As the dust settles, the battles begin

This year’s European Parliament elections were a big deal and generated a lot of coverage across the continent. There was certainly a lot to digest. As predicted in advance, the European People’s Party (centre-right) remained the largest faction but it lost a significant number of seats (down from 221 to 177, or from 29.4% to 23.6% of the total). The representation of the centre-left S&D bloc also declined, from 187 seats to 149 (24.9% to 19.8%). This means that the two main groups that have dominated the European Parliament since direct elections were introduced in 1979 now have a combined vote share of less than 50%. The big winners were the centrist Liberal alliance (ALDE) and Greens, but also the Eurosceptics and nationalists (comprised of three separate blocs).

Whilst the swing away from the nationalist parties was not wholly directed towards the Eurosceptics, which probably did less well than they might have hoped, they nonetheless found a lot of support, taking almost a quarter of the total number of seats. Such parties topped the polling in three of the largest EU countries: Italy (where they took 58% of the votes); the UK (44%) and France (36%) whilst they also did well in Hungary, the Czech Republic and Poland (62%, 54% and 54% respectively).

We should thus be under no illusions that the electorate in a number of countries has expressed dissatisfaction with the status quo and that it will be difficult to continue along the same path that we have been following for the past forty years. No one group can dominate the European Parliament, and a number of what might in the past have been seen as strange coalitions will have to be formed. The EPP will need the support of the Greens and Liberals, but even these three blocs will not be sufficient to command a parliamentary majority without the support of at least one of the smaller groups. This highlights just how difficult things are going to get in dealing with many of the big issues which confront Europe. On the one hand it is going to be difficult to find common cause on geopolitical relationships with the likes of the US, China and Russia. Then there are economic problems such as the environment and dealing with competition issues. If Europe has struggled with these issues before, life is about to get far tougher.

The horse trading that has already begun over the numerous positions in European institutions does not fill me with confidence. Key positions, such as the President of the European Commission, are supposed to be filled via the Spitzenkandidat (or leading candidate) principle. This principle was first established following the 2014 elections in which the candidate proposed by the leading political faction was in pole position to take over as Commission President. This is how Jean-Claude Juncker got the gig in 2014 despite opposition from the British and Hungarian governments. On this basis, Manfred Weber (EPP) would be expected to be one of the front runners. But the French have decided that they don’t like the idea of Weber getting the job, with President Macron apparently in favour of someone else (though we are not quite sure who).

Having put the Spitzenkandidat principle under strain, it raises the justifiable concerns of those who see the process of appointing the EU’s top jobs as a Franco-German carve-up, which will certainly not go down well with the large number of Eurosceptics in parliament. This dispute will also have implications for other jobs which are up for grabs. If Weber fails to get the job as Commission President, it would not be a surprise if Germany put forward Jens Weidmann as the new ECB President in succession to Mario Draghi who leaves in November. That would certainly not be welcomed in southern European countries, given Weidmann’s opposition to unconventional monetary measures such as QE. The more we look at the job allocation process, the messier it becomes.

All this comes against the backdrop of further disquiet on the part of the European Commission regarding Italy’s fiscal position. The Commission today wrote a letter to the Italian government warning that “Italy is confirmed not to have made sufficient progress towards compliance with the debt criterion for 2018.” This could trigger another excessive deficit procedure against Italy, following last year’s issues which were ultimately resolved when the Italian government softened its position a little, and which might ultimately lead to financial sanctions. Bearing in mind that the Italian electorate voted on Sunday for parties with a strong anti-EU bias, this will not go down well in Rome. It also puts the various actors in this drama in a tricky position. On the one hand, it is likely to reinforce Italian resentment regarding the actions of the EC to stifle GDP growth, which has averaged just 0.4% per annum during Italy’s membership of the single currency. On the other hand, the likes of Germany are becoming increasingly intolerant of Italy’s fiscal position and it continues to push for the southern European nations to play by the rules. This fault line running through the euro zone shows signs of growing wider, rather than narrowing, as the splits between federalists and nationalists and northern Europe and southern Europe grow wider.

