The World in 2014

The world in 2014 will be a more volatile and dangerous place. 
Following the 2007-2008 financial crisis in the United States, the global economy has suffered a lingering credit crisis. The impact of the destruction of trillions of dollars in global wealth has shaken financial institutions and governments. The cascade from the financial crisis on European economies was immediate, but not realized until 2010 when European banks began to struggle under the weight of their own property investment excesses. Unfortunately, their banks were too big to fail, and also too big to bailout, especially in the Eurozone periphery. The weight of the failing banks is destroying the public finances of these countries as the investment excesses of a few are effectively nationalized under undemocratic anti-progressive terms.
This essentially takes us to today, June 2012. The Eurozone is fracturing as debt-burdened periphery countries (Ireland, Greece, Portugal, Spain) are relying more and more on the core (Germany, France) to keep their banks and governments afloat. Greece has already accepted a government bailout under the most draconian of terms, Spain required €100 billion to keep its banks capitalized and will likely need a national bailout as well. Nouriel Roubini's "slow motion train wreck".
The Euro Crisis is extremely dangerous to the world economy as Europe is a lynchpin in global credit markets. Eventually "too big to bailout" will mean something and the ripples through the EU, and the global economy would likely perpetuate a recession worse than 2008-2009.
The EU is easily China's largest trading partner. Chinese exports to the EU were $356 billion ($324 billion to the US) in 2011. Imports from the EU at $211 billion almost double the US. This means that EU troubles are Chinese troubles and Chinese troubles affect global commodity prices and have spill over to Japan, Indonesia, South Korea, Brazil and Australia. This will also create conditions for a likely US recession.
All of this financial turbulence will lead to greater instability around the world. As the primary exporter of natural gas to Europe, Russia will face a dangerous situation of lower medium-term commodity prices. Already facing political challenges, Vladimir Putin, Russia's president/prime minister, will likely see that challenge increase as state coffers struggle to keep job growth. Similar political challenges might face Saudi Arabia, which already had to grant $150 billion in social programs to skirt out out of the Arab Spring. Saudi Arabia will likely survive politically, as they have $500+ billion in currency reserves available to appease the population. Countries like Nigeria, Argentina, Peru and Venezuela all face similar political problems in a low-price energy environment. All of this means greater uncertainty in the world economy that had so much promise at the turn of the new millenium.
In 2014, we are likely to see a world that become more fractured. While the neo-liberal agenda of free trade and globalization will continue, the benefits will be harder to see. City-states like Singapore and Hong Kong are likely to benefit as safe harbors. Fiscal pressures will continue to mount for developed economies as negligible growth will hurt tax revenues and aging populations will increase the burdens on the state. Massive pension and health care funding shortfalls exist in all developed countries and this will exacerbate an already precarious situation. This might even create political tension in the United States as Congress becomes forced to address fiscal challenges in 2013-2014. Although likely to become a beneficiary of a flight to quality, the US cannot continue to run trillion dollar deficits forever, even at 0.5% interest rates. All of this culminates in a very precarious world in 2014 which will likely continue until the end of the decade.

A tale of two Europes

Taking the EU debt crisis back to the Carolingian Renaissance in the late 8th century might be a bit of a stretch, but it is the beginning of France and the Holy Roman Empire, that would (a millenium later) become modern Germany. Throughout the centuries, this European division has been associated with a class of cultures as northern Europe struggled to take up the mantle from the Roman Empire.

Today's crisis harkens back to this era, but more noticeably to the Protestant Reformation and the development of an Anglo-Saxon model of economics. The Catholic countries of Europe (France, Spain, Portugal, Italy, Ireland), have always favored more state control in their daily lives. Much of this comes from the consecration of kings by the Vicar of Rome, ad the familial nature of the Catholic faith.

It is argued that Protestants, beginning with Martin Luther had reconceptualised worldly work as a duty which benefits both the individual and society as a whole. Thus, the Catholic idea of good works was transformed into an obligation to work diligently as a sign of grace. Whereas Catholicism teaches that good works are required of Catholics to be saved (viewing salvation as a future event), the Reformers taught that good works were only a consequence of an already-received salvation.

This Schism in faith continues to be articulated in modern Europe today. The Protestant work ethic is evident in Germany, whereas the Catholic nations of the south continue to have expectations that the state will be there to bail them out. In Portugal, Spain and Italy, their modern economies are vastly underdeveloped. They lag their economic peers by almost two decades in terms of labor efficiencies, tax policy and economic creativity. This is leaving an economy like Spain operating at almost 20% below nominal GDP. Because the government has controls on competition and over regulates industries to favor guilds and unions (many of which date back centuries). Southern European consumers are vastly underprivileged in terms of service supplied. An example would be a pharmacy, where compared to 24hr drug stores in the US and UK, France and Italy have a heavily regulated industry where even during business hours it can be difficult to get a prescription filled.

What does this mean for Europe and the Euro?

Germany is going to be the engine of Europe for the foreseeable future, and it is developing an neo-mercantilist relationship with its EU neighbors as low-value add processes take place in the periphery, whereas high value add jobs are done in Germany. This is the difference between bottling olive oil versus machining a precision tool for robotics. One economy is stuck in the 14th century, whereas Germany is competing directly with Japan, the US for command of the 21st (China will join that list in the 2030s).

The world should favor the Euro because it has created an economic union that rivals the US and China in size (the EU is already the largest economy). The challenges are now political, but PIGS needs to recognize, that it is better to be a vassal state of Germany's economic empire than to go it alone in a globalized world.