Divided we stand, together we fall?

Pim Burgers, Thierry Davelaar, Elvan Toygarlar

December 2017

One of the main objectives of forming the European Union was to make countries collaborate together to create a peaceful, united, and prosperous Europe. All in all, one can argue that it succeeded. However, there are countries such as Germany, France and the Netherlands, whom may be better off if they acted independently from a union. The financial crisis exacerbated the positions of Germany, France and the Netherlands in comparison to countries such as Iceland, Norway and Switzerland.

Figure 1: Development in Interest Rates on 10-year Government Bonds of Eurozone countries.

At first glance, collaboration between countries was the proper way to go. The union would result in one nation, where the financially stable parties lend a hand to financially weak countries. As depicted in Figure 1, the union worked remarkably well until the financial crisis of 2008 hit. The financial crisis resulted in a significant difference in financial position between the collaborating countries. The differences between the countries led to well performing countries reassessing their decision to stay united, as they are only worse off if they continue with the union. The reevaluations of the unity led to Great Britain taking their leave (Lilico, 2016; Arons et al., 2017). After the Brexit, other independent movements were also rising, which can lead to a Nexit, Frexit or even a Grexit. The main reason to renounce the unity is to be better off acting independently. However, the main question now is, “Do independent countries outperform in comparison to being in a union?”

According to the World Bank, countries such as Iceland, Norway and Switzerland are performing very well independently of the European Union, and remarkably they also have a high GDP per capita. These three countries are within the top 5 GDP’s per capita in Europe. These independent countries even have a higher GDP per capita than the Netherlands, Germany and Denmark. Furthermore, the Telegraph investigated the Brexit, and believes it is plausible that the GDP per capita in the UK will grow in the future. Whether this would happen to Germany, France or The Netherlands, if they leave the union, is questionable. However, there is a strong opinion among politicians such as Wilders, Le Pen and German politicians that the GDP per capita will increase. The GDP per capita is an important measure because a rise in GDP per capita signals growth in the economy and tends to reflect an increase in productivity. Meaning that a higher GDP per capita is related to a more stable, better and richer economy. Judging by the GDP of countries such as Iceland, Norway and Switzerland one can argue that they are economically stronger, richer and better compared to countries such as Germany, France and the Netherlands (Roubini, 2015; The World Bank). Moreover, an independent country has its own currency, which leaves the country to fend for itself. Take for example, the situation that happened in Iceland, where the financial crisis struck badly. The Icelandic government led the three biggest banks to go bankrupt and collapse. Then came the implementation of strict capital controls, austerity measures and a series of reforms, Iceland thus set out to reinvent itself. Leading to a stable, and growing economy nowadays (Matsangou, 2015). If Iceland was part of a union the government could not have done this economic strategy, they would have pulled other countries and banks into a negative spiral with them.

The Dutch ‘Centraal Bureau voor de Statistiek’ investigated how much money the Dutch government gained from the European Union, the results led to a negative outcome. Meaning between the years 2000 and 2015 the Netherlands was only losing financial prowess to the EU, this was also the case for Germany, France and the UK (Centraal Bureau voor de Statistiek, 2016). Independent countries do not face the loss of financial prowess, meaning they can save up money to spend on their more pressing matters. Also, independent countries don’t face the problem of lending money to financially weak countries in a union. The extra expenses, of well performing countries in a union, lead to the fact that countries within a union underperform. While independent countries perform significantly better, and are economically more stable. Switzerland, Norway, and Iceland are great examples of well performing independent countries (Lilico, 2016).

Another reasonable argument against unity is a region likely to survive on its own, which is named Catalonia. Catalonia is a region of Spain, and it is one of the most lucrative regions of Spain. Catalonia’s €215.6 billion economy accounts for a fifth of Spain’s total economy. On top of that, the economy of Catalonia is even larger than most countries in the Eurozone. Furthermore, Catalonia’s export trades represent more than a quarter of the national total (Henley, 2017). Even though Catalonia is only a region, its statistics state otherwise. Since Catalonia contributes much more to Spain, than it receives in return, they have opted for independency. Independence supporters in Catalonia argue that if they cease transfers to Madrid, this would turn Catalonia’s budget deficit into a surplus. Other than that, Catalonia has proven to attract new investment on its own. One third of all foreign companies, that Spain accounts for, reside in the regional capital of Barcelona (Kottasová, 2017a; Kottasová, 2017b).