Then, of course, there is the issue of Brexit. At the EU level, the change in the composition of parliament might have some bearing on whether it is possible to reopen negotiations between the UK and EU as some prominent UK politicians believe. A change in the Commission President could have a similar effect, whilst the departure of Donald Tusk as European Council President will rob the UK of a staunch ally in Brussels. As for what the election results meant domestically, everyone has a view based on their prior belief. Brexiteers argue that since the Brexit Party got the largest number of seats of any party, this is a strong signal that the UK should get out of the EU as quickly as possible. Remainers argue that the total vote share accounted for by Remain-supporting parties was larger than that of the Brexit Party and that the number of votes obtained by the Brexit Party (5.2 million) was smaller than the number signing a petition calling for Brexit to be stopped (5.8 million signatures). Both arguments have some validity but as we saw in 2014, it pays not to extrapolate the European election results too far.

But however we look at it, the events of the past few days have highlighted that the EU has a lot of soul-searching to do. It does need to do more to convince the people of Europe that its direction of travel is the right one. This parliamentary session will thus prove to be the most important in recent history as the EU figures out how to proceed. It is important to get it right, for otherwise it is easy to foresee rising tensions putting further strains on the workings of the single currency and the fabric of the EU itself.

Assessing the strength of the tremors

Earthquakes are the result of long periods during which two tectonic plates rub against each other but are unable to smoothly slide over each other due to geological irregularities. But the pressure finally builds up sufficiently to force one plate to slide over the irregularity with such force that it releases energy in the form of a quake. They are generally unpredictable in terms of their timing and the impact of their devastation. But the forces triggering them take a long time to build – indeed, one could be forming under your feet right now.

So it is with economic events and today we have seen a couple of minor tremors which could be the prelude to a much bigger event. Let’s start in Germany where talks to try and form a coalition government finally failed yesterday after two months of fruitless negotiations. There are now essentially three options on the table: form a minority government; form a grand coalition with the SPD or call new elections. Chancellor Merkel does not appear keen on a minority government and the SPD apparently are not willing to repeat the experience of the legislative period 2013-17 when they were accused of being the CDU’s lapdog. And the option of new elections is not palatable to anybody, although Merkel sees it as the least worst option. Indeed, the shock triggered by the September result might cause those who voted AfD as a protest to rethink their strategy because it simply leads to more political chaos. There again, they may not.

Having negotiated the Dutch and French elections earlier in the year, the irony would be if Germany were to become the primary source of political instability with Angela Merkel’s credibility dented beyond repair. It is bad news for two reasons. First, for the euro zone. Having helped steer the euro zone through an existential crisis, Merkel is perceived to be critical to attempts to keep the region on track. Indeed, in Emmanuel Macron she has a political partner across the Rhine who has the vision and energy to kick start Franco-German co-operation. But like other European countries which have turned in on themselves in a bid to address domestic dissatisfaction, a large swathe of the German electorate voted for the AfD in protest at Merkel’s policy of opening the gates to thousands of immigrants. Even assuming she remains as Chancellor, Merkel cannot blithely dismiss this constituency, suggesting she may be a bit too preoccupied in future with domestic issues to fully focus on the euro zone.

It may also be bad news for the UK as it seeks to push forward with Brexit negotiations, for precisely the same reasons. A German Chancellor who is understandably more worried about domestic developments will be less focused on a problem which is perceived across the EU27 as a self-inflicted wound. Moreover, there still appear to be those on the UK side who believe that getting Germany onside will be sufficient to help them get what they want. This was always a naïve view – after all there are 26 other governments with a vote. But if Merkel is less willing, or able, to push through a Brexit deal it removes a crucial weapon from the British armoury.

A second tremor today was the announcement that the European Medicines Agency and European Banking Authority are set to leave London for Amsterdam and Paris respectively. This is the Realpolitik of Brexit in action. For a quick overview of why the loss of the EMA is a big deal, this Twitter thread is worth a read. Recall that in April, Brexit Secretary David Davis would not accept that the two agencies had to leave London even though it was clear that the EU had already begun the process of finding a new home. And lest we forget, banks have not yet moved people out in great numbers – but move people they will over the next 15 months, despite the smug proclamations of those who think the world will remain the same as before. Indeed, for anyone who believes that Brexit is broadly leaving the UK unscathed, it should be noted that the economy is growing only at a rate of 1.5% per annum compared to a rate around 2% prior to the referendum – and that is despite an economic pickup in continental Europe.

