Thursday, April 29, 2010

The Rape of Europa; or Greece and Germany, You Disappoint Me

Last night in my Balkans class I brought up Greece, which has by now rejoined Europe’s messiest region (not including the Caucasus). Asked by the professor what I thought about the debt crisis, I said that given what we had seen in the last three days (the sharp rise in debt yields for Greece, Portugal and Spain and debt downgrades for those countries), the euro was finished. That’s a bit hyperbolic, as I tend to be, especially when I talk rather than write. But the problem is huge and I do believe the European Union as we know it is on the brink and we are likelier than not to see some major changes.

There is plenty of blame to go around. True fiscal federalism and a United States of Europe are not what the citizens of the European Union want, so there are political limits to the centralization of fiscal decision-making, which would the best way to ensure a stable common European currency. I do not support the argument of those who wrote ten years ago that the euro was doomed and who are now eagerly writing columns to prove that they were right. The euro was a much greater success than anyone anticipated for a full decade. There were two large policy problems beyond the inevitable and insurmountable economic asymmetries which have led to the problems of Spain, for example, which experienced a construction boom and built up external private sector debts and cannot devalue its currency in the crisis because it is on the euro. The first was that the rules of the Stability and Growth Pact limiting debt to 60% of GDP and deficits to 3% of GDP, which Germany insisted was necessary, were not followed, by the Germans and the French among others, well before the crisis of 2008 and onwards, which has required flexibility. Across the eurozone, the rules to limit vulnerabilities were flouted in normal economic times. Secondly, Greece lied about its numbers to get into the eurozone and continued to lie about its numbers until autumn 2009.

I believe the Greek crisis might still have been solved by a skillful response to the crisis by the European Union and the International Monetary Fund. But this did not happen. Nicolos Sarkozy wanted to keep the IMF out, partly because he is worried that Dominique Strauss-Kahn could be his opponent in the next presidential election. Germany wisely insisted on IMF participation. But Angela Merkel’s government has wavered so much on allowing the EU to do its part in rescuing Greece that the uncertainty in the markets has made the necessary rescue package larger than it had to be and less likely to succeed in helping Greece avoid default. As of a few days ago, I am 99% sure Greece will default. Why has Merkel allowed this to happen? Because rescuing the Greeks is enormously unpopular with the German public, and there is an election May 9 in Germany’s biggest region, Nordrhein-Westfalen (which includes Cologne, Dortmund, Essen, Düsseldorf, and a quarter of Germany’s citizens, actually a larger population than that of Greece). If Merkel’s Christian Democrats lose the region to the Social Democrats, they lose control of the upper house of the German parliament, they will have trouble getting their agenda enacted, and early federal elections could result. So Merkel can make an argument that she is acting in the wishes of her countrymen and bowing to political realities. But she is also sacrificing the interests of the entire European Union over the region of Nordrhein-Westfalen. Small-minded priorities are not new in Europe – Greece’s objection to Macedonia’s name is a perfect example – but Merkel is the most powerful woman or man in Europe, she knows it, and she should act accordingly.

The stakes are quite high. Contagion could result in multiple sovereign defaults. If only Greece defaults, the eurozone should be able to survive. If Spain goes down, it’s hard to predict what happens. Reintroducing the old currencies would be tremendously damaging to the peripheral economies. But if Spain defaults, we really would be in a “moment of extraordinary politics,” to use Leszek Balcerowicz’s phrase. What I anticipate is that a two-speed Europe would then become inevitable. A German-led core of the strongest economies, looking much like the original European Community of six nations (Bundesrepublik Deutschland, France, the Netherlands, Belgium, Luxembourg and Italy) plus a few like Austria and/or minus Italy, would have the euro, more fiscal federalism, and perhaps a more unified foreign policy. A ring of European states would be affiliated more loosely, naturally led by Great Britain, but including Greece, much of Eastern Europe and sooner or later possibly Spain, Portugal, and Ireland if they did not manage to or did not want to stay in the core, possibly Turkey (the lower-speed of a two-speed European Union is the only way Turkey would ever gain entry) and perhaps Norway, Iceland and Switzerland. It is hard to work out exactly what the looser group would share with the core Europe or how many of the EU-27 would choose or be forced into it. Perhaps there would be three “concentric circles” rather than two. But a Spanish default would change the European Union significantly.

