A Short Note on Fraudulent Banking

In my piece over at American Institute for Economic Research the other week, I discussed the phenomenon of selling property that one does not (yet) own. I mentioned a left-wing and a right-wing version, but focused my efforts mostly on the right-wing “Fractional-Reserve-Banking-is-Fraud” idea.

My main point was to, by analogy, point to other fiduciary relationship – specifically insurance and airline overbooking – that fulfil the same criteria of double-ownership that is so crucial for the right-wing view. Insofar as this analogy holds, rejecting fractional reserve banking as fraudulent and illegal requires one to similarly reject insurance policies and airlines’ practice of overbooking. Regardless of where one comes down on the legal relationship between a depositor and a bank, I thought the theme interesting to explore.

Unknown to me, in one of Hoppe-Hülsmann-Block’s (HHB) early articles they devoted about two pages to addressing my main points. To HHB, there’s a “fundamental distinction” between property and property titles that render these and other analogies “mistaken”: future vs present goods. Money titles such as fractionally issued bank notes are designated present goods whereas insurance policies, parking permits or flight tickets are considered future goods. Money is the “present good par excellence to use Rothbard’s words.

HHB claims that one can legally oversell future goods, but when overselling present goods, one is committing fraud. A narrow distinction, admittedly, and we’ll see that it doesn’t fare so well. Discussing the example of airline overbooking, this distinction does momentarily save HHB from condemning airlines; yes, the airline is selling a flight at a future date, which seems meaningfully different from the instantly-available present goods bank notes ought to be. But the thing about the future is that it inevitably and predictably becomes the present. Once that future arrives, HHB explicitly admits that having more passengers at the gate than they have seats on the plane does amount to fraud. Strangely, however, HHB exonerate airlines since they are “prepared to pay every excess ticket holder off”.

Oh, and fractional reserve banks aren’t?

At this point their already weak defense falls apart. Every instance of historical bank runs include management, shareholders and governments doing precisely that: slowing down the run by paying employees, friends or relatives to deposit funds; acquiring new funding (either debt or equity) to pay off skittish depositors who want their present goods right away; or my own personal favorite, as a good student of Scottish financial history: the Option Clause!

HHB say that airlines are not committing fraud since once at the gate – on the verge of having their oversold future goods transform into present goods – they stand ready to

“repurchase [the passenger’s] ticket at a price (by exchange of another good) that the holder considers more valuable than his present airline seat.”(HHB 1998: 47)

Let’s see what the financially innovative Scots did. Their notes were subject to a legal clause, allowing management to ‘mark’ particular notes when offered up for redemption. That meant deferring the redemption claim for six months, effectively transforming the present good (the money title) into a future good (money title in six months), at the maximum legal rate of interest of 5%. That sounds like a good “the holder considers more valuable”, especially considering that these notes were effortlessly accepted in trade – i.e., the holder could instantly turn around and buy things with this note, its value gradually appreciating as the six-month date arrived.  In practice, this deterrent was only used infrequently, and then almost exclusively against English currency speculators.

Indeed, extrapolating this point, as I do in a forthcoming piece on maturity-mismatch (and have flaunted in Austrian conferences), illustrate how little practical and economic difference there would be between the opposing and deeply-entrenched Fractional-Reserve-Banking camps.

Regardless, it seems the airline-insurance-parking permit analogy still stands.

Larry Siedentop’s Straw Dog

I finally had the chance to finish reading Larry Siedentop’s Inventing the Individual: The Origins of Western Liberalism.

download

It is a great book, and especially informative for those not well-versed in the intellectual history of political ideas within (mainly) Christian thought. The arguments starts with the Ancient traditions, to the early years of Christianity, all the way to the fifteenth century. According to Siedentop (p. 332) the main goal of the book is:

‘to show that in its basic assumptions, liberal thought is the offspring of Christianity. It emerged as the moral intuitions generated by the Christianity were turned against an authoritarian model of the church. The roots of liberalism were firmly established in the arguments of the philosophers and canon lawyers by the 14th and 15th centuries: belief in the fundamental equality of status as the proper basis for a legal system; belief in that enforcing moral conduct is a contradiction in terms; a defense of individual liberty, through the assertion of fundamental or ‘natural rights’ and, finally, the conclusion that only a representative form of government is appropriate for  a society resting on the assumption of moral equality’.

