Guest blog: Be Thankful for Europe

Adam Dixon

With yesterday’s downgrade of Italian sovereign debt by S&P, we can be sure that the chorus of euro skeptics will be further emboldened in their criticism of the European project, mainly in terms of the monetary union but also in the larger sense.

Yes, Italy has an unsustainable debt burden; growth has been anemic for the better part of a decade; the political system seems unable to adequately address the problem; and the list goes on. Coupled with the problems in Greece and elsewhere in the periphery, talk of breakup of the eurozone has never been higher and more real.

Proponents claim that deficit countries would then be able to devalue, which would reduce aggregate prices and wages, thus increasing competitiveness in these countries. You know the argument.

For all the macroeconomic arguments about letting a few countries out to effectively “do their own thing”, it is important to ask whether this will undermine the political will for sustaining free trade and limiting financial protectionism. So, what is the greater cost: keeping struggling periphery economies in, or cutting them loose only to see free trade undermined?

Indeed, anything that undermines the European project is actually quite unsettling. For one, the European project has been a major force in pushing forward free trade globally and in the removal of barriers to capital flows — i.e. creating a more hospitable space for investors at home and from abroad.

Since the end of the Second World War the international system has never been about letting countries “go it alone”. It has been about bringing countries closer together. The United States helped rebuild Europe; European countries have sought to bring themselves closer politically and economically; the world opened to China and the former Soviet States; and the list goes on. In doing so much prosperity was gained. No one really wants to reverse this trend.

For long-term investors, a resilient global economy that is open to trade and the free flow of capital is important. Hence, talk of a eurozone breakup or even the exit of a few countries is actually quite disconcerting. If enough countries start to lose faith in free trade and the free flow of capital, then long-term investors have a real problem. Greek default and even Italian default would seem like minor events.

Again, reducing debt in Europe’s periphery and igniting growth is going to be difficult and costly, whichever way it occurs. If they are left to “go it alone”, then there is little opportunity to reinforce principles of free trade in goods, services and capital in the process.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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