Tuesday, January 27th, 2015

Giant Killers

Every now and then England feels very cut-off from Europe. The story which dominated the papers on Sunday was not the upcoming Greek elections or the implications of the ECB’s historic QE programme. Instead we were treated to the news that four out of the top five teams in the English Premier League had been knocked out of the FA Cup and all of them by clubs in lower divisions with a fraction of the financial and player resources. In time-honoured fashion the headlines screamed “Giant Killers” and continued to do so on Monday, even though it was clear that something important had happened in Greece.

There is of course, no direct link between the political economy of the Eurozone and English soccer, except the metaphor that there is no such thing as a “dead cert” in sport or politics. Countries like Germany with money and power on their side, and the apparatus of the EU, normally get their way, but sometimes they don’t, and 2015 could be one of those years. If this were just an intuition, it would not be worth very much. There is however an interesting historical sequence at work.

Every 25 years or so, the relationship between Germany and the rest of Europe undergoes a seismic shift. Sometimes this is peaceful, sometimes less so. The last of these episodes stared in 1989 with the fall of the Berlin Wall, which lead directly to the fall of communist governments across Eastern Europe, and eventually to the failed coup against Mikhail Gorbachev in Russia in 1991. The fall of the Berlin Wall also lead directly to the Maastricht Treaty in 1992, which created the euro.

Previous episodes in the sequence are: 1962 – the completion of the Berlin Wall; 1939 – the start of the Second World War; 1914 – the start of the First World War. The sequence then breaks down because the next obvious date is the creation of the German Empire in 1871 – a gap of 43 years. Historians will know that there were several crises during this period including the First Morocco crisis of 1905, when France actually mobilised her army against Germany, but did not declare war. We can go further back to the revolutions of 1848 and beyond, but it quickly turns into an academic parlour game.

This is not investment research in the conventional sense, but we make no apologies for trying to give some historical perspective. Events in Greece can no longer be understood purely in terms of economic or investment analysis. When even the FT refers to Greece as “a quasi-slave economy” (Financial Times Editorial -27th January 2015), it is clear emotions are starting to run high. Campaigning for elections in Portugal (September) and Spain (November) will do nothing to cool the temperature.

We cannot predict the results of these elections or their consequences – except in one respect. It seems very unlikely to us that the status quo in the Eurozone will carry on for very much longer. Either Greece is granted a significant reduction in its debt-burden, or it will be on the path to leaving the euro. Either outcome would change the relationship between Germany and the rest of Europe for years to come. Greece may not be the Giant-Killer, but the way in which Germany plays the game will have lasting consequences.

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