Want to understand the European Union? Start with Vichy France

Merryn Somerset Webb talks to economist Bernard Connolly about Brexit, the true nature of the EU project, and what’s gone wrong with global capitalism.


Italy: not so keen on the euro these days
(Image credit: Credit: Giuseppe Ciccia / Alamy Stock Photo)

Merryn recently spoke to Bernard Connolly for the MoneyWeek podcast. This article is taken from that interview. You can listen to their whole conversation here.

Before I met Bernard Connolly recently, I watched his appearance on Panorama in 1997, where he explained clearly why the UK would be mad to join the euro. There were, he said, no "good economic arguments" for the single currency at all; it was clearly a political project a step on the path towards a European superstate.

If it went ahead, said Connolly, the European Central Bank (ECB) would become a "political football"; voters would soon feel they had "no control over either their politicians or policies"; and Europe would end up with a nasty mix of "economic distress and political despair" leading to "xenophobia, nationalism, (and) a retreat from democracy and free markets". Connolly got short shrift from some of the other participants. But look around you today and you might think the world would be a better place if more people across the European Union (EU) had listened to him then.

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We start our conversation with the sad conclusion that the enmity and discord he predicted 20 years ago are here and affecting us all. Look at how the Greeks feel about the Germans. Look at how those in Italy who used to be among the most enthusiastic eurozone members are "now heartily sick of everything to do with the stupid currency". The acute phase of the 2011/2012 crisis has passed, but much of the EU is now in a state of "chronic pain", with the young and the poor suffering the most (Connolly is not alone in wondering why the UK's young voted remain, when they could surely see what was happening to their generation in Italy, Portugal and Greece).

So here's the question: if this enmity and discord were the inevitable conclusion of the imposition of the euro something both Connolly and, he says, everyone involved in the practicalities of it, understood how did it ever get off the ground? Because the political impetus behind it was always (as former European Commission president Jacques Delors said) the eventual creation of a European superstate. The monetary union was always going to come to a fork in the road, when it would either collapse (with a nasty bout of political upheaval), or its participants would be pushed into a single country. Those who craved the latter, says Connolly, were prepared to risk the former (and its worrying potential for "political violence").

The EU: built on Vichy economics

This, of course, leads to the question of why they wanted a superstate to replace the nation states we know in the first place. For the answer to that, you have to go back to the end of the war, says Connolly. The European Coal and Steel Community (formed in 1951 with the idea that if we "communitise the sinews of war, steel, coal, basic industries that may go some way to prevent another war") and then the beginnings of the common market were very much Franco-German arrangements, extensions even of the "economic arrangements between Vichy France and Nazi Germany" (although with France, not Germany, as "top dog").The idea being that with the Anglo-Saxons on one side and the Soviet Union on the other, the only chance of reasserting themselves on the world stage was to do it together.

The euro's part in the EU's downfall

Will the superstate succeed, I ask? It depends, says Connolly. The obvious historical precedent is the Austro-Hungarian Empire. It could survive "as long as it wasn't democratic" and had a "multinational army, in which units drawn from one of the peoples in the constituent countries were always stationed in another of the constituent countries". But as soon as "democracy obtrudes or tries to make a reappearance in such a union it tends to fall apart". So the risk is that the fantasy that the EU allows "domestic democracies, and that's where you can express your democratic choices, that's where rules get made, that's where laws get made, that's where policies are implemented" continues to fall apart. Note that "the single currency has actually been a very powerful force in disclosing the nature of that fallacy".

It's also eating away at the idea that the EU is somehow noble and "a guarantor of peace and stability", such that even if you do find Brussels "irksome" it's still worth staying. The truth, of course, is that peace is not down to the EU, but to the North Atlantic Treaty Organisation (Nato), capitalism, democracy, "the principal of non-interference by one country in the domestic affairs of another", political legitimacy and the economic prosperity these things have allowed and which are all effectively "undermined by the EU". Look at it like this, says Connolly, and the EU is not a noble institution. It is more a force for evil (in its effect, if not its intention).

Does he think the UK will make it out? He does. He puts the odds at 50% on a clean Brexit (that's "crashing out" to those on the other side of the argument and "joining the other 135 countries in the world" that survive outside the EU to Connolly); 40% on Brino (Brexit "in name only"); and 10% on no Brexit at all. He's optimistic on the basis that Prime Minister Theresa May, while a Remainer, does at least appear to feel that it is her duty to get us out and so probably will despite the efforts of politicians, bureaucrats, businessmen, Davos man, lobbyists, much of the media, much of the academic world, and the "self-regarding, cold-hearted, boneheaded members of the metropolitan unintelligentsia" with their propaganda-driven, semi-religious attachment to their perceived identity inside the EU, trying to prevent her.

The nature of Brexit

What if there was another vote, I ask (something we both think is unlikely). Connolly reckons it would go the same way. The last result was about "people saying I'm not going to be told what I should think, I don't live in a totalitarian society and I don't want to, I know what I think. My eyes are open, I'm not stupid, I can put two and two together. I can see what it all means'". Most of us know very significantly more about the EU now than we did three years ago and it is hard to see how that knowledge would push anyone to remain.

