The Phaserl


The Decline and Fall of the EU

by Alasdair Macleod, GoldMoney:

This article identifies the headwinds faced by the EU in the wake of Brexit.

Without the UK, not only does the EU lose much of its importance on the world stage, but the Commission’s budget is left with an enormous hole. That is the decline. The fall is well under way, with capital flight significantly worse than generally realised, as a proper understanding of TARGET2 imbalances shows. Not only is the ECB running out of options, but without major support from Germany, France and Italy, Brussels itself faces a financial crisis. In a highly unusual move, Jamie Dimon of JP Morgan in a letter to his shareholders this week backtracked on his earlier pre-Brexit threat to move jobs from London, declaring that the problem is Europe itself.


The abandonment of the EU by Britain looks like a stroke of luck – for Britain, if she can extricate herself in time. It exposes the EU for what it is: a failing post-war project. An agglomeration of disparate nations, cobbled together, planned by America in the post-war years, now finds the new American President no longer supports it. The parent is abandoning its child, and so is Britain, American’s closest strategic partner.

This is important. Back in 1947, John Foster Dulles, a US delegate to the UN General Assembly, recommended to Congress that the Marshall Plan be used as “a positive instrument for a united Western Europe”. The following year, in the Economic Cooperation Act of 1948, it was stated “It is further declared to be the policy of the people of the United States to encourage the unification of Europe”.i

European unification was pursued subsequently by the founders of the CIA through the American Committee on United Europe. From the start, America wished to ensure that the European nations would never go to war again, and for a united Europe to form a buffer against Soviet communism. This policy was embodied in NATO, formed in 1949, which according to its first Secretary General, “was to keep the Russians out, the Americans in and Germany down”.

President Trump threatens to change America’s long-standing policy towards Europe. He was almost certainly unaware of the sensitivity of this early history, and the strategic importance of America’s relationship with the EU, when he praised Britain for its Brexit decision. He spoke of the EU in derogatory terms. Doubtless, he has now been briefed by his permanent intelligence staff of the importance of supporting both European solidarity and NATO, given Langley’s belligerent view of Russia. However, the damage has been done. Trump’s apparent refusal to shake hands with Angela Merkel in public on her recent visit, and his demands that Germany pay its share of NATO’s costs, were bad omens.

This might change, if wiser council prevails. But Trump’s vow to agree a new trade deal with Britain, as soon as she can sign an agreement, will have weakened the EU’s negotiating position over Brexit. In approximate terms, a trade agreement between the US and UK involves a total GDP between the two nations of over $21 trillion. The EU’s GDP ex-UK drops from $16.3 trillion to $13.5 trillion, a figure likely to be overtaken by China any moment. And while Britain may quickly achieve a trade agreement with the US, the EU has proved itself incapable of doing so after protracted and fruitless negotiations.

The EU itself evolved from a free trade arrangement between European powers, keeping the rest of the world at bay. Since then, the Soviet Union has fallen and Eastern Europe has been freed from communist oppression. The Iron Curtain has been swept away and new European states have materialised. Emerging nations in Asia, unhampered by wealth-destroying government taxes, have discovered the joy of free markets and are accumulating substantial wealth without western social-democratic baggage.

China will soon eclipse the EU, with a middle class significantly larger. China and Russia between them have already wrested control of commerce over the vast bulk of the Eurasian continent. Russia has an interest in seeing the disintegration of the EU, so she can trade more freely with the individual nation members. This is her practical response to America’s European policy, and will allow her in time to feel her own western borders have become more secure.

The EU is also likely to be side-lined in security matters. The US and UK work closely together on intelligence, with GCHQ by far the most important listening post in Europe. While cooperation on terrorism between Britain and the EU member states is unlikely to be compromised by Brexit, there is little doubt that in NATO-related intelligence generally, the Americans will work increasingly with the UK, and less so with Germany, France, Italy and the rest.

Leaked UK cabinet minutes, reported in last Sunday’s Telegraph, confirm the importance of the security angle, with British negotiators seeing this as a powerful negotiating lever. The Baltic states and the central European nations joined the EU as protection from Russia, attracted by the EU’s reliance on NATO for defence, together with America’s long-standing commitment to keep Russia at bay. Trump’s comments about the EU’s status quo and Britain’s Brexit places these newer EU members in a difficult position.