Neither of the tremors we have experienced today bode well for the future of Europe in general and the UK in particular. Sometimes, of course, preliminary tremors never result in the big earthquake – as residents of San Francisco over the last 100 years can testify. But they should be treated as a warning sign that there could be worse to come. In the UK case, you can bet on it.

Helmut Kohl's legacy

A memorial service was held in Strasbourg yesterday for former German Chancellor Helmut Kohl, who died on 16 June. Whilst his death briefly made headlines in the British press, coverage of what was in effect a European state funeral barely made a splash on this side of the channel. That says a lot about the way the British media thinks of European issues. Kohl was, after all, praised across the continent for being the lead architect in the construction of the EU – an institution which the British electorate rejected 12 short months ago.

Politically, Kohl was a unifier: In addition to his role on the European stage, he will forever be remembered as the Chancellor who reunited Germany. But as the German media has highlighted, one of the great ironies is that he never managed to unify his family: Even in death, he remained estranged from his two sons. Nor, despite the eulogies, did he share Angela Merkel’s vision, particularly with regard to the handling of the euro crisis. Kohl was a historian with no interest in economics. His was the politics of the grand vision, regardless of the cost. Very few politicians of the post-war era would have attempted a project as ambitious as German reunification. But no reputable economist agreed with the decision to convert the Ostmark to the Deutschmark at a rate of 1:1 which gave East Germans a short-lived income boost but which later wiped out the eastern economy.

Many German economists also believe that his push to introduce the euro was badly handled. The decision to introduce a pan-European currency without the appropriate leadership structure in the EU, and without a body to direct common political and economic policies for the euro zone, means that the single currency effectively remains little more than a glorified fixed income mechanism. It was created on the basis of the competitive situation which prevailed in the 1990s, and the pain associated with maintaining competitiveness was always going to require significant domestic adjustment: Even the European Commission was clear about this in the mid-1990s.  As Die Zeit put it, “a currency union was created that only worked when the sun shone.  And when a storm, in the form of a financial crisis, came along, Mr. Kohl’s peace project became the nucleus of the largest European crisis since the war.”

Undoubtedly, Kohl’s solution to the Greek debt crisis would have been to dip deeper into German pockets to find a financial solution. It might even have worked – for a while. But it does not detract from the fact that there are significant faults in the construction of monetary union which need to be fixed. Although Kohl was not honest with his own electorate about the costs of monetary union – living in Germany at the time, I was acutely aware of that – we cannot pin all the blame for the euro zone’s ills on his shoulders. Politicians in other countries signed up willingly to the euro without realising that their own economies would have to bear a far greater share of the adjustment burden than Germany.

The election of Emmanuel Macron as French President has been hailed across the continent as a chance to rebuild the Franco-German axis that drove the European project forward during the 1980s and 1990s. Macron has proposed a common fiscal policy, a joint finance minister and the completion of banking union, and surprisingly he has been given a sympathetic hearing in Berlin. But we cannot so easily turn back the clock to the halcyon days of Kohl and Mitterrand. The world has changed, with the rise of Asia having permanently altered the global economic landscape. Nor is it so certain that the people of Europe today share the vision for their continent which Kohl espoused. His was a vision rooted in the past, designed to ensure that the horrors of the first half of the twentieth century could not be repeated. That was, and is, a laudable goal. But the survey evidence suggests that European electorates remain sceptical of the need for further integration.

Europe in early 1995, after Kohl’s fourth election victory, felt like a good place to be. The EU was a smaller, more manageable institution with just 15 members. It was moving towards convergence at a pace which felt comfortable and although progress towards a single currency was ongoing, there were widespread doubts that it would be operational by 1999. It felt more like a warm and fuzzy aspiration which made the federalists feel good yet was far enough away not to worry the sceptics too much. In my view, that was Kohl’s real achievement: He led the horse to water. It is unfortunate that the purity of the water did not match up to expectations.

