The global market meltdown has continued overnight, as sharp falls in Asian market prepared the way for three to four percent declines in Europe. The euro has fallen well below what as recently as a week ago looked like firm level of support at $1.35.
The political and economic incompetence of Europe’s leadership is the chief culprit. One has to look back to the 1930s to find such a sustained period of muddled thinking and dithering in the face of oncoming catastrophe.
Today’s most disturbing news is that the Greek bailout is falling apart faster than Europe’s leaders can cover the cracks with duct tape. The news reported here on Sunday that Greece will miss its deficit targets for this year and next — and that the new, higher deficit numbers are still based on revenue assumptions that look optimistic — forced the eurozone finance ministers into yet another eurofudge yesterday. They are cooking up some kind of blended, average deficit reduction goal so that Greece’s projected larger deficits can still, if you squint, be squared with the program.
But at the same time, the deterioration of Greece’s position has already made the bailout’s discussion of 21 percent haircuts for bondholders irrelevant; the numbers now being kicked around call for a 50 percent cut in the value of Greek debt.
In other words, the key assumptions of the second bailout (the first fell apart months ago) are already shown to be false before the bailout is even completed. The third bailout must now be cobbled together somehow while European parliaments are still debating about implementing the second.
And the European stability fund, the €440 billion superfund that was supposed to solve the euro problem, is already seen as completely inadequate and people are scrounging around for ways to double or triple it.
The underlying conditions continue to worsen — in Greece and elsewhere. In Greece, it is clear that the population will not accept much more of this belt tightening. More of the Nordic countries are preparing to refuse further infusions of cash into what is an obviously flawed bailout strategy. The plan to “leverage” the European stability fund by turning a bailout fund into a kind of bond-flotation agency is bogging down in red tape and political resistance. The major European banks, led by the Francophone world, are experiencing funding problems and are relying more and more heavily on the European Central Bank to keep them liquid day by day. The nonstop torrent of bad news and the stench of institutional and leadership failure hanging over the whole dismal mess is having its effect on business and consumer confidence in Europe and abroad.
Every major international institution is writing down its growth forecasts. The IMF has issued dire warnings about Europe’s banks — even as the continent has yet to come up with credible stress tests.
Many observers note that while Greece is the eurozone’s worst performer, it is also a relatively small problem. Its GDP is small and the size of its debts, measured against the size of the eurozone, is small and manageable. But Europe has been unable to face the Greek problem honestly, much less address it effectively.
In a sense that has been true ever since Greece made its fraudulent application to join the euro, relying on deliberately cooked books and falsified information. Even after the fraud became clear, a paralyzed Europe lacked the will and the capacity to take decisive action.
Just one small but telling point: what European institution is pursuing criminal investigations against those who committed deliberate and intentional fraud? Where are the high profile investigations looking into the lax review of the application? What civil servants have had their careers ruined because of their gross neglect of duty? What political leaders have been pilloried for ordering civil servants to ignore the warning signs?
The best thing Europe could do for itself right now would be to jail a few Greek politicians and civil servants for euro-fraud and to fire the euro-hacks who failed to detect it. This would make it much easier to bail out the rest of the Greeks, and offer some assurance to taxpayers around the EU that the authorities were, finally, serious about actually running the union with some basic degree of seriousness and competence. They aren’t serious, of course, and even the most basic administration of justice is beyond the capacity of Europe’s weak political leaders and sluggish institutions.
Perhaps because the teachers (masters, we used to call them in those faraway days) at Pundit High spent so much time drilling the ancient stories and languages into our heads, I cannot help but compare what we see in Europe today to what happened in Troy something like three thousand years ago. The wily Ulysses persuaded the Greeks to build a giant horse and hide inside it; the Trojan leaders, blinded by gods who willed the city’s destruction, accepted the gift and joyfully hauled it inside their walled town. Late at night the Greeks emerged and set about the sack and the ruin of Troy; confused and disoriented, the town’s defenders could not comprehend what was happening or organize to defend themselves, and a handful of Greeks destroyed the city as the helpless Trojans milled fecklessly around, screaming in panic as their temples and homes came crashing down.
Greece has been a Trojan Horse in the European Union. It not only has brought the eurozone to a point of unimaginable crisis; its hostility to Turkish membership, and its insistence that the EU bring in the Greek Cypriots before forcing them to resolve their dispute with the Turkish Cypriots, paralyzed the EU when it came to Mediterranean policy.
But while the Greeks have been a problem, they are not the root of the problem. The deep problem in the EU is that while its core vision of international solidarity and common purpose is an inspiring and a noble one, a number of its member states continue to apply the selfish and destructive logic of traditional European power politics inside the Union. Greece’s policy of systematic lying and cheating carried out under both parties for many years, and combined with a single minded focus on using all of its resources inside the Union on a few critical and selfish national objectives, is one example, but it is not the only offender.
France is perhaps the most consistently selfish and Machiavellian European power. From the beginning the French elite has seen its participation in the EU as an instrument of national power rather than as a way to transcend power-political games. In the beginning the French saw the construction of a united Europe as a way to build a special relationship with West Germany that would make France the senior partner. Over time that strategy evolved as the French had to reconcile themselves first to German equality and then to German superiority; nevertheless the French have never stopped thinking of their participation in Europe as a way to maximize French power. They are still hoping today that having extracted the commitment to a common currency at the time of German unification, they can wrest control of the common currency out of Germany’s hands by empowering European political entities (not a technocratic, inflation-obsessed central bank in Germany’s image) to oversee the economic and political guidance of the eurozone and its money. They are hoping to use Europe as a way to force Germany to manage itself in ways more congenial to French power and interests.
