In George Orwell’s classic novel ‘Nineteen Eighty Four’ the world was divided into three competing super-states. Oceania represented the USA and other advanced English- speaking economies. Eurasia meant Continental Europe and Russia. Eastasia signified China and East Asia.
Orwell wrote the novel in 1948. Nearly sixty years on, this is now a remarkably good fit to the world live in today. But if you look further into the future, you can see that one of these power blocs is destined for political paralysis.
Economic decline and global irrelevance are assured. Your long-run investment strategy must act on this uncomfortable trend. In short, investors would be well advised to look east…and buy gold. Here, I will explain why.
In the era after the Second World War, the US’s most important overseas relationship was with Europe. Marshall aid helped rebuild Western Europe, which was of vital strategic importance during the Cold War. At the same time, US trade deficits provided the capitalist world with much needed liquidity. However by the mid-1960s America had embarked on a costly war – this time in Vietnam – and the twin trade and budget deficits ballooned.
Back then, America’s trade imbalance was principally with Europe, which held 40% of the world’s foreign exchange reserves. France in particular resented America’s ability to finance its political ambitions by printing dollars. So France started to sell dollars for gold, which was pegged at $35 per oz.
Despite three years of US financial diplomacy to contain European selling pressure on the US currency, the dollar-based fixed exchange rate system broke down in 1971. Gold floated up to $800 per oz by 1980. Three years later, it peaked over £320 per oz for sterling investors.
Now Europe means much less to the US. The Cold War is over and the countries of the old ‘Common Market’ are in relative economic decline. So the focus of US financial diplomacy has shifted from the Atlantic to the Pacific. The bulk of America’s trade deficit is with China and Japan.
At the same time, the countries of East Asia account for nearly 60% of foreign holdings of US debt. Germany, Italy and France account for 5%. The process of globalisation will reinforce this state of affairs.
But Great Britain remains wed to Continental Europe. It currently accounts for 50% of our annual exports. And globalisation has brought our economic choices into sharp relief.
On the one hand there is the 21st century’s information-based network, pioneered and led by the US, co-operating with East and Southern Asia. They increasingly dominate manufacturing. The scope for this co-operation – between a region with an abundance of low cost and industrious labour, and a country with a massive technological lead – are immense.
On the other hand, we have the European Union. The EU is obliged to rely on subsidies and trade barriers to protect, rather than earn, its way of life. Unless Europe wakes up and reverses direction, the region will be marginalised. Indeed, political paralysis is already here. Economic decline will worsen, and global irrelevance will follow as night follows day.
In fact, in the words of the French Institute of Foreign Affairs, Europe is heading for the ‘exit ramp of history’.
Why are we so pessimistic at the Fleet Street Letter about the long-term prospects for Europe? The two ‘no’ votes in France and the Netherlands that rejected the EU constitution earlier this year could have provided a perfect opportunity to put Europe on a different path.
But alas, the reaction of the political elites has been predictable. Their resistance to change has been implacable. Meanwhile, as Brussels fiddles, the economies of ‘Old Europe’ are being brought to their knees by catastrophic policy failures.
You will recall the fanfare that launched Britain’s presidency of the European Union in July. Tony Blair told the Commons he wanted to change the EU radically. He warned the European parliament: ‘The people are blowing the trumpets around the city walls. Are we listening?’
But so far very little has come of Britain’s EU presidency. There has been no progress on reform of the EU budget or the Common Agricultural Policy, nor on reform of the EU’s economic and trade policies. France has become the roadblock, a barricade of burning cars blocking change. French President Jacques Chirac has made it clear he is determined not to budge on the CAP. In his Bastille Day speech this year he said: ‘I am not willing to make the slightest concession on the common agricultural policy’.
So who is likely to get their way – Blair or Chirac?
Well, the one field of political activity where France has always excelled has been in foreign affairs. Time and again, she has proved more than a match for her adversaries as well – as her allies. To recap:
Despite the final and comprehensive loss of the Napoleonic Wars in 1815, the Peace Congress in Vienna of the following year reconfirmed France as a Great Power. The British and Americans saved France in World War One, but the Treaty of Versailles in 1919 reflected more the objectives and ideas of the French than either Britain or the US.
Then, after being occupied for much of the Second World War and contributing minimally to the Allied victory, France emerged as one of the four major powers settling the fate of Germany. After the war France succeeded in keeping Britain out of the Common Market long enough to dominate the agenda.
She refused to participate in the command structure of NATO but reaped the benefits of protection against the Soviet threat. And while many were celebrating the collapse of the Berlin Wall, Francois Mitterrand exacted an extremely heavy price from Helmut Kohl for recognising German reunification: the loss of the Deutschemark.
This history amounts to an incredible sequence of diplomatic achievements. So those optimistic pro-European politicians, who blithely envisage sidelining French influence in shaping the future of the EU, are seriously mistaken. Not for the first time, Tony Blair is blind to the lessons of history.
What’s more, the elite in Brussels will not take ‘no’ for an answer. Although the bureaucratic machine was initially shaken by the ‘no’ verdicts of the summer, they have now regrouped around a strategy of simply ignoring Western Europe’s popular will. The drive towards deeper integration remains unchecked.
The EU constitution proposed the creation of a European Defence Agency, the end of the veto on asylum issues, the appointment of a president of the eurozone group of finance ministers, and a continued increase in EU powers over national judicial systems. All these proposals are now being implemented – regardless of the popular rejection of the constitution.
Brussels’ bureaucrats are highly skilled. Through administrative ‘mission creep’, virtually all the objectives of the defeated constitution could be attained without a popular mandate.
But until the EU abandons its historic mission to engineer an ever closer union, and focuses on economic reform instead, oblivion beckons.
By Brian Durrant for The Fleet Street Letter.