Fight For The Finnish

The Weekly Standard, December 24, 2012

He won more votes than any other candidate in Finland’s 2011 parliamentary election, and the maverick party he leads is a profound embarrassment to the current eurozone regime, but there’s something refreshingly down-to-earth about Timo Soini, the leader of the euroskeptic Perussuomalaiset (PS), or, perhaps more easily for you and me, the Finns party. (The former translation of their name​—​the True Finns​—​was felt, a party official told me, to have an “ominous echo” in some corners of Europe of a sort that the PS did not wish to convey.)

Soini, 50, an eloquent, likable, and often amusing former “concrete boy” from Espoo, a city on the edge of Helsinki, was sitting across from me a few weeks ago in a restaurant in Midtown Manhattan. He’s a big man, with big opinions, haphazardly shaven, with rough-hewn features, thick glasses, a shirt with a touch of the lumberjack about it, and an air of genial dismay at my choice of Diet Coke to go with lunch. He has a beer (just one, I note, in case any of the more puritanical members of his party are reading). In his soft-spoken, pleasantly old-fashioned and very Finnish way, he’s outraged by what is now unfolding in Europe.

“A deal is a deal,” he says. The technocrats who once promised that under a shared European currency no country would ever have to bail out another now see things differently. As for the mendicants of the eurozone periphery, let’s just say that Soini is a man with a sharp sense of right, wrong, and history.

Unlike many European countries, Finland, Soini recalls, honored its debts throughout the Depression. And then it paid off the penalties imposed upon it by a vengeful Soviet Union after the Second World War. Later still, it worked its way out from underneath the wreckage of a savage banking crisis in the early 1990s. Left unsaid is the contrast with the Greeks, the Spanish .  .  .

Then it’s not left unsaid. They can be blunt, Finns. The mayhem that the single currency has brought in its wake has upset the European political order in ways that must shock even the utopian gamblers who originally calculated that a “beneficial crisis” was just what was needed to herd the EU’s recalcitrant nation-states into ever closer union. Governments have tumbled across the continent. The far left and neo-Nazis are on the march in Greece. The Catalans are eyeing an exit from Spain. Italy’s democracy has taken a timeout in favor of a technocracy that may soon be replaced by who knows what. Britain could, one way or another, be stumbling towards some sort of end to its unhappy European marriage. And there are plenty more melodramas to choose from.

Where there is Europe, there are euroskeptics. They are a motley crew, ranging from Britain’s neo-Thatcherite UKIP, to the Dutch Koran-bashers of Geert Wilders’s Freedom party, to the postmodern leftists of Beppe Grillo’s 5-Star Movement in Italy, to some groups to the east about whom​—​Soini rolls his eyes​—​the less said the better, and the list doesn’t end there.

Soini’s party, in time-honored populist style, draws on elements of left and right. In a nod to my Englishness, Soini describes his supporters as “working-class Tories.” Yes and no, I’d say. The PS, he explains, is for the workers (“but without socialism”) and for small businesses (“they create the jobs”). Like its counterparts elsewhere in Europe, it draws on the support of older folk and, in return, supports their right to a decent pension. The PS may not, strictly speaking, be socialist, but its 2011 program checked most of the boxes of the traditional Nordic welfare state, including high taxation as a moral good. The Tea Party it is not.

Soini himself is a Roman Catholic convert, exotic for Lutheran Finland. His opposition to abortion is, he admits, a minority view within his own party, but the PS is socially conservative, sometimes abrasively so. Like many euroskeptic parties, it is immigration-skeptic too, occasionally harshly so. When I ask him about this insult or that slur, he replies that a party should not be blamed for everything that one of its members might have said or done. That’s a stock response. What was not was his honest admission that not all his elected representatives are ready for prime time. Some, he sighs, are “stupid” or, he adds more kindly, “semi-stupid.” In a party that has risen so far so fast, that’s not surprising, but, that said, there is undoubtedly a harder edge to Soini’s lot than you’ll find with UKIP’s merry pranksters.

That the success of the PS and its kin elsewhere is due to the overreach of a project​—​an ever more deeply integrated Europe run by a small transnational elite​—​designed to head off such unruly expressions of populism is an irony to appreciate, if not always to savor. That it has happened in Finland only adds to its piquancy. Since joining the EU in 1995, Finland had always been a model pupil, diligent and thoroughly communautaire. Unlike Denmark, and despite initial considerable skepticism on the part of its population (in 1996 fewer than 30 percent of voters supported the idea of a single currency), Finland never negotiated an opt-out from its obligation to sign up for the euro, nor, like Sweden, did it simply grab one. The Swedes and the Danes then rejected the single currency in referenda, an opportunity never offered to the Finns. Eager to please the membership committee of a club they were desperately keen to join, Finland’s politicians were never going to risk allowing their electorate to second-guess the goal of monetary union.

For there was something else at work in Helsinki: the thought of a large and still troubling neighbor. Every step Finland took deeper into its new “European” identity, even the adoption of the EU’s funny money, was a step away from Muscovy. And it is not only the Finns who feel that way. Anxiety over the bully next door does much to explain the increasingly egregious Europhile posturing​—​plus royaliste que le roi​—​by some members of Poland’s political class, and, more poignantly, the reason given by the Estonian prime minister for signing his frugal, well-run country up for the madhouse math of the European Stability Mechanism: “Our objective,” he said, “is to never again be left alone.”

These are sentiments that Soini evidently understands. He shows me a photograph of his daughter standing on the apparently unguarded Finnish side of a stretch of the Russo-Finnish border that runs through the forests to the east. He reminds me​—​with a smile​—​that the U.K. did not exactly rush to Finland’s assistance when the Soviets invaded in 1939. I suspect he is not convinced that, if it ever really came down to it, Brussels’s umbrella would amount to much either. Finland must look after itself.

The still widespread idea that Finland needs Brussels to anchor it in the West is not one that the Finns party shares. It is opposed not only to Finland’s participation in the bailouts, but also to the euro itself (if a tad cagey about what to do about it). Most iconoclastically, the PS would prefer to see today’s EU replaced by a free trade area somewhat akin to the “common market” that gullible Britons believed they were joining in 1973. Within that looser association, Soini mentions there could be room for closer regional cooperation where it made sense, with the other Nordic nations, of course, and the Balts, say, and the Poles and maybe the Brits, too. And the Germans? “No, they would want to bring France with them.”

For now this is just talk. A large majority of Finns want to remain in the EU, and most still prefer to hang on to the euro. The bailouts of the eurozone’s weak sisters are a different matter. They are opposed by well over half of all voters.

It was voter anger over the bailouts that propelled the PS into the big leagues, but the party will struggle to take the championship. In the 2011 general election, it came in third with 19.1 percent of the vote, nearly five times the tally of four years before, but it was a triumph it failed to repeat in the presidential elections in early 2012: Soini (with 9.4 percent) was eliminated in the first round. In October’s municipal elections, the party won 12.3 percent of the vote, a result that may understate its real level of support but was nevertheless a disappointment when measured against the glory days of 2011.

The Finns party may have done its work too well. The two established parties most vulnerable to Soini’s appeal to rural and working-class voters have taken a markedly euroskeptic turn, not least the Social Democrats, from whose ranks the country’s finance minister is drawn. As a result, Finland has become an increasingly awkward member of the eurozone’s glum rescue party. The country insisted that its contribution to the second Greek bailout finalized in early 2012 be backed by collateral. And so (partially) it was, somewhat secretively and somewhat complicatedly, but good enough to allow the Finnish government to offer some reassurance to its restless electorate, a feat it essentially repeated for July’s Spanish bank bailout. Soini clearly remains skeptical about how valuable some of this collateral might eventually prove to be, joking that it really consisted of “stuffed penguins.” But whatever the role that Antarctic wildfowl may play in the efforts to protect the country’s finances, there is no doubt that, where it can, Finland is acting as a brake of sorts on the pace of largesse.

Yet still the ratchet turns. The aggressive actions of the European Central Bank have relieved some of the pressure on the eurozone for now, and Greece has just weathered its latest storm, but the crisis​—​not over by far​—​will continue to fuel demands for the cash and closer integration that the euro’s survival may require. That’ll be bad news for Finland’s finances and a disaster for its democracy, but when it comes down to the wire, the track record of its government​—​which includes just about everybody other than the PS​—​would suggest that it will be unlikely to say no.

The reasons for that might be respectable​—​unwillingness to risk the cost and the chaos that a euro collapse might involve​—​and they might be based on a genuinely idealistic, if misguided, belief in the virtues of deeper European integration, or perhaps even on humility: Is it really for little Finland to put an end to such a grand dream? Then again, less attractive reasoning could come into play. The groupthink of Brussels has a curiously powerful allure, as does the siren whistle of its generous gravy train, and the pleasures, as Soini, puts it, of the (ministerial) Audi.

Soini, who spent time in the belly of the beast as a member of the European parliament and didn’t like what he saw (he tells me a few tales of expense accounts), is not optimistic that Finland will bring this long farce to a close. On the other hand, this is the same Soini who, channeling Churchill, delighted the crowd at UKIP’s 2012 conference with his declaration that “we will never surrender.” Somehow I don’t think that he will.

Happy Warriors

The Weekly Standard, October 15, 2012 

Nigel Farage, UKIP Conference, Birmingham, September 2012   ©  Andrew Stuttaford

For people once described by David Cameron as “fruitcakes and loonies and closet racists, mostly” (I’ve always savored that sly “mostly”), the members of UKIP—the euroskeptic United Kingdom Independence Party—gathered in Birmingham last month for their annual conference were a bright, friendly, and refreshingly normal bunch.

They were also surprisingly upbeat. The euro—that Freddy Krueger of currencies—remains as indestructible as it is destructive, and José Manuel Barroso, the president of the European Commission, is openly using the once-taboo F-word, pressing for transformation of the EU into a “federation of nation-states.” But never mind all that, the cheerfully determined folk at the conference reckoned that events were moving their way. UKIP, said its leader, the indispensable, charismatic, and hugely entertaining Nigel Farage, is “a party in a very good mood.”

