Tango Lesson

The Weekly Standard, December 12, 2011

Casa Rosada, Buenos Aires, August 2011 © Andrew Stuttaford

There are good days and bad days, but even on the good days the abyss is never too far away. The eurozone’s dangerously original mix of innovation, incoherence, and unaccountability makes it difficult to identify a single event that could finally push it over the edge. But, with confidence already shot, there is one obvious contender, a series of old-fashioned bank runs given a brutal new twist by the logic of currency union as cash pours out of the stricken banks and the country (or countries) that hosts them. Unless the European Central Bank could show that it has what it really takes, fear would feed on itself, credit markets would seize up, and that, quite possibly, would be that.

The extra liquidity offered by the Fed and other central banks on November 30 was a sensible precautionary move, but its extent and its timing were clear signs of anxiety that, while the eurozone’s leadership moves from grand plan to grand plan, the building blocks of disaster are falling into place. U.S. institutions are wary about extending short-term funding to many European banks. European banks are wary about lending to each other.

Of all the sickly banks surviving on the Rube Goldberg life support systems now being deployed in the eurozone’s grisly ER, Greece’s are probably (and the implications of that “probably” are appalling) the most vulnerable to the panic that could set everything off. Their country is the closest to default. If Greece goes under, its banks will, without fresh capital, go under too. So what are their depositors doing?

They are not yet running. But they are walking away at an ever quicker pace (deposits have fallen by over 20 percent since January 2010) that can only have accelerated since the moment in early November when Angela Merkel and Nicolas Sarkozy first conceded that a country’s eurozone membership might not be irrevocable after all.

To understand just how bad things could get, the best place to look is Argentina in early 2001. In 1991, just 10 years before, Latin America’s most gorgeously faded republic had decided to turn over its latest new leaf. It linked its peso to the dollar at a 1:1 exchange rate. This peg was backed by reserves held by a currency board. Despite its distinctly permissive, distinctly Argentine, characteristics, it was designed to use external market pressure to force the country into the tough financial discipline that it had found impossible to impose upon itself. Those Greeks who regarded the EU’s single currency as something more than a free lunch supported signing up for the euro for pretty much the same reason.

At first, the Argentine experiment worked well. The economy grew briskly, and foreign lenders were pleased to feed its growth in a manner well beyond the capability of Argentina’s relatively small banking sector. After all, they told themselves, the country had changed its ways, and, thanks to the peg, exchange risk had been hugely reduced. What could go wrong? If you think that sounds a lot like the talk that accompanied the prolonged surge in international lending to Hungary, Latvia, Greece, Ireland, and all the other future catastrophes crowded into the euro’s waiting room (and, subsequently in some cases, the eurozone itself) just a few years later, you’d be quite right.

What could go wrong, did: Deep-seated structural flaws within the local economy, a series of external shocks (starting with the Mexican crisis of 1994), weaker commodity prices, and stresses flowing from the fact that the dollar and the peso were an ill-matched pair all combined to push the country into difficulties made cataclysmic by ultimately unsustainable levels of foreign debt. Private lenders shied away. Private capital fled. Taxpayers hid. Ratings agencies screamed. The cost of borrowing soared. The resemblance to Greece in 2011 is unmistakable. Interestingly, the Argentine storm was gathering strength at the same time as Greece was being accepted, not without controversy, into the eurozone, raising the question what in Hades the EU’s leadership was playing at. The implicit warning for Greece contained in the Argentine disaster was as clear as Cassandra, and just as ignored.

In any event, as the 20th century lurched into the 21st, Buenos Aires previewed Athens. There were differences, of course, not least the fact that Argentina had hung on to its own national currency, but that meant less than it might have done. By the end of the 1990s, 90 percent of Argentina’s public debt was denominated in a foreign currency, marginally better than Greece’s 100 percent (for these purposes the euro is a “foreign” currency everywhere), but not by enough to give any comfort. And it wasn’t just the debt: Wide swaths of the economy had been dollarized.

