Our relationship with Europe is like Dubrovnik’s with the Turks.

To stroll around the old walled city of Dubrovnik on the Croatian coast is to savour one of Europe’s gems. Now part of the unsophisticated (although rapidly recovering) Croatian economy, everything in this city suggests that in the Middle Ages this place was coining in it.

From its marble streets to the immense baroque cathedral, the heavily fortified harbour and the oldest pharmacy in the world, ancient Dubrovnik exudes affluence.

Moreover, with the world’s oldest orphanage (founded in the 14th century) and one of Europe’s oldest synagogues, it’s clear these people were both enlightened and tolerant. So where did the cash come from? Why did it dry up? And where is the modern-day equivalent of old Dubrovnik?

The Dubrovnik Republic was one of a number of very powerful city-states that emerged in the Middle Ages of which Venice was the most powerful and influential. When the rest of the bigger powers were wasting money and talent fighting wars, a few smart, small, nimble states saw that there was a serious and profitable niche in the world’s trading system.

As long as a city-state juggled its allegiances and avoided any military showdowns with the big boys, it could trade and export its way to prosperity.

The elders of Dubrovnik realised that the city was poised delicately, occupying a crucial strategic point in the Adriatic, half way between the expanding Ottoman Empire to the southeast and the rapidly developing Renaissance markets of Italy, France and Flanders in the northwest. Instead of involving themselves in wars, military alliances and territorial adventures, they set about building up the finest merchant navy in the Adriatic and honing their diplomatic skills to avoid conflict.

Trading with Renaissance Europe in lead and silver from Turkish-occupied Serbia and Bosnia (the silver mines still exist in Kosova today) and silks and spices from the Levant, generated Dubrovnik’s immense wealth.

Indeed, the Republic’s most famous son, Marco Polo (born on the nearby island of Korcula), epitomised the swashbuckling, capitalist adventurers of the time.

Working on the principle that flattery gets you everywhere, Dubrovnik managed to keep the Turks sweet by offering annual donations of gold and silver to the local Muslim Pasha in Bosnia.

This allowed the city to remain Catholic, which ensured brownie points with the rich Papal states of Italy and France.

Indeed, Dubrovnik was the only Catholic city in Europe given a Papal dispensation to trade openly with the infidel Turks.

In the first example of a national branding campaign Dubrovnik had, by the early 17th century, opened trade consulates in 80 cities from Alexandria to Marseilles. This golden era of peace and prosperity allowed the city to grow and the aristocracy to indulge in its passion for fine art and architecture.

At the same time, the Republic remained tolerant and open to minorities, attracting talent that was fleeing prejudice elsewhere and thus reinforcing Dubrovnik’s competitive advantage in human capital.

Its golden age faded when Dutch, and later British, fleets began to dominate global trading and the Atlantic, Pacific and Indian oceans usurped the Mediterranean as the key global trading route. Gradually but definitively, the era of the powerful, enlightened city-state passed and was replaced by the hegemony of large, “might is right” regimes that saw geographical size as an essential prerequisite for economic wealth.

Dubrovnik became a type of trophy prize fought over by Napoleon, then Austrians, later Italians and Germans and, most recently, Serbs.

In the past 10 years a kind of city-state has re-emerged. Following a 200-year absence, the city-state or rather the small, agile state is again a dynamic and powerful source of economic wealth creation.

Around the world small countries such as Ireland, Finland, Israel, Singapore and Hong Kong are thriving, while large lugubrious countries such as Germany, France, Russia, Ukraine and Brazil appear to be faltering.

The small countries are using the Dubrovnik approach. They are trading as much as they can, making themselves available to investment and trying, where possible, to produce goods of high value that are more the product of inspiration than perspiration.

Granted, the US — a large country by any standards — is still top dog. But its very domination allows the smaller countries to thrive, free of security and other geo-political fears. Size of army, abundance of raw materials or depth of population doesn’t matter so much. In short, the world is facilitating the re-emergence of something akin to the Renaissance city-states.

Politically, all are extremely nimble. As halfway houses they have learned the art of diplomacy well.

Hong Kong manages to be China without communism and has a currency tied to the US dollar.

Singapore is a business-friendly base in Asia free of the regional irrationality of Malaysia or Indonesia.

Israel, economically at least, is a little high-tech piece of the US in the Middle East and Finland has managed to keep its close ties with Russia while remaining absolutely neutral and becoming a founder member of EMU.

Ireland is particularly like ancient Dubrovnik.

Our relationship with Europe is like Dubrovnik’s with the Turks. We have got into bed with the EU, tying ourselves politically to Brussels’ orbit while not merely retaining but actively encouraging a rather promiscuous economic relationship with the US.

As a consequence, our economy is now definitely more Stanford than Stuttgart.

Like ancient Dubrovnik which had to keep the Pope on-side to trade with the Turks, we have played a smart game by smelling, feeling and sounding American (to corporate America) but making sure that everyone else, particularly the Brussels mandarin clique, believes we are fully European.

As long as free trade, free capital movements and falling communications costs are the status quo, Ireland — like the other strategically placed small or city-states — can thrive.

However, the city-states’ position is always a bit precarious. The reason is `geological’. Ireland should be regarded as living on the economic equivalent of the San Andreas Fault. When the huge continental plates of the US and Europe move in opposite directions, we find ourselves in an uncomfortable position.

Today, such a `tectonic shift’ is occurring with the euro going one way and the dollar and oil prices going the other.

Our delicate balancing act between being politically European and economically American looks momentarily inconsistent.

This is not the end of the world. Old Dubrovnik experienced similar problems. Periodically it had cyclical booms followed by downturns, largely driven by forces beyond its control. The key is not to get neurotic about it.

So when the likes of Wim Duisenburg comes here wagging the finger, we shouldn’t get up on our high-horse, rudely yelling he doesn’t understand us. Rather, we should regard him as the ancient Dubrovnikers regarded the Turkish Pasha.

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