Hanseatic League 2.0 reflects changing shape of EU

Values of new alignment can help EU hold its own relative to US and China

Jonathan Swift's satire Gulliver's Travels, published in 1726, still has much to tell us about the way we live now and how politics is conduced across Europe. One image from the book, of the small, vain Lilliputians tying down Gulliver, resonates with recent comments from ministers in larger European countries on the rise of the "Hanseatic League 2.0", an alignment of finance ministers from Ireland, the Netherlands and the Baltic and Nordic states. The name comes from the federation of towns and merchant guilds that exercised considerable economic power in northwestern Europe in the late middle ages.

Perhaps, unlike the Lilliputians, there are reasons for the European Commission and the larger European countries to take the Hanseatic countries, and their message, seriously. Indeed, in a bad year for politics and economics in Europe, the emergence of the Hanseatic countries is a new, positive development.

The first reason to focus on them is that they reflect the changing shape of the European Union. For some of the smaller European states – Ireland and the Netherlands, for example, the UK was a policy and political ally around which they could coalesce. Like the Hanseatics, Britain preferred a more liberal, decentralised conception of the EU and now Brexit means that small states need to club together in order to have a voice. Further, a consequence of EU enlargement has meant that older members of the EU such as Denmark have felt that their influence has been diluted. Grouping together with like-minded small states, many of whom share the same economic problems and viewpoints, helps to enhance their power.

Stress testing

A second reason is that the near-perpetual stress testing of Europe’s states through the euro-zone crisis has altered its political economy in that the need for high growth and stable state finances has been internalised in many small state capitals, though much less so, it seems, in larger countries. The Hanseatic view of the euro zone is that it should never again allow itself to be encumbered by debt, that focusing on economic growth is the best way to avoid another euro-zone crisis and to solve the underlying problems that provoke Europeans to opt for increasingly radical solutions at the ballot box.

Small states have some form here. The Nordic countries, Ireland and the Netherlands, together with the likes of Switzerland, Singapore and New Zealand, top the lists of most globalised, most innovative (Bloomberg Innovation Index), rule of law (World Bank) and democratic quality (Economist Intelligence Unit) league tables. They have a common emphasis on quality of life, and in crises have shown a singular ability to tackle big problems (for example, Sweden repairing its banking system, Ireland fixing its unemployment crisis and Denmark leading the world in renewable energy). This is indicative of the fact that small, advanced states, most of whom are European, have a ‘secret sauce’ when it comes to promoting economic growth and social stability. Other small states in, say, Eastern Europe can learn from this, but the larger countries should also take heed.

One example is Italy. In the past four months the exchanges between the European Commission and Italy on its budget deficit has been marked by the absence of a determined, detailed debate on a set of economic policies that could transform Italy's trend rate of growth. Instead, the tone from Rome has sounded opportunistic while that from Brussels has been punitive. Fiscal policy as dictated from Brussels sounds a little too much like another Swift book, A Modest Proposal.

Italy’s growth rate

The Hanseatic League 2.0 countries have already issued a number of policy papers. A provocative one would be for them, in a constructive way, to present Italy with a set of suggestions on how to increase its growth rate, based on their experience. The education sector is an obvious example. Italy has a couple of universities in the top 200 in the world (Times Higher Education rakings) while the four Nordic countries have 13.

There is a third dynamic at work, which makes the perspective of the Hanseatic nations worthwhile. The marked geopolitical trend of the past year has been the growing schism between the United States and China and the way in which this is forcing the transition from a globalised to a multipolar world. The US and China are so far the dominant poles here.

This reality is leading to a slow change in mindset in Europe, such that it must less debate the merits of the Italian versus the French view of the world, but rather how Europe looks compared with both the US and China. Talk of a European army is part of this. While the Hanseatic League 2.0 countries do not have a manifesto, the kinds of things they value – economic openness, innovation and human development – are the factors that can empower the EU to hold its own relative to the US and China into 2019.

Michael O'Sullivan is the chief investment officer in the wealth management division at Credit Suisse and author of Ireland and the Global Question. David Skilling is director of Landfall Strategy