Indeed it is, and why not? Nearly two decades after its founding in 1993, UKIP has come a very long way, despite bouts of internecine strife, a series of scandals, serial eccentricity, and a collection of electoral disasters that would have made even Harold Stassen pause. As Farage explained to the conference, things had been a “bit shambolic” in the past, a confession that was no revelation.

Thanks to the EU, and in more ways than one, this dismal state of affairs has been changing. The relentless intrusions of Brussels into everyday British life have sustained a market for UKIP’s ideas in a nation that was never europhile to start with. And one shocking continental innovatio—proportional representation—has given UKIP a position unimaginable under Britain’s first-past-the-post voting system.

The mathematics of first-past-the-post are brutal for upstart political parties, except in areas where they can find concentrated support such as that enjoyed by nationalists in Scotland and Wales. The Liberal Democrats took 23 percent of the vote in the 2010 election, but only 57 seats in the 650-member House of Commons. UKIP fared even worse, winning 3 percent of the popular vote and taking no seats at all.

Such results feed upon themselves. The electorate shies away from casting votes that will be wasted—or worse. Much of UKIP’s support comes from formerly die-hard Tories, and many more of that growing tribe would follow their lead were it not for their (justifiable) fear of splitting the right-wing vote and letting the left slip in through the middle. As it is, defections to UKIP probably cost the Conservatives some 20 seats—and an absolute majority—in the 2010 election. The Tories thus ended up in a coalition government with the euromaniacal Liberal Democrats, an irony lost on few and a strong disincentive for many potential UKIP voters to slip the Tory leash. And UKIP hasn’t done much better in local elections. It has just a handful of councilors and supreme power only in the Cambridgeshire town of Ramsey (population 6,000).

Thanks to proportional representation, worries about wasted or counter-productive votes have not been such an issue in elections to the EU’s Potemkin parliament. The few concerns have been further diluted by the suspicion—not quite as justified as in the past—that the world’s only commuting legislature (as a result of some ancient compromise, it sits in both Brussels and Strasbourg) counts for very little. UKIP celebrated the election of its first three members of the European parliament in 1999. Five years later, UKIP came third with 16.1 percent of the vote and 12 MEPs. In 2009 it overtook the governing Labour party, grabbing 16.5 percent of the poll and a haul of 13 seats out of a British total of 72. UKIP’s leadership is convinced the party has a good chance of coming out on top in the 2014 EU elections.

The very nature of a European election makes it an obvious vehicle for a protest against the Brussels oligarchy. That fact, combined with a typically low turnout (in 2009 an unimpressive 34 percent of the British electorate), means that those percentages overstate UKIP’s real backing. Nevertheless the prospect of UKIP topping the euro-poll in 2014—and the momentum that would come with it—must worry David Cameron, facing a national election the following year.

UKIP already stands at some 7-10 percent in national opinion polls, something that cannot just be put down to midterm disillusion with the Tories. There is a wide and growing disconnect between the pedantically centrist, tiresomely PC prime minister and a good number of his party’s natural supporters. Many of these are euroskeptic, and so this breach is only worsened by Cameron’s refusal to respond with anything other than curiously arrogant disdain to mounting British disgust with an EU that displays an ambition only exceeded—hanks to the flailing euro—by its troubles. One recent poll showed almost half of all Britons wanted out of the EU, while only under a third preferred to stay in. Making matters worse still for Cameron, however unfairly, is the U.K.’s failure to emerge from the economic mess his government inherited. Put all these circumstances together and UKIP’s allure is not hard to understand. Nor is the fact that the party’s appeal is reinforced by its plague-on-all-your-houses outsider status.

And that’s no act: The Birmingham conference was a long way in thinking and in feel from Britain’s political establishment. From the endearingly self-deprecatory remarks that accompanied so many speeches, to the occasional organizational glitches, to the misfiring microphone at the conference’s Friday night “gala dinner” (tickets cost all of $55), this was a gathering that featured little of the bombast and none the slickness of the larger parties’ shindigs. The auction that accompanied the gala included some cheaper items—tea bags in a fancy box, a woven silk portrait of the queen, and a painting that would have been unforgivable even had the artist been blind—that only underlined the distance between UKIP’s grassroots essence and the political establishment some UKIP members refer to as the Lib-Lab-Con.

At a desk near the entrance to the conference, some volunteers—including Mrs. Farage (a German, as it happens)—could be spotted selling Ukitsch: umbrellas, pens, mugs (“The EU is NOT my cup of tea”), tote bags (“The EU is NOT my bag”). Then there was the moment when Mr. Farage—no velvet ropes here—started hawking “Belgian damp rags” to a delighted crowd at five pounds each. (Full disclosure: I bought two.)

Autographed by Farage, these, uh, striking kitchen towels are decorated with the dispiriting features of Herman Van Rompuy, the president of the EU’s European Council. They are an allusion to the one event, more than any other, that made Farage the YouTube star that he is today, a status he cemented with a series of speeches that did much to ensure his recognition by Der Spiegel as the “seventh most dangerous politician” in Europe, no small honor. In 2010 Farage, an MEP since 1999, greeted Van Rompuy—world famous in Belgium, if nowhere else—to the European parliament shortly after the former Belgian prime minister had been appointed the quasi-head of the EU’s quasi-state. After asking who Van Rompuy was, and how he had been picked for this job, Farage compared the new potentate’s charisma to that of a “damp rag” and his appearance to that of “a low-grade bank clerk” (Farage apologized later to bank clerks). It was a virtuoso, deftly theatrical performance, but, as so often with Farage, there was a knife concealed within the knockabout. After the laughs there was this, delivered more quietly:

I sense though that you are competent and capable and dangerous and I have no doubt that it is your intention to be the quiet assassin of European democracy and of the European nation-states.

This display of unruly parliamentary vigor was too much for the EU’s mausoleum of democracy. Farage was fined $4,400 for his lèse-Rompuy, not a bad price for the publicity it brought.

Farage, 48, a smoker (despite a bout of cancer in his 20s) who enjoys a drink or two, is well aware of his naughty, none-of-the-above appeal. The Belgian damp rags were also decorated with a small, impish photograph of UKIP’s leader roaring with bad-boy laughter. UKIP’s anti-establishment message was a familiar refrain from the conference floor. The term “political class” was a frequent punch line, repeated with more resignation than anger, the exasperated lament of passengers who have found themselves on a peculiarly poorly run vessel but are still debating how violent the mutiny should be.

One thing that does seem certain, however, is that the Conservative party is in danger of being shoved over the side. It’s not just the EU, or the economy, or the drift to a witless center, although it is all those things. There’s something else. UKIP’s activists are a smart lot, and they understand but do not appreciate the contempt in which they have for too long been held by Cameron’s metropolitan clique. There’s recently been talk of some sort of UKIP-Conservative nonaggression pact for the 2015 general election. In his keynote speech, Farage appeared to leave a door slightly ajar “to consider it,” but only in exchange for a promise “written in blood” of an in/out referendum on the EU. A later speaker wanted something else: an apology. The applause that followed ought to be a reminder to Cameron to be careful in the future about whom he chooses to demonize.

As always in Britain, resentment comes wrapped in the country’s class sensitivities. The accents at the conference were provincial. Toffs were scarce on the ground. As I listened to the talk, time went into reverse, to Conservative constituency meetings of 30 years ago. These were Thatcher’s people; many of them had come of age under the Iron Lady’s reign. They were no-nonsense, often self-employed, and not the sort invited to the dinner parties that had dreamt up the rainbow coalition of politically correct gestures that, in the end, failed to carry Cameron to clear victory in 2010 against one of the most incompetent governments in British history.

To date the border between UKIP and the Conservative party has been ill-defined and rarely policed. That may be changing. If UKIP is to anchor itself at home as well as in the European parliament—essential if it is to increase its clout—it cannot just be about Brussels (the conference’s slogan was “Beyond the EU”). That will mean staking out a position more clearly distinct from the Tories than hitherto. Farage (who quit the Conservative party in 1992 over the EU’s Maastricht Treaty) has been successful in excluding racists and the jackbooted from his party, and describes himself as libertarian. But it is easy to see that the search for vote—particularly from what Farage terms “patriotic old Labour”—may be easing the party in the direction of the harder-edged, bigger-spending populism of euroskeptic parties on the continent, such as the Finns party (also known as the True Finns) and the Danish People’s party.

That could cause trouble in time, but for now Brussels remains the bogeyman around which UKIP can rally, a piñata for all, bashed in Birmingham by Farage in top form, clever, incisive, and witty. Later, “with greetings from the eurozone,” came Timo Soini (Der Spiegel’s “fifth most dangerous”), the leader of the Finns party and the politician responsible for forcing the previously supine Helsinki establishment to do something to protect its taxpayers from the ravages of a dysfunctional monetary union. Soini was hammer to Farage’s saber, but he was amusing and touching, too—proud of his country but also of de Gaulle’s grand vision of a Europe des Patries. If this conference was a celebration of xenophobia it was taking a very strange form. The single currency itself was, of course, singled out for rough treatment and rougher prophecies, not least from the distinguished City of London economist (and former Treasury adviser), UKIP co-belligerent Roger Bootle: “When did things go wrong with the euro? Right at the beginning.”