Siedentop clearly succeeds in making this point. As said, the book can be warmly recommended. The question is, however, why does he care about this issue? Siedentop (pp. 334-338) clarifies that he wants to fight the dominant idea that liberalism sprang from the Renaissance, and that liberalism almost equates secularism, or is even anti-religion, at least in the public sphere.

You do not need to be a scholar of the liberal history of ideas to raise more than a few eyebrows here. What liberalism is Siedentop taking up for argument? He is unclear about this, as he does not care to define this liberalism, nor does he provide references to liberal thinkers. That is where the trouble starts.

Undoubtedly there are some modern social-liberals who claim that liberalism is secular and that the state and lawmaking should be strictly neutral in religious terms. Arblaster in The Rise and Decline of Western Liberalism even explicitly refutes any liberal traces before the Renaissance. Unclear is how dominant these voices are, especially outside academia. One thing is certain, these do not comprise classical liberals.

In the Scottish Enlightenment, in many ways the birth grounds of classical liberalism, the place of religion in life, and religion as a source of morality, was discussed. In contrast to most other thinkers, -Smith included- Hume even criticized religion, albeit most openly  after his death in Dialogues concerning Natural Religion. Yet to my knowledge, no thinker actually denied the role of Christianity as a source of  important ideas, certainly not the  role of individuality.

Modern writers, who are more aware of classical liberalism as a tradition do not deny this either. Let me give a few examples.

Hayek in an essay on liberalism (in New Studies in Politics, Philosophy Economics and the History of Ideas) writes that it traces back to classical antiquity and certain medieval traditions. He actually attacks ‘some nineteenth century writers’ who denied ‘that the ancient knew individual liberty in the modern sense’. In his general overview entitled Liberalism, John Gray (then still in his liberal days), also neatly points to the pre-modern and early modern times for the development of liberal ideas as we now know them. David Schmidtz and Jason Brennan pay their due respect to these older sources in A Brief History Of Liberty and the same goes for George H. Smith in The System of Liberty, and David Boaz in The Libertarian Mind.

Of course, none of them made detailed studies of these influences because their books had different purposes than Siedentop’s. Yet all deal with it in a few paragraphs or even a separate chapter, making clear to their readers that (classical) liberalism has older roots then the Renaissance, that there are important Medieval and Ancient thinkers who all left their mark on the development of (classical) liberal thought.

Siedentop wrote a great book, that unfortunately is a straw dog as well: his portrayal of ‘liberalism’ is erroneous, either deliberately or not. It denies the views of the founding and one of the main liberal variants. That is sloppy, to say the least, for such a learned and experienced scholar. With the use of these general terms Siendentop’s attack is simply off target. He should have taken far more time to define the ‘liberalism’ and the liberal scholars subjected by his attack.

Myths of Sovereignty and British Isolation, III: British Superiority?

Continuing from my last post, before getting on to the pre-Waterloo history of Britain, some remarks on Britain as an exceptional and model state from the Hanoverian period (rule of the German Hanoverian dynasty who continued to be sovereign princes in Germany, 1714-1837) onwards. Isolating any one period as the one in which modern Britain emerges is inevitably hazardous, but there are precedents for selecting this period such as Linda Colley’s influential book, Britons: Forging the Nation, 1707-1837 (Yale University Press, 1992).

The defeat of the Jacobite Uprising of 1745 provides a good moment for the formation of modern British state, or perhaps better the moment at which a process of formation ends. The Jacobite Uprising was an attempt to restore the Catholic Stuart Dynasty, which had its starting point in the Scottish Highlands. It reached into the Lowlands and then England before being beaten back and then decisively defeated at the Battle of Culloden in 1746 by forces loyal to the Hanoverian dynasty, which was Protestant and was reigning in Britain because it was the closest in line after Catholics were excluded from inheriting the throne.

Not only was it confirmed that Britain would continue to be an officially Protestant country, with a German royal family, harsh and violent measures were taken to crush the social base of Jacobitism in the Highlands. The autonomy of traditional clan chieftains (hereditary local landlord rulers), who were operating a kind of confederal state of often conflicting clans within Britain, was abolished. Soldiers were stationed in the Highlands to enforce an assimilationist state policy in which the Gaelic language was repressed, as was traditional dress and customary laws. The violence and forcible assimilation faded away once British sovereignty in the region was assured, but that does not detract from the way that the British state was stabilised through force and military occupation, not through consent and building on ‘traditional’ liberties. The idea of a British state uniquely founded on consent to institutions in a context of laws and liberties emerging from ‘tradition’ rather than state action is essential to the sovereigntist-Eurosceptic view of Britain and its history under examination here.

