The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.

Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.

While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.

Along an expanding arc across the East, the EU faces a pact of autocrats. Russia and Turkey are moving closer to an outright alliance - an ideological hybrid like Molotov-Ribbentrop - that cuts at the heart of Nato. Both are openly at war with the post-Second World War liberal order.

The Kremlin is meddling in the Baltics, the Balkans, and the EU’s internal democracies. Vladimir Putin acquired a military edge during the energy boom - when the EU was disarming to meet austerity targets - and now enjoys a window of opportunity to extract maximum advantage.

In the West, the EU faces Donald Trump. This is a US president who refused to shake the hand of German Chancellor Angela Merkel. For the first time since the launch of the European project in the 1950s, the US no longer sees the EU as an asset in the diplomatic equation. Many in the White House would happily see it broken up.

This means that Washington will no longer allow the eurozone to use, or misuse, the International Monetary Fund for its own internal purposes. The implications are already apparent in talks over Greece, but they do not stop there.

It would be lamentable statecraft for EU leaders to pick a fight with Britain in these circumstances. For all the noise over Brexit, the UK is really the least of their problems. A clash would be worse than futile, as Italian premier Paulo Gentiloni said in London. Key figures in Germany, Poland, and Spain have repeatedly made the same point.

As the initial bitterness over Brexit fades, EU leaders are pleasantly surprised to learn that they, like many, misunderstood the referendum. Britain is not resiling in any way from Western liberal principles. It upholds all its strategic commitments to Europe through Nato, and is stepping up its defence EU’s eastern border with infantry and aircraft; it remains a champion of global free trade (more so than the EU itself); it has stuck by its climate pledges.

The country does not have a populist government. The Prime Minister could hardly be more cautious and proper, a child of the vicarage. She has defended the European cause in US Republican circles, almost as if she were its ambassador. Her cordial overtures have for the most part been received well in EU capitals and the upper echelons of the Commission.

The constitutional caveat, of course, is that Britain will act as an independent nation. It cannot accept the permanent jurisdiction of the European Court over almost all areas of UK law and policy, the baneful and masked consequence of the Lisbon Treaty.

It was always on the cards that the UK would have to extract itself from a venture that spends most of its energy trying to hold the euro together. Monetary union must evolve into a full-fledged federal state, with a single EMU treasury, fiscal system, and government, if it is to survive. Britain obviously cannot be part of such a structure. Trying to obfuscate this constitutional fact helps nobody.

In short, nine months after the referendum, Europe’s leaders are reconciled to the necessity of separation. The debate has moved beyond the false dichotomy of soft and hard Brexits. Most welcome the clarity of British withdrawal from the single market, recognising that it may be healthier for both sides than a messy fudge based on the hybrid Norwegian model. Scotland’s Nicola Sturgeon is barking up the wrong tree if she really thinks that the EU is pushing hard for Brexit Britain to stay in the single market.

There are, of course, discordant notes, especially in France, where much of the political elite is stuck in a time-warp. Emmanuel Macron, the electoral boy-wonder, offers little beyond ideological pedantry and the old EU Catechism when it comes to Brexit.

He is apt to dictate absolutist terms with an imperial tone. No such terms are imposed on Canada in its trade pact with the EU, and for obvious reasons: Canada is an independent state.

I doubt he will succeed in trying to chastise Britain since he also wants an unbreakable “Franco-German position” on Article 50 talks, and Germany has different interests. The old Rhineland axis was in any case rendered obsolete by the fall of the Berlin Wall. Any attempt to reconstitute it will merely underscore France’s painfully subordinate role in what has become (to the dismay of the German people) a German Europe. Better for France to hang on to the tight Franco-British defence and security pact for a little strategic ballast.

With or without Brexit, the EU has to keep living with the error of monetary union, so destructive that one leading voice of the French establishment has written a book, La Fin du Rêve Européen, calling for the euro to be broken up in order to save what remains of the European project.

The eurozone is horribly split into the creditor and debtors blocs, each with clashing macro-economic interests, and each clinging to their own narrative of what happened in the debt crisis. Quantitative easing by the European Central Bank and a cyclical economic upturn have masked the tension over the past two years, but the underlying North-South rift is still there.

The ECB will have to taper and ultimately end its bond purchases as global reflation builds. The markets know that once Frankfurt rolls back emergency stimulus, as it must do to avert a political storm in Germany over rising prices, Italy, Portugal, and Spain will lose a buyer-of-last-resort for their debt.

