by Thorsten Polleit

Many investors are probably asking themselves: Will the European Union (EU) survive? Will this politically motivated construct break apart sooner rather than later? And if so, what would the consequences be? Or can the EU continue to exist for a long time? These are undoubtedly weighty questions. Raising them probably causes discomfort, perhaps even fears, among many people. For many, the EU is synonymous with the achievement of creating peace and prosperity in Europe. Yet if one sets out to answer the questions posed above, a completely different picture emerges.

Let us begin right at the start with this realization: The EU is a union of states. More precisely, it is a cartel of states, as will become clear. When we look at the EU’s composition, we encounter individual states. This in turn leads to the question: What is a state (as we know it today)? Answer: The state is the territorial compulsory monopolist with ultimate decision-making power over all conflicts on its territory; and it claims the right to levy taxes (i.e., it does something that is forbidden to everyone else: extracting money from fellow human beings against their will).

It is foreseeable how such a compulsory monopolist operates: It is aggressive internally and, when it can, also externally. Internally, its aggression is directed against citizens and manifests itself in rising taxes and levies, ever more laws and regulations, and the state’s encroachment into all areas of the economy and society. The result: the freedoms of consumers and producers dwindle, and the economic performance of the national economy declines.

Externally, too, the state is aggressive when the opportunity arises. It imposes its laws and rules and standards on others, whenever possible, and even wages wars. The reason: The state, or rather those who can exercise its power, have a vital interest in expanding the state and its sphere of influence; after all, this enlarges the state’s dominion and power base as well as its tax revenue.

And that is precisely why states compete with one another for territories and taxable income—even, and especially so, in times of peace. The competition is mainly about talent and capital. People and companies prefer to settle where the comparatively best conditions prevail. This sets limits on any single state’s scope for paternalistic control: If the state becomes too intrusive, if taxes and levies rise too sharply, talent and capital migrate away. States therefore have an interest in reducing — or ideally eliminating — “locational competition,” because that increases their opportunities for predation.

One way to reduce or contain locational competition is to form a cartel. This is familiar from the theory of entrepreneurial behavior: A cartel (in the economic sense) is an agreement between competing companies aimed at restricting competition and achieving joint advantages. Companies (at least in theory) make price and quantity agreements, agree on territorial and market divisions, etc., in order to increase their profits.

But not only companies—states too have an incentive to form a cartel: They agree on uniform regulations and standards, carry out “tax harmonization” (agree on “minimum taxes”), arrange (financial) data exchange, etc., so that it becomes less rewarding for capital and talent to migrate from one (less favorably regarded) region to another (more favorably regarded) one.

However, cartels are not stable. When companies form a cartel, the best (most efficient) among them have an incentive to eventually break cartel discipline—for example, by selling at prices below the agreed cartel price. Such a voluntary cartel therefore proves to be only temporary and short-lived; it fails due to the diverging self-interests of its participants and falls apart.

This principle also applies to a voluntary cartel of states. The states that manage their economies comparatively better than the others have an interest in eventually leaving the cartel (when their own disadvantages become noticeable). Therefore, the states that have a particularly strong interest in a states’ cartel (i.e., the less well-performing ones) will strive to “make it stick”—by advancing political centralization within the cartel, i.e., limiting national decision-making power and transferring it to a higher level, or by subsidizing participating countries with “aid payments” to bind them to the cartel. In short: Cartel supporters want to make exit from the cartel as difficult as possible — ideally impossible. This is exactly the “model” of the European Union (EU).

The “architects” of the EU did draw a number of boundaries to prevent the EU from becoming a “super-centralized political institution.” However, these boundaries have proven not to be insurmountable, as EU political practice shows. The central problem is the ongoing violation of the principle of limited conferred powers: According to Article 5 of the EU Treaty, the EU may only act in areas where the member states have granted it authority. Everything else is supposed to remain with the nation-states.

That was the original idea: The EU as a political superstructure with limited, clearly defined competences. In practice, however, Brussels systematically disregards this. This is how it is done:

—Broad interpretation of existing laws. Articles 114 of the Treaty on the Functioning of the European Union (TFEU) concerning the ‘internal market’ and 352 TFEU (‘flexibility clause’) in particular are stretched extremely far. Almost everything can now be presented as “internal-market-relevant” or “necessary for the functioning of the internal market.”

—Creeping expansion through case law: The European Court of Justice has chosen integration-friendly, competence-expanding interpretations in numerous rulings (e.g., in environmental, consumer, or social policy).

—Creating new policy areas through “soft” instruments. Through “strategies,” funding pots, and “governance” mechanisms (e.g., the European Semester, NextGenerationEU), the EU gains influence over areas that formally lie not at all or only partially within its competence (education, health, family, migration, taxes, energy).