The forcible full incorporation of the Scottish Highlands and Western Isles into the British state system comes out of the attempts of the British monarchy to create an integrated Britain out of of the union of English and Scottish dynasties, which goes back to 1603 when James VI of Scotland inherited the throne of England as James I. James wanted a unified, integrated Britain from the beginning, and his wish was granted, if more than one hundred years after his death and the overthrow of his dynasty. The attempts of his son Charles I to impose religious uniformity on Scotland led to a war which was the prelude to the English Civil War. The two wars, and others, are sometimes grouped as the Wars of the Three Kingdoms. The powerful man of state to emerge from these wars was Oliver Cromwell, who incorporated the third kingdom, Ireland, into the British state, in a culmination of a history of war and colonisation going back to the Twelfth Century. This was also a process of forcible land transfer creating a Protestant English landowning class dominating a Gaelic Catholic peasantry. As in the Scottish Highlands and Islands, assimilation into the British state led to the decline of the Gaelic-Celtic languages into very small minority status, so to large degree an old culture was lost.

The forcible incorporation of Ireland into the British state system culminated in 1800 with the Act of Union, which created the United Kingdom, in abolishing the Irish parliament (not much of a loss, it only represented Protestant landlords) so that the Westminster Parliament (or crown in Parliament) had unlimited sovereignty through the islands of Britain and Ireland. The process did not bring clear benefits to the Irish before of after the Act of Union. The Great Famine of 1845 to 1852, when the British imposed a landholding system in Ireland and the whole British state system failed to prevent hunger and starvation for a large part of the Irish population and could be held to be at least in some measure responsible for the famine, is well known. Less well known is the Irish Famine of 1740 to 1741, which led to the deaths of an even higher proportion of the population than the Great Famine. I do not think that the Irish peasants of the eighteenth and nineteenth century felt lucky to be part of the British state system, or would have recognised it as some unique force for good in the Europe and the world.

The troubles of the Gaelic peasants of the Scottish Highlands did not end with the state reaction to the Jacobite Uprising. The disruption of traditional customs and restraints enabled the clan chieftains to forcibly remove peasants from land that had been theirs for centuries, starting a process of emigration to other parts of the British Empire. A situation in which the British state had abolished the power of chieftains to resist it while taking away traditional restraints on their power over the peasantry, led to an intensified period (“Highland Clearances”) in which peasants were sometimes taken straight from their customary homes to boats leaving Scotland for the Empire. In the later Nineteenth century, legal reforms were undertaken to improve the rights of Scottish and Irish peasants, but any discussion of the merits and otherwise of the British state system in relation to the rest of Europe in the eighteenth and nineteenth centuries, must take into account horrors of calculated state violence combined with laws and property rights biased towards a landowning class close to the state, that led to sufferings as great as any encountered in any European state of that era.

Next post, Britain as a supposed model European state after Waterloo, comparisons

From the Comments: The Suprastate and the Substate

My post on American Senator Rand Paul’s recent remarks on Kurdistan elicited the following response from fellow Notewriter Michelangelo:

If a neo-Ottoman federation arises I suspect it will begin as a political alliance between Turkey and Israel. Perhaps such a federation will arise from the Mediterranean Union, who can know really. The two countries are already relatively close in interests and are, alongside a few of the Gulf States, the closest things the region has to secular liberal powers. The Turks at this time would not favor an independent Kurdistan though and I fear they might withdraw support for a federation if that was part of the package.

I think it would be easier to first form an Ottoman federation and afterward grant Kurds their independence within the federation.

It is hard for me to imagine the Arabs joining said federation either way. The Egyptian-Syrian Arab republic went nowhere. Part of me (an infinitely small part!) kind of hopes ISIS manages to defeat the Iraqi and Syrian forces and creates the core of a Pan-Arab nation.