Watching them watching us

It is always interesting to read what outsiders think of Brexit, so I recently did a quick trawl of some of the main international newspapers to get a handle on the issue. One of the best places to start is with the excellent Irish Times, largely because it is a newspaper similar in tone to its more rational English cousins, but also because Ireland is the one EU economy likely to suffer heavily in the event of a nasty turn of Brexit events. 

This piece by Chris Johns argues that the attitude of the British government is reminiscent of the Charge of the Light Brigade. In his words, “Theresa May has just ordered ‘charge’ and an incredulous Europe stands, like the Russian gunners at Balaclava, ready to shoot as soon as the British come into view. It’s as one-sided a negotiation as they come.” He also notes that “the UK is facing into the most challenging set of decisions since the second World War and is being led by May, Johnson, Davis and Fox, all of whom appear to have been completely captured by the Daily Mail … it is rare to see such a lethal combination of incompetents and ideologues. Even Margaret Thatcher had a deeply pragmatic side and was able to populate her administration with people who knew how to get things done.” Clearly, it is not just me.

The Irish Times’ Berlin correspondent Derek Scally wrote in a recent article that  “for seven decades, most Germans idealised Britain much as many Brexiteers idealise Britain’s past and its post-EU future: a thriving, open-yet-closed land of cricket, cream teas and fair play. But Brexit has toppled Britain from its lofty, post-war pedestal in Germany.” I can attest to the fact that the German view of Britain is very different to that which many Brits have of their country. The Germans have failed to understand how the UK domestic political landscape has changed and how the right-wing capture of the centre ground has made the political debate a lot harsher. Those who come to live here soon notice that beyond the flashy façade of London, the public finance squeeze makes the UK look pretty shabby in contrast to most German towns. Those who have been here for any length of time understand, just as the natives do, that there is an increased degree of mean-spiritedness about Britain which is far from the idealised version of the story books.

What about the view from Germany? The conservative Frankfurter Allgemeine Zeitung argued in an editorial last week that Germany was likely to be a big loser from Brexit since it will reduce Germany’s blocking majority against the creeping trend towards turning the EU into a transfer union. An online reader survey in the same newspaper, which polled more than 20,000 readers, showed that 64% are opposed to the idea of the UK leaving the EU, versus 30% who believe it to be a good thing with 6% undecided.

Die Welt was rather less sanguine, with one story about Theresa May carrying the headline “The Iron Lady of Little Britain.” The range of views amongst reader comments was also interesting and echoed many of the opinions one often hears outside the rabid UK tabloids. This one from Ulrich H. particularly caught my eye, “For many jobs there are no British candidates, not because they are badly paid, but because the British are too poorly trained. Note also that the UK voluntarily opened its doors to the likes of the Poles, when Germany and Austria did not do so due to transitional arrangements. The fact that the number of foreigners is now regarded as a problem and a cause for Brexit has more to do with xenophobia - which does not really fit with a country which is open to the world.”

The French newspapers, perhaps surprisingly, also took a conciliatory approach. Le Monde reported in an editorial that “Now begins the enormous task of undoing all the ties that have united Great Britain to the life of the Twenty-Seven. And the ties that bind them to the life of the British. We must forge a new relationship that minimizes the damage for both. This will be all the harder since Theresa May, the British Prime Minister, has set goals that ultimately will hurt her country's economy and, most likely, inflict collateral damage on its ex-partners.”

The article also highlighted the extent to which people have crossed borders and made their lives in other countries, Brits in the rest of the EU and continentals in the UK. It thus concluded “now that Article 50 has been activated, this issue has to be dealt with separately, not as a "parameter" in the talks, which will be tough. We suggest starting the talks on a positive gesture: let's first deal with the question of our nationals trapped by Brexit. The four European dailies signing this editorial call for an agreement between London and the 27 to guarantee the rights of these five million people.”