—Using crises as door-openers for further expansion: The financial crisis, euro crisis, corona crisis, Ukraine war, and climate crisis have each been used to create new competences and financial instruments (ESM, Recovery Fund, joint debt, etc.) that would actually have required treaty changes.

All of this leads ever-greater concentration of power in Brussels, at the expense of individual liberty, national democratic control, and long-term economic vitality.

Citizens elect national parliaments that can decide less and less. Power shifts to Brussels, where influence for the ordinary citizen is difficult to see through or no longer possible. Legal uncertainty increases. Companies and citizens often no longer know exactly which rules really apply and how far the EU may go. Especially smaller and medium-sized member states lose de facto sovereignty, while the large countries (or the EU Commission) set the course. And there are no effective correction mechanisms: Unlike a real constitution, there is no effective way for member states to push the EU back.

The single currency, the euro, is of particular importance for the chaining together of the EU states’ cartel. Once a country has joined the cartel, the EU treaties require it to eventually adopt the euro (exceptions are Denmark and Sweden, which have an “opt-out” clause; the same applied to the United Kingdom, which officially left the EU in January 2020, and had never adopted the euro). Introducing the euro means a loss of national monetary sovereignty for the people of that economy; they are henceforth under the monetary dictate of the European Central Bank (ECB) — a supranational institution that is de facto removed from the influence of national politicians and especially national voters.

The ECB’s monetary policy not only plays the decisive role for the purchasing power of the euro. Through its monetary policy, the ECB Council also exerts far-reaching influence on the economies of the participating countries. It determines, for example, the borrowing possibilities of the participating states, the liquidity of national banks, and even the economic structure and jobs. One need only think of the ECB Council’s “green agenda.”

It is intended to make credit financing more expensive for CO₂-emitting industries compared to other sectors. The ECB thereby creates higher credit and capital costs for CO₂-producing producers, worsens their competitiveness, thereby forcing them to stop production and/or relocate to other parts of the world. The result: Countries with CO₂-intensive production lose jobs and prosperity. As a result, the ECB is not just conducting monetary policy, but industrial and structural policy “from above,” literally over the heads of (national) voters.

Moreover, once the euro has been introduced, a country’s exit from the EU becomes quite difficult. The costs of leaving the euro and (re)introducing a national currency are enormous—both for the exiting country and potentially for the remaining countries. If, for example, a country that is still comparatively strong economically and financially leaves the euro area, this could lead to a loss of confidence in the euro project. Financial market chaos, sovereign debt and banking crises—all of these are conceivable consequences. That said, the political pressure from the remaining euro countries to prevent a country from leaving is therefore predictably enormous. One can already see: The “embracing and binding effect” of the euro is immense; it drastically raises the pain threshold for any country that might consider leaving the EU states’ cartel.

Moreover, it is (at least so far) fundamentally difficult for political parties at the national level to mobilize voters for a country’s exit from the EU. For pro-EU sentiment, actively promoted by EU propaganda, is still very strong in many countries. And even most EU critics do not want to end the EU; instead, they suggest that with suitable EU reform and the reappointment of key EU offices, the complained-about grievances could be corrected. Last but not least, knowledge of the problems of the EU states’ cartel is presumably still not visible (enough) for many people to want to push for a country’s exit or even the dissolution of the EU through parliamentary means.

Under these conditions, the EU can particularly well continue driving its centralization and expansion policy. One sees this, for example, in its basically unbroken territorial expansion drive: The EU now comprises 27 participating countries with a total of 452 million people (about 5.5 per cent of the world’s population). And there is no end to EU enlargement in sight. In principle, the EU’s expansion potential is not even limited to the European continent, as the EU’s advances toward Canada (and vice versa) illustrate; there is actually no “natural” size limit for the EU states’ cartel. The EU embodies the principle of “maximum expansion.”

Yet the EU states’ cartel is not unshakable or unassailable. The political and bureaucratic apparatus in Brussels (still) has no police or military apparatus with which it could enforce its dictates through force (or the threat of force). The EU’s financing also ultimately depends on the consent of the people in the participating states. Brussels is therefore dependent on the willing subordination and cooperation of the nation-states. And as long as the people in the EU participating countries believe they benefit from the EU, they will be “obedient,” remain loyal to the EU, and the EU will have “won.”

There are (repeatedly) tensions and disputes within the EU states’ cartel (between North and South, East and West, sovereignty versus centralization, about uncontrolled mass immigration, populism, etc.), but in cases of conflict the cost-benefit calculation in the participating countries has so far always spoken in favor of remaining in the EU states’ cartel—and certainly also because “path dependency” has meanwhile become very high: After decades of “integration,” exit for a country has become extremely expensive and risky. It is fair to say that the majority of governments in the EU countries fear the exit of any one country (think of the “Greece case” or the “Cyprus case”) and are therefore willing to make most generous aid and subsidy payments (to be shouldered by net-taxpayers).