I’ll let him have the last word here (be sure to scroll though the entire dialogue), but I just want to take this opportunity to stress the importance of thinking about the world in terms we might not be used to. The standard unit of measurement – for lack of a better term – for thinking about international affairs is the nation-state, but this way of thinking about the world has, like all devices humans use to make sense of their world, weaknesses as well as strengths. To my mind, as the world becomes increasingly interconnected thanks to liberalization, the nation-state becomes less and less useful as a tool for understanding human action.

What Michelangelo is doing here is thinking ahead of the curve; he is applying the notions of suprastate and substate to international affairs. A suprastate is an organization or union that is composed of various nation-states, such as the ones Michelangelo uses in his argument (i.e. “Mediterranean Union”). A substate is a region within a nation-state, such as Kurdistan or Scotland or Somaliland.

Often, especially in debates here at NOL, the notions of suprastate and substate are used in conjunction with the developing, or post-colonial, regions of the world. This doesn’t mean these notions can’t be applied to places like the United States or Argentina. Indeed, the US itself was created as a supranational union in order to combat the strategies of the British, French, Spanish, and various Native nations. If you can entertain the notions of suprastate and substate when you think about human action, you will be that much closer to advocating clearly for the free and open society (see this piece on the informal economy by Dr Gibson, for example).

Scotland, Nation, and Liberty

As I start writing voting is coming to an end in Scotland with regard to a referendum on whether Scotland should remain part of the United Kingdom. The United Kingdom comprises England, Scotland, Wales, and Northern Ireland. There are those in Cornwall, a peninsula on the extreme south-west of England who argue that is should be represented as an entity on  level with those four components of the UK, as it was regarded as distinct from England into the sixteenth century, never having being properly incorporated into Roman Britannia or Anglo-Saxon Wessex (the Old English kingdom in the south west, which became the nucleus of the Medieval English state).

From the 10th century onwards Anglo-Saxon kings asserted supremacy over Scotland with varying degrees of success in obtaining some recognition of overlordship from Scottish kings. Wars between Scotland and England led to victory for Scotland in the fourteenth century when the English monarchy ended attempts to use force to demand Scottish subordination, or even incorporation of Scotland, and European states accepted Scotland as a sovereign entity. In the early seventeenth century, Queen Elizabeth I of England died childless so that the heir to the English crown was King James VI of Scotland who became James I of England. He moved his court from Edinburgh to London, and pushed for the union of two kingdoms in his person to become a state union of England and Scotland as Great Britain. (At this time, Wales was treated as a part of England.)

The English Parliament resisted the creation of Great Britain, but by the early eighteenth century there was mutual interest in the trade and economic advantages of state union with accompany reductions on trade barriers, particularly after the failure of a brief attempt at Scottish empire building in Central America.  An Act of Union was passed by the English Parliament in 1707 and then by the Scottish Parliament in 1708, which abolished the Scottish Parliament. It also left in place major differences in laws, the legal system, education, and the state church, which have lasted until the present day.

Before the personal union of Scotland and England under James VI/I, Scotland itself went through a process of internal integration, or colonisation of the peripheral regions by the centre, as all nations have. This included the 1493  abolition of the Lord of the Isles, which indicated sovereignty over an area covering the highland and island areas of Scotland, and which has a complex history in relation to all the neighbouring powers. The incorporation  of that region, what could easily have been a separate sovereign nation if history had gone a bit differently, was not completed until 1745, that is after the Act of Union, when a British army destroyed an attempted restoration of the Stuart family of James VI/I. The attempted restoration is known as the Jacobite Rebellion. Jacobite refers to the latinised form of James, in honour of James II, who was overthrown in the Glorious Revolution of 1688 due to his Catholic religion, fears that he was attempting to enforce that religion as a state church instead of the existing Protestant established church, and fears that he was creating an absolute monarchy with a decorative role only for Parliament.

The Jacobite Rebellion itself divided Scotland between the traditional semi-feudal highland chiefs and the commercial world of the Lowlands. As a consequence of the failure of the Rebellion, British law was enforced fully for the first time beyond the Highland line, while restrictions were placed of Highland customs, clothing, and language. The language of the Highlands was Gaelic (a Celtic language relate to Irish, Welsh, Cornish, and Breton).   This was the triumph of the Scots (a dialect of English, or a language which is very close to English depending on point of view) and English speaking Lowlanders and the end of the process initiated by the early Stuart overthrow of the Lords of the Isles.