And so had the banks: According to the IMF, close to 60 percent of the Argentine banking system’s assets and liabilities were denominated in dollars throughout the second half of the 1990s, leaving the banks horribly exposed in the event that the peg broke. Indeed, the potentially enormous cost of breaking the peg was a good part of why it was maintained, a logic similar to that now keeping the embattled PIIGS (Portugal, Italy, Ireland, Greece, and Spain) on the euro’s leash. This should come as no surprise: The stability that such mechanisms can bring largely rests on the absence of any obvious exits. Countries that sign up for them need to be sure that they have what it takes to stay the course. Slinking in on fudged numbers and, ludicrously, expected to maintain some sort of pace with Germany’s Porsche economy, the Greek jalopy stood even less of a chance than had far-better-intentioned Argentina.

Argentine headlines in 2000-01 must have read much like those in Greece today. The country accepted billions in international assistance (from the IMF) in exchange for the imposition of austerity measures that pummeled an already faltering economy. There was a voluntary debt swap (on terms as absurdly expensive as those proposed for Greece earlier this year) that bought time, but no confidence.

Massively widening spreads between peso and dollar debt signaled the market’s fear that the peg was doomed. But, to quote the IMF’s invaluable Lessons from the Crisis in Argentina (approved by one Timothy Geithner), it was “the resumption [in July 2001] of large scale withdrawals from Argentine banks [that was] perhaps the clearest sign of the system’s impending collapse.” Indeed it was.

The banks—and, of course, the country itself—were quite literally running out of the dollars that made up a monetary base already depleted by previous capital flight, and a growing current account deficit. The rules of a currency board (even in its looser Argentine variant) meant that it was not possible simply to print money to fill the gap. This is a problem familiar to those of today’s PIIGS who have to watch the money drain out of their economies, yet are blocked from direct access to the printing press by the European Central Bank. Argentina’s more sinuous treasuries (provincial and then national) tried to meet this challenge by issuing a series of evocatively named quasi-monies (IOUs, basically), but these patacones, porteños, quebrachos, and lecops were harbingers of doom, not a solution.

And when the dominoes of finance finally fall, they fall quickly. To return to the IMF’s grim textbook: “The crisis broke with a run [on] private sector deposits, which fell by more than $3.6 billion (6 percent of the deposit base) during November 28-30.” At that point the game was up. The authorities’ response (notably the introduction of the corralito) should alarm depositors throughout the PIIGS as they mull how their governments might stop precious euros escaping to safe havens abroad in the wake of bank runs at home.

The corralito limited cash withdrawals from individual bank accounts to the equivalent of $250 a week (the dollar value would soon fall sharply). And the response to it should worry those now running the PIIGS. Argentinians took to the streets and reduced the country’s political order to chaos. Depending on how you define the term, Argentina had five presidents in less than a month, but none could change the inevitable. The country defaulted on its debt, the peg was scrapped, the peso tanked, and the corralito was replaced by the corralón, the centerpiece of an even tougher regime. Depositors were allowed to withdraw a little more money than before, but only in heavily depreciated pesos. Term deposits were frozen, and transfers of money out of the country heavily restricted. Not so long after, dollar deposits were switched into pesos, and the ruin of Argentine savers, many of whom lost their jobs as the economy crashed, was complete.

History does not always repeat itself. Maybe those remaining Greek depositors are confident that, however battered their nation’s finances, its guarantee of bank deposits up to some $135,000 will hold up through the toughest times. Maybe they have faith that Greece will stick with the euro. And maybe they trust that, should the walk from Greek banks turn into a run, the European Central Bank will do what it takes to put things right. But if they do have any doubts, they can, for now, easily move their euros to a part of the eurozone—Germany, say—where there is no currency risk and bank deposits are blessed with a guarantor that is, you know, solvent. Thinking like that is how a run on the banks can begin. Paranoid? Well, if you were a depositor with a Greek bank, what would you do?

And, if you were a depositor in an Italian bank, watching all this and aware that money is ebbing away from Italy too, what would you do?

I know what the Argentine advice would be. Run.

And if the Greeks run, and the Italians run, who will be next?

Right but Repulsive

Peter Oborne and Frances Weaver: Guilty Men

The Weekly Standard, October 31, 2011

A doctor ignored by a smoker won’t celebrate if lung cancer strikes. Britain’s euroskeptics are generally too worried about the consequences of the Eurozone’s thoroughly predictable crisis to submit to the temptations of I told you so.

