Possibly the end of globalisation – The populism in Europe

United we stand, divided we fall – one of the proverbs that had been taught to us to understand what makes us – the homo economicus – a social animal, may soon change. This may not only change the seal of Kentucky, the seal of American commonwealth states that include 4 of the 50 American states but also questions the existence of the largest economic and political union that the history of mankind has ever seen – the European Union (EU) and the motivation behind it – The globalisation.

If we scroll through the history of EU formation, the roots lie in the Second World War when there was a new movement to create unity between Germany and France, which were in shambles by the end of the war. Originally formed as European Economic Community the infant step the globalisation, the union aimed to prevent wars and strengthen economic bonds. Britain joined the union in 1973. The pillars of formation were free movement of human and goods and protection of rights across countries. European union was a move from a single market to a single currency, a single banking system, a single budget and eventually a single political entity. With the Lisbon treat of 2007, the formation of EU as we see today was complete.  As on today, covering around 7.3% of the human population, the union generated 16.5 Trillion dollars of nominal GDP – around 22.2% of the global nominal GDP. To give an economic perspective, of the top 500 largest corporations in the world measured by revenue in 2010, 161 have their headquarters in the EU, which enabled the union to hold control over the global trade till date.

For Britain, the cost of EU membership was around 12 Bn Euros and it used to get subsidies and grants worth 4.5 Bn Euros. Obviously, a country still struggling to get employment for the youth will not like this bargain. In June 2016, the British public decides to vote against continuing in the union. In an emotional drama, David Cameron resigned as prime minister the next day. This is the story as we know it and is the dream of a single political entity is almost over.

How does this affect the global power politics? Brexit will inevitably increase the friction between the Britain and its international trading partners. Many large businesses, unsure of future on their access to the Eurozone, will most likely freeze their major investments in the U.K. Since global business is so interconnected, there is a good prospect of a global economic slowdown.

There has been pushing back against globalisation over the years. The violent protests seen in Seattle during the World Trade Organisation meeting in December 1999 were the first sign that not everyone saw the move towards unparalleled freedom in a positive attitude. With the Brexit populism has become an increasingly important force in global politics, followed by the promise of Marine Le Pen to move the France from EU and reinstate the French mark may trigger an avalanche that could result in similar movements in already brewing markets such as Italy, Netherlands and Austria. With the decreasing role of trade alliances such as NAFTA, OPEC and Mercosur and the TPP that Trump nailed to the wall, it is high time for us to bet on the Anti-Globalization.

Economics Geopolitics

Is the defense spending a precursor to Economic Supremacy?

I am quite sure you will not agree. But you will agree to the fact that the empire that had the strongest military always ruled the world both economically and politically and thus achieved the world domination. If one scroll back through the pages of history,  British defence share of government expenditures during the 17th, 18th and 19th century were up to 75 % of GDP, never dropping below 55 %. The predecessors for British were the Dutch who had even larger numbers to boast.

If you look at the spending pattern of US on defence, it was less than 1% during the Renaissance, grew to around 12% of GDP during the Civil War of the 1860s, 22% during World War I and culminated to staggering 41% during the WWII –  the time of the universal call by Uncle Sam for the Armageddon. Even today, U.S. military accounts for a staggering 40% of global military spending. More of a fact, US annual spending on the military is higher than the next 13 nations combined. To give you a perspective the constitutional democracies build by the people, for the people (I am not so sure about that) and of the people, as the Uncle Sam says, the allies of US account for over 80% of military spending of the world. Wow, that’s quite a large number!

But have you really thought why this country and its allies alone are spending so much money on defence? At least for a few of us, when we speak of value, the ‘Dollar’ term creeps in. Why are we speaking so much about the Dollar?

Even though there are over 180 currencies in the world, the cost of crude, an investment made by IMF, the debt of countries and even the Big Mac Index is always measured in Dollars. If we look at global forex transactions, there is a 44% chance that one of the currencies in the transaction is the greenback and hence it enjoys the status of world reserve currency. Are we reading about completely unrelated topics?

Not really. This insatiable “recall” / “demand” / “a belief” in dollars has handed the U.S. government a virtually unlimited credit card and a perfected money minting machinery. U.S., with a debt of about $60 trillion, is currently the world’s biggest debtor nation. Due to dollar’s role at the centre of the international monetary system, US has the largest domestic debt securities market ($30 trillion) which is more than double the size of the next largest domestic market Japan ($1 trillion). The defence superiority also enables the country to forge international economic and military partnerships, a trend which points to the country’s strategic clout. This is what the US achieves by retaining its first rank in the defence and military spending, which otherwise would be difficult to maintain in competition for a global superpower. Although China is trying hard to crack to this by making its presence felt, Grand Old Uncle knows that Military prowess and economic prosperity are not zero-sum games. Although “democratic countries” know that they have the potential to realise $1.30 of extra private spending over a period of 5 years for each $1.00 reduction in defence spending (study by Mercatus Center), will our Grand Old Uncle change its military and geopolitical strategy in Emerging markets for such a silly gain?

Let’s wait and see how Uncle tames the dragon… !!!