The Brexit Pandora’s Box

For my (mainly) American friends, file this under “why you don’t understand Europe”:

The Vietnam War was a war that scarred the national psyche and dramatically changed the tone of American foreign policy for a generation. If you visit the Vietnam Memorial in Washington DC today, you will find roughly 58,000 names of fallen soldiers from that period. Now imagine if instead of losing 58,000 soldiers, the United States lost 2.5 million during the Vietnam War. For a country like the US of roughly 300 million people, that kind of casualty rate would mean that virtually every household in America would be touched by combat death, whether it’s a father, son, brother, uncle, friend or neighbor. Then 25-30 years later, which is roughly the span between the Vietnam War and 9/11, the country got involved in another conflict with a similar death toll.

Imagine the resulting national trauma.

That’s what happened to many European countries in the First and Second World Wars – and the losses quoted would be roughly what the equivalent losses are for the US on an equivalent per capita basis on par with many European countries. The Credit Suisse Global Investment Returns Handbook has documented the financial cost of a century of war in Europe. Here are the real returns to different asset classes in France over the last century. In addition to the human carnage, investors suffered devastating losses during those wars.


Here is the same analysis for Germany. In addition to the lives lost, many investors had to contend with the permanent loss of capital. Some of those “risk free” interest rates that may have been in financial models weren’t so free of risk anymore.


The UK fared a lot better as unfriendly foreign troops never set foot on its soil. On an inflation adjusted basis, its equity returns was an order of magnitude better than France or Germany.


For comparative purposes, here is the return record of US assets. Americans were fortunate to have escaped the two world wars with minimal financial damage. The Great Depression caused more equity damage than the wars. The terminal real value of equity investments was three times better than UK results.


So is it any surprise that at the end of the Second World War, the leadership of Western Europe surveyed the carnage and came to a conclusion that we can never do this again. Ever. Thus the Common Market, the EEC and later the EU were born. While it was originally structured as a free-trade agreement, the political intent was to bind the two main combatants, France and Germany, so tightly together so that a European war cannot happen again. The political goals of Europe has largely succeeded. Today, if Angela Merkel mobilized the Bundeswehr and told the troops that they were going to war against the French, the men would all laugh, have a beer and go home.

That is the miracle of Europe. Against the tail-risk of millions killed and cities devastated, the price of little squabbles about bailing out Greece seems like a minor price to pay.

The rise of the Euroskeptics

Today, the political glue that holds Europe together is starting to disintegrate. Regardless of what happens on Thursday, the Brexit referendum is a symptom of how a rising tide of nationalism across Europe is opening up a Pandora`s Box. This new Pandora’s Box is unraveling of the political consensus holding Europe together.

In a past post (see A history lesson, and why Europe should try to be more Canadian), I highlighted a column by Margaret Wente in the Globe and Mail about how those of us in Canada are different from Old World.

Our identity is not defined by blood, or by our sense of destiny. We have no concept of Volk. We’re just folks. We don’t care who you are or where you came from or who or what you worship, as long as you share our good Canadian bourgeois values. Don’t litter. Send your kids to school. Wear a poppy.

(For the uninitiated, the tradition in British Commonwealth countries is to wear a poppy on Remembrance Day, November 11, as a remembrance of the sacrifices made in past wars.) Those of us living in the New World tend not to be as tribal as the Old World – and tribalism is what the European Project is trying to minimize.

That’s all changing. The Brexit referendum is just one manifestation of renewed nationalism and tribalism in Europe. A recent report by Timbro, the Swedish research institute, documents the rise of authoritarian populism in Europe (and authoritarian populism is usually identified with Euroskepticism).

Never before have populist parties had as strong support throughout Europe as they do today. On average a fifth of all European voters now vote for a left-wing or right-wing populist party.

The voter demand for populism has increased steadily since the millennium shift all across Europe. No single country is clearly going against the stream. 2015 was the most successful year so far for populist parties and consistent polls show that right-wing populist parties have grown significantly as a result of the 2015 refugee crisis. So far this year left-wing or right-wing populist parties have been successful in parliamentary elections in Slovakia, Ireland, Serbia, and Cyprus, in a presidential election in Austria and in regional elections in Germany.


The news is full of the rise of Euroskeptic parties with authoritarian populist leanings (both left and right) headed by the likes of Le Pen (France), Wilders (The Netherlands), Orbán (Hungary), Grillo (Italy) and so on. As an example of the inroads made by these Euroskeptic protest movements, Beppe Grillo’s Five Star party’s candidate, Virginia Raggi, won the election as Rome’s first female mayor on the weekend.

Europe turns inward

The Pew Research Center recently surveyed Europeans and showed how their people are turning inward:


In foreign policy, even though they profess support of greater engagement and multilateralism, polling internals indicate that nationalism remains ascendant and appetite for compromising with allies is low.


The Brexit referendum is an example of how its people are turning inward. As this analysis of the demographic leanings in the vote demonstrates (via Ian Bremmer), Brexit is mainly an English initiative as Scotland, Northern Ireland and Wales tilt towards Remain while most of the Leave support comes from England (except for London).


