For the avoidance of doubt, this really is 2021; it is not 1939. Why do we offer the reassurance? Because Europe is going to war over Poland again. More accurately, with Poland. Don’t panic! Only verbal hostilities have broken out, but the clangs of political swords clashing will resonate widely.


This latest battle between Brussels and Warsaw is a struggle of principles and a fundamental misalignment of values. The stakes are high for both as threats and insults were traded this week between the Polish Prime Minister, Mateus Morawiecki, and Ursula von der Leyen, President of the European Commission. For, as we mentioned in last week’s column in the context of the Northern Ireland Protocol and the EU protecting the hegemony of the European Court of Justice, at the very heart of this simmering but long-running argument with Poland, now boiling over, is the fundamental concept of sovereignty: the right to self-determination; who sets laws; whose court is supreme, which is subsidiary.


The many tensions within the EU both pre- and post-Brexit are all too obvious, exacerbated by the Covid crisis exposing deep and rancorous rifts about strategies to deal with it. Some tensions are economic, some are social, all are political. With the UK gone, one of the most enduring is Brussels’ relationships respectively with Warsaw and Budapest. More accurately it is the fundamental differences between Brussels and the ruling PiS party in Poland, and Brussels and Prime Minister Viktor Orban in Hungary.

Poland and Hungary: serial offenders. Light blue touchpaper, retire to a safe distance

The Polish problem is simple: Warsaw refuses to believe in the supremacy of the European Court of Justice (ECJ) over its own national supreme court. The underlying source of contention is the Polish government’s increasing meddling with supposedly independent national broadcast media, turning it in to a propaganda tool of the PiS, but more importantly, its direct interference with Poland’s judiciary and justice system, again making it an arm of the ruling party rather than an independent organ of the state. Clearly there is much of which to be critical here. In both cases, Brussels maintains Poland is in contravention of EU fundamental principles of freedom of speech and independence of justice, both undermining EU law and the Human Rights convention; the Polish government insists this is a domestic issue and that the offending policies were very explicit manifesto objectives voted upon in entirely open and fair elections successively; it claims the right of a democratic mandate on its side.


In August, the government ordered the Court of Tribunal to pronounce a ruling to that effect; the EU response was to give the Poles until August 16 to explain what they proposed to do to comply with EU law, law that they explicitly signed up to under treaty when they joined the EU. Far from doing the EU’s bidding, this week the Court of Tribunal ruled that in respect of Polish law, it and not the ECJ has supremacy. Cue fireworks.


In Hungary, Orban takes great delight in poking Brussels with a stick at any given opportunity. However, he earned its undying enmity when, faced with a tide of refugees and asylum seekers from Syria, Iraq and Afghanistan, he pragmatically but quite illegally shut his borders telling Brussels that until they came up with a practical solution that actually helped Hungary deal with the crisis he would take whatever action was needed to protect Hungary’s interests (of course, last year most EU member states did precisely the same thing, unilaterally closing national borders to combat Covid). Since then, and again protesting that such policies were manifesto promises to be honoured arising from free and fair elections, among other significant infractions, Orban has most recently clamped down on LGBGT rights in contravention of EU law and, like Poland, has begun the politicisation of the judiciary. More serial fundamental flouting of human rights and EU values, guaranteed to provoke a robust response.

EU sabre-rattling or toothless tiger?

The difficulties besetting the EU with its two most recalcitrant members are obvious. The problem is what to do? It has been here before on multiple occasions with Poland and Hungary. Both have been threatened more than once with the EU’s nuclear option, the ultimate naughty step, Article 7 and the suspension of voting rights (there is no treaty provision to eject a member from the club). But the threats were empty, the EU bottled it every time when push came to shove, not least because the invocation of Article 7 requires unanimous support. Poland and Hungary acted in concert last Christmas, vetoing the EU’s new 7-year budget until conditional aid sanctions against EU rule-breakers (i.e. Hungary and Poland) were removed or diluted, to which the EU more-or-less caved in to get the budget approved. Both countries had already been threatened with Covid aid being withheld from the EU’s €750bn recovery fund, repeated towards Poland this week alongside yet another threat of voting rights suspension. The more Brussels cries “Wolf!”, the more the delinquents are encouraged to push the boundaries. So worried are senior Brussels delegates that there is a concerted push among MEPs and Commission members to force von der Leyen’s hand and even if not to suspend Poland, then to sue it (one Dutch MEP said “von der Leyen should be sacked” if she fails to take concrete action).  


Many would quite happily jettison Hungary (Holland’s Mark Rutte has said Hungary “no longer belongs in the EU”) and the Hungarians themselves are reportedly considering what the point of membership is any more when from next year they become a net contributor to the EU budget rather than a net beneficiary. Poland on the other hand, so far a significant net beneficiary of EU largesse, rejects any notion of “Polexit” however much Guy Verhofstadt, one of the EU’s more colourful personalities in a sea of grey, this week accuses Warsaw of talking the language of Brexit.


