Why Europe is much more fragile than anyone thinks

I’ve just written an editor’s letter for this week’s magazine on how economists don’t spend enough time thinking about the things they can’t measure – and why that’s a problem. I am not the only person worrying about this.

Russell Napier is one of MoneyWeek’s favourite strategists. And in his Solid Ground Fortnightly, he has had a look at the things we’re not thinking about in Europe. I’m worried about the redistributory and social effects of quantitative easing, and about the shock effects of Greece leaving the euro. But he is thinking more of Europe as a whole, and the attempts to create clearing prices in a federal whole.

“Have we totted up the impact on emigration from Ireland and on family life as prices in that country adjust to their clearing level? Have we calculated the faith of the people of Spain in the democratic process as prices in that country adjust to their clearing level? Has anybody put a figure on the impact on political stability of the loss of sovereign power dictated by the move to federalism under a single currency?

“Ultimately all these things which are not counted, because they are in essence unquantifiable, remain crucial to stability and the sanctity of property rights, and may be the only thing which actually does count to investors in the single currency experiment.”

Think back, says Napier, “to the occupation of Washington DC by an army of 43,000 unemployed WWI veterans in July 1932” after Andrew Mellon, Secretary of the Treasury decided it would be a good idea to “to “liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate” in order to let everything find its clearing price.

On that occasion the appearance of General Douglas MacArthur, Major George Patton and Major Dwight Eisenhower on Pennsylvania Avenue with a heavy presence of infantry, cavalry, tanks and tear-gas made it clear that finding clearing prices can come with risks that can’t be counted.

At the time “the great speculator, head of the SEC, US Ambassador to the Court of St James and much else besides”, Joseph P Kennedy, was worried. He would, he said, have been “willing to part with half of what I had if I could be sure of keeping, under law and order, the other half.” No one in Europe feels quite like that yet. But as Napier points out, we once again find ourselves surrounded by economists who refuse to see what actually counts.

It might, he says, be “time to stop counting and to start watching.” Because “it is clearer every day that the people will not consent to a process which forces upon them a decline in both living standards and state sovereignty. Without such consent there can be no single currency. And there are now, right across Europe, any number of people loudly voicing that discontent and non-consent.”

It’s a more fragile time than our politicians would have us believe.