Well, most of them are. The United Kingdom may be outside the Eurozone, but some British Banquos have managed to crash its beggar’s banquet nonetheless. One, Foreign Secretary William Hague, has compared the currency union to “a burning building with no exits.” He can be forgiven his bluntness. As Tory leader, he had said the same and much more besides when that ill-fated building was still under construction. The reward for his prescience was to have his words used against him as part of a vicious and deceptive campaign that failed in its specific objective, yet succeeded in a wider task: contributing to a political and cultural climate that doomed Hague to vilification and defeat in the 2001 general election, and Britain to years more of Tony Blair.

That campaign—to persuade Britons to adopt the euro—has now been retrieved from the memory hole and made the subject of Guilty Men (Centre for Policy Studies), a brutal, brilliant new pamphlet by Frances Weaver, a freelance writer and researcher, and Peter Oborne, the Daily Telegraph’s chief political commentator. The title is provocation and insult. Published in 1940, the original Guilty Men was a savage, if not always accurate, attack on British politicians of the appeasement era. To revive its name was to hurl down a gauntlet.

Guilty Men should be seen as the third in an Oborne trilogy that began with The Rise of Political Lying (2005). That volume and The Triumph of the Political Class (2007) are two of the finest books on British politics in recent years. Their titles speak for themselves, and their message ought to resonate far beyond Britain. The same is true of Guilty Men. Within its covers you will find the description of an elite unimpressed by its homeland, enthralled by transnationalism, seduced by the main chance, and buttressed by a mistaken conventional wisdom that it chose to defend by any means possible. None of this, of course, could ever happen here.

Like all the best thrillers, Guilty Men begins with a dastardly foreign plot. In its introduction, Peter Jay, a distinguished journalist and a former British ambassador to the United States, describes a lunch in Paris he attended as a 15-year-old in 1952. The guest of honor was the French diplomat Jean Monnet, the man who launched what eventually became the European Union. Dismayed by the spectacle of a France now eclipsed by the United States and Soviet Union, Monnet apparently explained that the only way that la gloire could return to France was within a Greater Europe. But this would have to be a superpower created gradually and by indirection, “by zig and by zag,” until, as Jay puts it, “the walls of old-fashioned national sentiment collapsed in favor of a new focus of national unity, Europe itself.”

In the nearly 60 years that have followed, there has been plenty of zig, and plenty of zag, and rather too much European Union, but the United States of Europe has yet to emerge. And as for “the dimension of empire” that EU Commission president José Manuel Barroso claimed to detect within Brussels’s realm back in 2007, well. . . .

Critically, there is, to borrow the unkind observation of Václav Klaus, the Czech Republic’s splendidly Thatcherite president, “no European demos—and no European nation.” There are, of course, the institutions—the parliament, the Commission, and so on—and the pretensions and the massive regulatory overreach. There’s a pretty flag and, via Beethoven and Rhodesia, a nice enough anthem, but that’s about it. To the extent that there is any European patriotism beyond the expensively furnished lairs of the upscale and, let’s concede the point, some genuine enthusiasm for Europe’s Ryder Cup golf team, it finds its most powerful expression in, significantly, something negative—distaste for the United States. These are too-flimsy foundations on which to build a challenge to the world’s colossi.

Thus it was not some atavistic dream of empire that persuaded so many of Britain’s best and brightest to rally behind the campaign to sign their country up for a shoddily constructed currency that was, whatever Paul Volcker (oh yes) might have said, clearly ill-suited to the U.K. economy. For some, career was the motive, and not only in an obvious way. Brussels can pay well, directly and indirectly, but, more than that, opposition to the euro had been cleverly smeared as a badge of the bizarre, an ornament to no résumé worth having.

The sharply told tale of how the opponents of the Eurozone’s madhouse money came to be regarded as nuts takes up some of the most interesting sections of Guilty Men, but it’s worth pausing to note how the structure of Britain’s politics and media makes it easier to manipulate public opinion there than in the United States. Power is much more centralized. There are fewer movers and shakers who need to be convinced. There are no awkward states to cajole. The press is ideologically diverse, but television and radio matter far more, and in broadcast the loudest voice is that of the officially nonpartisan, taxpayer-funded BBC, a megaphone for the pieties and prejudices of the soft left. There is no meaningful equivalent to Fox News or America’s gung-ho Genghis talk radio to bite back. And at the time when the euro wars were at their most intense, the blogosphere was still being born, and Twitter had yet to hatch.