Whilst this trawl was, of necessity, a fairly quick exercise I believe it shows there is sufficient goodwill amongst other EU nations to ensure that a reasonable settlement can be achieved as long as both sides approach the talks in the right spirit. But perhaps what it shows most of all is that the sheer nastiness of the domestic debate, in which the press has played a key role, is in stark contrast to the more reasoned view elsewhere in Europe. The British pride themselves on their good manners. Perhaps some of our commentators and politicians should look across the channel for lessons on how to conduct themselves with dignity.

Taking Europe's temperature

For all that many of the claims made by the UK Brexiteers are absurd, there is a rising tide of dissatisfaction across the whole of Europe towards the EU. This is a danger of which politicians and bureaucrats in Brussels must surely be aware. After all, the evidence comes from the European Commission’s own Eurobarometer survey. The survey, which is conducted biannually, has shown that since late-2011 more than 50% of respondents have registered a lack of trust in the EU whereas prior to the onset of the financial crisis in 2008, distrust levels were running at significantly less than 40%.

Ironically, there are seven countries above the UK in the latest Eurobarometer survey indicating high levels of EU distrust. Perhaps not surprisingly Greece tops the list with 78% of respondents expressing dissatisfaction. Worryingly, given the proximity of the French presidential election, France is in third place with 65% whilst Italy is sixth at 58%. The UK’s 56% dissatisfaction reading is only slightly ahead of Germany (53.2%) which also happens to be around the EU average (53.9%).

However, it is one thing to be dissatisfied with the status quo – it is another thing for voters to opt for departure as has happened in the UK. In a bid to assess the degree of Euroscepticism, perhaps we ought to pay closer attention to the degree of optimism shown by voters towards the future of the EU, on the basis that those who are the most pessimistic are the most likely to want to leave. Here, the picture is slightly different. On the whole, EU citizens show a moderate balance of net optimists (53%, if we exclude those expressing no opinion). But again, Greek citizens show the greatest degree of hostility with only 32% recording optimism regarding the future, whilst the French are in third place (42%) with the Brits fourth (44%).

On the basis that French optimism levels were lower than those of the UK even before the Brexit vote, this suggests that we should take the threat of Marine Le Pen more seriously than we are today. Although the generally accepted view is that Le Pen has no chance of winning the second round, there is a danger that too many pundits are looking back at 2002 and arguing that a coalition will form to stop the Front National (FN) winning the presidency at any cost – just as happened to her father. This view, which is expressed both in France and abroad, might be a touch complacent. Marine Le Pen is not the antagonistic figure that her father was (indeed, still is even in his eighties). If Le Pen continues to hammer home the message that the EU is the root cause of many of France’s ills, she may well run her challenger far closer than the expected 60-40 defeat that the polls currently predict. This is not to say she will win, but if the result is a close run thing, it does suggest that the FN is likely to be a force to be reckoned with in the years to come and that their popularity may not necessarily peak in 2017.

In any case, what has changed since 2002 is that immigration policy is far higher on the list of voter concerns than it was 15 years ago. The Eurobarometer survey indicates that at the EU level it is far and away the biggest concern, followed by terrorism issues, whilst the economic situation trails in a poor third. French voters apparently believe that unemployment is the biggest single domestic issue with immigration some way behind. If the FN manages to convince voters that the EU is partially responsible for the lack of jobs, it will only bolster their standing in the polls.

What is perhaps most concerning for politicians across the continent is that the degree of dissatisfaction which began to take hold in 2008 is gaining momentum. There is little doubt that the economic crisis of 2008, which morphed into a full-blown Greek debt crisis in 2010, has been badly handled. Greek voters are resentful that they have been forced to accept austerity whilst voters in other EMU countries are less than keen to continue providing support. The apparent inability of the EU to defend its borders, with the result that huge numbers of immigrants from the Middle East and North Africa have entered Europe, has also caused resentment. The German government’s policy of throwing open its doors in 2015 is widely perceived to have exacerbated the problem because it has raised tensions in other countries on the transit route that were not consulted.

