Europe - Back to the Future

As we began the current century, Europe was destined for great things. Some even claimed that this was Europe’s century. Indeed so far it is, but not for the reasons that many were hoping for.

The dream of a United States of Europe is fading and in its place there is no Plan B. Instead, we watch the daily disintegration of a dream and the nightmare of a gradual economic meltdown which will impact every citizen, most directly those who use the Euro for their daily transactions. This economic meltdown is having substantial personal consequences for Europeans – high unemployment, significant personal insecurity, new taxation and challenges to a sense of identity – as well as communal impact, with large regions of Europe unable to manage their socio-economic future. For example, Catalonia, once the most prosperous region of Spain, is close to bankruptcy and is calling on the Spanish government for help. In turn, the Government of Spain has indicated that one more major bank failure or the failure of a regional government, such as Catalonia, will bankrupt the country. Spain will be the new Greece.

At the heart of the challenge for Europe is the idea of “the in between time” – the time between an old way of functioning as an entity and a new way.  The model of European union and fiscal union on which the Eurozone is built is dying and the new version of Europe has yet to emerge. All of the actions of the EU, the IMF and the European Central Bank are aimed at restoring the old in the face of the new. They are doomed to failure. (I describe this in between time more fully in my recent book Rethinking the Future – Six Patterns Shaping the New Renaissance – available from lulu.com and on Kindle.com).

Take, for example, the use of the “shock doctrine” in response to the situation in Greece. The doctrine, so well described by Naomi Klein, prescribes a simple solution to the economic challenge of Greece: let the market function and get out of the way. The idea here is that Government should be a small part of the nation, not the focus for its economy. Shrink government and eliminate all government debt, privatize anything that people want to own and reduce taxation and regulation (especially labour laws and workplace regulation) so that a free market can operate as near free as possible. This is basically the German response to the problem of Greece’s profligate government and the rationale for the IMF view that the people Greece needs to “grow up and pay their taxes, reduce their expectations of what government can provide and let the market function”.

There are three reasons this is going to fail. First, no one has “sold” the shock doctrine in terms of bringing the future to the present. Its all pain, no gain. The absence of visionary leadership both within Greece (as is clear from the fact that it has not been possible to form a Government either of a majority or of national unity) and from the EU means that the people of Greece have to place blind bets on the future with no one really having an adult, visionary conversation. The second reason is that there is not a country in which the pure form of the “shock doctrine” has worked over a medium to long period of time – Naomi Klein’s key point. The final nail in the coffin is that democracy prevails. What the people of Greece want is to get on with their lives with a sense of surety about their future. The shock doctrine applied to Greece will deny this to them for several decades – it will reduce the standard of living for the majority of Greeks by between one third and one half. In a democratic society, this is a recipe for instability and unrest, not to mention violence.

When Spain, Italy, Portugal and Ireland become Greece, as they surely will, what will the EU then be like?

It cannot be a monetary union without total political union. This requires the ending of sovereignty for nation states and the subservience of national governments to a central government. France and Germany have long held the view that this is the desired end-state for the EU, as long as France and Germany run it. Britain and several other countries, notably former Eastern bloc countries - the newish members of the EU - have experienced such a deal with their former subservience to Russian state centralism in the USSR. They wont buy it and, frankly, neither will anyone else. The French simply do what they always do – take what they like and ignore the rest. The Germans seek dominance so that they can preserve their Germanic culture and economic power. If these “innate rights” of nations are eroded, then the French will explode onto the streets and the Germans will quietly move their money and their businesses elsewhere.

This is why there is a growing push for a straight “in or out” vote on the EU in Britain and some other countries. What is the EU and where is it going? Do we want to stay on the express train with no driver going in a direction we don’t understand?

So what is the alternative? It is back to basics. Back to the idea of a group of nations agreeing to permit free trade and the free movement of people. Back to national currencies with national control. Back to central banks making banking decisions. Back to agreements on education transferability of credits and credentials and to standards for the food supply and health care. But less Brussels, less eurocracy and less imposition of EU directives on national governments. In short – its back to the future.