The BBC had therefore an immense advantage, and it abused it. In the course of one nine-week period in 2000 on BBC Radio 4’s influential Today program, Oborne and Weaver record, “the case for the euro was represented by twice as many [speakers], interviews, and soundbites [as] the case against.” That’s not the end of it. A controversy can be defined by the way that it is framed by the media. When euroskeptics were heard on the BBC, it was often in the context of hugely exaggerated reports of splits within Conservative ranks over the single currency. A divided party is electoral poison, and the splits became the story. The argument against abandoning the pound was shelved for another day.

Word games of a type all too familiar from America’s mainstream media were deployed (it was euroskeptics who were the “hardliners”). Scare stories of the terrible fate that awaited Britain outside the Eurozone made headlines, inconvenient statistics that cast doubt upon them were buried. If you think that sounds a lot like much of the American media’s treatment of the global warming debate, you’re correct.

The BBC was not the only prominent media institution to play these tricks. The Financial Times is widely perceived as authoritative, serious, informed, the voice of British business, the house journal of the City. It is meant to be something more than a mere newspaper. Oborne and Weaver demonstrate how, when it came to the euro, it was very much less. Not all its writers played along, but too often the Financial Times resorted to a camouflaged advocacy journalism that may even, ironically, have contributed to the Eurozone’s present mess. How many bankers will have read the paper’s ecstatic accounts of the euro’s progress and felt just that much better about lending to Greece, Ireland, or Portugal? What could go wrong? On May 26, 2008, the FT ran a leading article with a headline that included these words: “Europe’s currency union has been a remarkable success.” Remarkable indeed. Less than two years later the first Greek bailout was under way.

With such purportedly fair-minded grandees lending weight to the cause of the euro, and the Tories burdened by the irrational popular loathing that had swept them out of office, the vitriol of more openly partisan journalists came to be treated by many as something approaching gospel. In its viciousness their work anticipated the high-minded nastiness seen in the coverage of the Tea Party a decade or so later. Weaver and Oborne have plenty of examples showing just how low reputedly respectable detractors of “euroskeptic pus” could stoop. The euroskeptics were a “menagerie of has-beens, never-have-beens, and loony tunes.” They were “a sect” of “intellectual violence . . . [stoking] the phobic fire.” They were keen on “Hun-bashing,” yet had something to do with the Latvian SS. They were liars, they were hatemongers. They were a “paradigm of menace and defeat,” “extremist,” “dogmatic,” and “hysterical.” Surely someone somewhere must have said that they were “bitter.” They were “maniacs.” Their opponents were “sane,” a loaded adjective frequently abused in American polemics too.

This dark mood music was deftly conducted by Prime Minister Blair and an entourage skilled in the blackest arts of politics. What was there to lose? An economic illiterate, Blair didn’t grasp how destructive dumping the pound could be, but as an iconoclast he appreciated the break with the past. And campaigning for the euro could bring its own rewards. The Conservatives’ opposition to a change supported by some of the country’s smartest could be used to reinforce the image of the know-nothing Tories, out of touch and not even “sane.” The assault was relentless: Addressing the Labour party conference in 1999, Blair launched into an attack upon the “forces of conservatism,” a faintly totalitarian diatribe that implicitly linked the jailers of Nelson Mandela to the euroskeptic threat. The idea was to push the electorate’s perception of the Tories to a point where the Conservatives would be viewed as oddballs who deserved to be driven out of parliament and, indeed, polite society altogether: Under former Conservative prime minister John Major, explained Blair, “it was weak, weak, weak. Under William Hague, it’s weird, weird, weird. Far right, far out. . . . The more useless they get, the more extreme they get.”

Naturally, a place in the respectability room would be found for those “sane” Conservatives who would sign up for the “cross-party” crusade for the euro. Quite a few did just that.

