June 21, 2010 Published originally in The Weekly Standard
When America’s flimsier corporate colossi threaten to collapse, they tend to follow a wearyingly familiar script. Quarterly reports “disappoint,” the media begin to stir, and questionable financial dealings come to light. The CEO then emerges from his bunker to announce that all would be well but for the (vicious/ill-informed) press, (greedy/destructive) short-sellers, or both. Then all hell breaks loose. That’s how it was with Enron. That’s how it was with Lehman Brothers.
And that, more or less, is how it’s going with the euro. A dangerous gamble with other people’s money, irresponsibly operated, and dishonestly sold, the European single currency has been showing signs of severe stress, and leading EU officials have been doing just what the Ken Lays of this world do: dodge.
There have been the “all is wells” from the likes of José Manuel Barroso, president of the EU commission—the man who boasted in February that the euro was “a protective shield” against the crisis. There have been the attacks on the press—often with an interesting twist. Spain’s transport minister, José Blanco, for instance: “None of what is happening including editorials in some foreign media with their apocalyptic commentaries, is happening by chance, or innocently. It is the result of certain special interests.” Just who were those unnamed “special interests”? (Clue: Europeans traditionally believed that they wore Stetsons or bowler hats.) The Spanish prime minister reportedly ordered his country’s National Intelligence Center—the Inquisition no longer being available—to investigate. An alternative theory was conjured up at around the same time by Jürgen Stark, the European Central Bank’s chief economist. Asked by Der Spiegel whether he suspected that the “Anglo-American” media were “behind the attacks” on the euro, Stark replied that “much of what they are printing reads as if they were trying to deflect attention away from the problems in their own backyards.” That’s a nice try, but it’s also an answer of staggering disingenuousness. Can Stark really have been unaware of the long-running media furor in Britain and the United States over their domestic deficit disasters?
To be fair, the head of the ECB, Jean-Claude Trichet, did warn in May that “one should be wary” of talk of Anglo-Saxon conspiracies, but by then plenty of farfetched plots had been dreamt up. Were those “apocalyptic commentaries,” for example, an ideological assault by diehard euroskeptics or were they, perhaps, part of a dastardly scheme to preserve the U.S. dollar’s position as the ultimate reserve currency? As conspiracy theories go, neither was bad, but such theories play even better when seasoned with a “speculator” or two. Maybe, the Anglo-Saxon media were in cahoots with Anglo-Saxon plutocrats looking to make a sleazy buck out of a sickly euro. By talking up the crisis, were these hacks simultaneously peddling a sexy story and filling the coffers of Wall Street and the City of London? Quelle horreur.
That there might actually be a crisis to talk about was only grudgingly conceded, and its true cause remained the stuff of denial. Far easier to blame the sons and daughters of Gordon Gekko. It was in this vein that Ireland’s minister of state for finance, Martin Mansergh, claimed last month to have gotten to the bottom of the market’s distaste for the euro: “If you had lots of separate currencies that would be more profits for the financial sector.” Let no one say that blarney is dead.
Wiser blamesayers have avoided conspiracy theories and stuck to abuse. Anders Borg, finance minister in Sweden’s (vaguely) right-of-center, (not so vaguely) Europhile government, grabbed headlines in May comparing market players to a “wolf pack.” The jibe might have had more weight had it not come from someone who had, just a few months before, sternly intoned that there was “no legal basis” for an EU bailout of Greece, exactly the sort of ill-starred comment that is now food for the wolf pack.
As zoological insults go, however, Borg’s lupine sneer was one of the best since the moment in 2005 when Franz Müntefering, then chairman of Germany’s Social Democratic party, compared foreign hedge funds and private equity groups to “locusts.” Yes, those investors had been buyers rather than sellers back then, but they had been the wrong sorts of buyers (short-term, asset-strippers, foreign).
To his credit, Müntefering spoke out when the times were good. Many of those now criticizing “speculators” held their peace when those wicked markets were betting on the “convergence plays” that kept interest rates down (and pushed asset prices up) in the countries now known as the PIIGS (Portugal, Ireland, Italy, Greece, and Spain).