All this is happening at a time when Europe lacks leaders unable to sell a vision of what the EU can achieve. At least in the days of Kohl and Mitterrand we knew the direction in which Europe was travelling even if not everyone agreed. Without strong leadership, the EU as we know it is doomed – at best to irrelevance, at worst to further fragmentation. The Eurobarometer surveys make it clear what EU citizens are concerned about. But is anyone in Brussels listening?

The rhymes of history

“More than the success of the Brussels negotiations is imperilled by the divisions of the western world … The western alliance lies spread-eagled after losing both common purpose and mutual confidence.” It could have been written yesterday. In fact it was written almost 54 years ago and forms the opening lines of the Glasgow Herald editorial from 15 January 1963. The context of the article was French President de Gaulle’s decision to reject British attempts at membership of what was then called the EEC, whilst also rejecting US overtures to provide the weaponry to help defend Europe which he regarded as usurping the French place on the world stage.

Fast forward to 2016 and we are again debating the nature of Britain’s relationships with its European partners, whilst the extent to which the US is prepared to underwrite Europe’s military defence has been one of the issues in Donald Trump’s US presidential campaign. In many ways, de Gaulle’s fears look remarkably prescient. When asked what was France’s position regarding Britain’s entry into the Common Market, he replied “The Treaty of Rome was concluded between six continental States, States which are, economically speaking … of the same nature … The entry of Great Britain … will completely change the whole of the actions, the agreements, the compensation, the rules which have already been established between the Six … Then it will be another Common Market … which would be taken to 11 and then 13 and then perhaps 18 [and] would no longer resemble, without any doubt, the one which the Six built.” 

To put it simply, de Gaulle foresaw that the entry of the UK would be the thin end of an expansionary wedge which would change the nature of the European project. Historians argue about the old man’s motives but there is little doubt that the UK has never sat comfortably within the EU. Moreover, the eastward expansion in 2004, which almost doubled the number of member states, did indeed change the nature of the project as de Gaulle predicted.

I find this whole debate fascinating because it highlights that many of the problems which we face in the US and Europe today could usefully use a little historical perspective. We can debate whether the trend in the US towards retreat from some of the world’s more intractable problems has echoes of the isolationism of the 1930s with all its attendant consequences, though I have no intention of doing so here. For those interested in a more detailed take on US foreign policy, I would recommend organisations such as The Foreign Policy Association (here).  Suffice to say that we should have a better idea next week of the direction in which US foreign policy is likely to evolve.

But when it comes to European issues, it is safe to say that never in my lifetime has the continent appeared so febrile and policy so lacking in direction. In recent years, the EU has suffered a crisis of confidence brought about initially by the Greek debt crisis and latterly by a huge refugee influx. In part, this reflects the over-confidence of the 1990s which prompted the EU to expand too far, too fast. It also reflects policy mistakes, particularly with regard to the economy. Indeed, it increasingly appears that the construction of monetary union failed to adhere to de Gaulle’s message that forcing disparate countries together in a single economic system was a recipe for disaster. This came about because policy makers across Europe used economic structures for political purposes. But as every economic historian knows, fixed currency arrangements tend to end in tears (I will explore this in a future post).

The solution to many of the EU’s economic woes is more federalism, but the tide of public opinion is swinging back in the other direction. It increasingly looks as though the EU built the foundations of the structure which it wanted to become but delayed for too long in building the walls, let alone the roof. The tide of history is now moving too quickly for the EU to resurrect the ideas of the 1990s but a return to the Common Market ideal of 1957 also appears unpalatable to many European politicians today. Yet the latter option may be the only solution which is ultimately workable for a Europe riven with disparate economic and political goals.

As for the UK, it is quite clearly a nation ill at ease with itself. Half its voters want to secede from the EU and half do not. Yet such is the febrile mood today that when the judiciary rules parliament must have a say in how the country leaves the EU, it is accused by the Fourth Estate (the unelected and self-styled voice of the people) of being an enemy of democracy. Lest we forget, the early years of the Thatcher government were also a period of extreme social unrest but I cannot recall an atmosphere as poisoned as the one we have today. Economic rationality (if such a thing can be said to exist) is being totally ignored as we debate our economic future.