That was the fun stuff. It’s when discussing the next stage in this saga that the usually ebullient Farage began to look a little anxious. He has long been skeptical, for good reason, about the terms of any referendum that Cameron might offer the British electorate. His new concern is that Barroso’s attempt to push for federation will provide an extremely convenient escape hatch for Cameron, by providing him the opportunity to offer the British to vote on joining a closer union or remaining “as is.” The problem with that choice is that, unless the position of those EU member states who choose to remain outside the deeper union is fundamentally renegotiated, “as is” is not good enough. It might seem attractive to a country easily bored by the technical complexity of the EU debate, but Britain would remain subject, in practice, to the heavy burden of EU regulation, not to mention the exorbitant costs, direct and indirect, of membership. In short, it would be a very limited victory. The electorate’s fear of the unknown will make an in/out referendum a risky proposition for UKIP and its sympathizers, whatever the current opinion polls may predict, but for now it remains the last best hope.

Making matters worse is the gradual approach of 2015 and the likely election of a europhile Labour government and, with it, the closing of the exit door, quite possibly, forever.

And writing those words makes me think of a scene in the final Lord of the Rings film. As Gimli, the martial dwarf, contemplates the perils ahead, he turns to his companions, and remarks, “Certain death. Small chance of success. What are we waiting for?” Gimli, I feel, would have been a member of UKIP.

Estonian Economics

National Review, September 27, 2012 (October 15, 2012 issue) 

Raekoja Plats, Tallinn, August 2012 © Andrew Stuttaford

Tallinn, Estonia – Sitting shirt-sleeved and without, sadly, his trademark bow tie, in his official residence here in the Estonian capital, this Baltic nation’s Swedish-born, New Jersey–raised president, Toomas Hendrik Ilves, looks pained. He’s chewing antacid pills (I’d guess), but it’s the name that I just mentioned that is the problem, not indigestion: “Krugman.”

He sighs.

“I know this has been done to death,” I admit.

Ilves does not disagree.

Estonia has a tragic history of being a battleground for other people’s wars. Thankfully, the latest conflict into which the country has found itself unwillingly drawn — the debate over how the West can emerge from its post-Lehman malaise — has involved nothing more than a “snide” (to borrow Ilves’s adjective) bit of blogging by Paul Krugman for theNew York Times. And even that, the president concedes, ultimately turned out to be “good publicity” for a tale of economic recovery.

In 2008, Estonia’s boom, fueled to overheating by (primarily Scandinavian) banks attracted by the country’s post-Soviet revival, turned, like so many others, into bust. GDP fell by 3.7 percent in 2008 and by 14.3 percent in 2009, taking tax revenues with it: The budget went into a deficit of 2.7 percent in 2008, shocking in a country that aims to run a structural surplus. Unemployment soared to 16.9 percent in 2010, from 4.7 percent in 2007. Housing prices crashed 40 to 50 percent from their peak.

In response, the country’s governing coalition of conservatives and classical liberals cut spending and raised taxes (Estonia’s flat-rate income tax was, however, left untouched at 21 percent) in a squeeze equivalent to over 9 percent of GDP. But it was what happened next that must have really bothered Krugman: After pain came gain. GDP jumped 7.6 percent in 2011, and should grow by 2 to 3 percent this year and next. Unemployment has dropped to 10.2 percent and seems set to fall farther.

That did not fit comfortably with the sometimes-cartoonish Keynesianism that the professor has been pushing since the era of hope, change, and stimulus. So he took to his blog, cropped a graph, and took aim at “the poster child for austerity defenders” — not a role that the Estonians had sought for themselves. There had, wrote Krugman, been a “depression-level slump” (true enough) “followed by a significant but still incomplete recovery. . . . This is what passes for economic triumph?”

Well, no, but that is not what the Estonians, a modest bunch, are claiming. No one I talked to described times as easy, but progress is progress. What’s more, if you push the graph back a touch earlier than 2007, which Krugman used as his starting date, the broader picture is revealed to be rather prettier than the Nobel laureate let on. Yes, it was true that GDP had yet to return to 2007 levels, but it still stood slightly higher than in 2006, no plague year. President of one of Europe’s tech-savviest countries, an irritated Ilves turned to Twitter to rough up the “smug, overbearing & patronizing” Krugman.

Let’s take a step back: Estonia is not Greece. Government is transparent and thrifty. Taxes are paid. Private borrowing ballooned during the bubble years, but that of the public sector did not. At the end of 2008, the state’s debt stood at a sober 4.5 percent of GDP, a figure that might have tempted some governments to try to splurge their way out of recession. In rejecting that route, Estonia did the right thing. It depends on its external trade: Exports amounted to 79 percent of GDP in 2010 (compared, for example, with Greece’s 22 percent). With the European economy in savage, sudden free fall, efforts to pump up domestic demand would have achieved little.

Instead the government concentrated on maintaining the fiscal discipline that is one of the country’s most valuable assets and waited for better times, helped in the meantime by the fact that its banking system (dominated by the subsidiaries of large, well-capitalized Swedish banks) kept liquidity flowing. The wait was not too prolonged. Benefiting from policies often very different from those pursued by the tightwads of Tallinn, many of Estonia’s trading partners pulled out of their post-Lehman dive rather more rapidly than might otherwise have been expected, dragging the Estonian economy up in their wake as exports picked up again. The budget is (broadly) back in balance, and the ratio of central-government debt to GDP stood at 6 percent at the end of 2011, a time, ahem, when the U.S. number was over 100 percent. Estonia’s finances remained intact.

And so, largely, did the population. Demography is a sensitive topic in the three Baltic states, small nations with (in the case of Latvia and Estonia) ethnic balances severely distorted by the influx of Russians who arrived in the Soviet years. The slump has triggered a large wave of emigration. Estonia has been spared the worst of this, not least because of the presence of Finland (Finnish and Estonian are closely related languages) just across the Baltic Sea. Why emigrate if you can commute? There’s probably something else at play, too. All three countries have come a long way since their escape from Moscow in 1991, but Estonia has gone the farthest: Perhaps its citizens were more willing to believe that hanging on would be worth their while.

Estonia’s is an impressive story, but it is a distinctive one, with specifics — including a history of budgetary prudence, the presence of those Swedish banks, a heavy export orientation, assistance from the EU’s structural funds, and a windfall from the sale of emissions quotas — that mean that advocates of an Estonian solution to the euro-zone crisis should proceed with care. Crushing the economic activity on which tax revenues depend is increasing the burden of government debt in many of the PIIGS. In that sense, Krugman was right. Estonia is not a poster child for “austerity defenders.”

But it is a poster child for Estonia: Its frugal, free-market, low-tax, and transparent democracy is indeed something to emulate. An Estonian-style tightening could never have ended Greece’s slump, but if the Hellenic Republic had earlier taken a path that was more Baltic than Balkan, it would not be in the mess that it now is. Coulda, shoulda, drachma.

The sting in this tale is that the euro’s distress may mean that Estonia will not be allowed to follow its own example much longer. This will not be the first time that the trickster currency has caused trouble in Tallinn. It was the prospect of Estonia’s adoption of the euro that triggered that last, fatal surge in Scandinavian lending. On the other hand, it has also represented an additional incentive (and some political cover) for the maintenance of that budgetary discipline without which — ironically, in the light of the shambles elsewhere — the country would not have been eligible for membership in the currency union.

Switching to the euro was seen by most of the Estonian elite as final confirmation that the country had left its Soviet past behind. Even though the Estonian kroon had been pegged to the Deutsche mark, and then to the euro, since its rebirth, many ordinary Estonians were not so convinced that it should be swapped for the single currency, but the terms of the country’s accession into the EU in 2004 rendered their discontent moot. Calls for a referendum were ignored, and Estonia moved over to Brussels’s funny money on January 1, 2011.

If the alternative approach, retention and then devaluation of its own currency (frequently a useful tool in an economic crunch), was considered, it was not considered for long. Exports are vital to Estonia, but it adds comparatively little value to them. Devaluation would therefore have had little impact on their cost to international customers. What it would have done, however, is risk importing yet more inflation into Estonia’s small, open economy. Above all, devaluation would have, as Ilves explains, “wiped out” the middle class. Typically, the mortgages — often on properties that had since collapsed in value — that Estonians had taken out from those generous Scandinavians were denominated in euros. To repay them in depreciated krooni would have been a Sisyphean nightmare. Another alternative, redenominating those loans in local currency, was never a serious option: The liquidity that the Swedes provided throughout the crisis would have dried up overnight.

That was then. The problem now is that Estonia arrived in the euro zone at a very bad time. The safe haven has turned out to be anything but. And it could prove an expensive place to stay. Estonia dutifully helped underwrite the European Financial Stability Facility, the currency union’s temporary bailout fund, and just a few weeks ago ratified its commitment to the fund’s permanent successor, the European Stability Mechanism. If things go badly, that could leave this small country on an unnervingly large hook.

This has not played very well with the electorate. To date, the country’s voters, many of whom remember the infinitely harder Soviet period, have supported the hair shirt. The government was reelected with an increased majority last year. But bailing out feckless, richer folk in Europe’s south (for example, Estonian average earnings are only about one-third higher than the Greek minimum wage) has been a tougher sell. Most Estonians opposed participation in the EFSF and ESM. By contrast, the political class remains willing to trudge through euro-Calvary, although there are some signs that this resolve may begin to crumble if the bailouts grow bigger (and thus potentially more costly to Estonia) and more widespread. And it would be the insult, not just the cost. Should still-poor Estonia really be asked to stump up for Spain? Or Italy?

Ilves points out that, “to put it crassly,” Estonia has profited nicely from its membership in the EU (not least from the financial support that Brussels channels to the union’s less prosperous members), and it has — so far. But there’s an obvious danger that Santa could turn Fagin.

And the euro’s woes menace more than Estonia’s coffers. It now seems clear that attempts to fix the single currency will revolve around trying to integrate the euro zone into a deeper political and budgetary union. Such a union, were it to be formed, would be launched with promises of financial discipline, transparency, and democratic accountability, none of which, given such a construction’s artificial, ill-fitting, and unnatural character (not to speak of the EU’s own lamentable track record in these respects), are even remotely credible. And what then would happen to Estonia, trapped within a Frankenstein union that could be held together only by methods — budgetary and otherwise — that would be the antithesis of everything that independent Estonia has come to stand for?