But it was never more than an uneasy peace. The scapegoating of Wall Street and the City may be a diversionary tactic but there is nothing fake about the animus that lies behind it. The great majority of the EU’s political class disdains the Anglo-Saxon market capitalism that is, in its disorderliness, brutal competitiveness, and unembarrassed pursuit of profit, the product of an economic and political tradition that is the antithesis of its own. Americans expect that sort of thinking on Europe’s left, but it’s present on the continent’s right too. Outside the U.K., the dominant strain of thinking amongst the EU’s establishment right is in the Christian Democratic tradition. Its origins lie in Roman Catholicism—a creed never entirely comfortable with the free market. The mixed “Rhineland” model of capitalism is its model and “solidarity” its lodestar. For a very French example of this thinking, check out Nicolas Sarkozy’s Testimony (2006), where the future president attacked “stock market capitalism” and “speculators and predators.” (Note the date: Sarkozy was not one of those who kept quiet when times seemed to be good.)
Thus the rejection of the Wall Street way by European elites is philosophical and aesthetic as much as it is party political. Its roots are deep and its expression, sometimes, ugly. In November 1942, a French official wrote a piece for a pro-Vichy magazine (interestingly, the same issue features an article by one of the future architects of the euro, François Mitterrand) bemoaning those who would live “free” (his scare quotes) in the “soft, comfortable mud of Anglo-Saxon materialism.”
The “Anglo-Saxon” other (the Vichy crowd liked to throw in the Jews, as well) is a convenient target for European leaders looking for someone, anyone—other than themselves—to blame for the current shambles. But this is a scapegoat that the EU’s mandarins are also riding in pursuit of two long-standing objectives: crippling the City of London and, so far as possible, keeping Wall Street out of Brussels’s domain. Less than two weeks after the implosion of Lehman, Sarkozy announced that laissez-faire was “finished.” Wholesale reform of the global financial system was, he pronounced, essential.
Few would deny that some reform is needed. It’s even possible to assemble a respectable defense of the “anti-speculative” measures (such as certain restrictions on short-selling), if not their confidence-killing timing, recently put into place by German chancellor Angela Merkel. But look more closely at the underpinnings of Merkel’s actions and the picture darkens. The new measures can then be seen not as well-intentioned reform, but as the next step in Merkel’s populist crusade against the “perfidy” of international “speculators,” a crusade designed to mask the extent to which the current crisis (and the bill to German taxpayers) was brought on by the speculative scrip—the euro—that Germany’s politicians had forced upon their voters.
The fact that “speculators” have had little to do with the convulsions now shaking the eurozone means nothing to Merkel. It’s far easier to talk to the electorate about a “battle of the politicians against the markets”—a not unfamiliar tune to U.S. voters—than admit that the real battle that she has been fighting is against what remains of the political, democratic, and financial integrity of the European nation-state.
And we can be sure that the EU elite will continue to stand alongside Merkel in combating the bogeyman bankers, a wag-the-dog war that dovetails nicely both with short-term expediency and long-term belief, and is designed to cut the financial sector—specifically the Anglo-American financial sector—down to size. That doesn’t mean the death of the local big banks that have for so long been a part of the European financial landscape, but it does mean that their business will be reined in. They will see a return to the far tighter political control of the past with all the potential for abuse that can bring. Significantly higher taxes lie in their future, although increasing worries over the fragile state of many EU banks (not least because of their exposure to the PIIGS’ debt) may stymie such plans for now. The bonus culture will come under additional pressure (not all Americans will mourn that), and efforts will be made to ensure that the markets are just that bit friendlier to entrenched interests—such as those of governments that borrow too much. The news last week that France is falling in with Merkel’s recent initiatives and that both countries would like to see them extended across the EU, is an early indication of what is to come.
Much of this is bound to affect the business carried out by Anglo-American finance in Europe, but it is not directly protectionist. The same cannot be said of Brussels’s Alternative Investment Fund Managers Directive, a rough beast now slouching towards some kind of birth. The primary focus of the directive is much tougher regulation of “alternative” investments, such as hedge funds, private equity funds, and the rest of Müntefering’s locust class (funds, incidentally that have received no bailouts—but who cares about that in Brussels). That’s not good news for the players in this market—mostly in the U.K.—and it could also represent a major obstacle to U.S. funds operating within the EU. In neither case is this a coincidence.
Hogtied by recent changes in the EU’s rulemaking procedure, the U.K. cannot do much to stand in the way (should David Cameron’s new, not very City-friendly government even feel so inclined). That leaves Washington as the last line of defense. There are clear and reassuring signs that Treasury Secretary Timothy Geithner now recognizes the nature of the danger that American finance now faces.
That’s something. But will the Obama administration really be prepared to go to the mat for an industry that it too finds convenient to demonize? And even if it is, just how much will Brussels be prepared to listen?
As Rahm Emanuel once said . . .