If Canada, the US and Mexico can enter an effective free trade deal and gradually expand its boundaries to cover services, education and health why cant Europe. Canada retains its national identity, currency, control of its economy, but does a massive amount if trade with the US efficiently and effectively. There is a relatively free movement of people across borders and the currencies, while separate, are easily tradable. It works. It is simple.

Any other strategy for Europe appears doomed. Britain should lead the way in this conversation, since it reflects the strong views of the British people. They want easy movement across borders, an effective basis for trade. They don’t want the European Courts deciding British law – for example, that prisoners have a right to vote when the British parliament has twice decided that they do not. They don’t want new regulations affecting UK businesses to appear roughly every twenty minutes of the working week from the EU and they don’t want massive centralization of decision making in Brussels or Strasbourg.

So the future is: back to the future and less of Europe is more of Europe. It may take some getting used to.

Europe - The Clock is Ticking

It is becoming clear that the real crisis in Europe is one of leadership and imagination.

Last week at an informal summit meeting (complete with a formal photograph), the European leadership came up with a new “rescue plan” - "project bonds" to be launched for a trial period this summer. Some €230m (£183m) has been earmarked from the existing EU budget to help the state-backed European Investment Bank provide infrastructure loans. This initiative will apparently attract €4.6bn in private investment, so helping the Eurozone grow its way out of trouble. It shows how much in denial the European leadership really is. Growth is stagnant in Europe, even in Germany. As Liam Halligan says in todays Sunday Telegraph, this “solution” is akin to “tackling an inferno with a water pistol”.

The underlying problem is that most of the banks of the European Union (with some notable exceptions) are insolvent. Spain’s Bankia just asked for €19 billion (this on top of support already received) and many banks through the region are now so interdependent on Government bond payments that they are effectively bankrupt. Regions of the EU are bust. Catalonia, Spain’s wealthiest region, announced this week that it is bust and needs the central Government to pay its bills.

None of these issues were discussed last week at the informal summit. Nor was the pending exit of Greece from the Eurozone – now a certainty. Nor were the recessionary forces now shrouding Europe on the table – German indicators, for example, show a sharp drop in GDP growth in the last quarter. It is as if the leadership of Europe is walking in a trance towards Eurogedden.

All look to Angela Merkel. She is said to be “dusting off” the plan made for the integration of Eastern Germany some several years ago, which forced a degree of austerity onto the German people so as to permit integration. She is a one trick poney, and that trick isn’t a solution.

The real solution is painful. It requires European nations to become competitive and productive. In real terms, this means lowering the standard of living in Spain, Portugal, Greece, Italy, Britain and France and raising the bar for the receipt of social services. It means increasing the number of hours worked, delaying retirement and changing working practices. It means returning to a focus on cost reductions in public and private sectors and to a relentless focus on innovation. It also means abandoning lofty and expensive ideals about climate change mitigation based on state subsidy – something which is making matters worse rather than better in that it is significantly increasing the volatility of energy prices and raising energy costs to a point in which industry cannot compete. One estimate is that this package of measures means a lowering of the standard of living in these countries by one third.

And this is why we have no leadership. What leader in a democracy based on four year terms is going to advocate these policies? None. Yet the alternative – drift, denial and despair – is inevitable. Prepare for Eurogedden. The clock is ticking.

Experiencing Europe

The headlines across Paris focus on the future of the Eurozone without Greece. It is a foregone conclusion, at least amongst the patrons of the smart café’s in the Montparnasse, that Greece will exit the Euro. “Not a moment too soon,” says my waiter, who is a student of economics at the Sorbonne. “Trying to keep Greece in the Eurozone has been a costly mistake for the EU” he thinks.

