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FRANZ FERDINAND: HOW THE ASSASSINATION OF AN ARCHDUKE KILLED OFF THE 19th CENTURY Monthly Strategy Report August 2014 Alejandro Vidal Crespo Head of Market Strategy AW ARD BEST ASSET & WEALTH MANAGEMENT SPAIN 2013 OBAL BA N GL EV E R IEW NC NG & FINA KI S 1 Monthly Strategy Report August 2014 FRANZ FERDINAND: HOW THE ASSASSINATION OF AN ARCHDUKE KILLED OFF THE 19th CENTURY “The assassination of the heir to the throne of the Austro-Hungarian Empire, Archduke Franz Ferdinand of Austria, on 28 April 1914 in Sarajevo saw Austria declare war on Serbia, with a complex set of alliances that would lead to the outbreak of the First World War. Beyond the conflict, the consequences represented the end of the political configuration of the nineteenth century, redrawing the political maps and the power balances that would go on to dominate the twentieth century. Let us look at the background to and consequences of the Great War on this, its 100th anniversary” During the second half of the nineteenth century, Germany was emerging as a major world industrial and economic power. However, it had been excluded from the dividing up of the African continent which had largely been a British and French exercise. France had recently lost a war with Germany (the Franco-Prussian War of 1870), with the victors proclaiming the Second Reich at the Palace of de Versailles - a complete humiliation for the French - as well as annexing the Alsace-Lorraine region. And so, despite a series of skirmishes in Africa, France and Britain coincided in their view that the rapid rise of Germany represented a threat and so lead them to join in military alliance - the Entente Cordial - very much in the style of earlier centuries. In Eastern Europe, the swift break-up of the Ottoman Empire had led to the independence of the Balkan states - Romania, Bulgaria, Serbia, Greece, Montenegro and Albania. Confrontations between these nascent countries seeking to define their borders as well as being the objects of desire for the large empires that surrounded them: basically the Austro-Hungarian Empire to the north looking to gain territories in the Adriatic and the Black Sea, and the Russian Empire to the east with its traditional affinity toward Slavs and those of the Orthodox faith. In order to have Germany’s support to counterbalance the strength of Russia, the Austro-Hungarian and German Empires signed another alliance along with Italy, similarly interested in expanding territorially: the Triple Alliance. This forced Russia to join the Entente Cordial in order to avoid isolation in Europe, forming the so-called Triple Entente. Europe therefore was at peace, although with a sensation of imminent war: a period known as “Peace through strength”. As the situation grew more tense, the various powers became embroiled in an arms race, a process which sped up as war grew closer. All of which brings us to the moment at which the heir to the Austro-Hungarian throne, Franz Ferdinand, was assassinated in Sarajevo by a Serbian anarchist group known as the Black Hand. Austria demanded that Serbia intervene in the investigation into the crime and took punitive active against its security forces. On the latter’s failure to comply, Austria responded by declaring war on Serbia. Serbia, however, was very much within Russia’s sphere of influence and enjoyed its support. In order to counter this threat, Russia mobilised its armed forces, leading to Germany declaring war on Russia, and, as a result, France and Britain declaring war on Germany. The complex network of alliances and counter-alliances had resulted in war on a worldwide scale. And with it, the end of the 19th century. Beyond the conflict and its enormous cost in human lives, the First World War also resulted in sweeping changes to the established social and economic order in the early 20th century. Perhaps the clearest manifestation were the changes that took place in national borders, as the war saw the disappearance of four empires whose history dated back to medieval times: Austria-Hungary Monthly Strategy Report August 2014 completely broke up to form various countries (Austria, Hungary, Czechoslovakia), and Yugoslavia (consisting of Croats of Austrian descent, Bosnian Muslims and Serbian Slavs) was born. Russia underwent a revolution in 1917, leading to the advent of the communist era, a path followed by a number of independent republics. The Ottoman Empire fell, leaving the Middle East and Arabia under British and French control, while the German Empire was forced to give up numerous territories in Europe and the Pacific (which would be occupied by Japan and subsequently one of the settings for the Second World War), giving way to the Weimar Republic. European borders were completely redrawn. In political terms, the United States was the clear winner. The United Kingdom definitively lost its worldwide hegemony, its place taken by the U.S. which had also become the main creditor of the vanquishing powers. This was also a period in which the U.S. opened up in terms of its foreign policy, putting an end to the relative isolationism of the 19th century, when the priority was seen as consolidating its own integration and resolving its domestic conflicts. In Europe, the pressure brought to bear by the victorious powers on Germany in order that she might cover the cost of the conflict led to a catastrophic economic and social crisis there, with serious incidents such as the occupation of the mining region in the Ruhr valley, the basis for the subsequent rise of Nazism. In economic terms, the excessive need for credit in order to finance the fighting created a massive over-indebtedness in European economies, who had assumed that the conflict would be short-lived and that they would be compensated by their vanquished foes. However, the war dragged on and all sides found themselves in severe financial difficulty, both in terms of purchasing goods from a world at war (there were obviously economic blockades set up between the belligerents, further hindering the flow of capital) and in controlling inflation. This led to a modification to the gold standard, which had set the value of each currency against that of gold, making the metal the cornerstone of world trade. The new system was based on a more fiduciary approach to currency (the gold exchange standard, which also fell in 1944 in favour of the dollar standard) which gave individual countries greater control when setting its price, as gold reserves became more volatile, thereby benefiting neutral countries such as the U.S. until 1917 and Spain. The mass printing of currency and inflationary spirals also had a significant bearing on the Stock Market Crash of 1929, and especially on German hyper-inflation during the 1930s. As far as industry was concerned, the war represented effective state control of industrial machinery, with production and research now focusing on everything that was war-related. The steel, chemical, textile, automobile, naval and aviation industries all saw spectacular advances, as did anything else related to armaments, obviously enough. New techniques such as the standardisation of products, the application of more rational and scientific methods used to operate mass-production industries resulted in a real industrial revolution which would carry over into the years of greater economic tranquillity in the 1920s. In the social sphere, the mobilization of over 67 million soldiers left factories and farms with serious staff shortages, meaning they were forced to turn to the female workforce. This saw women enter many working environments in which they had previously been excluded, mainly in industry. This proved to be the basis for the women’s rights movements which was to win the vote and ensure that women enjoyed greater participation the society of the time. All of these developments represented profound social changes across the board, with the status quo that had existed for centuries drastically altered in little more than four years. Despite the fact that many of these changes can be seen as positive, the cost borne by Europeans was immense, not only in terms of the enormous casualties in the 1914-1918 war, but also due to the consequences that defeat of the Triple Alliance had on the outbreak of the Second World War and on later conflicts such as the Balkan Wars in the final decade of the 20th century.