Polite society paid attention. Conventional wisdom builds upon itself, especially when self-interest is greasing the way. It wasn’t just individuals on the make who discovered their faith in currency union; it was companies too, dancing the corporatist waltz. Obama’s GE would understand. Firmly in the pocket of big business interests confident of their ability to play the EU game, the influential Confederation of British Industry (CBI) threw itself behind the campaign, lending it further credibility and then, less helpfully, incredibility. The CBI’s polling data showed that 84 percent of British business supported the euro. Once this distinctly Soviet result was revealed (thanks to the work of yet another determined euroskeptic “crank”) to have been arrived at by distinctly Soviet math, the pushback slowly began. Within a few years the CBI found itself (in the words of one well-known journalist) “tugged towards the new extremism and europhobia.” In other words, it adopted a neutral stance on the euro.

But don’t see this saga as evidence of some giant conspiracy. There were a few plotters to be sure, notably in the Labour party and, doubtless, Brussels, but for the most part the surge of support for the euro among the U.K.’s chattering classes was the result of something more insidious and less planned: This was a scheme they simply felt to be right. For many British intellectuals, the cultured Europe of their vacations and their imaginations has long been a finer place than their grubby, greedy, and in all senses insular homeland. The weather is nicer, the food is better, and the ambience is both pleasingly picturesque and refreshingly sophisticated. Most alluring of all, Continentals treat the intelligentsia with a respect rarely to be found in unruly, ill-read Blighty.

To such folk, confident in the inadequacies of what they prefer to describe as their midsized nation (then perhaps the fifth-largest economy in the world, with nukes to boot, but let that pass), the EU was a safe haven that only the mad or the bad would disdain. The fact that it had evolved, not into the superpower of Peter Jay’s fears but into the vaguely utopian, proudly progressive post-national technocracy that was Monnet’s greater vision, only added to its appeal. If signing up for the euro was the price of admission to the EU’s inner circle, why would any civilized, “sane” individual want to object? And who knew anyone who had?

There was a lady called Pauline Kael who once asked a question much like that.

In the end, the thin red line held, maintained by politicians of integrity (and, yes, sometimes eccentricity), the caution of British voters, and, crucially, the venom of Gordon Brown, the finance minister, too jealous of the upstart Blair to allow him to take the U.K. into the Eurozone. Britannia stayed out, and has weathered the current economic storms far better than she could have done with the euro around her neck. Signing up for the single currency will be off the agenda for quite a while.

A happy ending then? No, it’s more a “to be continued.” As Weaver and Oborne understand, the opprobrium heaped on the Conservative party for being, as it turned out, right about the euro helped derail the careers of three Tory leaders and paved the way for “modernizers” such as Prime Minister David Cameron, determined to avoid “banging on about Europe” at a time when that’s just what he needs to be doing. The increasingly desperate attempts to resolve the Eurozone crisis are likely to include proposals to change the EU’s legal framework in ways that will require the approval of all member-states. That will be a good moment (if Cameron can be persuaded to seize it) for the U.K. to finally play hardball with its European partners over the repatriation of powers that should never have been transferred to Brussels in the first place. Britain’s euro-claque will noisily object. A reminder to the rest of the country of just how hard that still largely unapologetic claque worked to shove Britain into the Eurozone’s abyss is just what such a debate could use. And that’s what Guilty Men is designed to provide.

Oborne and Weaver give plenty of indications of how much it will be needed. One of the guilty, former EU commissioner Lord Patten, chairs the BBC’s governing body. His vice chairwoman, Diane Coyle, is a lady once deeply concerned about the “gut anti-Europeanism and Little Englandism” of the pound’s “elderly” defenders. This dismal duo will find little in the Beeb’s current EU coverage to disturb them. The Financial Times is now edited by its former Brussels chief, another cheerleader for currency union. He is in charge of a newspaper that appears sadder these days, if not much wiser. Waiting, perhaps, for a fresh euro-dawn, former CBI boss Adair Turner is currently using another collective mania to hobble the British economy. He’s chairman of Britain’s Committee on Climate Change, a perch from which he can admire similar efforts by Britain’s destructively green energy minister, Liberal Democrat Chris Huhne, a europhile who has lost none of his vim. And then there’s Tony Blair, continuing to pontificate to anyone who will pay attention or, at least, pay. He’s not the only member of the Labour party who still believes that Britain should sign up for the single currency—when the time is right, of course.

Zig and zag.