But if the French are among the most egotistical players in the European game, they are so often so good at what they do that their egotism has often strengthened rather than weakened the Union. They have been extremely clever at finding solutions that secure important French goals that also advance what at least looks like a community agenda; French political deftness has helped the Union thrive despite the very un-European motives the French often bring to their policy making.
Via Meadia has no essential quarrel with this. One of the most important skills of the diplomat is the ability to build bridges between your interests and the interests of the other parties at the table. That the French have for so long managed to pursue their unbridled national self interest while advancing the construction of the European Union testifies to their intelligence and political skill — and illustrates the power and validity of the idea of European union rather than undermining it.
But the French are much better at politics than at economics. The creativity and intelligence that goes into French diplomacy can turn into a preference for tricks and illusions at the economic level. The small and tightly knit French business and political elite (unlike the US which is a bit more loosely and unpredictably organized, France actually is a Chomskyan state in which a corporate-government alliance drives major decisions) may no longer be able to accommodate the cultural and social preferences of the French population to the demands of capitalist competition at the top levels of the global economy.
Historically, France has been on the cusp between the less dynamic, inflation prone and slow growing Latin, southern European economies (Italy, Portugal, Spain) and the more bustling capitalist dynamos of the north. We see that pattern today; France is either the most successful Latin country in Europe or the least successful northern one. As a political vocation, bridging that gap makes sense for France and would be a constructive and even necessary element in building a deep and lasting European Union.
Unfortunately that gap may be unbridgeable. The French have blocked all real stress tests, so there is no real way to know, but investors seem to doubt the stability and even the survival of the French banking system as we know it. Banks in France (as in China) are often less driven by commercial than by national purposes; if the French banking system is in trouble, the peculiar structure of the French corporate system is also fundamentally at risk. The intricate and delicate balancing act that keeps French business innovative and competitive while satisfying the public’s demand for a comfortable welfare state and preserving French control over key companies may not be tenable if France is locked into a Teutonic-style monetary union. In the past France has resolved many of its economic stresses through cycles of inflation and rigor; it probably “needs” a big bout of inflation now, but is locked into a Bundesbank-style inflation corset.
But French egotism, frustrating as this often is for its partners, is an intelligent egotism which seeks to build rather than simply seeking to defend. Greece is another story; so, unfortunately may be Italy in the next phase of the crisis.
Greece has been playing hardball to an extent not fully appreciated in a lot of the press coverage. Greek authorities know very well that a Greek collapse will be very expensive for their partners; they have used that knowledge repeatedly to avoid complying with the most painful demands made of them. They are playing — perhaps they have to play — a dangerous game of brinkmanship as they dance on the edge of a sword between the demands of their creditors and the demands of Greek society and Greek business.
Italy has a much stronger hand, and is likely to play it even more aggressively. Italy understands very well that an Italian collapse would mean a European and even a global collapse. Italy has absolutely no intention of being the global patsy and allowing itself to be unduly “punished” and “disciplined” by European or global financial authorities. It will use the leverage of collapse to force massive concessions and bailouts on a scale undreamed of by Greece. It will violate every agreement it makes; it will intrigue and divide; it will use every trick of every Renaissance pope and prince to cut the best possible deal for itself.
The deeply cynical attitude which most Italians have toward their own state (which they assume to be corrupt, incompetent, avaricious and only to be obeyed as a last resort) will reappear when the demands of foreign creditors and international institutions become too onerous. Cynical and worldly Italians will not see any reason why Italian interests should be sacrificed to protect German ones; they will not feel intimidated or abashed when Danes, Germans and Finns lecture them with Protestant earnestness and Nordic rigidity.
They will smile with that uniquely charming ease and poise, and slip the knife between your ribs in the friendliest possible way.
For most of Europe’s postwar history, Germany was both willing and able to put up with this. Like Thidwick, the big-hearted moose in the Dr. Seuss story, Germany was content to carry an ever larger number of ever more demanding partners — even as the zoo in its antlers started to make more onerous demands. But there are signs that Germans are less patient; that more and more Germans are asking why Germany should be the only European country genuinely interested in sacrificing its interests for the common good.
During the years of what Germans now call the “Bonn Republic” (the time when Bonn was the capital of West Germany and Berlin was a divided city), there was an obvious answer to that question. For Germany, given its history and geography, the common good of Europe was its national interest. Keeping western Europe together and strong during the Cold War would make Germany’s economy grow, prevent the Soviets from expanding and endangering West Germany, and prevent new tensions in Europe when these had been so disastrous for Germany in the past.
That memory is fading now and the European situation has changed. Germany still wants and needs good relations with France, but Germany’s long term economic and security interests may be more east-west than north-south these days. Subsidizing Italy, Portugal, Greece and Spain long term may not make much sense for a country working to integrate Hungary, Poland, the Czech Republic and other, closer neighbors into a dynamic new economic zone.
The price of north-south European integration is becoming stratospheric just as German interest in the Mediterranean is sinking — and German confidence in the ability of the Berlin Republic to pursue its own foreign policy is rising.
The European Union these days looks a lot like Troy, but it isn’t just Greeks hiding in that wooden horse. The French, the Italians and the Germans are in there too. Europe is composed of many separate peoples who have quite different histories, cultures and interests. They share a certain vague but real European identity, and they have a lot of interests in common.
So far, their behavior in this crisis suggests that when the chips are down, most Europeans are still more nationalist than European. Like the French, they see Europe as a means to national ends, rather than as an end in itself.
We will see in the great crisis now unfolding whether the Germans still agree with former Chancellor Helmut Kohl who saw the euro as leading to “a European Germany rather than a German Europe.” So far, German policy in this crisis looks aimed at making Europe more German rather than the other way round, but it is still too soon to be sure.