Pierre and his student friend Martine, also an economics student at the Sorbonne, both suggest that what we are witnessing in Europe is the classical struggle for the soul of capitalism that Marx described in Das Capital. It is clear that capitalism has failed the people of Greece, Spain, Italy, Portugal and Ireland and that permitting the financial markets to operate with a great deal of immunity from responsibility and then transferring private risk to public debt will mark the end of this period in the history of capitalism in the West. What these two students don’t understand, they tell me, is how the adoption of the Shock Doctrine – austerity and privatization ($50 billion of public assets in Greece are about to be transferred to the private sector in the next quarter) aimed at stimulating capitalistic responses in a “more efficient” market will lead to growth and prosperity.

They are not alone. Austerity has not and will not work. While Greece does need to better manage its public finances, the underlying problem is the lack of growth coupled with the decline of productivity, the absence of significant manufacturing capacity and skills and the ageing population. Austerity will just hasten a “death spiral” for the economy, says Andre - an MBA student at INSEAD.

The movement towards growth, spurred by the G8 meeting at Camp David, will splutter and splinter the EU. The summit meeting held this week showed this clearly. Even though Angela Merkel was present at the G8 and appeared to support the “growth agenda”, behind the scenes she is quickly undermining some of the key ideas. She is against EU wide public spending using pooled EU funds. Against the issuance of Euro Growth Bonds underwritten by the Eurozone countries. Against letting inflation rise to 4-5%. Against increasing the size of the European Stability Fund to permit greater risk taking by Government. Against the creation of nationally owned “bad banks” to restore confidence in the “good” banks so that they in turn can lend with surety. In short, the German Chancellor is against actually doing anything that would lead to growth.

History is her pointer. She points to broken promises by the Mediterranean Eurozone countries with respect to public finances. She points to Italy and asks “if we did everything everyone is talking about, would Italy suddenly change and become highly productive, efficient and effective economy?”. She is right to ask the question. She is also right in her assumption that, apart from the earthquake hit region in the North, the answer would be no.

But her conclusion is that “austerity is the only way” and that “this lady is not for changing her mind” is a mistake. It shows a lack of understanding of the real situation here, which is only partly a structural economic problem. The underlying problems are social, generational, political and cultural.

The social dimension relate to the underlying assumptions within many European countries of entitlement. Entitlement to a limited work week (by law, 35 hours in France is the maximum anyone is allowed to work), to early retirement with state pensions (between 55 and 60 in France), to generous support for unemployment (up to twenty four months at 70% of salary in France) and generally free health care, including prescription and dental. While these entitlements are now being challenged, the public reaction to even modest changes is equivalent to the reaction of a small but violent group of students in Montreal to a modest increase in student fees.

The generational dimension is that fewer of the young married couples in many parts of Europe want children and that many of the young adults stay at home longer than did their parents. This reduces the mobility of people, lowers birth rates and increases the stagnation of community. Demography is a major structural challenge for the whole of Europe and, while demography need not be destiny, it is becoming an underlying political issue in that disaffected youth are politically volatile. Remember – youth unemployment of the 16-24 year olds in many parts of Europe exceeds 50% of the age cohort.

The political dimension is complex. At its heart is the fact that no one is seen to be describing either the current situation well or is bringing the future to the present with any sense of authority. Europe is being led by light weights, like David Cameron in Britain or, well, no one in particular in Greece. Indeed, Greece’s inability to form a Government is a symbol of this issue. The electorate does not trust anyone to govern and those who would govern do not really know what to do. The leadership vacuum is palpable to the observer.

The cultural dimension is an interesting one. In Paris and in the French country side, life continues. The café’s are busy, cinemas are selling out, shops like BHV (the largest Department store in Paris) have many customers. To some extent, this genuine crisis does not impact daily life for many people. It is not until it impacts more people in more places will the extensive nature of this crisis hit hard. In Greece and Spain it is already doing so. In Italy it is beginning to do so. But at the heart of French life, the situation is normal.

On the TGV from Paris to Tours (which was full) the Deputy Commander of French Naval forces told me that recruitment is up, retention is high and the fleet is well equipped. “For what?” I asked. He smiled. “For whatever comes next”, he replied, somewhat laconically. This is more than can be said for France in terms of economic strategy. It is not well equipped and is finding it difficult to retain its businesses. The navy may be well positioned, but the country is not.

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.