A Hitchhiker's Guide to the European Union, the Euro and Brexit

"Should I stay, or should I go?" Brexit is the current chapter of a centuries-old story. 

Rob Hajduch, Principal Credit Analyst

The modern concept of a united Europe was born in mid-1950 when the French Minister for Foreign Affairs proposed the creation of what was termed the European Coal and Steel Community (ECSC). The underlying motivation for the ECSC was to bind former World War II opponents together economically, thereby reducing the likelihood of future armed conflict. Specifically, the ECSC was intended to reconcile France and Germany, which had traded possession of the Alsace-Lorraine region four times over the course of roughly 70 years and three wars. In the spring of 1951 six countries (Belgium, the Federal Republic of Germany, France, Italy, Luxembourg and the Netherlands) signed the Treaty of Paris, making a common market for coal and steel under the ECSC a reality. 

The ECSC mandate was expanded in 1957 to include a wider common market for a broader range of goods and services. Simultaneously, the ECSC was rebranded as the European Economic Community (EEC). Over the course of the 1960s, customs duties between the six founding members were abolished and common policies on trade and agriculture were adopted. Membership in the EEC was increased for the first time in 1973 when Denmark, Ireland and the United Kingdom were admitted. Greece, Spain and Portugal followed suit in the 1980s. 

In November 1993, member states enacted a new treaty at Maastricht, Netherlands, adding inter-governmental cooperation in foreign policy and internal security to the existing economic mandates, replacing the EEC with the European Union (EU). As Austria, Finland and Sweden were admitted to the new EU in 1995, efforts to create a single currency for the union were underway. In January 1999, 11 member states replaced their existing currencies with the euro for non-cash transactions and the European Central Bank assumed responsibility for monetary policy over the common-currency eurozone. Physical notes and coins were introduced into circulation in January 2002. 

The collapse of the Soviet Union in 1991 eventually allowed for the EU to expand eastward, with the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia joining in 2004. EU membership has subsequently expanded to 28 member states. Sovereign adoption of the euro has not been as broad, with the eurozone covering 19 of the current members of the EU, with Denmark, Sweden and the United Kingdom (UK) conspicuous in opting out of the currency union. 

The UK's relationship with the EU has been complicated from the beginning. The country's first attempt at joining the EEC in 1963 was thwarted by French President Charles de Gaulle, who viewed the UK as being too closely aligned with the United States. The UK was unable to successfully apply for membership in the EEC until de Gaulle relinquished the French presidency in 1969 and it was finally admitted in 1973 - three years after de Gaulle's passing. 

Within two years, the UK was on the brink of backing out. It held its first referendum on whether to stay in the EEC in 1975, with an overwhelming majority voting in favor of remaining. Tensions between the UK and the continent - most specifically related to farm subsidies - continued to simmer and, in 1984, they reached a boiling point. Against another threat of divorce, the EEC reduced the UK's contribution to the union's budget to roughly 12% from over 20%. 

Discord reemerged in 2015 - this time related to a migrant crisis from North Africa and the Middle East.  The UK government, led by David Cameron, again renegotiated the UK /EU relationship in early 2016 and set June 23rd as the date for another "stay or leave" referendum. Turnout was heavy with over 30 million votes cast, with the "leave" vote winning by a thin 51.9% to 48.1% margin. The referendum resulted in the collapse of not only Cameron's government but also that of his successor, Theresa May, who was unable to negotiate an exit treaty that satisfied her parliamentary constituents and the EU.  Responsibility for exit negotiations subsequently passed to Boris Johnson who was elected Prime Minister in July 2019.

An outspoken proponent of the UK's exit from the EU (Brexit) Mr. Johnson publicly committed to leaving the EU on the previously designated date of October 31, 2019 whether a treaty was in place or not (known as hard Brexit). Negotiations produced a framework for an orderly withdrawal on October 17th and, after four contentious days of debate, the UK Parliament passed the bill. Parliament simultaneously rejected the fast-track timetable favored by Mr. Johnson in order for the UK withdrawal to be completed as originally scheduled, forcing the Prime Minister to apply for another extension until January 31, 2020. At this writing it appears that the EU is inclined to grant the extension request and that Parliament will ultimately pass Mr. Johnson's proposal, but in its own good time. In any event, it seems the worst-case scenario has been averted and the UK will likely begin an orderly withdrawal from the EU beginning early in the coming year. 

Given the acrimony that has characterized the UK / EU relationship, it is difficult to imagine a point in time in which most of what we now know as the UK was inextricably joined to the European mainland both politically and economically. That actually was, in fact, the case - although one has to look back a long way to observe it.

After successfully invading in 1017, Danish Viking Cnut Sweynsson was crowned King of England and, by the end of the following year, he had gained effective control of both Scotland and Wales. The same year, the death of his elder brother (the then-reigning King of Denmark) extended Cnut's reign to Scandinavia, which he used as a platform to add Norway and parts of Sweden to his dominion. Among his first priorities after consolidating power was standardizing the coins of England with those of the parts of Scandinavia under his control. Already closely linked economically with the neighboring Holy Roman Empire, Cnut also adopted the weight of the ounce used by the Byzantine Empire to measure gold and silver for his own coinage - in practice creating a single medieval European trading market that stretched from the Atlantic Ocean to the Asian continent.

Unfortunately, Cnut's monetary union proved ephemeral, as it was held together by the force of his personality and it barely survived beyond his own biological expiration date in 1035. Cnut's son, Harthacnut, was proclaimed King of England in 1040 - although his brief reign ended with his death in 1042. Upon his passing, the thrones of England and Denmark were separated and Europe would have to wait the better part of 10 centuries before another monetary union was attempted.   

 

Editor's note: The intro asks the question, "Should I stay or should I go?" but we would be remiss not to point out the question is also a song title from the Clash's classic 1981 album, Combat Rock. The lyrics wrestle with the difficult decision whether to stay in a relationship. But what might be more interesting here is the single hit #1 on the charts a full decade after it was first released, proving that sometimes making history does, in fact, take time.

 

Sources:

Colchester, Max and Douglas, Jason, "Johnson's Brexit Deal Clears Hurdle in Parliament but His Timetable Is Rejected," The Wall Street Journal, October 22, 2019

Fontaine, Pascal, "The European Union Explained, Europe in 12 Lessons," The European Union, January 2014

Oliver, Neil, The Vikings, A New History, Pegasus Books, 2014

Pruitt, Sarah, "The History Behind Brexit," History, June 20, 2019