Should the Leave side win, the most likely outcome would see Scotland holding another succession referendum, but this time succeeding, followed by possibly Northern Ireland and Wales. The United Kingdom would fragment into its basic unit of Volk, just as Europe is fragmenting.

How Europe can end

The disintegration of the European ideal is the greatest threat to European stability – through rising nationalism and tribalism. Problems like Cyprus, Greece, Spain and Italy can be fudged through the kinds of messy compromises that are typical of Europe. But if enough Euroskeptics take control of enough member states, the European Dream dies. The markets implicitly understand this risk. As the Brexit Leave side was gaining in the polls, it wasn’t the yield on the 10-year Gilt that was rising, but the spread on peripheral debt that was blowing out.

To be sure, no one is going to war if the Leave vote succeeds this week, but it creates a higher element of longer term tail-risk for the region. In a future post, I will detail one possible development that may create hope that Euroskepticism may be reaching its high tide mark.

13 thoughts on “The Brexit Pandora’s Box

  1. A truly great post Cam. Well said.

    Much of the angst around Europe is centered on immigrants from war torn regions close by. After the bullets stop flying, the developed world should do a Marshal Plan to rebuild the devastated cities. Many or most of the immigrants would rather go home but their homes are rubble.

    This would give a great boost to economies in the developed world as well as the war torn areas.

    The hatred towards the West would be counteracted. The West spent trillions blowing up things. Spend trillions to rebuild and make the world safer.

    1. I agree that could be a solution to jump start growth, but you have seen the kind of antipathy here in Canada in the last election against outsiders – and Syrian refugees in particular. Sitting where you are in the heart of the Tory heartland, you must see a lot of that attitude around you.

      With that in mind, what are the chances of implementing such a “Marshall Plan”?

  2. I agree with Ken…great post.

    I thought this was an interesting “view from the hill” piece (surprisingly from an ex-CIA middle east operations officer) which also agrees with Ken’s point:

    If we don’t want the South coming North, then the only other option is for the North to go South. No, not in the old punitive way. In many respects the North has already “been South” in past centuries, and it hasn’t always been a pretty sight. This is not to dismiss some fine western-sponsored technological projects and NGOs like Doctors Without Frontiers. But sadly these contributions are only a drop in the bucket. Vastly more is called for. Remember the hugely generous American Marshall Plan at the end of World War II aimed at rebuilding a devastated Europe, including Germany? It was not conceived as philanthropy but as an integral part of American security policy.

    How to improve conditions across the developing world? US foreign aid in this capacity has been miniscule— less than 1% of the annual US budget. Yet wasteful and unproductive Pentagon budgets run to some 54% of US annual discretionary spending. (More if we consider bloated security and intelligence institutions.) Are we more secure today? From ISIS? From refugees? From terrorism? From Russia and Chinese border politics on their peripheries? Where are our security priorities?

    More here:

  3. I’m curious, Cam, is there no level of incompetence and dictatorship on the part of the Euro leaders that is too much for an otherwise successful country like the UK to tolerate anymore? If most of the laws affecting Canada were determined in Washington DC with little input from Canadians, would that bother you? If being stuck under a common dictatorship is the only way to avoid war, should Canada give up sovereignty and be ruled by Washington?

    I expect the Brits to vote remain, because being part of a slow moving disaster that is the EU seems safer in the short run than taking steps to control one’s own destiny, at the cost of temporary uncertainty. But the EU is doomed anyway, with an increasing number of countries (just look at France these days) trying to live at the expense of the few other countries that actually produce goods and services that people around the world want to buy. It’ll break apart one way or another; if the UK were smart it would beat the rush and leave now, but in the end it will be on its own again, and better for it.

    1. When you use the term the United Kingdom, do you really mean England? The Scots are very pro-Europe and they would be likely want to leave the UK. This time, it’ll be settled at the ballot box and not at Culloden. If Scotland leaves, the economic incentives for Northern Ireland to join their brethren to the south are high.

      There is nothing wrong with English nationalism, but Brexit is a recipe of how to take the “Great” out of Great Britain.

      Also see this amusing comment from Niall Ferguson:

      1. The Scotts will go to whoever subsidizes them the highest. The best thing that happened to them was voting no for independence when oil was $100/barrel. Were they independent now, they would be running deficits that would make Greece look like Germany. The English are covering their deficits for now, but might be happy to say good riddance, and hand over to the increasingly bankrupt EU the great honor of subsidizing Scotland, should it want to leave an independent UK.

        The EU is, as Margaret Thatcher said about all socialist states, running out of other people’s money. Its craving for a “monetary union” is another way of saying they want the countries with viable economies to subsidize the spendthrift deadbeats. I think eventually Germany and some others will say, who needs these parasites?, and leave, perhaps to form a “union of the competent.”

        Anyway, I look forward to your suggesting Canada give up most of its governmental functions and become a colony of the US, since presumably that will prevent a war between us.

        1. If Canada became part of the US, it would tilt the government to left. Hillary Clinton would be right of center in Canada.