The United Kingdom was formed by the 1800 Act of Union, which abolished the Irish parliament. Most of Ireland left to form what is now the Republic of Ireland in the early 1920s, but Northern Ireland remained, now with its own parliament, which is why there is still a UK, not just Great Britain.

All this history is to indicate the long historical nature and the complexity of the  relations between England and Scotland, with regard to sovereignty, identity, and so on. Scotland like England was itself a work in progress before union, and the integration of Scotland into what might be taken as a single nation, was completed over one hundred years after the Act of Union, over two hundred years after the union of crowns, under the leadership of the British crown, which at that time was unified with the German princedom of Hanover.

Scotland was never assimilated into England, even when there was no parliament, and Scotland has always been distinct from England than Wales in at least two respects:

  1. there is a higher proportion of trade within Scotland than with England, than of internal Welsh trading activity compared with trade with England;
  2. Wales’s contact with urban centres is just as much with the nearby English cities of Bristol, Birmingham, and Liverpool as with its own cities (principally Swansea and Cardiff) while Scotland is very focused on its own cities (principally Edinburgh and Glasgow).

However, Wales is more distinct from England in language since twenty per cent  speak Welsh fluently, everyone studies Welsh at school, and Wales is officially bilingual, even gesturing towards Welsh language priority. Gaelic speakers are about one per cent of the Scottish population.

The Welsh-Scottish comparison serves to show that ways of assessing national identity and distinctness vary and that there is no one way of evaluating this, so there can be no one institutional and political strategy for accommodating national differences within a state. The level and intensity of Scottish distinctness and identity has amounted to a nation now divided almost exactly down the middle about whether it wishes to separate from the UK.

This is not just an issue of identity though, as a large part of the Scottish independence vote is based on a belief that Scotland is egalitarian, welfarist, communal, social democratic, or even socialist, in comparison with England and that the countries are polar opposites on these issues. Another part of support for independence is the hope that North Sea oil will bring more benefit to Scotland if a Scottish government is collecting the tax revenue, accompanied by the belief that taxation at the UK level is some kind of resource theft.

Building on the historical, political, and institutional account above, what conclusions am I drawing? The first thing to state is of course that Scotland has every right to leave the UK if it so wishes, that it is a good thing that a referendum is being held to test what Scots want, and that if independence is what is wanted, then the government of the residual UK use must take a positive and co-operative approach to the departure of Scotland.

However, I certainly don’t believe that Scotland should separate. Part of that is the emotional patriotism of an Englishman, call it nationalism no problem, based on centuries of shared enterprise and struggle, good (the defeat of National Socialist Germany) and bad (imperialism). The Scots took a disproportionately large part in the trading, colonising, and military aspects of that joint history, and during that history many Scots went to England and became part of English society, John Stuart Mill’s father is a notable example. One of the great flourishing moments of that history was the Scottish Enlightenment of David Hume, Adam Smith, and others, which always involved education, travel, and interaction in England as well as Scotland.

Why peace behind centuries of joint enterprise in which despite centralising processes, differences of identity and in institutions proved to be compatible with the growth of commercial society, civil society, liberty under law, parliamentary government, science and culture, and the twentieth century struggle against totalitarianism.

There’s  a lot for liberty advocates to admire there, without denying that a lot of worse things happened as well, and surely we should be disposed to favour building on that rather than destroying it. Many liberty advocates have a preference for small nations where maybe there is more chance of intelligent laws and policies, less remote from everyday reality and individual understanding of particular realities.

I can only agree with the provision that such a result can be achieved through forms of federalism which are decentralising rather than centralising so that the federal centre is largely responsible for trade, foreign and defence policy, and the lower region and national levels do everything else in an innovative, flexible, diverse, and competitive way.

There is still some benefit in the UK remaining as a unified power for defence and military purposes. It is would not be good from a liberty point of view for a country that in its military budget and capacities, its diplomatic and transnational weight, is still a match for nearly all the major powers. The UK whatever its faults is one of the more liberty  oriented parts of the world, and no good would come from lessening its strategic and diplomatic weight. Of course those liberty advocates who prefer very neutralist and almost pacifist attitudes to international relations will not be impressed, but we live in a world where states with low levels of inner liberty and little respect for the rights of others exist, and should be at least matched by powers that are more liberty oriented at home and more respectful of the rights in the international sphere. The role of liberal democracies has not always been admirable in this sphere, but better those errors than unchecked aggression from authoritarian states.