But fundamentally the EU is in a bind with both Poland and Hungary. Poland in particular is important economically and strategically, facing Russia, possessing meaningful and competent military resources and being one of the very few which meets the minimum 2% GDP defence spending requirement laid down by NATO. Alongside Ukraine, Warsaw is feeling particularly sore about Nord Stream 2, indeed it was Warsaw which painfully and pointedly dubbed Germany’s relationship with Russia to supply it with gas as the ‘21st Century Molotov-Ribbentrop pact’. After the spectacular own goal of Brexit, politically Brussels cannot afford to lose Poland, the fourth biggest member of the Bloc. On the other hand nor can it afford to allow the precedent to be set that a national court goes rogue and ignores the ECJ and gets away with it. The ECJ is also currently acting against Germany’s supreme court in Karlsruhe for doing precisely that in the ongoing spat over the legitimacy of the ECB’s monetary policy and the compromising of German national interests, and the ECJ’s authority lies at the centre of the row about the Northern Ireland Protocol.


Brussels is notoriously tin-eared when challenged, the road to Brexit being an object lesson of the EU’s arrogance and intransigence when facing down non-believers in “The Project”. Waving the big stick at Poland risks inflaming Polish nationalism and playing to the PiS’ advantage. Were Brussels cannily to defuse the situation and deny Morawiecki nationalist oxygen, it’s not impossible that Donald Tusk’s Civic Platform party might stand a chance of winning the 2023 election. On the basis that Tusk is the former President of the European Council, an anti-Brexit EU apparatchik to his core, one might reasonably suppose the EU’s problems with Poland would evaporate overnight. But for the Brussels hard-liners, perhaps there are too many ‘ifs’ and ‘buts’ in this rose-tinted hypothesis, they can’t take the risk, the Polish boil needs lancing now.

Deeper-seated problems confront the monster that is the EU…..

But whatever the outcome of this current crisis, there is a much more fundamental and enduring problem with the EU: it remains a half-finished, half-baked confection. It pretends to some of the trappings of a state without actually being one, however much it likes to see itself as one. A single currency shackles the economic fortunes of 19 disparate eurozone member states while paradoxically accentuating competitive divisions creating winners and losers between them; worse, there is no symmetrical fiscal union to create a joined-up, coherent economic system which only magnifies tensions between the fiscally conservative northern countries and their fiscally incontinent neighbours in the south. Eight more countries are members of the club: contributors to, but mostly net beneficiaries of, the supranational EU budget; bound by treaty to the Customs Union and the Single Market; subservient to the ECJ; and yet still with their own national currencies. In short, it is a monster of its own creation.


By its very nature with 27 equally-weighted interested parties, its decision-making processes are sclerotic and slow and subject to endless horse-trading and compromise in a bid to reach agreement, any agreement, on whatever subject. It is inherently protectionist to a fault and its natural inclination founded on the centralised, controlling Napoleonic principle of statute law is regulation over stimulation or innovation; it likes to homogenise, pasteurise and sterilise. In doing so it consumes vast amounts of human energy which could be used far more productively were it not so myopically and introspectively preoccupied with the protection of “The Project”. Against such a backdrop it is hardly surprising that the corrosive frictional effect of layering cost-upon-regulation-upon-regulation-upon-cost has seen a loss of more than 10 percentage points of share of global GDP over 30 years among eurozone members.

….a monster stuck in a cul-de-sac

As for the EU’s direction of travel, the reality is it is stuck in a cul-de-sac: the logical progression is to complete the transition to full monetary and fiscal union across all 27 countries. But on the fundamental democratic principle of no taxation without representation, a pre-requisite for fiscal union is full political union and voting reform; the democratic deficit is a systemic fault-line. However, for many this full submission of sovereignty is a step too far, indeed it will be a clear political dividing line in the forthcoming French Presidential election between the EU integrationists and the Eurosceptics. In Germany the composition of the next government will be key depending on who holds the balance of power within whatever coalition is cobbled together: in a right-leaning government relying on the FDP, integration is a red line; in a leftward government relying on the Greens, integration is a condition.


But reversing out of the dead-end is also not an option. If the dissolution of national currencies and the creation of the euro was a carefully managed and very successful process (regardless of how fundamentally flawed strategically), the disintegration of the euro would be chaotic. A disorderly end to the euro would present a significant systemic global economic and financial risk, a price not worth paying. The death of the euro has been reported prematurely on may occasions; it is not an event to relish no matter how Eurosceptic one is.


It seems a safe bet that the future of the EU will remain a fertile source of material for these Merlin Macro musings for years to come. Don’t say you haven’t been warned!

Investment perspective 

Against this overarching backdrop, we find investing in Europe relatively unappealing. But while the Jupiter Merlin Portfolios have no European-badged funds, through several of our equity managers we do indirectly own European equities, mainly big companies of high quality with substantial international revenue and profit streams.


The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

The value of active minds – independent thinking:

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks:

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.  The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change.  This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM. 28138