Nevertheless, clear fault lines remain. They result from the cost-benefit calculus of the participants: If the net contributors come to the conclusion that EU membership is no longer advantageous for them, their willingness to pay declines, and the net recipients accordingly receive less (or nothing at all). This would force a reform of the EU in the interests of the contributor countries, and would make it less attractive for the recipient countries to remaining in the EU; it could even seal the EU’s end. Specifically, the EU states’ cartel is particularly vulnerable to the following factors:

—Disappointing economic growth: Support for the EU wanes when prosperity gains in the EU lag behind those in other regions of the world. Political pressure for reform, but also for countries to leave, then becomes conceivable.

—Migration: Nation-states will rebel against the EU more strongly if they no longer want to support EU migration policy. The EU wants uniform rules for the Schengen Area; nation-states want to retain control over their borders, population, and resources.

—Inflation: Another fault line is the inflation of the euro and the associated consequences for people in the participating countries. The worsening of the public debt problem, especially in the large euro states, will foreseeably require firing up the electronic printing press: The ECB will have to buy up government debts and expand the euro money supply to prevent payment defaults. The resulting inflation will also hit consumers and producers in countries that (still) manage their economies comparatively better. The costs of rising inflation likewise increase the incentive for some countries to turn their backs on the euro and thus also on the EU.

An exit from the EU would automatically also mean an exit from the eurozone for a euro country. The eurozone is not a separate treaty but an integral part of the EU treaties (especially the TFEU and the EU Treaty). The ECB and the common monetary policy are provided only for EU members. There are no provisions in the EU treaties that allow leaving the EU but keeping the euro. Exit under Article 50 TEU (as in Brexit) causes all EU treaties to cease to apply—including the monetary union. The introduction of the euro is therefore considered “irreversible”, and there is no provision for a “euro exit” without an EU exit.

Upon exit, the departing country would have to introduce its own currency or continue using the euro unilaterally (similar to Montenegro or Kosovo, which use the euro without an agreement). For a former EU country, however, this would be complicated: The ECB would no longer supply banknotes or provide monetary policy support. Contracts, debts, and payment systems would have to be renegotiated—with high costs and potentially serious legal disputes. A country could theoretically leave the EU and immediately want to rejoin (with special status) or negotiate an agreement—but that would be highly complex and politically unrealistic. No country has tried this so far; and the EU most likely wouldn’t want to accept it.

At this point, the following can be stated:

(1) The EU is a states’ cartel that has now erected very high exit barriers for the participating countries—and this includes above all the introduction of the euro single currency.

(2) Yet the EU is not “set in stone.” It has unmistakable weaknesses and breaking points that are ultimately determined by the cost-benefit considerations of the people in the participating countries. Things such as (i) permanently disappointing welfare gains, (ii) high euro inflation, and (iii) the realization that the EU states’ cartel damages economic, political and cultural development could lead to the EU’s dissolution.

(3) If one of the possible breaking points in the EU construct actually breaks, it is still necessary for a country to actually be able to leave the EU: It must also be possible for voters to translate their political will into political action through free elections in their national parliaments. However, this very possibility is increasingly being thwarted by the “globalist agenda,” which has now taken over large parts of the national party landscape and which of course also predominates at EU level — for example through financial aid to EU-friendly parties and initiatives, pressure on EU-critical journalists and information platforms, etc. It is certainly not an exaggeration to say: The EU has far better chances of survival under undemocratic conditions than under democratic ones.

(4) For the state, government, and bureaucrats, crises and emergencies come almost as if called for. This is by no means said cynically. For emergency and crisis situations allow them to expand their powers and reach: Suddenly measures can be implemented that would not be possible in “normal times”—such as tax increases, restrictions on freedoms, expropriations, etc. In this sense, one has to expect that there is even a political incentive to actively bring about crisis situations or at least exploit them as much as possible—especially when the government is in distress and needs “scapegoats” to distract from its own failures. Foreign policy entanglements, especially wars, are particularly well suited for this. Politicians can then conveniently blame the “enemy” for the self-inflicted over-indebtedness, the faltering economic growth, the rising inflation, etc.

What has been said applies not only to individual states but also to the EU states’ cartel. One must even assume that the EU states’ cartel intensifies this ominous dynamic. On the one hand, large, influential states can exert particularly effective influence on all other cartel member states via the EU; on the other hand, the EU center itself can force the cartel member states “from above” into a policy it desires.

It is obvious that the EU and, with it, especially the governments of the large, economically and financially ailing member countries such as Germany, France, and Italy (as well as, from outside, the United Kingdom) have an interest—in view of the Ukraine-Russia war—in a continued “war emergency”, in the creation of their own “war economy” or even spark a war in order to defend and expand their power position against growing domestic resistance. Yet this is precisely the path on which the EU states’ cartel works against freedom, prosperity and ultimately peace.