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.