Neither Ilves nor any other of the political figures to whom I have spoken in Tallinn appear to believe that this is what lies ahead, but, even amid the confidence that is the product of past success and satisfaction at Estonia’s hard-won arrival in “Europe,” it is impossible to miss some hints of uncertainty over what comes next.

That uncertainty needs to be replaced by alarm.

Europe, Bloody Europe

The Weekly Standard, August 13, 2012

It’s always bloody Europe. It was Europe (specifically, Tory splits over Britain’s relationship with the EU) that finally did in Mrs. Thatcher, and it did in poor John Major too. Now it is beginning to look like David Cameron might eventually go the same way, felled by the issue he has tried to dodge since becoming party leader in 2005. To borrow his phrase from the following year, “banging on” about Brussels was over. Saving the planet was in.

But the elephant was still in the room, increasingly intrusive, increasingly destructive, and increasingly unwanted. Britons have never truly warmed to the EU, but a 2009 poll showing that more than half of them wanted out was just one more sign that resigned exasperation was at last giving way to something more determined. With the economic crisis drawing attention away from the Conservatives’ divisive past and onto the ruling Labour party’s dismal present, some carefully calibrated Brussels bashing would have been a smart way for Cameron both to score points against a notoriously europhile government and, no less important, to calm a restive (and euroskeptic) Conservative base dismayed by their leader’s often clumsy attempts to reboot the party’s image. It was an opportunity Cameron largely ignored, preferring to stay in his comfort zone and sing the old tunes that had worked so well. Carbon menace!

Many voters weren’t impressed. In the 2009 European Parliament elections, the euroskeptic—and distinctly maverick—UKIP (the United Kingdom Independence party) beat Labour into second place behind the Tories, grabbing 16.5 percent of the vote, up a sliver from the already remarkable 16.1 percent scooped up in 2004. It was a humiliation for Labour but a warning for the Conservatives. Less than 12 months before a crucial general election, the Tories who had flocked to UKIP’s side had not come home. A commitment from Cameron to hold a referendum on the EU’s pending Lisbon Treaty—if he was elected before it was in force—reassured few. Rightly so: The treaty came into effect ahead of the election. The Conservatives dropped their referendum.

It may be a coincidence that it was from roughly this point that the Tories struggled to retain a clear lead at the polls. What cannot be denied is that UKIP won enough votes in enough constituencies to deprive the Conservatives of an absolute majority in the 2010 general election. Rather than shoot for a minority government (the bolder, better course), Cameron opted for a coalition with the Liberal Democrats, the most europhile of all Britain’s major parties. The irony was obvious. The self-inflicted wound has taken a little longer to become visible.

With the keys to 10 Downing Street so close, Cameron’s choice can perhaps be forgiven. The same cannot be said of his reluctance to take a more aggressively euroskeptic tack in the years that have followed. The constraints of coalition have something to do with it, naturally, as do memories of earlier Tory disaster. Nevertheless, with the woes of the euro—a dangerous experiment lauded by many in the Labour party and by the Liberal Democrats—both unnerving the electorate and vindicating those squabbling Conservatives, it ought to be a time to make hay. But that’s not what Cameron has done.

And the chances thrown away may not just be domestic. As things stand, the currency union’s nervous breakdown offers the only remotely realistic prospect of a successful renegotiation of the U.K.’s position in the EU along lines that most Britons, including (he claims) Cameron, really want—to remain in the club, but less so. That’s because any credible long-term fix for the eurozone is likely to involve amendments to the EU’s governing treaty. That would need the approval of all member states including the U.K. That in turn might give Cameron the leverage he would need to secure all the other member states’ agreement to the treaty changes that would be required to accommodate the U.K.’s EU lite.

It’s not going to happen. Holding the global financial system ransom (and that’s how it would be portrayed) is a gamble too far, particularly for the prime minister of the country that hosts that hub of international finance, the City of London, and even more so when that same prime minister is unwilling to risk a breach with his Liberal Democrat partners.

It’s possible—just—to see the current approach as one of accidentally masterful inactivity. If the 17 eurozone countries are permitted to merge into a politically united core within a broader “multi-speed” EU, that could leave Britain to its own devices in a more congenial outer-EU. But you’d have to be very naïve to believe in such an outcome. All 27 EU countries would still be trapped within a European project that is explicitly set up to grind relentlessly forward (“ever closer union”). The speeds might differ, the direction would not.

If that’s to change, there will have to be treaty changes of the type that Cameron, pleading crisis and coalition, has not begun to attempt to renegotiate or, for that matter, even design. To be fair, his government has passed legislation designed to subject any future significant transfer of powers to Brussels to a referendum, a step almost unthinkable a few years ago. It was a start (and one day it may trigger a necessary confrontation), but the suspicion with which the new law was greeted by euroskeptics (because of the loopholes lurking within it) was yet another sign of how estranged Cameron has become from those who should be his party’s natural supporters.

That estrangement has been sharpened by a series of recent blunders. One of the biggest was an effort last October to browbeat Tory MPs into voting against a largely symbolic motion calling for a referendum on Britain’s membership in the EU. The motion had no hope of passing, but Cameron’s rather telling overreaction helped provoke a massive revolt within his parliamentary party, a revolt that goes some way to explaining the prime minister’s decision to keep the U.K. out of the fiscal pact cooked up by Merkel and Sarkozy in December.

The goodwill generated by that faint flicker of the bulldog spirit has since been squandered with characteristic carelessness of euroskeptic sensibilities. Cameron may have respectable, even euroskeptic, reasons for rejecting a referendum just now, but to argue (as his spokesman did in June) that there was “no popular support” for an immediate referendum at a time when half the voters were telling the pollsters they wanted just that (another third wanted one “in the next few years”) was not only inaccurate but, politically speaking, nuts: Cameron is lucky that Labour remains unenthusiastic about such a vote.

Even nuttier, and much more damaging, was his subsequent observation that he would “never” campaign for the U.K. to quit the EU. Again, there can be good reasons for a “practical euroskeptic” (as Cameron styles himself) to oppose an in/out referendum, not least the danger that, faced with a stark decision (made, doubtless, to seem even starker by big business), the electorate might well “keep ahold of nurse / For fear of finding something worse.” Read that way, opposition to such a vote is a question of tactics, not principle.

But by going further—and in such categorical terms—Cameron shredded the shreds of his euroskeptic credibility for no evident reward other than, perhaps, a smattering of the bien-pensant applause he treasures for reasons, sadly, other than cynical political calculation. How now was he supposed to be able to renegotiate a better deal with the EU? With the threat of a British withdrawal removed (quite a few EU countries still want the U.K. to stick around) and the idea of vetoing closer eurozone integration long off the table, it’s unclear what cards the prime minister would have left to play. “Practical” euroskepticism looks to be not so very practical after all.

The inescapable logic, for euroskeptics, points to an in/out referendum, followed, in the event of an “out” vote, by a total recasting of Britain’s relationship with Brussels, as the country begins the withdrawal process provided for under the EU treaty. That’s not what they will get. The best guess, amongst a bewildering range of scenarios, is that at the next general election (due in 2015) the Conservatives will guarantee a referendum on whatever feeble deal Cameron, reelected and freed from the chains of coalition, might (fingers crossed) manage to extract from the EU. Will that lure enough UKIP Tories back to the fold?

It’s unlikely, not least because there will probably be more of them than in 2010 (the 2014 elections to the European Parliament should add to UKIP’s momentum). The chances of a Conservative majority in 2015 thus appear (in the absence of an intervening economic miracle) slight. Instead the odds must be that Labour will be back in power, in which case there will be no renegotiations with Brussels, and that will be that.

What was that slogan about a roach motel?

Here We Go Again

The Weekly Standard, April 30, 2012

Penas Blancas , Spain, 1972 © Andrew Stuttaford

A phony peace is unlikely to end much better than a phony war. When the European Central Bank (ECB) poured a total of $1.3 trillion in cheap three-year funding into the continent’s financial institutions, that’s what it got.

Sure, it beat the alternative. Lehman part deux was staved off yet again. All those billions (and the suggestion of future ECB support that they represented) were enough to restore confidence that Europe’s sickly banking system would not crumble too far or too fast—for now. Between the announcement of the first of the bank’s long-term refinancing operations (LTRO) in December and the arrangement of the second at the end of February, many of Europe’s stock markets soared, and yields on much of its sovereign debt fell. But that was then and this is now. Dodging a bullet is not the same as victory. That trillion-and-a-bit bought time as well as confidence, but it bought less breathing space than was first hoped, and what little it did buy was squandered. The markets noticed. The crisis is back. And Spain is taking its turn on the rack. But if it hadn’t been Spain, the fear would simply have settled somewhere else. On Portugal, perhaps, or on Italy, or maybe even France, take your pick.

Given the scale of the problem, the rescue party has been grudging. There was the ill-tempered finalization of the second ($170 billion) Greek rescue in March. There was also the gritted-teeth agreement in the same month to use the eurozone’s new $650 billion permanent bailout fund (the European Stability Mechanism) to complement, rather than replace, the existing “temporary” European Financial Stability Facility. But band-aids costing hundreds of billions are still band-aids, and the eurozone’s key political problem remains unresolved.

Those running the richer, mainly northern member-states continue to be unwilling to risk the wrath of domestic electorates already riled up by bailout after bailout and resistant to further moves towards the closer fiscal union that is the best hope of preserving the single currency in its current form. Many northern voters have grasped that this process would culminate in the creation of a grotesquely expensive bailout regime (“transfer union” is the polite term). Given the vast economic divergence that is found within the eurozone, this would endure through the ages. Over a century and a half after Italian unification, Naples is still not Milan. How long would it take to transform Athens into Berlin?

