Tag Archives: EC

Plus ça change, plus c’est la même chose – maybe


An old French adage posits the more things change, the more they are the same. But that’s not always true, historiographers, those who invent how to write history, must figure out when transformational changes do occur. It’s [at least my version of] the string theory: yes, things do go along on a consistent pattern [genes, for example] until suddenly, something from the outside changes one knot, and then they pick up routinely again but along the now changed form.

That’s where we are at the moment with “the Europe project”, an attempt to create a peaceful, united, prosperous, democratic Europe. [Napoleon and Hitler tried other unfortunate solutions.]

In the late 40s, after all the horrors of World War II, European unification was generally considered necessary and unavoidable. Every “right-thinking person” understood two European “civil wars” had almost destroyed Western civilization. How to prevent another such conflict was at the center of thinking by enlightened European politicians, especially France’s Gen. Charles De Gaulle and Germany’s Chancellor Konrad Adenauer, and such technocrats as Frenchmen Jean Monet and René Mayer.

Common sense as well as idealism demanded embracing what would inevitably be a reemerging strong Germany in a bear hug by a weakened France and Britain. It should start with what in those economies was basic, the iron and steel industries, incidentally, located in contested border regions. The exquisitely detailed Treaty of Paris established the European Coal and Steel Community, signed April 18, 1951, by “the inner six“, France, West Germany, Italy, Belgium, Luxembourg and the Netherlands It laid the cornerstone of today’s European Community. The basic metals agreement turned into a customs union, a common labor market, capped by a common currency – at least for major Continental members.

Now that common currency is in deep trouble. The lack of central fiscal and monetary control has taken its toll. More prosperous northern European countries [especially Germany] used the Euro to boost Union exports and southern Europeans used its creditworthiness to buy goodies but alas! more than their productivity could afford. The Greek collapse and its attempted rescue has been seen widely as the ultimate test not only of the Euro but inflated to cover the whole idea of “Europe”. And as the crisis deepened — for the rest of the European Union is deeply burdened by welfare economies they find increasingly difficult to support — the Euro is said by some to be a test of the whole idea of “Europe”.

That’s a pity, especially since there is no consensus on where to go now. Some advocate dramatically moving to a centralized economic state. That would be put together — as the EU has been until now — by Brussels bureaucrats rather than any compromising legislative assembly. [That the difficult American constitutional convention came so close to failure is omitted in the self-congratulatory versions of US history nominated as a template.] Others see creating a two-tier Euro system. And some braver souls are ready to abandon the monetary project, with Greece, and other highly indebted partners, retreating into their own currencies to force readjustments difficult for populist governments

Again, this last option is seen by many as the end of the whole unification effort. Such an analysis is skewed. It relies on a mindset of at least a generation ago. The old bugaboos are gone, perhaps replaced by new ones, but they are gone. For the first time in 2,000 years, the German tribes are depopulating. True, Germany remains the strongest European economy but its overdependence on mostly older products exports, with subsidized credits is a longterm threat. For Europe, other problems – not the least the difficulty of integrating an immigrant labor force in a declining native population, primarily recruited among Muslims – takes precedent. War between the major European powers in a time of cultural amalgamation and Europe’s relatively declining world role, is unthinkable

Remodeling, at least, of the Euro is now inevitable. But it need not be seen as a failure of “Europe”. European unification now might take a leaf from the American book and go back to building more representative institutions. The growing regional nationalisms – from Scottish to Catalonian – which European federalization has encouraged might even be a basis for a new attempt at political integration. But what is certain is a new era demands new thinking and new solutions. The old rationales for a federal Europe are dead.

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To deconstruct or not to deconstruct is no longer the question


                 Increasingly, however reluctantly, Europeans are bellying up to the Eurozone’s ultimate crisis. Talking heads present a dilemma: either the European Community will pick apart its common currency or take radical steps toward a highly centralized economic command.

That’s because a triangle is strangling the Euro: markets faced with the threat bankrupt members of the monetary alliance will default raise the cost of refinancing; northern European taxpayers warn their elected governments they will not continue bailing out southern neighbors; and a plethora of national and international monetary organs desperately maneuver to protect their bloated bureaucracies’ turf by improvising temporary rescues.

Placing even more power into hands of unelected bureaucrats for economic amalgamation would be a giant step. That’s not going to happen because inauspicious as it is for the monetary crisis, widespread political opposition [most of it constitutional and peaceful] to the growing calls for austerity is evidence of grassroots sovereignties as old as the end of the Roman Empire. How difficult they are to assuage has been demonstrated by a half century of tortured progress of The European Project. More apparent daily is the inadequacy of building “Europe” from the top down – even given the vision of Gen. Charles de Gaulle and Chancellor Konrad Adenauer and their technocratic collaborators. Absence of a process such as the American Continental Congress with grassroots representation painstakingly compromising conflicts has led into a blind alley on the economic front, however much limited success has been achieved politically.

Meanwhile, as so often happens, the helter-skelter of daily events obscures the coming inevitable decision. Those include critical happenings on the dollar side of the Atlantic, too. Evidence of the refusal to face up is a proposal by idiosyncratic economics Nobel Prize winner Robert Mundell to fix the dollar to the Euro to anchor the ever more threatening parallel international currency instability. Mr. Mundell might just be defending his original sponsorship of the Euro, a common currency designed to bounce around a dozen different national economic strategies without an overall guiding hand. But pinning fixed prices for rapidly devaluing dollars to disintegrating Euros would be, indeed, rearranging deckchairs on the Titanic.