The institutions of liberty are more likely to flourish in democratic states, where a multiplicity of national and regional identities flourish, than in attempts to break away based on some inclination, of some degree of intensity, that singular national identity is better than multiplicity and that national identity needs unrestrained state sovereignty. In the particular case of Scotland, the Scottish National Party, and others for independence, are relying on the dream of a more socialist country where ‘Scottish’ oil is protected from the English to fund an expanding state, without having a plausible explanation for the currency to be used on independence, or any sense of reality about how international markets testing the prudence of a new state are likely to drive it towards high interest rates and displays of deficit reduction.

The political consequences of a subsequent disillusion with social democratic dreams mingled with existing  assumptions of a morally superior Scottish community, and related anti-English feeling, in economically disruptive circumstances could be most severe and disturbing. Even on a more optimistic assumption about the future in which Scotland moves smoothly into a more social democratic future, nothing is gained from a pro-liberty point of view. Pro-liberty commentators who think that because Hume and Smith were Scots that an independent Scotland will be guided by Enlightenment classical liberalism have completely lost the plot.

Secession and international alliances go together

It is important to scrutinize the intellectual strength of libertarian ideas about international relations. Here are a few – admittedly only partly systematic- thoughts about the relation between secession and international relations. Or more precise: some libertarians are positive about secession, yet at the same time negative about international alliances. How does that relate?

Pleas for secession can be found in the works of Von Mises, Rothbard, Hoppe and other luminaries of libertarian thought, broadly defined. In an informative chapter on the issue, Mises-biographer Jörg Guido Hüllsman (at mises.org) defined secession as the ‘one-sided disruption of (hegemonic) bonds with a larger organized whole to which the secessionists have been tied’. Recent examples are the bloody secessions of South Sudan or Eritrea. Yet the issue also remains topical in Western Europe, for example in Scotland. It is not my purpose to emphasize the practical failures and wars associated with secession. From a libertarian perspective the principal benefit of secession is that a group of sovereign individuals decide for themselves how and by whom they are governed, and in which type of regime this shall happen. So far, no problem.

Let’s assume a world where secessions take place freely, peacefully and more frequent than in the past twenty-five years, where the number of sovereign states just went up by approximately twenty recognized independent countries. The logical result will be the fragmentation of the world in numerous smaller states, or state-like entities, of different sizes, composed of different groups of people. Perhaps some of these states will comply to an anarcho-capitalist libertarian ideal, so with a strict respect for property rights and the use of military defense only for clear-cut violations of these rights by others. However, it is unlikely that all states will be characterized in this way. Consequently, there remain a lot of causes for international conflict and war. For example, as there are more borders, there are also potentially more border disputes, about natural resources, water, stretches of land, et cetera. Of course humans are not angels, and no libertarian ever claims they will be. It simply means none of the other causes of war are perpetually eradicated in a world of free secession either.

So how to defend oneself in such situation, particularly when your state is much smaller than one or more other states in the vicinity? In such a situation you are unable to defend yourself against the most viable threats. Even if you declare yourself a neutral state it is unlikely this will always be respected. After all, it takes at least two to tango in international politics. Of the many possibilities to defend your property rights and sovereignty, the negotiation of agreements with other countries, or joining an international alliance seems logical and potentially beneficial (of course depending on the precise terms). It would amount to a system of multiple balances of power around the globe, very much like for example former Cato Institute scholar Ted Galen Carpenter favored for the current world. Surely, this would not be ideal, and would not be able to eradicate war either. Yet it will prevent many wars and safeguard the liberties and property rights of the participants.

This differs significantly from the pleas by people who simultaneously favor secession while calling for a non-interventionist foreign policy without alliances, such as Rothbard, Ron Paul (see for example in a column), or many contributors on www.lewrockwell.com.

Admittedly, most of these anti-alliance commentaries are directed against particular parts of current US foreign policy. However, it is still fair to demand theoretical consistency. Either these writers overlook there might be an problem, or they choose to ignore it. Still it is important to acknowledge there is an issue here. It is too simple to reject international alliances while embracing secession at the same time.