So for now the “fiscal pact,” the Merkel-driven attempt to enforce a shared budgetary discipline that was drawn up in Brussels in December before being finally agreed to in early March (it has yet to be fully ratified), is all that is going in the way of structural change, and to the extent that it’s going anywhere, it’s going in the wrong direction. The imposition of austerity on the eurozone’s stragglers may be good politics (in Germany, the Netherlands, and Finland anyway), but it is primitive, apothecary economics. Draining the blood out of enfeebled, tottering economies and then—fingers crossed—hoping that they bounce back into rude health is a dead end, not a discipline.

Consider the sorry spectacle of hopelessly dysfunctional, hopelessly uncompetitive, hopelessly indebted Greece. Its GDP will have fallen by almost a fifth between 2009 and the end of this year. The country is trapped in a spiral in which austerity (however overdue) is dragging its laggard economy ever lower, shrinking the tax base and thereby increasing the fiscal woe that better budgeting is meant to resolve. Greece holds a general election on May 6. With the political establishment under pressure, and radicals polling strongly, a dramatic rejection of the apothecary regime cannot be ruled out. And the markets know this all too well. They also recognize that Portugal, now doing its best to adapt to the single currency for which it was never going to be suited, but struggling badly, is headed towards a second bailout.

Then there’s the other Iberian nation, Spain, the twelfth largest economy in the world and, therefore, potentially much more of a problem than, say, puny Greece, a country that took an infinitely more self-indulgent route to hell. Prior to the crash, Spain’s government finances were decently managed. Debt stands at around 70 percent of GDP, even now a ratio that is far from the worst in the eurozone, but it has been rising rapidly (the budget deficit was 8.5 percent of GDP in 2011). Overspending by this highly decentralized country’s regional authorities is emerging as a major problem, but the most dangerous poison may be brewing in the banks.

Like just about everywhere else, Spain saw a massive construction and real estate boom in the 2000s. This was fueled by low interest rates that reflected conditions in the eurozone’s Franco-German core rather than Spanish reality, as well as the belief, cheer-led by Brussels, that the economies of the currency union’s members were converging when, particularly as compared with Germany, they were doing anything but.

The bust that followed that boom took down a large chunk of the Spanish economy (unemployment stands at 23 percent, over 50 percent among the under-25s, a disaster exacerbated both by Spain’s sclerotic labor market and the malign impact of apothecary economics). There will be more misery to come. The IMF is forecasting that Spanish GDP will shrink by 1.8 percent in 2012. If Ireland is any precedent, and if the apothecaries have their way (the proposed deficit reduction amounts to a daunting 5.5 percent of GDP over this year and next), Spanish real estate prices could fall by another third. Should that happen, the country’s battered banks are (according to Open Europe, a mildly Euroskeptic think tank) likely to take a hit too large for cash-strapped Spain to cover by itself.

And the knife has further to twist. When the first LTRO was announced, French president Nicolas Sarkozy had a bright idea. Each state could sell its bonds to its newly flush banks. At first glance, such a trade would not only be patriotic, but profitable. The yield on debt issued by the eurozone’s struggling sovereign borrowers would comfortably exceed the bargain rate that the banks were paying to borrow from the ECB. And that’s the “carry trade” that Spain’s banks made. Indeed, in the view of Open Europe, Spanish banks have been the principal (“essentially the only”) buyers of Spanish government debt since December. But these banks are fragile and frighteningly reliant on ECB support (their borrowing from the central bank almost doubled between February and March). What would happen if their vulnerability to Spain’s mounting economic distress, not to speak of their specific exposure to Spain’s real estate nightmare, meant that those banks could no longer keep buying? How would Spain’s bills then be paid? After all, membership in a currency union means that Spain (unlike, say, the U.K.) can no longer print its own way out of a liquidity crunch. As the University of Leuven’s Paul De Grauwe pointed out last year, a “liquidity crisis, if strong enough, [could] force the Spanish government into default.” Indeed it could. Spain has already (and wisely) issued about half the debt it will need for 2012, but the rest?

Wait, there’s more. Spain’s borrowing costs are rising (yields on its 10-year bonds have been testing, and sometimes breaking, the toxic 6 percent barrier), to a level that may not be sustainable. That’s bad enough, but those higher yields also mean that the value of Spanish bonds bought by Spanish banks playing that Sarkozy carry trade will have been falling, with unpleasant implications for their beleaguered balance sheets at exactly the wrong time. If you are looking for a fine example of a vicious circle, this will do nicely.

Optimists will counter that the European Central Bank can again help out. And they are right. As an institution subject to relatively low levels of direct democratic control, it is better placed to ignore the concerns of northern voters than many eurozone institutions. Meanwhile the IMF’s managing director is in full telethon mode. Maybe the IMF/G20 meetings (underway in Washington, D.C., as I write) will see agreements to fund a firewall large enough to reassure. Maybe, maybe, maybe .  .  .

Outside Spain, Portugal, and the carcass that was Greece, the theoretically praiseworthy reforms launched by the eurozone’s proconsul in Italy, the technocrat prime minister Mario Monti, are beginning to run into serious opposition. The country’s planned move to a balanced budget in 2013 has also been postponed by two years (for now). New spending cuts will add to the economy’s pain. Italy has revised its forecasts for 2012’s decline in GDP from 0.4 percent to 1.2 percent, but that’s a sunny projection when contrasted with the fall of 1.9 percent forecast by the IMF.

Then there’s France, facing a presidential election in which the increasingly clear favorite (as I write), Socialist François Hollande, is clearly no great fan of the fiscal pact. And finally there’s the awful, undeniable fact that lies at the core of this tragedy: One size does not fit all. Laurel cannot wear the same suit as Hardy. Portugal is not Finland. Greece is not Germany. A shared currency designed to bring nations together is tearing them apart. Confining them in a monetary union that, as constituted today, cannot realistically cope with the profound differences that define their economies is an insult to common sense, an affront to democracy, and a rejection of elementary decency. Those countries it does not loot, it will sentence to stagnation and worse.

No matter: Whether due to the (not unreasonable) fear of what a breakup could mean, or to fanaticism, careerism, or simple, dumb inertia, the eurozone’s political class is sticking with its funny money. As it does so, other Europeans are quietly passing their own judgment. Stories of capital flight from Greece are not new, but a recent analysis of eurozone central bank data by Bloomberg News appears to show that euros are flowing out of Italy and Spain and into Germany, the Netherlands, and Luxembourg at an accelerating and unprecedented pace.

Just a few weeks ago, Mario Monti declared that the eurozone crisis was “almost over.”

Not yet, I reckon.

Declarer of Independence

National Review, March 1, 2012 (March 19, 2012 Issue)

He’s a tolerant man, Nigel Farage, a devotee of John Stuart Mill, a cricket-loving happy warrior, an “accidental politician.” The leader of the Euroskeptic United Kingdom Independence party (UKIP), and, since 1999, a member of the EU’s Potemkin parliament, he is standing expectantly at the bar of his local, the George & Dragon (of course) in Downe, a friendly low-ceilinged Kentish pub as English as its name. I’m ordering the beers. There’s a traditional, brewed-by-two-yokels county bitter for him (of course) and for me an industrial, vaguely Teutonic lager, bitte. “Euro-piss, I see.” Mock shock: Live and let live. Later on we share a bottle of good red wine. French.

We met up earlier at a railway station in a spot where the countryside emerges from London’s shadow. As we drove past tall hedgerows and stark winter trees, the late-fortysomething Farage proudly played guide: “I’ve always lived around here.” There’s landscape, history, old graveyards to inspect, English Shinto. Up there (he gestures) are the remnants of the oak where William Wilberforce resolved to launch his great anti-slavery campaign, and over here is the splendid pile where Pitt the Younger once lived. I point out Biggin Hill, an RAF redoubt during the Battle of Britain. Replicas of a Hurricane and a Spitfire stand guard. “They had real ones when I was a boy.”

Farage feels the past in this place. He’s a history buff, a battlefield maven, just finishing reading a book on Allenby of Great War fame. We stopped off at the small town of Westerham to inspect a statue of its most famous son, General Wolfe, conqueror of Quebec. Nearby, a restless-looking Churchill seems ready to leap out off the chair on which his sculptor sat him. The last lion’s last den — Chartwell — is nearby. Then on to the George & Dragon, just past the house of another Farage hero, Charles Darwin: The woods where the great scientist wandered are “just as they were . . . almost.”

But to believe, as many critics like to suggest, that Farage and his party are golf-club xenophobes wanting their country back as it was (. . . almost) is to subscribe to a very partial version (in both senses) of the truth. To be sure, there is a trace of the 19th hole about them; oh, what a horror. And is the idea that the country has gone to the dogs imprinted in UKIP’s DNA? Maybe, but the country has gone to the dogs. Claims of xenophobia, however, are difficult to reconcile with reality, in ways both small (Farage’s second wife is German; their two young children are being brought up to speak the language) and large: UKIP is a defender of de Gaulle’s Europe des patries, fighting the bureaucratic drive to remold the continent into a homogenized administrative unit in which history has been sanitized, tradition reduced to decoration, and difference regulated away.

If there is an era for which Farage is nostalgic, it’s more likely to be the 1980s, a time when big government was in retreat and big opportunity was round the corner. Not the most diligent of students, he skipped university and went straight into the City, London’s financial center, just as Mrs. Thatcher’s reforms were transforming it from an entertainingly seedy, mildly run-down club into today’s chilly international hub. It was “like a gold rush,” as we both recall. And there’s still the hint of an Eighties trading desk about Farage, an engaging, quick-witted risk-taker (a survivor of testicular cancer, he still enjoys his Rothmans) with a taste for a good time that has sometimes got him into trouble. Rick Santorum he’s not. Smart, direct, and impressively fluent, he speaks in paragraphs, punctuated with one-liners: He has a way with words, and he knows it.

