lost decade, that more and more people are getting fed up with the political establishment? Or looking for an alternative, including leaving the EU?

In fact the average figures mask a deeper problem. The situation is far, far worse in some individual countries.

The following chart summarises the situation in the worst afflicted. I’ve also included the EU and euro area average, and the two best performers in the region – Germany and the Netherlands. What’s more I’ve included the USA and Japan for comparison.

Unemployment rates end 2015 EU.jpg

It’s clear that EU economic policies have foisted misery on far too many of the half a billion people that live there. Greece, Spain, Italy, Portugal – even France – simply have far too many people with too little to do.

The USA looks like a positive employment paradise by comparison. Even Japan – now well into its third “lost decade” – doesn’t have an unemployment crisis.

Donald Tusk’s letter is symptomatic of the real problem at the heart of the EU. It’s elites are in denial. They cast around for blame, but don’t get to the real root causes of the problems – themselves and their policies.

In the meantime it’s fertile soil to plant political alternatives such as nationalism. The EU many blame others for its problems. But in reality it’s (still) sowing the seeds of its own demise.

Which means both a rocky road and the potential for ripe future pickings for investors. You should expect regular crises of the political and financial kinds in Europe, followed by huge (but not necessarily long term) profit opportunities.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.