  4. Well, I’m from Europe. The European Union is a special project. It features independent governments with a government on top of it, with the European parliament and commission, which I shall just call the European government. And it does create a conflict. The national independence is partially lost since the European goverment does influence the national governments’ policies. While at the same time, there’s not a real connection between the population of a member country and the European government. I can’t prove that in a hard way but I think it’s almost universally accepted to be true in Europe. It certainly seems true in Greece. Since it almost seemed to be held hostage. Europe demands the debt to be repaid which leads to more social austerity for that debt to be repaid. While at the same time, Greece has lost the ability to print its own money. It has lost its own currency. So that ‘glue’ between Europe and its member countries can be really restricting their own freedom. Countries can be stuck. Stuck to Europe and to the European Central Bank. (ECB) Stuck to the Euro as well… And because countries are all stuck to the same currency, we’re a lot more stuck to each other politically as well.

    I believe the glue you were talking about was there. Many felt united and stronger. But I believe the European Union has gone too far. The European project may have started with very good intentions and may even have prevented some wars. But it started as an economic project. And now it’s very political. I also don’t think we should ever have had the Euro and ECB. And many, I believe, are sceptical about the European Union. But many are also scared. Scared to end up in an economically weaker position after leaving. I believe this is so in Great-Britain as well. And political parties try to enlighten this fear. If the people knew they be’d just as strong economically, I think they would vote to leave.

    Also, ideologically, I believe independence should be treasured. Otherwise, democratic power gets all too powerless. Though, I so often do hate those right wing politics. It does feature a risk.

  5. I find the article and responses without a central theme. The Europeans would never enact a Marshall plan the way US did post world war, considering it is a bankrupt continent. Furthermore, what incentive do Europeans have to aid the refugees anyways? As regards nationalism, Europe has never been too much for integrating immigrants anyways (see German refugee villages). Many Europeans have never granted citizenship rights to a child born there if the parents were not Europeans (unlike the US; do not know about Canada). The rise of Euro nationalism is nothing new. Europe was always segregatory and pro nationalist, Canada comes a close second, in my experience. As an American immigrant, I found Canadian immigration far far more discriminatory than US. Yes, countries that were fighting till only fifty years ago, are not likely to give up their soverenigty to another like the EU that simply. The whole idea of EU IMHO was a mistake. If the Brexit vote does not get passed today, it just postpones it. The Euro has the backing of all member sovereigns. What kind of currency is that? Who and why should it be taken seriously without complete political union? The Brits have a point. Euro bureaucrats are now calling the shots affecting British policies. The British are not liking the taste of their own medicine that they dished out to Asians and Americans, following policies without representation. The ultimate irony here is that Germany has fought two wars trying to control Europe. Germany now has the control of entire Europe and does not want it. As regards Canada, it rides the coat tails of American business, but does not want to admit it. Rick is right, Canada should simply sign up as the 51st state, and avoid bloodshed. If Canada were to join the US, Canada would tilt to the right! A Brexit would have enormous political and military implications. It would start a new cold war. It would create incentives for Asians colonizing smaller Europeans countries (much like Europeans did in the past 5 centuries). Smaller European countries would have little ability to defend itself militarily against Asian giants, much like what they did to Asian countries a few centuries ago. Britain, would finally be forced to stand on its own. Yes, competition would be good. Britain would try and create new weapons to defend itself under perceived threats, igniting a new cold war. Russia and China could well gain significant leverage in the process.

  6. Well, I’m from Europe, too. From one of the countries that joined after 2000. I shudder if I imagine how life in my country would be like if we’d never joined. The democratic values that EU »forced« upon us, the common market, the legal rights, no borders to cross, no black markets for currency exchange, Erasmus study programs … Yeah, we’d get there without EU – in time for my grandgrand children to enjoy the fruits. A young democracy doesn’t turn overnight into a ripe one. Not without a helpful push from someone more experienced. Sure, EU is a bureaucratic beast unable to take any quick decisions. Well, there are 27 countries in it – and guess what – every single one has a say! It’s far from perfect (introducing the euro, but no common fiscal policy), but I see it as a constant work in progress. And not just for the better of Germans.

  7. Cam,

    I believe you built in your missive a convincing case for why the EU developed and the sensibility for its creation. Where I think you began to make erroneous assertions was about the middle of the paper where you said “That’s all changing.” While it is changing slowly, and it may be rising nationalism that is occurring, beneath that moniker is the real reason: having less and fear of even less.

    Most are generous, less fearful and perhaps gregarious when they have plenty. But all that evaporates when they are fearful of not having enough or as much as they used to have. That’s what is going on in Europe economically and has been since the turning point you mentioned – the millenium. Even your charts show basically no growth in Europe since that time, except for some in Germany and the UK. Look at the 20 year chart of EEA. It was at about 20 in 2000. Now it is about 8 and has had mostly a slow downward trend for 16 years. That is similar to what we would have seen in the US if the SPY was now below its low of 09. Also, all anybody hears about growth in Europe is that there will basically be none. Suspicions about the EU grow from this and then are fueled by the forced immigration that many believe will only hurt their economic plight.

    Follow the money and “Its the economy, stupid” are time-tested principles. It is not a nasty, we are better than you type of nationalism that is happening; but rather a fear-induced pulling in.

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