Greater Europe, Lesser Europe

National Review, June 2, 2011 (June 20, 2011 Issue) 

By the time you read this, Greece may have defaulted on its debt. Or it may be preparing to default, but without the D-word. Most likely it will be negotiating another rescue package, but it may still be fighting to secure the latest payment under its existing bailout. Only one thing looks certain as I write. The eurozone crisis will not be over.

It’s been a long, hard journey since the first Greek bailout just over a year ago, a €110 billion loan package from the European Union (€80 billion) and International Monetary Fund (€30 billion) secured by pledges of drastic austerity. A €750 billion European Financial Stability Facility was announced a little later. The prospect of its billions’ being available to any eurozone country that ran into difficulties was intended to “shock and awe” (yes, that term again) the financial markets into calm.

It did not work out. Both Ireland and Portugal have since had to be bailed out. The destructive contradictions of the one-size-fits-all currency remain unresolved. The damage they caused is unrepaired. Then there’s the fact that the very nature of the eurozone leaves its weaker members vulnerable to fears of default. Most of their debt is in euros, and, for all practical purposes, the euro is a foreign currency. Once investors move out of, say, Irish bonds to safer euro debt elsewhere, all that Ireland can do to lure them back is increase interest rates and tighten its belt yet again. If that doesn’t work, the cash will run out.

Belgian economist Paul de Grauwe argues that a liquidity crunch of this type could force an otherwise solvent country into default. Maybe; but in Greece’s case that’s beside the point. The country has, financially speaking, ceased to be a going concern. Neither the 2010 bailout nor the (partial) introduction of austerity measures that are already at the limit of the politically possible have been enough to do the trick. Indeed, by depressing domestic demand, the latter have — at least in the short term — made the budgetary situation even worse. Tax revenues have been hit by the slump in an economy that shrank by over 4 percent last year, and will likely dwindle by another 3.5 percent this year. The conventional response — a massive devaluation designed to restore international competitiveness — is unavailable so long as Greece remains yoked to the euro.

And it’s not easy to break free. Capital controls would be introduced overnight. The Lazarus drachma would collapse in the morning. Inflation would surge the day after. The country would, de facto or de jure, default on its debt (as would a sizeable slice of its private sector). Greek industry would face a painful funding squeeze. Payrolls would plunge, a brutal blow with the official Greek unemployment rate already at 16 percent or so — and rising.

Beyond Greece’s borders, there would be panic selling of debt issued by some or all of the other PIIGS. With a number of EU banks heavily exposed to the PIIGS, an uncontrolled Greek default, and, more dangerous still, its consequences, could conjure up sweaty memories of the financial crisis. And those affected might include the European Central Bank itself. The ECB has been an active buyer of PIIGS debt. Writing down those holdings could be awkward, especially since the eurozone’s embattled taxpayers would be left holding the tab.

But if Greece’s departure from the euro is too risky to consider, that does not change the fact that the May 2010 financing has not worked. And default would be default whether inside the eurozone or out. It’s all very well criticizing the dodgy process by which Greece was admitted into the currency union, and there are few words ugly enough to describe the squalid state of Greek public finances. Nevertheless, for creditors to insist that the country can cut, privatize, and tax enough quickly enough to stave off disaster is to allow indignation to prevail over financial and political reality. Greece lacks the social cohesion (and shared memory of recent hardship) required to weather the kind of drastic “internal devaluation” that (fingers crossed) took the Baltic countries through their recent debt crises.

According to the EU Commission, Greece’s debt/GDP ratio will rise to 166 percent next year. The annual budget deficit will stand at just under 10 percent of GDP. Under the terms of the May 2010 bailout, that number is supposed to fall to 3 percent by 2014. Dream on. On May 30, Greece’s two-year bonds were yielding over 26 percent. The market’s message was clear. Without substantial additional external financing, default was on the way.

Adding to the concern have been worries that Greece might not satisfy the conditions necessary to allow the IMF (more rule-bound, it is speculated, in the wake of Dominique Strauss-Kahn’s departure) or EU lenders to release their next portions of the original bailout funds. You may know if they have agreed to do so by now, but the best guess must be that these monies will somehow reach Athens, even if it takes a new bailout agreement to get them there. If they don’t, that could, within weeks, trigger the “hard” default that no one wants.