Is he happy to leave under May's withdrawal agreement? No. But it is not just the withdrawal bit that bothers him. It is the political declaration on our future relationship too. If we stick to it, we end up under the control of the European Court of Justice in many areas indefinitely. There are particularly frightening bits including, for example, "one article that commits us to co-operation on combatting misinformation". So anything anti-EU could be instantly "classed as misinformation". Is it worth going ahead even so, just to be a little bit out?

"It depends on whether or not we'd be prepared, once we saw how dreadful the withdrawal agreement and declaration was, to break the treaty." The key here is that if you are in, you can get out with Article 50.It isn't easy, but it is possible. That's not so withMay's deal. So it could be "much worse than being in".

The problem with global capitalism

The EU sorted out (or not...), we move on to what's wrong with global capitalism. Two things, says Connolly (which he has, by the way, been warning about for much longer than almost everyone else). The first is the rise of crony capitalism. The industrial revolution saw a lot of people getting rich. But they at least "made something" and helped to set in train a series of developments that "after thousands of years of nothing much happening... lifted people out of poverty and gave them opportunities and standards of living they would never otherwise have had". Are the people getting superrich today improving standards in the same way? Some are (Amazon, while far from perfect, has improved the lives of many consumers). But there is also a "huge amount of rent-seeking": large firms have too much power to crowd out the small, and regulators do too little to stop it.

The second is that much of the new wealth has been created simply by those riding on the coattails of Federal Reserve policy (cheap money) by buying into stock and property markets. That creates nothing for anyone else and is thus politically unacceptable. But it's hard to reverse. You can deal with the first problem with good anti-trust regulation. But the concentration of wealth created by the equity bubble? That puts the Fed in a "terrible dilemma" it can't really be reversed "without crashing the world economy... we've seen the extent over the past three months of how dependent the US stockmarket is, not so much on trade talks with China, not so much on China's growth or global growth, not so much on what happens to wages in the US, but on what happens to interest rates and what happens to interest-rate expectations".

Fed chairman Jerome Powell has pulled back from rate rises to stop the market falling, but how much longer can he do that for? US unemployment can't fall much further and if the Fed continues to try and keep US growth at an annual rate of 2.5% (as it plans to) "there will be an L-shaped Phillips Curve, wages will start to accelerate quickly, there will be inflation then there's real trouble" for the stockmarket and the global economy. The Fed got itself into this spot of course starting with Alan Greenspan keeping rates too low in the mid-1990s, and most recently with Janet Yellen not putting rates up fast when Donald Trump came in with policies that "did increase the level of potential growth in the US." Had they done that, they'd have less of a bubble to deal with. While the rate of growth would have been less fantastic than over the last year, "the prospects for growth going forward would be much better" as would the politics of wealth distributions. Now, says Connolly, it is all too late. "There is no easy way out."

Listen to the full interview here

Who is Bernard Connolly?

Oxford-educated economist Bernard Connolly made headlines when he lost his job at the European Commission in 1995, after writing The Rotten Heart of Europe: The Dirty War for Europe's Money. The book (reissued in 2013 by Faber & Faber) attacked the European Exchange-Rate Mechanism (the euro's precursor), arguing it was part of a plan to force a greater degree of political integration than voters would support. The Times's Anatole Kaletsky called the book "the most intellectually persuasive, economically coherent and politically prescient account yet published of the development of European institutions in the 1990s". In 2001, Connolly received the Frode Jakobsen prize, awarded in Denmark for "outstanding moral courage in public affairs". He is the founder and CEO of a macroeconomic research boutique, with asset manager clients in New York, and is now writing a book on how central banks and academic economists have perverted capitalism.

It's also worth studying the economic organisation of Vichy France under Jean Bichelonne (minister of industrial production until his transfer to, and death at, the SS hospital at Hohenlychen in late 1944) to get a little more insight into how the EU has ended up being run. Bichelonne was "the archetype of the European technocrat" and particularly giving towards big businesses in terms of helping them decide how best to "stitch up their particular industry and... avoid competition from new smaller firms", something that "has been a thread running right through the history of the EU".

Britain's biggest post-war mistake, as far as Connolly is concerned, was joining in. After Suez, it was clear that (like France) we were no longer going to be an independent world power and that we must tie ourselves to someone. France chose closer ties with Germany. The UK initially tried to find a middle way between that and aligning with the US: in the late 1950s and early 1960s, the "big thing in British diplomacy was the idea of an Atlantic free-trade area". That didn't happen (though it would, says Connolly, have been an excellent thing). Then the arguments for the common market began (they were the same then as now the EU is protectionist and we will be shut out of their markets); by 1961, Harold Macmillan had decided we should be in; and the die was cast. All other options vanished and we have been tied in ever since to an organisation that has always been designed to create a Franco-German-led Europe and an economy run in the style of Vichy France "essentially in the interests of existing large corporations".

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.