To Understand Eurozone Investing, First Understand Eurozone Politics

Is Germany a bully, intent only upon establishing a new mercantilism using foreign labor and resources to create finished goods to sell back to their neighbors, which some might consider ersatz colonies? Is Greece a nation of lazy malingerers, who want only to borrow its way to a good time and let someone else foot the bill? So you might believe if you look only at the headlines, biased as they may be by one’s own geographic location or cultural heritage. The truth, as always, is far more complex.

The first thing we need to understand is why the European Union (EU) is seen as essential today. Its formation was not based on economic issues, but rather security issues. After two devastating world wars tore apart the infrastructure of European nations and left permanent scars upon its populace, those still alive swore they must never again allow their bickering to reach the point of open conflict. Understanding the following brief history of the past 60 years of discussions, negotiations, agreements, and treaties that have formed the European Union of today will help you place in context the Brexit and Grexit “crises” du jour. The creation of today’s EU has never been without missteps, arguments, or backsliding. Indeed, it has been quite the iterative process!

Like Thomas Jefferson before them, a seldom-acknowledged intellectual forebear of the EU, the battered but still-standing leadership of many WWII combatant nations realized that an interconnected community that shared a somewhat common border, a few shared cultural traits, some degree of military cooperation and inter-operability and, most importantly, economic interdependence would be less likely to go to war against each other.

Statesmen who transcend the title of politician began this crusade to get Europeans fused together. Giants like Winston Churchill, Konrad Adenauer of Germany, Paul Henri Spaak of Belgium and Jean Monnet of France all embraced the idea of a United States of Europe, with Churchill calling it just that. He was convinced that only a united Europe could come close to guaranteeing peace on the continent by eliminating intense nationalism once and for all. The EU of today, however, has evolved in baby steps, sometimes retracing, sometimes going sideways, but mostly moving forward closer to Churchill’s and these other founding fathers’ dream of a united, peaceful and economically prosperous union.

Taken together, today’s EU has the highest GDP of any other “nation,” including the US, China, Japan, etc. Its first incarnation, in 1951, was the European Coal & Steel Community (ECSC,) a primarily economic union between just six nations: Belgium, France, Germany, Italy, Luxembourg and The Netherlands. In 1958, with expanded agreements signed at the Treaty of Rome, these six became the European Economic Community. During the 1960s, these ECSC countries stopped charging custom duties when they traded with each other. They also established joint control over food production which, contrary to the doomsayers’ predictions, crated agricultural surplus.

As the decade progressed, the European Atomic Energy Community (Euratom) and the European Economic Community (EEC, or Common Market) were formed. These three became the new “European Community” (the EC,) with the goal of establishing a completely integrated common market and an eventual federation of Europe. By the 1970s and early 1980s, six more nations join this federation: Denmark, Greece, Ireland, Portugal, Spain, and the UK. Flexing its newfound muscle, the EU regional policy starts to transfer huge sums to create jobs and infrastructure in poorer areas. In 1986, the Single European Act was signed. This was a treaty which defined the basis for a six-year program designed to overcome any problems with the free-flow of trade across EU borders and thus creates the ‘Single Market’.

Concurrent with the collapse of communism across central and eastern Europe in the early 1990s, in 1993 the Single Market was completed with the “four freedoms” of: movement of goods, services, people and money. At the conclusion of and as a result of the Single Market agreements, the ‘Maastricht’ Treaty on European Union in 1993 was signed, creating a common currency, the “Euro,’” more than 40 years after the first steps toward European unity were taken by the early ECSC members.

In addition to creating the common currency, Maastricht, still with just 12 Western European members, created the “convergence criteria” to ensure price stability within the Eurozone (the area in which the Euro is the common currency.) These criteria set limits on member states like...

* The rate of inflation: Must be no more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.

* Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases (as it has done for Greece repeatedly).

* Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

* Long-term interest rates: The nominal long-term interest rate must not be more than 2% higher than in the three lowest-inflation member states.

Two years later the EU gained three more members, Austria, Finland and Sweden. And that same year began the implementation of the “Schengen” agreements that allow people to travel without having their passports checked at the national borders. Initially signed only by the Benelux nations, Germany, and France, “Schengen” has huge political, economic and security implications, making them every bit as important as the creation of a common currency.

Today there are 26 European countries that have abolished passport and any other type of border control at their common borders. This allows these nations to function effectively as a single country for international travel purposes. Not all EU nations participate, with the UK and Ireland opting out and 4 other member states (there are now 28 EU nations, 19 of which use the Euro) dragging their heels. But Norway, Iceland and Switzerland, all non-EU members, have joined the Schengen Area.

I just completed a research and pleasure trip to Europe. My passport was checked once when I landed in Oslo, Norway. I then flew to Vienna, Austria, and traveled to Hungary, France, Belgium, The Netherlands, Germany and back to Norway by plane, train rental car and boat without ever having to show a passport. Only a side trip to the UK required that I show it once again.

The European Union is a reality, but that reality is not written in stone – it is an ever-moving target. I personally believe Britons want to remain in the EU, but with somewhat more favorable conditions, and will vote accordingly. I personally believe the notion that a Greek exit would create a domino effect is overblown. Greece needs the EU far more than the EU needs Greece.

Hopefully this brief overview will put in context that, for 60 years, there have been real and imagined crises, but the EU continues to move forward, albeit haltingly, to fulfill its founders’ dreams of a united, peaceful and economically prosperous union. 

Disclosure: The author wrote this article, and it expresses his own opinions. The author is not receiving compensation for it. The author has no business relationship with any ...

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Singcaver Singcaver 7 years ago Member's comment

Germany is now waging an economic war on its European partners, instead of physical war. The only thing to understand about EU politics is that EU politicians are out to erode democracy and restrict the rights of citizens to decide their own future, and have become ultra conservative, arrogant and in most cases incompetent, and very very unaccountable.

Navin Singhania 7 years ago Member's comment

Dear Joseph. You started well but I felt that you left the article mid way. I could understand very little about EU Politics. Some more insights will be required.