One other fact about Catalonia is that it has lower unemployment, and generally less income inequality than the rest of Spain. All in all, one can clearly argue that staying united with Spain will only result in a worse Catalonia than an independent one. Catalonia makes a solid case for its independency, as this also results in added fuel against the notion of a union.

The last argument against unity comes in the form of a country that is likely to excel on its own merits, which is Germany. For the last years Germany has been viewed as the economic catalyst and stabilizer of the European Union states. Even after the 2008 financial crash, Germany’s economy managed to get back on his feet in a quicker fashion than the neighboring Eurozone states (Chu, 2017; McRae, 2017). Apart from that, Germany has the largest economy in Europe. The nation thrives on its well performing trade sector, low unemployment, and the upwards-running budget surplus (Nath, 2015). In contrast to the German economy, the Eurozone countries have not recovered as quickly. Despite the number of post-crisis reforms, EU countries continue to suffer due to lack of global competitiveness, in which Germany lends the hand in the matter. Greece for instance, has used the support of the European Central Bank as much as possible to pay their debts. As Greece continues to milk the cow, Germany is the one supplying the cow with hay. As of today, Germany has lent the country north of fifty-six billion euros. Furthermore, Germany continues to represent an anchor in the European Union economy. Consequently, it can be argued that Germany too is likely to be better off acting independently of the European Union.

Although one can argue that unity exacerbates the position of certain countries, one can also argue the contrary. The best way of dealing with economic depression is setting new milestones for the future to recover from the economic depression. One milestone was to form the European Union, as has occurred as a result of World War II. Economically, the aim of EU is to establish a single market across European countries and economic harmony. The economic unity allowed member countries to export, and import easily without custom duties. Most of the member countries have been benefitting from the EU, and their long-term interest rates have been declining. However, after the 2008 financial crisis they were back to the drawing board to find counter measures to the economic depression. One can argue whether the exit from European union is a cure, but it could also lead to detrimental results. The secession of the EU has chain effects. These chain effects result in expensive goods, services, and trades amongst member countries will go down. Hence, relinquishing the economic benefit of trading under low cost tariffs is not a good idea for productivity, and prosperity of the EU market. Moreover, being part of the second largest economy in the world improves bargaining capacity. However, being an independent country means that the country only holds a small fraction of the union economy capacity, and loses all bargaining power. To clarify the current situation, we know that 66% of exports of Germany, 65% of exports of France, 77% of exports of Netherlands, and 49.7% of exports of Catalonia are to the European members (The Observatory of Economic Complexity). These numbers will probably decline with the secession of the EU. Lastly, when a EU member decides to leave the union, and abandons the Euro currency, the ‘new’ currency will appreciate and become volatile, thus reversing its export strengths. The appreciation of the ‘new’ currency will lead to banks holding devalued foreign assets, which is a detrimental influence on the economy of that country (Cotter, 2012). Since the EU has common regulations, the foreign banks and companies will prefer to move their departments from the now independent country to a EU member country. This will have an impact on unemployment rate (Arons et al., 2017). Ultimately, as they say for every choice, there is price to pay.

Unity in most cases seems to be a greater approach than just handling a situation on one’s own. However, being in a unity that is not lucrative for all the parties involved, will not lead to uniform improvements in each individual country. The cases of Germany, the Netherlands, and France are a perfect example of this. Furthermore one can take the UK, as an example of a country that realized that leaving the union is a more beneficial step in the long run. All in all, one can argue that independency of a union can be a better way forward for a well performing country. Considering the well performing independent countries discussed previously, such as Iceland, Norway, and Switzerland, The UK will probably head in the same direction as these independent countries. To add, Catalonia, as mentioned before, acts as a strong argument against unity, due to their solid performance in Spain’s economy. Catalonia will probably be better off serving as an independent entity, which will also be the case for other well performing countries in the union. However, what is also worth mentioning is that the costs of exiting the union will be significantly high plus the chain effects are not lucrative, which will make the decision for independency much more difficult to make. Nevertheless, one can argue that at the end of the procedure of filing for independency, the pros will outweigh the cons. However, the contrary can also be argued. The main question of this blog was, “Do independent countries outperform in comparison to being in a union?” Given the arguments of this blog the answer to this question can go both ways. All in all, we are still wondering whether divided we stand, and united we fall should become the new saying.