A Conversation on Europe's Political Economy with George Friedman and John Mauldin
MIN READJun 13, 2012 | 14:02 GMT
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, Stratfor cannot guarantee their complete accuracy.
George Friedman: Hi, my name is George Friedman. My guest here is John Mauldin, a leading financial analyst and a man who I regard as brilliant, and we're going to be talking about Europe today. And we take it from different perspectives: mine is geopolitical, his is financial. Now let finance begin.
John Mauldin: Well, the problem is that finance isn't the driver in Europe anymore, it's politics, just as it has become in the U.S. I mean, the world has become upside down. It used to be that you could analyze economics and markets and the politicians would more or less get in line and follow. Today, politics is driving it. It's an upside down world, and that's why we were laughing earlier when I talk about my latest speeches — I come into the stadium, the podium or whatever, and they're playing R.E.M.'s "The End of the World as We Know It." Because I think it is the end of the world as we know it.
The operative words are "as we know it," because it's the world that's driven by politics rather than economics that's coming to an end, and thank God because that world sucks. Because who knows what these politicians are going to do? I can pretty much tell you economically what should happen, but politicians are economically rational (if you call it economically rational that they want to vote).
George: Well, to put it differently, from my point of view, Adam Smith (who all good economists admire so much) never used the word "economics," he always used the word "political economy." The term economics really doesn't come into the lexicon as an independent term until the Marginalists in the 1880s.
And Adam Smith had, I think, a much stronger understanding of the situation when he used political economics. Remember, the name of his book was not "How to Make a Million Dollars," but "The Wealth of Nations." And he understood nations were important. And he understood that nations were kind of the framework within which economics worked. Economics wasn't the framework, nations were. And if you actually read Adam Smith, which very few people do, it's a discussion of economics in a much broader and more subtle context.
Economics has never left the picture. From the day the modern corporation was invented by politics that said you were not going to be liable for your debts beyond that which you've invested in the company, and these are the rules, the market was invented by politics.
So from my point of view, we've never left politics. It was this fantastic illusion of the last 20 years that economics is driving everything.
John: Well I think it's been that fantastic illusion for the last 200 years.
George: I don't think Adam Smith had any illusions about what was running things. I don't think David Ricardo, who was talking about international trade, had any illusions. The illusion really begins when Adam Smith's view of the world turns into the free market view.
John: But I would not disagree with you that politics and the geopolitical entities make a difference, because the economics and the structures within Italy, the national character of Italians, is different than that of the Dutch, which is different than that of the English, which is different again than the Chinese or the Americans, I get that. But given those parameters you could pretty much say this is how this group is going to do against this group over periods of time, this is how this policy is going to work.
And now, because of the choices that have been made about how we're going to create X amount of debt, a radical subservience to Neo-Keynesianism (not even, I think Keynes would turn over in his grave if his name were associated with some of the stuff) and the creation of a monetary union that is dysfunctional to begin with, that's the driver…
George: I think the deeper point is this: the Europeans tried to abolish the nation.
George: They tried to argue with Karl Marx that capital has no country. It was really interesting to watch the bankers adopt the Marxist view that we've reached a point where capital has no country.
Well capital does have a country. Capital can be locked up by national actions. But most importantly, when it comes down to it, if you're a Spaniard you're interested in the fate of Spain. If you're German, you're interested in the fate of Germany.
John: It's deeper than that. If you're a Spaniard, it depends on whether you're in Catalonia or Basque, okay? Because if you're Barcelona you're interested in Catalonia, the rest of those guys can go away.
George: Well, I mean, there's regionalism…
John: There's regionalism, but it gets local.
George: It frequently gets local, but it always comes to this point and I think this is the crucial thing that economists forgot, which is your fate is bound up with your nation. There was an idea for a while, here, that somehow your fate as an individual was made by you. And what we're discovering is that your life as a Greek is different from your life as a German.
Now, it's an interesting question: who is responsible? The Germans are saying that the wily Greeks fooled us. I've met the German bank examiners, they don't get fooled easily. There are many myths of what's going, but I think there's an underlying truth, which is the persistence of the nation state.
John: There is an interesting book out that I've read a synopsis of and bits and pieces of, and its name escapes me, but somebody can Google roughly "the importance of cities." And what they argue is that the differences that we see in city profitability in the business climate of a city really depends on a lot of the local business leaders: how they go about bringing people in, how they do innovation, how they structure things. So you can see two cities that should be the same demographically, one is much more prosperous than the other because that political entity, that local group says this is how we're going to structure things.
And that's the same thing written larger on a national scale. So it's exactly what you're saying: you are tied up, not just with your nation, you're tied up with your neighbors.
George: And I think it's what I call love of one's own. But I think this is the important thing. When we talk about the European crisis, we tend to think about financial flows, trade flows. There's a more fundamental question. The Europeans tried to bury hundreds of years of history, bloodshed and brutality.
John: I think that's a great insight, by the way.
George: Well, it just seems to me that they wanted to abolish history. And history keeps coming back and biting them in the form of the nation state. Where do you see Europe going?
John: My crystal ball is really cloudy because it's a political decision. The economic decision would be to go to a multi-tier euro: euro, euro light. I mean, if you are economically rational and you're German, you recognize you're either going to have to write a multitrillion- (not one trillion, not two trillion, but start counting trillions) dollar check because Europe's got three problems.
They've got sovereign debt, they've got too much debt. Their banks have too much of that debt, so their banks are all technically bankrupt everywhere, it's not just the Spanish. French banks are, God have mercy, and the French cannot save their banks because it's three times their GDP. And French banks are important. And that's a really world problem. And they have the trade imbalance.
And you cannot solve the problem that is Europe without solving all three. You can't just solve sovereign debt and banking liquidity, which is what the European Central Bank (ECB) is trying to do. And they're not addressing what I think is the fundamentally more important question (which I think you've hinted at, but you would agree): the trade imbalance. Unless you solve that, you have not solved the problems of Europe and you're going to keep having the tensions.
George: And you can't solve that in a country like Germany that derives 40 percent of its GDP from exports. So on that note of delightful confidence, let me thank you.
John: Well, thank you.
George: And thank you for listening.