Monday, December 12, 2011

Why Europe Will Solve Their Problems

Over the last year, the EU situation had been one of the dominant stories.  More importantly, the editorial community has continually stated that each plan was deeply flawed and therefore the end of the EU was near.  Regarding this constant stream of negative news it's important to point out two facts: first, negative reviews increase headlines and web traffic.  Second, none of these reviews -- at least to my knowledge -- has touched on the primary reason for the creation of the trading bloc and therefore why the EU will eventually solve their problems.

Back in the 1990s, Europe faced two problems.  First, it's overall power on the world stage has fading.  While Germany, France and England would be invited to all the important diplomatic events, they weren't real power brokers anymore.  The continent was well aware of this fact and wanted to be dealt back in.  At the same time, on the world stage, political power was slowing beginning to take a back seat to economic power.  Remember this is the time when Clinton was trying to get China admitted to the WTO; the BRICs were slowly starting to emerge as their own power centers and Asia was clearly on the rise thanks to its economic heft.  The EU realized that if they combined their forces they would again be powerful because that power would be derived from their common economic market whose size rivaled the US'.

Secondly,  imagine this scenario.  A French company wants to sell its product across the continent.  They ran into as many economic and legal systems as there were potential trading partners.  And while some harmonization was underway, it still had a long way to go. 

So -- we have a region that if they combined their forces -- would provide a political counter-weight to the US, but that weight had to come from their political unity.  Hence the formation of the trading block.

Let's fast forward 10 years.  I can tell you that -- at least from a tax perspective -- the genie is out of the bottle and can't be put back in.  When talking about moving money within the block , tax planners have one basic basic strategy; get money into the region in some capacity.  At that point, moving money between countries (and hence profits) is a remarkably uniform affair.  People now move across borders easily as well.  And now we have macro-economic structures such as the ECB and to a lesser extent IMF that help to bring the region together economically.   In short, integration has already moved forward; unwinding it would be nearly impossible.

Does that mean there aren't problems?  Nope.  We are currently running into what is perhaps the biggest one: a common currency with multiple budgets below it.  That has to be dealt with in a comprehensive manner.  And dealing with it is incredibly difficult -- hence the multiple plans that have emerged and the length of time it has taken to solve the problem.  Put another way, this is not a problem that will be solved easily or overnight.  The reasons pundits can't see this is, 1.) they have no practical dealings with the region and hence talk entirely from a theoretical perspective, 2.) they talk entirely from a political perspective that dislikes the idea of EU unity (or just the EU) and hence are predisposed to dislike everything that comes out of the region. 

However, disunity is simply not an option if the region wants to remain a power player on the world stage.  And that is what will eventually force the region to solve their problems.