If you doubt that, just check out the way he welcomed Herman Van Rompuy to the European Parliament shortly after that discreetly sinister Belgian had taken the EU’s top job at the beginning of 2010. Farage’s speech was brutally iconoclastic, rudely funny, and, in its warning of the threat that this official with “the charisma of a damp rag” posed to European democracy, deadly serious. It created uproar across the EU and made UKIP’s leader a YouTube star. Check it out, and you will see why.

“You’re a bit of actor, aren’t you?”

Farage grins his confession. His only regret — a very English regret — is that he may sometimes appear “too shrill.” In fact he doesn’t, but, endearingly, he insists on explaining that the microphones in the EU parliament’s chamber are set up in a way that makes it difficult for viewers to hear the barracking to which he is, not infrequently, reacting. But if it’s not always possible to make out the jeers, you can, I tell him, occasionally see the faces of his critics twisted into something that looks a lot like hatred.

“Oh, it’s hatred.” He names a couple of names. “They have their dream. It’s their religion. These are dangerous people.” They cannot accept dissent, especially when they know they’ve been rumbled: They just don’t want to be told how anti-democratic they really are. Wouldn’t they be happier if bolshie John Bull just quit the EU? “Some of the Euronuts,” maybe, but not the Merkels and Sarkozys: They’d be too nervous about which country would be next.

But is UKIP the right vehicle to extricate Britain from this mess? Since its founding in 1993 as a party set on taking the country out of the EU, it has woven an unsteady path, marked by scandal, factionalism, sporadic incursions by the far right, PR disasters, leadership crises, damaging outbreaks of eccentricity, and, above all, the pervasive, persistent sense that it was not ready for prime time. This was probably inevitable, and not just because small parties tend to be a lot like that. There was also the matter of UKIP’s great cause.

Euroskepticism was hardly unknown in Britain at the time — particularly amongst Conservatives — but it was house-trained. Withdrawal from the EU was widely considered a step too far even amongst those who loved Brussels least. “Banging on” about Europe (to borrow David Cameron’s notorious phrase from a decade or so later) was portrayed by media and political grandees alike as obsessional, retrograde, and profoundly damaging to the governing Tories’ unity, the last a development that, in a paradox understood by just about everyone, could only help sweep the slavishly Europhile Tony Blair into power. And, it turned out, keep him there.

Smears can be self-fulfilling prophecies: The nascent UKIP attracted more than its fair share of cranks, outsiders, and the hopelessly adrift. And it continued to do so, creating the image of the party to which David Cameron played when, in 2006, he referred to UKIP as a bunch of “fruitcakes and loonies and closet racists, mostly.” The feigned reasonability of that “mostly” was a clever touch.

Farage is no fan of Cameron. Is the prime minister a Christian Democrat on Rhineland lines? Not really. “Dave” (“an affable chap,” he adds, kindly) is more of a social democrat, a paternalist, a statist, and he’s not going to do much about Brussels: nothing that counts, anyway. Farage, a staunch Thatcherite back in the day, doesn’t have much time for the way in which the Conservative party has evolved. To read what UKIP would stand for, at least in theory (once Britain was out of the EU), is to be presented with an attractive mix of the hard-nosed and the libertarian, including deregulation, flat taxes, strict immigration controls, proper schools, tough policing, an aversion to multiculturalism, and a reversal of the kamikaze greenery of the Cameron years. Compared with the Tories, what’s not to like?

The problem is that Britain’s “first past the post” electoral system guarantees that, in most elections, a vote for UKIP is wasted — or worse. It’s “difficult,” Farage admits, an understatement. In the 2010 general election, UKIP scored some 3 percent of the vote, but took no seats, and, by nibbling away at Tory support, cost the Conservatives an absolute majority, thus (more or less) forcing them into coalition with the Eurofanatic Liberal Democrats. UKIP hoped that the Lib Dems would use their new position to push for the adoption of a voting system friendlier to small parties. They did, but they failed: A switch to the Alternative Vote was rejected in a referendum in May 2011.

Farage still wants electoral reform (AV+, since you asked). A glance at Britain’s elections for the European parliament (where a type of proportional representation is used) in 2009 explains why. Led by Farage since 2006, UKIP came in second (slightly ahead of Labour) with 16.5 percent of the vote and, like Labour, won 13 seats out of the UK’s total of 72. Even allowing for the low turnout and the fact that European elections are an excellent opportunity for Britons to register a protest against the EU, the result was a triumph.

Stymied at home, however, by the uncooperative electoral system, UKIP continues to struggle domestically, even as it stands at about 6 percent in the polls, not so far behind the Liberal Democrats. But Farage is determined, stubborn, and resilient (he has survived a plane crash as well as cancer). He’s not giving up. And he’s going to do it his way. Deals with the Conservatives, such as (one suggestion) an agreement not to challenge the party’s many genuinely Euroskeptic MPs, seem out of the question for now. Farage clearly wants UKIP to be seen as more than a Tory offshoot (he takes pains to tell me that its membership also includes “patriotic old Labour and classical liberals”). Those Euroskeptic Tory MPs? Useful camouflage for a Conservative party unserious about the only thing that really counts: prising Brussels out of Britain. “Unless we sort this out, we can’t do the rest.” The financial cost of EU membership is enormous (in direct payments alone, a net £10.3 billion in 2010, UKIP estimates). The democratic toll is still higher: About half of all “British” laws are now passed at the EU level. True enough, bad enough, but by splitting the right-of-center vote, Farage risks helping the Europhile left, which is always pressing to make matters even worse.

So there he stands athwart a political conundrum, Captain Sparrow at the head of UKIP’s motley crew, but something of a one-man band too, harrying the Eurocrats, embarrassing Britain’s establishment, deftly playing new media and old, deftly playing politics, new style and old. He crisscrosses the country, addressing meetings (he truly is a terrific speaker), talking to schools, retail stuff, good stuff. He’d like UKIP to take first place in the next European elections (2014), but what Farage, the gambler, wants most is a referendum — in or out — a high-stakes, binary game (a vote, however reluctant, to remain in the EU is every Euroskeptic’s nightmare). It would bypass that domestic impasse. And he believes it is winnable: His much-disdained UKIP has, “like Stalin’s [Red Army] punishment battalions, softened the ground up.”

The polls suggest that Farage might be right, but he understands that fear of what lies outside (possibly exaggerated further, and ironically, by the instability that the battered euro is leaving in its wake) could make voters pause. To calm that, he’s looking for business support to rally behind his idea of a country that sees its future in a world far wider, and freer, than the EU’s inward-looking, closed, and highly regulated customs union. That’s a vision that ought to be made all the more sellable to clearer-headed voters by the damage that the euro-zone crisis has done to the whole notion of Brussels’s “ever closer union.” And that crisis is unlikely to end soon or well. Farage doesn’t know what’s coming next. If he did, he’d be “in the betting shop.” He guesses that Greece will exit sometime in 2012, followed by Portugal, and believes that the “ultimate question” is France. But he’s not waiting to find out. To him, the issue is this: If Britain does not quit now, then when? Remaining in the EU is death “by a thousand cuts.”

I ask Farage whether he’d like Pitt the Younger’s old job. No thanks, he’s not interested in rank. He’d rather be remembered like a Wilberforce, for having changed things for the better.

Put another way, he will damn the torpedoes and steam on ahead.

A Bridge, but Leading Where?

The Weekly Standard, February 4, 2012

Purity has no place in a crisis. The 2008 TARP bailout was a clumsy, ugly, and rather shameful creation, but by signaling that Uncle Sam was in the room (with his printing press not far behind), it headed off the final descent into a panic that would have brought the banks, and, with them, the economy, and, with that, who knows what else, tumbling down. Three years later, another four-lettered program has been launched, this time in Europe, but once again designed to calm fears that were threatening to metastasize into catastrophe.

It was no coincidence that the European Central Bank (ECB) launched its first LTRO (long-term refinancing operation) on December 8, the first day of a two-day Brussels summit in which the EU’s leaders planned to show that they were really, really in control of a currency union on the edge of chaos. The central bank’s billions were intended to sugar the bitter pills that the Brussels summiteers were bound to prescribe—and did. The eventual, uh, “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” that was hacked out of those talks (and a second summit last week) combines the big-heartedness of Scrooge with the vision of Magoo and the credibility of Madoff. Its significance lies more in what it won’t do than what it will. Few were impressed.

The LTRO, by contrast, got off to a tremendous start. In the months prior to the new program’s debut the central bank had been criticized (not always fairly) for not doing enough to support the eurozone’s stumblebum banks. Its rescues were too ad hoc, too brief, and too grudging. Not any more: Just in time for Christmas, the ECB repackaged itself as Santa, offering out longer-term (three year) funding at highly attractive rates and, as an added bonus, not being too fussy about how it was collateralized.

The combination of one generous lender and many anxious takers produced a spectacular result. From across the eurozone, 523 banks borrowed a total of 489 billion euros ($641 billion), a far larger haul than financial markets had anticipated. This was a measure both of the easy terms being offered and the difficult straits in which so many European banks had found themselves. Lehman’s unquiet ghost was on the move. Trust in the banks was eroding, as was trust between them. Interbank lending was slowing, crimping the banks’ ability and willingness to lend money out into the “real” economy.

By December, credit to the eurozone’s businesses and consumer clients was falling at a rate that conjured up memories of the nightmare of 2008. With the currency union’s extended ordeal driving Europe into recession, the last thing anybody needed was credit crunch part deux to make matters even worse. Yet that is what the continent was getting. And the deeper the recession, the harder it would be for the PIIGS (Portugal, Italy, Ireland, Greece, Spain) to escape their budgetary hell, and, crucially, for their lenders’ faith in them to return. And so the vicious circle turns.