Arranging a fresh bailout will be an unpleasant process, thanks not least to politics. After years of restraint at home, financing the feckless abroad has proved highly unpopular in Germany, the EU’s principal paymaster. The single currency has been a boon for the country’s exporters, but its voters don’t seem to care. They never wanted the euro, and the events of the last twelve months have only reinforced their suspicion that their beloved Deutsche mark was replaced with an extremely expensive dud. Forcing through the earlier support for the PIIGS was a nightmare for Chancellor Merkel. To ask this most cautious of politicians to demand yet more from restless German taxpayers is to ask a great deal. And lender discontent, a useful reminder of how little grassroots appeal EU “solidarity” really enjoys, is not confined to Germany. The Austrians are unhappy, the Dutch government is floundering, and anger in Finland over its participation in eurozone rescue parties has helped propel the populist-nationalist True Finns to the top of the polls. A new bailout will only add fuel to these fires. Merkel, it seems, may be preparing to walk through them. On May 31 markets surged on reports that Germany had dropped its insistence that any new bailout should be conditional on bondholders’ sharing in the taxpayers’ pain.

But despite, doubtless, additional austerity measures and fierce mechanisms to enforce them, new rescue packages will do little to solve the underlying structural problem in Greece and, for that matter, elsewhere. They may buy time but, in the end, there is simply too much debt for some PIIGS to repay. If an honest, old-fashioned default is too terrible to contemplate, that leaves three routes to a theoretically more permanent solution.

The first is, basically, what Merkel wants, “restructuring,” a default in sheep’s clothing, albeit one timed later than she would like. This would be designed in a way that allows banks to dodge the write-downs that could bring them low. The ECB is fiercely opposed to this approach, arguing that it will inevitably set off a fresh wave of financial contagion, even a new Lehman. Nouriel Roubini, Doctor Doom himself, disagrees. It is impossible to say who is right. Both sides are, in the end, making guesses about the mood of a perpetually manic marketplace. That said, the ECB’s stance implies the PIIGS will eventually be able to repay all their debt: an idea as implausible as the notion that they might fly.

More probably, the ECB is relying on Brussels to push forward with the closer fiscal and economic union without which no large monetary union can succeed. This has always been on the European Commission’s agenda, but until this thoroughly predictable and most convenient crisis, it had been politically impossible. That’s changing. Fiscal and economic integration has gone farther and faster over the last 18 months than would have been imaginable just a few years ago. The Eurocracy may, despite current traumas, even see this all as a vindication of the great gamble that was taken when the euro was launched half-done. The problem for Brussels is that the events of the last year have left voters in the eurozone core free from any illusion as to how costly such deeper integration — which would essentially establish a permanent funds-transfer regime from north to south — would be. Will they go along? Will they even be asked?

The third, and, I’d argue, best alternative for now — the split of the euro into two, a strong “core” euro and a weaker euro for the PIIGS — is not without its difficulties, but it ought to work. It would give the PIIGS both the devaluation they need and a chance of avoiding default, and, in addition, it should trim some of the “excess” German surplus. This may be the best alternative, but it’s also the least likely. To Brussels such a velvet divorce would represent an unacceptable step back, and that would never do.

Estonia’s anti-euro campaigners compare the single currency to the Titanic. It’s easy to see why.

The ‘Beneficial Crisis’

The Weekly Standard, May 31, 2010

It would have taken a heart of stone not to laugh. Wheeled out earlier this month for celebrations to mark his 80th birthday, a rickety Helmut Kohl announced that the fate of the EU’s floundering single currency was a matter of life and death: “European unification is a question of war and peace .  .  . and the euro is part of our guarantee of peace.”

The former chancellor’s dire warning might have been a touch more persuasive had it not been repeated quite so many times before. To take just one example, in the course of Sweden’s 2003 referendum on whether to sign up for the euro, a “weeping” Kohl told the Swedish premier that he did not want his sons to die in a third world war. A reasonable ambition, but hardly the strongest of arguments for junking the krona. Sensible folk that they are, the Swedes voted nej and are all the better for it today.