Mark Twain is reputed to have said that history never repeats but it does rhyme. But the poem being written today is not of the epic variety. It is closer to the worst kind of doggerel.

It was twenty years ago today ...

It dawned on me this morning that it is twenty years since I packed myself off to Germany to start a new job. Two whole decades! As I reflect on where the time has gone, and why English football is in an even worse state than it was then, I am struck by how much simpler the world economy appeared back in 1996. The world's economic power was concentrated in Europe and the US, which meant that keeping track of the fundamental issues driving markets was a relatively simple task. European monetary union remained an aspiration for policymakers whose aim was to meet the qualification targets for entry into the single currency. Central and eastern European economies were still adjusting to the post-Communist world and were early converts to go-go capitalism which promised a massive rise in living standards. In Japan, we were awaiting a recovery following the bursting of the bubble economy in 1990, whilst southern and eastern Asian economies were regarded as a dynamic, but very unsophisticated.

How times have changed. Two market booms and busts later – the most recent being the most far-reaching since the Great Depression – the position of the US as a kick-ass superpower has changed. It is still the strongest military power in the world but its economic supremacy is no longer unchallenged. European monetary union did happen as promised, but as recent events have shown, it is far from a one-way ticket to prosperity. Many of the smaller nations in southern and central Europe are struggling under the weight of the massive rise in debt accumulated during the boom; we are still awaiting a solid Japanese recovery following 25 years of stagnation and Russia looks more like the old Soviet Union than the engaged partner the west hoped it would become. But the biggest change has been in the perception of Asia, particularly China, which is reclaiming its historical importance as a big player on the world stage.

Of all the events which have taken place over the past two decades, perhaps the most emblematic was the Lehman’s bankruptcy of 2008 which marked a seismic shift in the western world. This signalled an end to the fantasy world of debt-fuelled prosperity and the dawn of a day of reckoning. No longer would we be able to build our monetary Tower of Babel all the way to Heaven (to use Jens Weidmann’s analogy). We would have to be content with a smaller place with fewer floors (or should that be flaws?). As it turned out, the foundations  of our tower were pretty rotten and even now we are still digging them out, trying to construct a more sustainable structure.

In retrospect, we should have foreseen many of the problems which hit us, but most of us did not. As Martin Wolf noted in his book, “The Shifts and the Shocks”, we “lacked the imagination to anticipate a meltdown of the Western financial system.” Perhaps that is because we had created a system which had proved pretty robust to all that had been thrown at it and we simply became complacent. But an additional reason is that we failed to understand the significance of the change in the world economic order. Ben Bernanke argued as far back as 2005 that excess saving in surplus countries such as China was a contributory factor to the boom which preceded the western bust. It is not the whole story, but it indicates that the changed dynamics of the global system meant that western economies were potentially subject to forces which they had not been designed to withstand.

So whilst it may be overstretching it to argue that the 200 year dominance over the world economy enjoyed by the west is at an end, I have long believed that the high water mark of western capitalism was reached in summer 2007. As that particular tide begins to ebb, it will become ever more apparent how important the Asian economies will be to the global economic order. The US and Europe will no longer be in a position to decide for the rest of the world.

I noted some years ago that against this backdrop, Europe will have to be more outward looking; more open to hearing the voice of the electorate in order to shape its liberal democracy to cope with the demands of a 21st century world. Policymakers will have a key role to play in this debate, balancing the need to impose adjustment against the resistance of the electorate to the radical changes which are needed. The signs are not looking propitious. The stresses imposed by the euro zone debt crisis have exposed fault lines in the design of the single currency whilst the threat of Brexit may be the thin end of a wedge which exacerbates European divisions as populism rises up the political agenda.

We can be certain only that the old certainties no longer hold and for that reason it is pointless to try and predict what will happen in the next twenty years. Suffice to say that western policymakers have a lot of work to do to ensure that we will be in a position where we can feel as positive about our future in 2036 as we were in 1996. I would like to be optimistic about where Europe is headed. But until such times as we rediscover our sense of purpose, I suspect the years ahead will be politically and economically challenging.