Initially, the market was unsure how to respond to the LTRO. Was the program’s size a reason for celebration or concern? But then sentiment changed for the better. Italy completed a number of successful bond auctions. Yields on French and Spanish government debt fell—while those of Germany’s safe haven bunds rose. The Rodney Dangerfield euro even made up some lost ground against the dollar. And this was despite the flow of dreary news that just would not go away. The impasse over the “voluntary” restructuring of Greek debt continued, Portugal slid closer, again, into bailout territory, there was a further round of ratings agencies downgrades (this time from Fitch), and hideous fresh reminders of the plight of the eurozone’s periphery continued to slouch into view. In late January statistics were released showing that Spain’s unemployment rate had hit 22.8 percent in the last quarter of 2011. For the under-25s the rate is nearly 50 percent.

But for now the glass was half full. The old TARP trick had worked again. The European Central Bank had not only supplied the banks with nearly 500 billion euros ($650 billion) in badly needed liquidity, but it had also signaled that it was there on the ramparts alongside them. The cash was important, the boost to confidence no less so, and the message will be rammed home with an LTRO 2.0 scheduled to take place later this month. Another gusher? Maybe. The standard guess is that this second round will amount to 350 billion euros or so, but some have speculated that the total could swell to as much as 1 trillion euros.

According to the logic of a seminal paper published last year by Belgian economist Paul De Grauwe, the very structure of the eurozone (monetary union without fiscal union) was an invitation to financial panic. Fears that money would drain out of the zone’s weaker countries would be self-fulfilling. One consequence is that the possibility of bank runs cascading through the system has been among the most dangerous of the many threats swirling around the eurozone. By supplying that extra liquidity, by promising a second helping, and by implicitly suggesting that in a pinch there could be even more, the ECB is trying to deliver the message that there will always be cash in the banks’ tills. No need to panic, or even think about panicking, after all.

Theoretically (and for now in practice) that should make it easier—and cheaper—for those eurozone countries not yet in intensive care to borrow on the international markets. There’s something else that may be helping too. One of the devices used to reassure skeptical Germans that the new European Central Bank would be more Bundesbank than Weimar was a broad ban on direct purchases by the ECB of government bonds from the eurozone’s members. There’s no equivalent rule, however, that stops commercial banks from using the LTRO loot they have just received from the ECB to purchase the bonds that the central bank cannot. Indeed the banks appear to have been incentivized to do just that. Using cheap ECB funds to buy high-yielding eurozone government bonds looks, at first glance (if not necessarily the second), like a nicely profitable carry trade.

Pause for a moment, though, to think through this money-laundering: Banks that have been weakened by their exposure to dodgy European sovereign debt were being encouraged to use loans (secured by similar debt, and worse) from an already highly leveraged central bank (underwritten by increasingly restive taxpayers) that was itself heavily exposed to identical crumbling borrowers, to buy even more of the same poison. Ponzi himself would have blanched. Nicolas Sarkozy, however, thought it was a great idea. “Each state,” he said, “can turn to its banks” to buy its bonds. Because thanks to the LTRO, the banks “will have liquidity at their disposal.”

It remains uncertain how many banks followed the French president’s advice. Quite a few, in all probability: Nevertheless a good portion of the LTRO proceeds have been placed right back on deposit with the ECB. The banks are still building fortifications in preparation for the day of reckoning they obviously fear may be on the way. That they are has something to be said for it (healthy cash reserves represent a handy preemptive strike against panic), but it is also a sign of a system that no longer believes in itself. The wider slowdown in lending that comes with it carries, as Europe has seen, its own terrible cost.

The next few months will show how effective the LTROs are at calming these fears. Somewhat, I’d guess, but sorting out the eurozone’s predicament will take more than the European Central Bank’s billions. The fundamental flaw of the euro was, and is, that this one-size currency does not fit all. All the liquidity in the world will not change that. Europe’s monetary union was assembled on the basis of political fiat rather than economic reality, and the economics and politics have both turned sour. And not just sour: They have combined into a murderous cocktail. Understandably enough, the looted taxpayers of the north want to see budgetary discipline imposed on the dysfunctional south. German chancellor Angela Merkel has been leading the posse pushing for just that. But too much austerity too soon is draining the ability of the PIIGS to generate the growth that is the only way out of their burning sty. More dangerously still, it is reaching the limits of the politically possible. Shuttered businesses, soaring unemployment, and the prospect of years of stagnation to come are not the stuff of social stability. If insults like the recent draft German proposals that would have ground into dust the last shards of Greece’s economic sovereignty (and much of what remains of its self-respect) are then added to the mix, an explosion is unlikely to be far behind.

The next moves will not be straightforward, but, if they want the eurozone to survive in its current form, those who control its destiny will have to reshape it into a cut that will eventually (if they are very lucky) have a chance of fitting all. They will have to make a drastic change of course. They will have to acknowledge that austerity alone is failing and move instead to fiscal union (and a permanent transfer payment regime) buttressed with, to quote IMF managing director Christine Lagarde, a “clear, simple firewall.” This, I’d guess, would have to be a jointly underwritten financing mechanism of a size (2 trillion euros?) that recognizes how prolonged and tricky this process will be.

Whether the voters will go along with all this is an entirely different and very pointed question, but if the eurozone continues to be run as it is now, the LTROs will turn out to be brilliant, necessary bridge financings that lead, ultimately, to nowhere.

Grade School

National Review, February 6, 2012

Niagara Falls, October 1989  © Andrew Stuttaford

When watching a disaster movie it’s occasionally worth pausing to take stock of where the main drama, obscured by subplots, rubble, and confusion, really stands.

Standard & Poor’s announcement, on, suitably, Friday the 13th, that it had downgraded nine euro-zone countries in various disapproving ways was a chance for just such a moment. S&P’s stripping France and Austria of their highly prized triple-A ratings grabbed the headlines. The downgrades of less-than‒Black Card nations such as Cyprus, Italy, and Spain (each down two notches, to BB+, BBB+, and A, respectively) added the clickety-click of tumbling dominoes to the story. But most striking of all was the rating agency’s release of answers to questions it anticipated it would be asked about the downgrades, answers that portrayed the euro-zone crisis in ways that Angela Merkel, in particular, will not have wanted to hear.

This mess is not, explained S&P, just about the debt. While their governments’ “lack of fiscal prudence” had undeniably played a part in some countries’ arrival in the PIIGS sty, not least in the case of a certain Hellenic Republic, this was not always the case. “Spain and Ireland . . . ran an average fiscal deficit of 0.4% of GDP and a surplus of 1.6% of GDP, respectively, [between] 1999 [and] 2007,” a period in which, the agency added, a touch cattily, Germany had run a deficit averaging 2.3 percent.

So what had gone wrong? S&P makes coy references to “boom-time developments” and “the rapid expansion of European banks’ balance sheets,” but appears unwilling to spell out too bluntly how the mirage -- promoted in Brussels, Frankfurt, and elsewhere -- of economic convergence (and whispered hints of mutual support) within the euro zone did so much to set in motion the spree of mispriced lending (Irish real estate is just one of many hideous examples) that has now unraveled to such destructive effect.

That’s a shame, because publicizing the truth about those years might have helped counteract the notion, heavily pushed by the EU’s elite, that the euro zone’s troubles are the result of market failure, when in fact they are the product of just the opposite. The devastation of recent years is in no small part the consequence of economic reality’s finally returning to a space from which it had been barred by the introduction of a “one size fits all” currency that was, of course, nothing of the sort. Perhaps S&P was concerned that dwelling too much on the misdeeds of the past might further infuriate a euro-zone leadership that has fallen menacingly out of love with the rating agencies that were once its accomplices (less than two years ago S&P was, remarkably, still treating Greek debt as “investment grade”) but are now, belatedly, stumbling along the road to long-overdue repentance.

Instead, the agency looks forward. As mirages tend to do, convergence is receding: “The key underlying issue for the eurozone as a whole is one of a growing [emphasis added] divergence in competitiveness between the core and the so-called ‘periphery.’” Indeed it is, and, with monetary union meaning that the zone’s weaker members are unable to devalue themselves back into contention, any reversal of this process will be extraordinarily difficult, if not close to impossible. And, as things now stand, they may no longer even be given the opportunity to try.

Up until now the PIIGS (as S&P does not call them) have been able to manage their “underperformance . . . (manifest in sizeable external deficits) because of funding by the banking systems of the more competitive northern Eurozone economies.” That party is now over.

So what to do? S&P argues that “a greater pooling of fiscal resources and obligations as well as enhanced mutual budgetary oversight” could buoy confidence and cut the cost of borrowing for the euro zone’s weaker brethren. What these arrangements would look like is not spelled out. What they would not look like is the misshapen agreement that slunk out of Brussels in early December, a pact that S&P clearly views as too little, too vague, and too stingy.

Thus, the rating agency is understandably skeptical about whether plans to advance the start date of the €500 billion European Stability Mechanism (the permanent bailout fund designed to replace the existing €440 billion European Financial Stability Facility) by twelve months, to July 2012, will make much of a difference. Tactfully enough, S&P does not speculate whether its own downgrading of some of the countries that stand behind the ESM will make that almost certainly inadequate entity’s job even more trying. In case you wondered, it will. And in case there was any doubt about that, on January 16, S&P downgraded the EFSF.

Although it never comes out and directly says so, S&P seems to want today’s currency union to evolve into something far closer to the Brussels dream (and democratic nightmare), a fiscal union that would be the logical complement to a monetary union encompassing 17 different countries. Left unstated, but surely implicit, is that this process would be preceded by the firing of the long-awaited, effectively German-underwritten “bazooka,” the resort (however artfully described) to the monetary printing press on a scale thought (fingers crossed) to be sufficient to extinguish the euro’s growing fever. The fever is one thing, but curing the underlying disease -- the competitiveness chasm -- would be the work of generations (how long do you think it would take to build a Portugal that could keep pace with the Netherlands?), and would be an immense challenge to the social and political order in countries struggling to adapt to the theoretically admirable disciplines of a currency for which they are in fact very poorly suited.