The core problem remains: the conflicting needs of Germany and the South cannot be reconciled within EMU. The gap in competitiveness and debt burdens is too great. They should not be sharing a currency union at all.

As matters now stand, Italy’s anti-EU Five Star movement leads the polls by a six-point margin with 32pc of the vote. The four anti-euro parties are likely to win over 50pc of the seats between them in the Italian parliament in the elections early next year.

David Fuller's view

This is one of the most realistic and comprehensive assessments of the European Union’s political situation that we are likely to see, in my opinion.  Moreover, it is discussed in the context of the Western world. 

What is not mentioned in this fine article above, is the credit which the European Union has been generously given by other commentators, not least from across the Atlantic, for maintaining post WWII peace throughout much of Europe. 

I will quibble with this because the EU was not actually created before 1993, following the Maastricht Treaty, otherwise known as the Treaty on the European Union.  Considerably earlier, The European Economic Community (EEC) was created in 1957.  It was more familiarly known as the Common Market and also the European Free Trade Association (EFTA).

Peace within Europe or any other global region, I suggest, is more likely maintained by independent, democratic governments with successful economies.  This is what the European Common Market / EEC / EFTA, actually achieved, to their considerable credit. 

Sadly, the Maastricht Treaty’s creation of the EU in 1993 marked the beginning of the end for Continental Europe’s self-governing and mostly economically successful countries, which were being homogenised in what became the biggest bureaucracy ever created. 

The introduction of the Euro in 1999, purely for political reasons, has been nothing short of a tragedy in term of declining economic performance and rising unemployment.  Moreover, this failing system has become fractious, not only among European countries but also within individual nations, leading to populist uprisings.

What about Europe’s financial markets?

We frequently hear that EU share valuations are very attractive, not least relative to the USA.  That is somewhat true, not least for European banks but they are generally more risky, having been much slower in dealing with bad debts.  Germany is by far the safest EU market in my opinion.  Nevertheless, looking at indices, the German DAX Index (p/e 20.14 & yield 2.53%), according to Bloomberg, consists of 30 blue-chip stocks.  While the US DJIA Average (p/e 19.05 & yield 2.36%), also of 30 blue-chip shares, is slightly cheaper.  Of course, analysts have more specialised measures for valuations, and p/e ratios and yields are only a rough guide.   Automobile firms are similar.  I hold some BMW est (p/e 8.36 & yield 4.13%), which is slightly more expensive than General Motors (est p/e 5.91 & yield 4.27%).

As a top-down analyst, I would rather look at 10-year price charts.  You would expect me to say that and I am certainly interested in relative strength, particularly following a significant global selloff.  I would also look at governance, starting with a country’s president or the equivalent title. 

Trump remains a wild card, although his tax, infrastructure and also capital repatriation incentives are appealing, assuming he can bring them to fruition.  Meanwhile, those have already been at least partially discounted.  For national governance, I think India’s Narendra Modi is the best since Singapore’s Lee Kuan Yew, and clearly less authoritarian.  

Continuing with the top-down approach on governance, next look at companies which are still run by their founders, particularly in the dynamic tech industry.

We frequently hear that EU share valuations are very attractive, not least relative to the USA.  That is somewhat true, not least for European banks but they are generally more risky, having been much slower in dealing with bad debts.  Germany is by far the safest EU market in my opinion.  Nevertheless, looking at indices, the German DAX Index (p/e 20.14 & yield 2.53%), according to Bloomberg, consists of 30 blue-chip stocks.  While the US DJIA Average (p/e 19.05 & yield 2.36%), also of 30 blue-chip shares, is slightly cheaper.  Of course, analysts have more specialised measures for valuations, and p/e ratios and yields are only a rough guide.   Automobile firms are similar.  I hold some BMW est (p/e 8.36 & yield 4.13%), which is slightly more expensive than General Motors (est p/e 5.91 & yield 4.27%).

As a top-down analyst, I would rather look at 10-year price charts or longer.  You would expect me to say that and I am certainly interested in relative strength, particularly following a significant global selloff.  I would also look at governance, starting with a country’s president or the equivalent title. 

Trump remains a wild card, although his tax, infrastructure and also capital repatriation incentives are appealing, assuming he can bring them to fruition.  Meanwhile, those have already been at least partially discounted.  For national governance, I think India’s Narendra Modi is the best since Singapore’s Lee Kuan Yew, and clearly less authoritarian.  

Continuing with the top-down approach on governance, next look at companies which are still run by their founders, particularly in the dynamic tech industry.  Changes in CEO's and other corporate officials every few years are often a sign of  trouble.

Here is a PDF of AEP’s article.