The European Union Needs More States, Not More Territory

The recent uproar over the upcoming vote on the potential secession of Scotland from Great Britain illustrates well the European Union’s foreign policy weaknesses. The EU’s potential to increase the number of states within its borders without having to expand its geographic space is an overlooked avenue to reaching a bolder, more sophisticated foreign policy.

Regional aspirations for more political autonomy have been voiced since the time of the creation of Germany and Italy in the late 19th century, but wars, nationalism, economic concerns, and fear of wars (along with the presence of the American military, of course) have largely kept these aspirations on the fringe of domestic political debates in Europe.

Steven Erlanger’s 2012 piece in the New York Times explains well why this is changing and what is currently happening in the European Union:

The great paradox of the European Union, which is built on the concept of shared sovereignty, is that it lowers the stakes for regions to push for independence.

Erlanger also goes on to quote a scholar at the European Council on Foreign Relations:

‘The whole development of European integration has lowered the stakes for separation, because the entities that emerge know they don’t have to be fully autonomous and free-standing,’ said Mark Leonard, the director of the European Council on Foreign Relations. ‘They know they’ll have access to a market of 500 million people and some of the protections of the E.U.’

The European Union has essentially taken the place of the nation-state as the chief entity in charge of standardizing trading policies in Europe. This political setup is a great opportunity for regions that have been absorbed into larger nation-states to assert more fiscal and political independence because of these regions’ new interdependence with a larger part of the European economy. The confederation has provided an opportunity for smaller states to emerge while at the same time providing these small state polities with a range of options and allies that are often missing from small states’ repertoires. The best of both worlds has a chance to flower: local governance and total participation in world trade.

This is better understood with a quick historical sketch of 19th and 20th century Europe in mind.

In the last decades of the 19th century the large nation-states of central Europe – Germany and Italy – had just been formed after centuries of being composed of hundreds of small polities. These small polities were parochial, and many of these polities’ elite factions had erected protectionist barriers around their small territories. These newly established nation-states were flanked on their eastern borders by cosmopolitan-but-despotic empires operating from Vienna, Moscow and Istanbul, and to the south were small Muslim polities haphazardly connected to the Ottoman Empire and economically dependent on Mediterranean piracy and Saharan trade routes. To the north and west: oceans and the seafaring, imperial regimes of Great Britain, the Netherlands, and France.

A map of Europe in 1800 AD. Look at how many polities are in what is now Germany and Italy. Thanks goes to euratlas.com

The formation of these larger nation-states were undertaken, generally speaking, in order to unify territories considered to be connected under various broad cultural domains into a cohesive political units and mercantile trading blocs.

After Germany and Italy achieved political unification, programs geared towards creating economic spheres of influence within the territory of the new nation-states began to be implemented. The creation of nation-states in central Europe had the contradictory result of opening up free trade zones within the territories of nation-states while simultaneously erecting new trading barriers that targeted individuals and factions not connected with the new nation-states. Free trade won in the domestic arena of these new states, but it also lost out internationally.

The political unification of these nation-states did not go down well with a myriad of factions. The reasons for resistance were varied, but suffice it to say that there was an intense backlash against the centralization of power and the nationalization of everyday life in the new nation-states of central Europe.

To counter regional resistance, proponents of political centralization argued that political union halted the wars that had wracked Europe for centuries (the economic benefits of freer trade were touted as well, but this argument did not have the same clout as it does today). However, this intellectual argument was framed in nationalistic terms, so when it trickled down into the public sphere of European life what emerged was a solid case against regional fracture that involved one part peace and one part national chauvinism.

The end result of this was the destruction of Europe through two large-scale, horrific wars.

The European Union has succeeded where the nation-states of Germany and Italy failed: by creating a massive free trade zone that eliminates protectionism (as the German and Italian nation-states did), and the necessity of cultural chauvinism (“nationalism”)  to maintain legitimacy (which the German and Italian nation-states could not do), the European Union has provided Europe with an incredible opportunity to build a lasting peace.

Adopting a requirement for member states  to incorporate a constitutional option that allows for referendums on secession would be a bold move that would not only bring a higher level of sophistication to EU foreign policy, but also fluster Moscow without edging closer to its borders (think about the example this would set in Russia’s own self-styled federation).