Europe: The Problem and the Prospects

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The flow of history sometimes looks so obvious in hindsight.

In 2004 the European Commission issued a formal warning to Greece, having found that it had falsified budget deficit data in advance of joining the Eurozone. That’s right, Greece had not just failed to meet the budget requirements for joining the new currency — lots of countries did that — but it had lied about it for the privilege of swapping drachmae for euros.

Over the next few years the Greek government's modest attempts to reform the coddled Greek labor market, particularly the obese public sector, met with massive protests, many of them violent.

In the late spring of 2009 I sat across from an old law school friend, drinking wine on the terrace of a Parisian bistro near the Bastille. It was a mild early evening with hours of sunlight left, yet as usual my friend was already in his cups. But then, this guy (call him “Jay”), was smarter drunk than I am sober.

As I drained my glass of Beaujolais Cru, just a few years after Greece had joined the Euro, the Greek debt crisis was in full cry. Bailout negotiations between the EU and Greece had begun. Jay is a prominent international finance lawyer, and he represented the EU on the legal side of the negotiations. So I ordered another drink and got an inside view of the proceedings.

Jay and I debated the virtues, vices, and prospects of a bailout. It was all very speculative and academic, reminding me of so many college rap sessions in which my friends and I handily remade the world to no good (or ill) effect. The curious difference here, decades later, was that Jay really was involved in remaking the world.

As an aside, think of Professor Obama noodling over, say, the constitutionality of a federal mandate that everyone buy health insurance, the kind of seemingly harmless brain game that is played all day, every day in our universities and law schools. Most of the highly accomplished students who, like Obama, attended the top schools become convinced that they know what’s good for you. And some of them attain the power to give it to you. A student’s collectivist or paternalist nonsense is harmless. But with the stroke of a pen wielded by the nerd who used to sit next to you in Social Studies, governments convulse huge sectors of the economy. The difference is that the harmless nerd, the student Obama, for example, has become the hand of power.

At that early stage of the Greek debt crisis (which became the Italian, Irish, and Portuguese debt crisis, which became the euro crisis, which became the Europe crisis, which is becoming the second dip of the Great Recession, and which may doom the European Union to diminishment or dissolution and trash the feeble recovery in the US), it was hard for me to see the historical context of the problem. Jay went straight to it, talking about the German fear of inflation and profligacy, at odds with the German fear of the consequences of a divided Europe.

With the stroke of a pen wielded by the nerd who used to sit next to you in Social Studies, governments convulse huge sectors of the economy.

I know this is remedial history, but just in case: Germany suffered three great traumas in the 20th century, and two great boons. The three traumas were the first war of Europe divided, WWI; the second war of Europe divided, WWII; and between them the hyperinflation of the Weimar Republic, which probably resulted in German National Socialism. The two boons were first, Germany’s long, vigorous period of growth and prosperity, which persisted and accelerated in conjunction with the economic, monetary, and political integration of Europe; and second, German reunification, which came with the collapse of Soviet communism.

France, the other dominant player in the current crisis, has learned much different lessons from history. Of course it fears Germany as Germany fears itself, but it trusts government in a way that Germany does not. The French ruling class favors European unity, not just because it wants to restrain Germany but also because it thinks it can harness the Germans. This has made France the serial instigator of Euro-government activism.

At the center of France’s vision of European peace and unity is an organ grinder with an elephant instead of a monkey, but the elephant does not collect peanuts and coins; it distributes them. France is the organ grinder. Germany is the elephant. The rest of Europe stands around applauding, and collecting peanuts and coins.

Later in 2009, Greece lost its credit rating. Much bad news, “reforms,” and bailouts followed in a parade of horrors that continues now more than 2.5 years later, like shit hitting a fan in super slow motion. Greece, the EU, France, and Germany made and broke a series of promises about Greek debt. Greece was solvent. There would be no second (or third) bailout. Greece would never default. Greece would reform. Etc.

More of the same, until something really breaks, is a good prediction. Sarkozy the organ grinder will play furiously. Like an Indian mahout, he will even bring out the “ankus,” the goad. At the sharp end of the ankus are reminders of Germany’s behavior in World War II. The elephant will give out more coins and peanuts in greater quantities but with greater reluctance, and greater resentment for the crowd of client states that surround the center of Europe. In exchange, the crowd, and even France, will give up freedom, sovereignty, and independence. France does not like loss of sovereignty but believes it will always call the tune. The UK will congratulate itself for staying out of the euro and will refuse to sacrifice its own sovereignty to save the newish currency.

By helping us see how people in nation states see themselves, history helps us guess what they will do. But it does not tell us the results of their choices, which they themselves always fail to predict. After all, none of the EU, France, Germany, or Greece intended the Greek crisis or predicted it early enough to do anything to avoid it. How did that happen?

Descriptions of economic crises past reveal the historian’s perspective, bias, and even philosophy. The Great Depression makes a good example, over which commentators continue to fight. Was it caused or worsened by too much trade protection, too little Keynesian stimulus, a shrinking money supply, the bursting of the credit bubble that preceded it?

Soon there will be as many descriptions of the euro crisis.

I see that crisis and America’s subprime mortgage debacle as symptoms of the same contradiction, one that has strained most of the developed economies for decades and seems to be reaching some kind of limit now. The contradiction is between the love of state largesse and the limits of governments’ ability to raise revenue. That is not a very original observation, but in diverse countries and regions, the fallout from this strain takes surprisingly diverse and original forms.

The form of the fallout seems to depend on the particular weaknesses of a country’s institutions. In Greece, they overborrowed, overspent, cheated, lied to their creditors, and chronically failed to collect taxes due. In Germany they turned a blind eye, because European profligacy spurred Germany’s exports, and exporters had the ear of the German government.

More of the same, until something really breaks, is a good prediction.

In the United States we accepted war as an excuse for big deficits, and when the electorate showed resistance to faster growth of the welfare state, Congress contrived to finance it “off balance sheet” through Freddie Mac and Fannie Mae. And now the Great Recession gives us a reason to bail out financial institutions and automobile manufacturers and to print money (“monetary easing”).

In all these cases, the severity of the crises will partly depend on how and how thoroughly a state and its people fool themselves. The exact nature and severity of the crises are hard to predict. There may be cause for real fear.

I am afraid. For the first time in years, I feel financially insecure. I thought that, through work, good fortune, and saving, I had acquired financial security. Now I don’t know. Will quantitative easing cause high inflation? Will the markets where I store my wealth behave bearishly for long enough to beggar me before I die? Will the European crisis grow so deep and severe as to badly infect the world economy? Is Greece in effect a domino? I don’t know, but it’s falling. There will be no soft landing.




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Comments

Dennis

What wonderful prose!!!

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