Friday, May 25, 2012

Solutions and Distractions in Europe

In the last article I outlined the four big challenges for Europe – economics, demography, energy and leadership. Now we will look at the future. What is likely to happen?

Two strategies were outlined at the end of the last article – closer political integration or a return to nationalism within a market based union, the place where the Common Market began in the 1950’s.  But before either of these things happens, there will be distractions.

The first will be the failure of austerity, the exit of Greece from the Eurozone and the subsequent Eurogedden which will follow.  The exit of Greece is now inevitable. It is not possible to imagine Greece meeting its austerity obligations for additional funds from the European Stability Fund and the IMF. It will default. The question is when. When it does, it will leave the Euro, despite the pleas of the G8 leaders to stay in. It will be better for Greece is the medium and long term to be out than in. But the short term will be very painful. The Drachma 2.0 will be almost worthless at inception and Greeks will find their economy very troubled – much more so than now. But the great “reset” provides an opportunity for the rethinking of Greece as a nation and the rebirth of national pride and strategy. If they follow the roadmap available from Iceland and Argentina, both of which recovered from similar positions, they will have a modest chance of recovery.

The second will be the ripple effects of the Greek exit from the Euro, especially for Portugal, Spain, Italy, France and Ireland. All of these countries will find themselves under fresh pressure to pursue austerity and fiscal discipline while at the same time seeking to protect their vulnerable banks and financial institutions. Some will not make it. Hollande’s decisions concerning French strategy, especially with respect to publicly supported financial institutions (e.g. Caise Centrale du Credit Immobiliser – the French equivalent of Freddie Mae and Freddie Mac). Hollande is likely to pursue what is becoming known as “inclusive capitalism” – seeking to use wealth creation as a means of producing greater equity in society – a kind of Nordic capitalism.

The third will be the need to balance fiscal responsibility with the push for growth. Britain in particular will find this challenging. Having pursued fiscal discipline for the last three years without the results showing the economic benefits intended, the UK Government will find it difficult to reinvest in public spending and innovation aimed at growth – its more than a change of rhetoric, it’s a U-Turn of significance. It will likely lead to the Conservatives losing the next election.

What is required throughout Europe to stimulate growth is a rise in inflation – letting costs and spending rise beyond the 2-3% level “permitted” under the policies being pursued by the central banks. This is in fact how Germany secured its own growth position and its trade imbalances (the real engine of the German economy).

Speaking of losing elections, this is the fourth distraction. Eleven Governments have fallen in the last three years, starting with the fall of Gordon Brown. Chancellor Merkel, on current performance, could lose the next election in Germany. Her party performed poorly this month on regional elections and rising energy costs and the rising costs of “bailing out” Europe are causing real disquiet in Germany. Even if she wins, the new coalition she would have to form to govern is likely to have a different character from the current coalition.

The major distraction will be a straight “in or out” of the European Union referendum in Britain. This is now an inevitable election promise from both the Conservatives and the Labour Party, with Boris Johnson, Mayor of London, leading the call for “out”, thus cementing his bid for the leadership of the Conservative Party in 2016 or beyond. On current polling, the “No’s” would win, the case for “Yes” being made more and more difficult by the daily shifts in the economic performance of the EU and its leaders. Britain is not in the Eurozone and has a high degree of intolerance of the decisions imposed on it from Brussels and the European Court. The sense of nationalism is rising in Britain and the next election will see a rise in votes for the candidates with a Eurosceptic position.

While these and other distractions are occurring, the officials of the EU will be working to secure closer financial and political integration – their only strategy. They will pursue this along the lines of strengthening the control of non-elected officials over the operation of elected Governments, of which they are increasingly skeptical. In this they will be supported by other non-elected organizations, like the IMF, the World Bank and the UN. This is part of a international push for global  governments which can act independently of democratic processes – the new technocracy. Europe has been rehearsing this for some time through the work of the Commission and the European Court. We can expect to see a great many of their proposals being endorsed by meetings of about to be unelected leaders who can see their own future in the making.

We can also expect a variety of moves to impose new controls over the social and economic policies of member Governments, specifically with respect to the harmonization of taxes and conditions of employment, energy and innovation investments. As the non-elected seeks to impose more central control over the operations of separate nation states, we can also expect tensions to rise within the EU over strategic direction.

This in turn will give strength to emerging nationalist sentiment across the EU, so we can expect to see real gains in votes for nationalist parties – something we have already seen in Finland, Sweden, Britain, Greece, Germany and France. It will be rough and tumble politics – rougher and more tumbles than we have seen for some time. At the heart of this will be questions of democracy, nationalism and the nature of capitalism.

For historians, they will see in these developments the return of many of the conditions that were precursors to the conflicts in Europe in the latter half of the nineteenth  century and the first half of the twentieth – inflation, economic uncertainty, nationalism, unelected officials dictating the fate of nations, treaties which impose austerity and produce unemployment and fear. It is explosive.

What we can hope for, but have no sign of, is visionary leadership – a group of leaders who can rally Europeans around a vision for the future which goes beyond the technocracy of public finances and speaks to a future which is aspirational, desirable and achievable, even if it involves pain. This vision has to be more than an economic vision – it has to speak to the idea of community, the person, compassion, equity, mindful employment, learning and innovation. It has to speak to a new renaissance.

In Europe – this series is being written from London, Paris, the Loire Valley and Budapest – people are anxious about their own future, the future of their families and community and the meaning of their lives. They are looking for someone who can give them hope and the images of a future beyond the “despair” of the present. No one right now is doing this with any conviction. A lot of what passes for visionary leadership is “mush” or “befuddled tosh”, as my London taxi driver told me. He also said of British Prime Minister David Cameron, who is a multi-millionaire married the daughter of a peer of the realm, “his connection to ordinary people is about the same as my cell phone’s connection in a dark tunnel ten miles long and six miles underground – non existent!”.

So, watch Europe carefully. It is in the in-between time between an old version of Europe as an effective market and leading group of nations who were expected to be a model for the twenty first century world to the new Europe. We don’t know what the new Europe will look like, but it will be an interesting period of finding out.

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