In our September 24 letter, we wrote:
“Europe, with its early 2015 stock market rally ended, is facing another challenge entirely, one that we did not imagine we would see this soon: the migrant crisis. The fault lines that are emerging here may be just as significant as the economic fault lines, and for a variety of reasons, may spell real trouble for the whole EU project.”
At the time, we hesitated to comment on the likelihood that jihadis would exploit the migrant tsunami to find their way into the heart of Europe, but tragically this has proved to be the case. Evidence suggests that at least one of the Paris attackers seems to have recently arrived through Greece, using a Syrian passport. At a stroke, the political turmoil surrounding the migrant crisis has descended into something much darker. In September we also noted:
“Under the immense pressure of the migrant surge, the unlimited generosity promised by Angela Merkel has proved too much to handle for local German authorities, as well as for other transit countries, such as Austria -- and the Schengen area has begun to see renewed border controls. This breakdown represents a fissure in one of the most economically beneficial aspects of the EU.”
Now after the Paris attacks, France has called for the “temporary” suspension of the Schengen Agreement -- the treaty signed in 1985 that made Europe a borderless region with uncontrolled transit across national boundaries.
The problem is deeper than the migrant crisis that has unfolded this year. Most of the attackers were born in France and Belgium to immigrant parents. While we do not hold that most Muslims feel this way, numerous mainstream polls indicate that a significant percentage of Europe’s Muslims hold views deeply at odds with European values of secularism and religious tolerance.
Europe’s long-term effort to offset the demographic decline of native European populations by encouraging the immigration of higher-fertility populations from Africa and the Middle East may have created a conundrum from which the continent cannot escape: the presence in many European cities of an unassimilated Muslim minority, many of whom have virtually no devotion to the project of European civilization.
The great majority of Muslims decry the actions of terrorists, but in the absence of a deep and organic reformist movement within Islam, jihadis can still make a powerful case that their interpretations of Islamic law and tradition are the most authentic. When that appeal to authenticity is coupled with the high unemployment and the rootlessness of young Muslim men, both in the Arab world and in the diaspora, the results are what we see: a ready cohort of potential radicals.
European nationalists claim that this population of alienated potential jihadis has no proper place in Europe. The current crisis is supporting the rise of political movements within Europe that are opposed to the European Union, and has strengthened the hand of Euroskeptics, especially in eastern Europe. Viktor Orbán’s vigorous response has won huge support in Hungary; he recently stated, “As long as this government breathes, we will not take in any refugees.” The Poles have elected an immigration-skeptical government, and the new Polish foreign secretary has called for an end to Europe’s “mass migration obsession.” On November 17, the Czech Republic’s national day, the Czech President, Milo Zeman, addressed the Czech group “Bloc Against Islam,” with invited observers from Germany’s immigration skeptic PEGIDA group in the audience.
Angela Merkel, Germany’s chancellor, who briefly rode high in public opinion, is facing a sea change both from voters and from senior members of her own party. Wolfgang Schäuble, her Minister of Finance (widely regarded as a potential competitor for leadership), has criticized her publicly, and some local governments are in open rebellion against her. The UK Independence Party’s support for an exit of the UK from the EU is gaining traction. The populist politicians being bolstered by the current tragic events bring with them a package of other views, some of which are contrary to the mainstream thought that has created the EU as we know it. Many of them have ideological roots in political movements that have been fighting against European integration for a century or more.
On balance, current developments do not bode well for European unity, and we do not believe these are passing trends.
Of course, the ascendancy of certain nationalistic, Euroskeptic parties will be strengthened by current events. The world may be witnessing a fraying of the EU that is more severe than anything associated with their recurring financial and fiscal crises. In our view, Europe’s current political problems are simply too deep to be solved by QE and improved economic growth. Eventually, we anticipate a reversion to a pre-European Union environment, where individual nation states conduct their own affairs. It will take time, but we expect the European experiment, which began nearly a generation ago, will gradually disintegrate over the next decade.
Investment implications: Last week’s tragic attacks in Paris have boosted the fortunes of Euroskeptic politicians. We believe the problems and fault-lines exposed by the migrant crisis, and now by terrorism in Paris, are deep and intractable, and may result in the ultimate disintegration of the European Union.
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