Meanwhile, even if they can get past historic memories of what Weimar’s printing presses eventually led to, the prospect of paying for what will be, by any reasonable reckoning, a prolonged, expensive longshot is something that horrifies the taxpayers in Germany (and elsewhere in the euro zone’s north) who would be stumping up the cash. That’s why Angela Merkel, a trial-and-error politician at the best of times, will give every alternative approach a go before marching her country down a route that would enrage the electorate that is supposed to be reelecting her in 2013.

But no other alternative is likely to provide much relief for long. S&P warns that “a reform process based on a pillar of fiscal austerity alone” may well prove self-defeating. However overdue they are, and however necessary they may be to sell the bailout parade to northern voters, austerity programs on the scale now being implemented in the PIIGS suck money, confidence, and demand out of their already battered economies. They shrink the tax base to such an extent that higher rates cannot compensate for falling revenues. Policies designed to cut deficits may actually end up increasing them. The PIIGS will have been chasing their own tails.

The markets understand this well. That’s why those PIIGS that can still tap the international markets have been finding it so expensive to do so. And that’s why there is such limited trust in a European banking system (already enfeebled by the 2008–09 financial debacle) that is, directly or indirectly, dangerously exposed to the woes of the euro zone’s laggards. And when there is limited trust in the banks, credit begins to freeze up. And when credit freezes, economies slow. And when economies slow, tax revenues decline. And when they do, bad deficits get worse. And, and, and . . .

If there’s one scrap of comfort to be found in S&P’s ruminations, it is in its observation that the European Central Bank has staved off “a collapse in market confidence” by a series of measures designed to prop up the EU’s banking system. Basically, the ECB has supplied Europe’s banks with large amounts of low-priced, comparatively lightly collateralized funding that, in December, grew to include €500 billion in three-year money -- and there will be more such bonanzas to come this year. That this may have left the ECB’s balance sheet looking like the books of an unusually generous pawnbroker is a problem, but it is a problem for another day.

All that money has bought some confidence, but not, unfortunately, a lot. Contrary probably to the hopes of the ECB, the banks have not been lured into using these cheap funds to “invest” in high-yielding government bonds issued by the likes of Italy. Instead the cash just piles up -- much of it, ironically, back at the ECB -- as nervous bankers wait for the crisis in which Angela Merkel is forced to choose between deploying the bazooka that saves the euro zone but destroys her career and (much, much less likely) abandoning the euro zone and taking a leap into the unknown.

That crisis will arrive. It could be triggered by Greece, which is teetering, as I write, on the edge of disorderly default, or maybe a spreading bank run will do the trick. There are plenty of possibilities to choose from. And that’s before the black swans come into view.

Clickety-click.

Euro Melee

National Review, December 1, 2011 (December 19, 2011 issue) 

Brussels, July 1985 © Andrew Stuttaford

The euro may not have brought Europe together, except in shared misery, but it has divided it in previously unimaginable ways. Votes can now be won in Finland by bashing faraway Greece, a place hitherto thought of in Helsinki (if at all) as a helpful supplier of beaches. Europe being Europe, the troubles of the single currency have also given a boost to more traditional antagonisms and, Europe being Europe, revived plans for a nasty new tax.

That tax, the financial-transaction tax, is now being pushed by Germany (with France scampering behind). Britain, already in the doghouse for allegedly not doing enough to help out the single currency it had rejected, is talking veto, while Germany, being Germany, is threatening to proceed regardless. Fleet Street being Fleet Street, there are warnings of a “Fourth Reich.” Many Greeks are saying (and shouting) the same thing, much to the fury of those German taxpayers bailing out a nation they see as idle, dishonest, ungrateful, and — old prejudices bubble up — a little too swarthy to be trusted.

It’s time to calm down. The financial-transaction tax is a thoroughly bad idea, with a dose of old-fashioned national nastiness thrown in (Britain would pick up a huge percentage of the tab), but Merkel’s demands for better budgetary discipline within the eurozone are, in theory, rather more easy to justify. If Germany is, one way or another, to underwrite the common currency, insisting that its money is not frittered away is good housekeeping, not empire-building. Not an empire in any traditional sense.

But Merkel is pfennig-wise but mark foolish (or she would be if such splendidly sound money still existed). She is set on defending Germany’s interests, but only within the parameters of the EU’s transnationalist, post-democratic agenda, to which, it seems, she subscribes. The appealing idea that Germany should, for its own good, quit the eurozone, either alone or in the company, say, of the frugal Dutch, remains off limits, and there is absolutely no prospect that Germany’s voters will be given any direct say on that topic. They never wanted the euro, but they got it. Now they are stuck with it.

And that’s how the EU, born out of a distrust of nation-states and their voters, was always meant to work. The difficulty for Brussels is that this system is now being tested as never before: The eurozone has become the site of a dangerous, chaotic, and half-hidden power struggle between its political and bureaucratic leaderships (which are themselves deeply divided on how far to take deeper integration, but that’s mainly a tale for another day), nervous financial markets, and increasingly riled-up voters.

This wasn’t on the program. To the extent that Brussels had any strategy at the time of the single currency’s launch beyond finger-crossing and prayer, it was that the eurozone’s inherently flawed nature (very different economies joined in monetary, but not fiscal, union) would eventually lead to an over-by-Christmas “beneficial crisis.” Financial markets would force through the closer fiscal union that politics could not deliver. Once that had been achieved, the zone’s individual nation-states would count for very little, and their voters for even less.

That’s not how it has worked out. The mechanics of currency union (more on that later) have combined with irresponsible sovereign borrowing and the economic horrors of recent years to foment a financial storm that may be too devastating to be harnessed in quite so “beneficial” a way. The crisis could yet work out (in that cynical Eurocratic sense), but the terrible damage it has already caused has driven home the real costs — political, economic, and financial — of the monetary union to electorates that have long been denied an effective say in its future. Now that they know what they now know, it will be more difficult to keep them on the sidelines.

But over in the PIIGS they are still huddled there for now. In the last few weeks, Prime Ministers Berlusconi and Papandreou have been forced out with shocking ease, replaced by technocrats bearing the Brussels stamp. Italy was issued a former EU commissioner, and Greece a former vice president of the European Central Bank. Neither man had previously been elected to anything. Who cares? The message to Italian and Greek voters was clear — beggars cannot expect to be, so to speak, choosers — and so far surprisingly few of the beggars have objected. So long as it is seen to be better to be in the zone than out, hairshirts and all, this argument will fly. Underlining this, Spain, Portugal, and Ireland have all held elections, and, in each case, the electorate supported austerity. But if virtue’s reward is too long delayed, that consensus could easily shift, and if that change in sentiment is not addressed by those in charge, there could well be serious disorder.

A kinder, gentler eurozone, fueled by the printing presses of a looser, laxer European Central Bank and, once fiscal union has been safely set up, significantly higher transfers from the frugal “north” to the PIIGS, might be one way of smoothing the path to some sort of recovery. But the rise of the populist True Finns, the collapse of the Slovak government, and the continuing success of Holland’s Euroskeptical Geert Wilders all suggest that growing numbers of northern voters are in not such a generous mood. The only fiscal union they would be likely to support would be more Scrooge than Santa. These voters are signing checks, not receiving them. Their concerns ought to count for far more than those of the pauperized periphery. And they just might.

Even in Germany, there is some evidence that portions of the overwhelmingly Eurofederalist political class are becoming unnerved not only by popular discontent (as a proxy for that, nearly 80 percent of German voters are opposed to the issuance of Eurobonds guaranteed by all the eurozone’s members) but also by clear signals of unease from the country’s powerful constitutional court over the liabilities Germany may be taking on. Merkel’s grudging responses to the bailout requests of the last two years may have been an attempt to maintain financial discipline, but they are also a recognition that her domestic voters once again count for something. And maintaining that tough stance is playing well at home. According to a new ZDF poll, the percentage of German voters who approve of Merkel’s handling of the crisis has risen sharply (from 45 to 63 percent) over the last month.

To the extent that Merkel is a fan too of a Scrooge-style fiscal union, this may actually strengthen her hand as the eurozone’s bad cop. That’s something that alarms another key participant in this drama: the financial markets. Market players are fond of a quick fix. They are not very interested in the plight of the eurozone voter. Most are pushing for closer integration (preferably Santa-style) as the only way to make the single currency work. Merkel has not appreciated this pressure, or the turbulence that has come with it, and she is not alone. The currency union echoes with the rage of a European political/bureaucratic class that prefers to blame the crisis on wicked “Anglo-Saxon” speculators rather than on overspending and the shortcomings of a gimcrack currency union that should never have seen the light of day.

And it’s in the operation of the latter that the immediate danger lies. As Paul de Grauwe of Belgium’s University of Leuven has noted, if markets panic about one of the eurozone’s members, euros will pour out of that country (let’s call it Greece), and unless that flow is somehow reversed, that country (unable to print its own money) will simply run out of cash, and it will go bust. As I said, let’s call it Greece.

That gives markets the whip hand, and that does not play well on a continent that has never really shaken off its command-and-control traditions. So long as financial markets bought into the euro dream, their exuberance was welcome and, indeed, encouraged in Brussels, Frankfurt, and elsewhere. There were few complaints about ratings agencies, banks, or speculators back then. Now the bubble has burst. The markets have woken up, and, as we all know, the results have not been pretty to see — and they are visible to all.

This has not pleased the eurozone’s leaders one bit. They have responded with an onslaught of measures — from bans on certain kinds of short sales, to the financial-transaction tax, and, even, an aborted plan to censor the ratings agencies — all designed to throw sand in the gears of the free market, cut financiers (whose pay, even higher than that of the Brussels elite, has long been a source of irritation) down to size, and, in particular, give those semi-detached Brits, arrogant Yanks, the greedy City, and even greedier Wall Street a very good kicking.

To be continued . . .