One thing is certain even if Greece dodges default – Germany and the other members of the eurozone are going to be very wary of letting additional members into the common currency area from now on, although according to the accession treaties Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, Slovenia and Sweden are all obligated to join the euro eventually (only Denmark and the United Kingdom are excepted). For Latvia in particular, a country which has suffered an internal devaluation as its leaders have clung to a tight currency peg to the euro and an as-soon-as-possible euro accession strategy like a raft in the storm of a crash which has cut the value of the economy by 20%, changing rules would be extremely cruel. The crisis in the eurozone and the European Union could also delay the EU membership of Croatia, which is already ready already, and countries like Montenegro and Macedonia which for various reasons it would be better to bring in sooner rather than later (while it is tempting to use the crisis to force Greece to abandon its childlike position on Macedonia’s name, this is probably not possible because the country’s leaders are expending so much political capital on austerity measures).

Germany’s inward focus on this crisis only exemplifies what has become a problem for the European project in recent years. Leadership by the big three countries is necessary in enacting changes in the structure and size of the European Union. Britain is perpetually wary of Europe. A referendum on EU membership (actually promised by the pro-European Nick Clegg, who unfortunately doesn’t have a chance of becoming First Lord of the Treasury even if the Liberal Democrats win the most votes May 6, rather than by David Cameron, leader of the Euroskeptic Tories) would likely lead to withdrawal from the Union. Britain has however been a force for widening the union, while fighting against deepening. (This eurozone crisis, by the way, has for the first time convinced me that Britain’s hesitancy to join the euro might not be stupid). The elite of France are quite committed to the European project and deepening the Union and playing an important role in the world, even if the French people themselves are more skeptical. However, France worries that enlargement of the EU dilutes its voice and thus only went along with the 2004 big bang enlargement to the east and strongly opposes Turkish membership. Germany is the most important country in Europe because of its size and economy, and it is the key swing vote between Britain’s widening strategy and France’s deepening; having ambitiously pushed for both widening and deepening in the past, under Gerhard Schröder and Joschka Fischer’s Social Democratic-Green government, it has turned against both under Chancellor Merkel, particularly in her second term with the FDP as her partners instead of the Social Democrats. Only Croatia has a good shot at getting into the EU in the next five years because of its Habsburg history and the fact that Germans like Adriatic beaches. Merkel’s hesitancy to help Greece has only exposed the fact that her pro-European image has been declining since her reelection.

Which brings us back to Greece. Italy is often seen as a joke because of its unfunny clown of a prime minister and its inability to consistently match its economic and demographic weight in Europe with equivalent political weight. But Italy is actually less likely to default than other countries in Europe’s periphery due to high private saving and it actually made some heroic economic adjustments to prepare itself for eurozone membership in the 1990s, even if it has not sufficiently dealt with its large debt (117% of GDP). Greece does a much worse job fitting in with its European partners. Greece has not sufficiently reformed its economy while lying about its numbers. Greece is a beautiful place with a nice culture, but it is not a Western European country and it was and is not prepared for membership in the eurozone. The modern country holds far more the legacy of the Byzantine and Ottoman Empires. Along with the Greek Cypriots, the Greeks are Russia and Serbia’s best friends within the EU. Greece belongs in a wider conception of Europe that has room for less dynamic economies and Orthodox and Muslim cultures. The behavior and statements of continental Western European statesmen and stateswomen in recent years, from Sarkozy to Merkel to EU President Herman Van Rompuy, has called into question whether that is the Europe that Paris, Berlin and Brussels want. The question of European identity is one that will never be resolved, but the debate is one Europe needs to have. We have a fairly good idea of the dominant British and French viewpoints. The German one is less clear.