In future, NATO, upon which the EU relies for defence, will be controlled by non-EU members. The newer EU members will be thoroughly dismayed, and will surely re-assess their strategic options. They will be watching the turf war between Washington and Langley closely, as well as the developing political alliance between Russia and Turkey. They will not want to compromise their relationship with the UK, post-Brexit.

They will also note that American sanctions limit their trade options with Russia, putting them in the front line of a renewed cold war. Trade between Russia and China is booming, and they are forbidden to participate. How would you feel if the alliance you joined is suddenly in decline, telling you what you can and cannot do, threatening to fragment, and is losing control of its defence?

Brussels is now the obstacle for those that believe they are in the firing line. When Theresa May emphasised her hopes that the UK and the EU would continue to cooperate on security, this was diplomatic code for “the EU has a very big problem in this respect”. You can visualise the exaggerated wink that went with it.

Perhaps these realities were aired in the meeting of the remaining 27 states in Malta last weekend, when the Commission presented its draft negotiating guidelines. At that point, the bluster came to an end, and the reality of the EU’s position must have become obvious to all the delegates. The Commission’s President, Donald Tusk, gave a press conference after that meeting, responding to the Brexit letter. His mood was certainly downbeat and conciliatory in tone, a far cry from his colleagues’ bravado of recent months.

How geopolitics will pan out is anyone’s guess. For the moment, it appears that President Trump is moving away from détente with Russia, but that is all part of the turf war between the White House and the Deep State. President Putin is likely to respond with patience, as he has always done, until America settles on its foreign policy approach. Meanwhile, Russia will try to mend her fences with Eastern European nations through trade and diplomacy, hoping to undermine the EU’s solidarity.

Patience will be required because trust levels in Eastern Europe with Russia are close to zero. But as the EU declines, and members threaten to drift away, Russia’s best interest is to do everything to promote constructive, peaceful trade.

That’s probably what galls Langley most: Russia and China are becoming powerful enough to overturn American hegemony in Europe, not through military prowess, but through economic power. China, with Russia in tow, is destabilising America’s post-war regime, and America is losing her grip on global dominance. Her post-war European project has lost its relevance. The European Union will begin to decline both in political importance and in nominal GDP terms when Britain leaves. Compared with the resurgence of the Sino-Russian axis, it will continue to decline in relative terms as well.

…….and fall

Britain leaving the EU will expose a hole in the EU Commission’s budget of about €8bn, out of a total annual spend of €145bn. Of that total, roughly €136bn is committed to redistributions between member states. The EU Commission itself spends the balance, about €8.5bn, on its own administration and projects, so Brexit will cost the Commission its entire net budget.

There is a further problem. Brussels has spending commitments over and above the official budget, which at the end of 2016 stood at a massive €238bn These are commitments incurred but not yet paid for, reste à liquider in the jargon. It includes capital projects and various items such as future pension liabilities for Commission staff. This extra expenditure forms the basis for claims that the UK will have to pay an estimated €60billion as part of the Brexit settlement. Legal advice to a House of Lords sub-committee is that the UK has no liability for this amount, and given it was contracted without Britain’s explicit agreement, its status is certainly questionable. It also ignores the value of Britain’s property rights, accumulated during her membership.

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1 comment to The Decline and Fall of the EU

  • Ed_B

    “In a highly unusual move, Jamie Dimon of JP Morgan in a letter to his shareholders this week backtracked on his earlier pre-Brexit threat to move jobs from London, declaring that the problem is Europe itself.”

    Good old Jamie. We can always count on him to get it… eventually. The EU is imploding and we should be seeing additional signs of this at any time now… as if any more are really needed. The countries in the EU that are productive are tiring of funding those that are not. They are also tiring of being told that they WILL accept huge numbers of immigrants who don’t want to become Europeans. It also has finally occurred to them what it will mean when the EU does implode and everyone there has most, if not all, of their wealth in a dying currency. Yes, indeed… 2017-18 will be “interesting times” in Europe as well as here in the US but not for the same reasons.

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