Early on as it is, it’s rash and, of course, daunting, at this juncture to speculate in a few hundred words implications of the Euro’s demise. But where angels fear to tred, here are some guesses:

  • Whether or not hard-nosed advocates will win out in fostering surgical cutbacks of American government spending in order to save the dollar from being overwhelmed by domestic and international deficits – a question as large as the Euro’s future – the role of the dollar as the international reserve currency is willy-nilly being strengthened. Any talk of massive huge East Asian dollar holdings shifting into Euros – never a real possibility – is now out the window. Talk of a non-convertible Chinese international reserve currency is too idiotic to discuss. We have already been through a failed “supracurrency” experiment of creating the International Monetary Fund’s “drawing rights”. And there may not be enough gold to cover ever-expanding liquidity demands.
  • The attenuation of the Euro crisis unfortunately has elevated its role in the total project for a stable, prosperous, unified Europe. It was, originally, if always highly important, only one of many unification efforts – a common trading market, a common labor/migratory zone, financial, environmental and health regulatory unification, a common foreign policy, a common defense. These have been, at best, only partially achieved just as only 17 – notably excluding Britain with its world finance hub in The City — of 27 EU members adopted the Euro. Always important, the Euro has been exalted to the touchstone for success of unification and its demise therefore now made increasingly catastrophic.
  • The coming Euro breakup coincidentally will partially rehabilitate the U.S. superpower role despite Washington’s obvious economic and geopolitical-military overextension, persistently exaggerated by Pres. Barack Obama’s determined campaign to deflate the American image. That will be coupled not only with hedonistic Europe’s continuing lack of determination to tend its own military defenses but its continuing reliance on the U.S., for example, an American intercontinental anti-missile shield which Washington has no option but to build in pursuit of  its own security.

So, accept: the Euro construct is dead! long live European diversity — the wellspring of Western civilization!

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Meanwhile back at the ranch …


Mesmerized by the Osama Ben Ladin drama, world attention has swung away from world economic issues. That may not be for long. A three-ring circus of instability matching P.T. Barnum’s extravaganzas is in full swing. But unlike Ringling where only the viewer’s attention connects acts, so intertwined are these convulsions even the most arcane market punter is having difficulty telling us what is going on – much less how to invest.

  • · Ring No. 1 is the soap opera – to change my metaphor — playing out with Europe’s common currency. It is becoming increasingly clear, as some of us predicted at the beginning of the crisis, the Euro cannot survive in its present form. With Greece near civil war, the markets tell anyone listening there is no confidence in bail-outs even as a new one is underway in Greece and one just put together for Portugal. Because default could come at any moment, borrowing rates are too high for recovery even where recalcitrant politicians have the courage to inflict the pain of austerity. Joining Ireland, and soon probably Spain, clinging to the Euro vitiates unavoidable belt-tightening their separate currencies once forced on earlier regimes. Threat of a German taxpayers’ revolt grows for German Chancellor Angela Merkel’s increasingly shaky federal coalition — wounded recently by loss of the largest state after 34 years of conservative rule but still soon facing four state elections. Public opinion sees Berlin doing the heavy lifting for spendthrifts but ignores it was those miscreants who gobbled up German exports. Unfortunately, the Brussels EUrocrats’ rescue stratagems invite a future dramatic Euro crash. By procrastinating, they increasingly are making the common currency’s fate synonymous with the whole “European project” of creating a united continent to avoid wars and preserve prosperity.
  • · Chinese delegates have decamped Washington after another annual talkathon with a befuddled Obama Administration trying to spin what is in reality a dismal impasse. Just as everyone was being lulled into myths of Beijing’s boosting consumption, April marked record trade surpluses. The combination of higher imported commodities, slackening appetite for its subsidized exports and growing concern about its real estate bubble did not stem the tide. Beijing’s escalating humongous dollar holdings show where big chunks of the Fed’s “quantitative easing” [printing dollars] have gone. Meanwhile, Beijing further screws down political repression. Announced internal security costs are larger than its understated publicized defense budget. On the eve of a generational transfer of power, there is paranoia about “Arab spring” contagion and much shin-kicking among leaders. The Communist politburo is in no mood for “experiments” but “keeps on digging its [financial] hole”. That is now leading to inflation [if paused for the moment], especially in food, the overwhelming concern for most Chinese. Thus, recruits to the tiny China-will-implode prognosticators, among them yours truly, is growing.
  • Our third ringmaster [or perhaps snakeoil salesman to mix out metaphor again] proclaims greedy oil companies are the cause of high gasoline prices. Mr. Obama’s own clamp on Gulf offshore drilling as well as Alaskan oil are the real culprits. Of course, as markets showed in mid-May, probably temporarily, a sudden stronger dollar and lower commodities prices could sink notoriously unpredictable crude oil prices – but probably only as a sign of a descent into double-dip recession. For the moment, relief seems unlikely for Memorial Day weekend driving with Louisiana’s 15% of refining capacity threatened by the Mississippi River flood  And continued high prices at the pump could just be the 2011 election eve deciding lollapalooza rather than the current concern for fiscal discipline by an American electorate burdened with  joblessness and foreclosures now running three months in arrears.

Interconnections among all these phenomena are infinite and mostly unpredictable. But the 1997-8 crash apparently did not teach us – there are signs among our bankers – clever derivatives and exotic algorithms are not going to give us a road map to recovery. Just as the self-emulation of a single unemployed Tunisian – the least likely trip-wire in the whole Muslim world — set off a wave of unpredictable revolutionary unrest among 300 million Arabs, the world economy, too, is at the mercy of unforeseen events and their unanticipated consequences.

Tighten your seat belts!

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