Greece gave birth to Europe with Periclean Athens in the 5th Century B.C., seen as a wonderful model by Brits, French and Germans in the 18th and 19th Centuries. It now looks like Greece might well destroy Europe. By the way, does anyone know what image Greece chose to put on their two-euro coin when they dishonestly qualified for the euro back in 2001? The Rape of Europa.

Thursday, April 22, 2010


Before I was 18 (when I went to Bavaria and Austria for a week upon graduating from high school), I had spent all but a few hours of my life in the United States (those few hours were in August 1998 in Victoria, Canada, on a ferry day trip from Washington state's San Juan Islands, no passport necessary, the world had just learned the name of Osama bin Laden several days earlier after the embassy bombings in Africa and the US border control and customs officials were worried about two things - Cuban cigars and counterfeit Beanie Babies). I was no travel addict or international politics buff, and certainly was not obsessed with Europe yet. The countries I most wished to visit were probably Australia and New Zealand and Ecuador (Galapagos Islands) because of their cool animals and geology, but running closely behind them and in my mind perhaps the leading candidate for my next jaunt abroad was Iceland. WHFS 99.1 FM, my favorite radio station, was constantly playing ads for weekend getaways with an Icelandic airline which flew out of Dulles or BWI. This was the land of Vikings, hot springs, and a really cool music scene, home of alternative music's queen of strangeness, Björk. Reykjavík is fun to say.

A year after that first excursion into Europe, I spent the summer in Alaska, where I learned another Icelandic word: Jökulhlaup. This was the standard term for an ice-dam lake, a unique phenomenon whereby a stream runs into a glacier, can't move and so starts a lake at the side of the glacier, which every now and then had enough water to actually float the glacier an inch or two. This happens annually in McCarthy, Alaska. When it does, the dangerous, cold, fast river at the end of the glacier gets faster and more dangerous. Back when McCarthy and Kennecott were at the center of the world copper mining industry, they would have to rebuild the rail bridge annually because the jökulhlaup would take it out. For decades they just had a zipline over the river, five years before I went they installed a bicycle bridge with good concrete pillars, but you can still only drive to McCarthy in the winter when everything is frozen.

But I digress. Iceland has always seemed a cool, unique place to me, and I assume to many others. But to many Europeans since 2008, it has been a cursed source of evil. British and Dutch citizens and communities lost their savings when Iceland's ambitious banks, whose assets ultimately amounted to more than 10 times the island's GDP, went bust in the crisis. The national governments protected their citizens, but then expected Iceland to pay them back. The Icelandic people objected to this. The government of Geir Haarde (a SAIS alum) fell, a left-wing coalition emerged led by the world's first openly gay head of government, the very cool Jóhanna Sigurðardóttir, Iceland applied for European Union membership, then the basically ceremonial president jeopardized that possibility by exercising a veto for I think the second time in Icelandic history and putting the government's debt-repayment deal with the Brits and Dutch to referendum. It lost.

Now comes the volcano, the eruption of Eyjafjallajökull which grounded Europe by darkening the skies with ash, keeping thousands of travelers from their homes (I enjoyed Gideon Rachmann's piece about this), preventing Barack Obama, Angela Merkel, Nicolos Sarkozy and others from going to Lech Kaczynski's funeral, hurting the airlines, and frightening the ponies and puffins of southeastern Iceland. You've read about it since I'm a little late getting to writing this, so just enjoy these pictures from Foreign Policy and The Boston Globe. They're awesome!

I wonder if Thor is angry about the Brits using anti-terror legislation to freeze Icelandic accounts, or about the worldwide weak banking regulations which got us all into this disaster, which caused his people to suffer especially (although not as much as Latvians and some others). I'm hoping Björk does a concept album about it all. I've designed the cover for her already.