Panzers will not roll in the event of a euro collapse, but that doesn’t mean there isn’t a decent case to be made for the $1 trillion (actually $937 billion at the time of writing, but who’s counting?) support package for the EU’s single currency union announced on May 10. The growing financial panic triggered by Greece’s economic woes was metastasizing into a crisis of confidence in the eurozone’s southern and western rim—the now notorious PIIGS (Portugal, Italy, Ireland, Greece, Spain)—a development that threatened ruin for much of the EU’s fragile banking sector and the shattering of any hopes of European economic recovery. After a dangerous delay caused by German hostility to the idea of bankrolling the Greeks, a 110 billion euro ($137 billion) EU/IMF bailout of the Augean state had been agreed. But it came too late to head off the financial markets’ mounting unease.

Financial panics are best dissipated by a swift, decisive, and dramatic response that signals that a believable lender of last resort has arrived on the scene. This is why, for all its faults, TARP worked. Uncle Sam had rolled into town. There would be no need after all to storm the ATMs.

Jittery Europeans have had to make do with considerably less reassurance. The eurozone lacks the characteristics and resources of a unified nation. It is a hodgepodge of pacts—some observed, some not—whispered understandings, cultivated ambiguities, and clashing interests that does little to inspire confidence. The nearest it comes to a plausible lender of last resort is Germany, historically the EU’s most generous paymaster—a real nation, with real wealth but, awkwardly, real voters too.

Those voters have been up in arms at the thought of helping out Greece. This was the real reason that German chancellor Angela Merkel dithered so long before coming to Athens’s aid. She was right to be worried. Within a day or so of the Greek bailout, her governing coalition was thrashed in regional elections in North Rhine-Westphalia, Germany’s most populous state.

Something spectacular had to be done. And if $1 trillion isn’t spectacular I don’t know what is. The support package that finally emerged on May 10 falls into three main parts. The largest is the creation of a “temporary” (three-year) special purpose financing vehicle. This is authorized to borrow up to 440 billion euros ($550 billion) to fund or guarantee loans to member states who find themselves being frozen out of the capital markets. On top of this, there will be a 60 billion euro  ($75 billion) “rapid reaction” facility operated by the EU Commission and designed to help any eurozone country facing an immediate cash crunch. Oh yes, the IMF agreed to throw another 250 billion euros ($312 billion) into the kitty.

But, wait, there’s more. To make sure that struggling European financial institutions are not starved of dollars, a number of the world’s major central banks, including the European Central Bank (ECB) and the Fed, revived the emergency currency swap agreements put in place in late 2007. The ECB then topped up the punch bowl by commencing to purchase government debt from the PIIGS, a move explained by the need to move fast (it will be a while before the full support package can be put in place), but which opened the ECB to the charge that it had been reduced to printing money (“quantitative easing” is the preferred euphemism). The ECB denies this, saying the bond purchases are being “sterilized” by other maneuvers draining the excess liquidity the purchases create.

International investors feted the support package for all of one day. Then they recognized that, as Merkel conceded, it had “done nothing more than buy time.” The rot within the eurozone continues to fester. As for claims that this was all the fault of the wicked speculators of Wall Street and the City of London (a tiresome cry from the EU’s leadership in recent months that reached a new crescendo last week), well, that’s like blaming the canary for the gas in the coal mine.

The Greeks, Portuguese, and Spanish have all announced new austerity measures, but, even if we make the optimistic assumption that the recent riots in Greece will be the exception rather than the rule, these steps are unlikely to be enough to bring this story to happy ever after. Piled on top of existing budget cuts, the fresh rounds of slashing and taxing run the risk of crushing what’s left of domestic demand and with it an essential element in these countries’ ability to generate the additional tax revenues their treasuries so badly need. The usual remedy for such a predicament is devaluation and an export-led recovery, but with the PIIGS yoked to the euro that option is not available. The euro may be weakening against currencies outside the zone, but against their competitors within, the PIIGS are as uncompetitive as always.

It’s not easy to unscramble an egg. For one of the PIIGS to quit the euro would almost certainly mean both default on its public debt and the bankruptcy of wide swaths of its private sector. The domino effect across the rest of the continent, and beyond, would be appalling. Another, more promising, alternative, albeit one freighted with severe technical and practical risks of its own, would be for a German-led group to depart the euro and form a separate “hard currency” union of its own, leaving the PIIGS with the deeply depreciated (down perhaps 30-40 percent) euros they so obviously need. This would be tough on the PIIGS’ unfortunate creditors, but there would be a chance that default, and all its attendant dangers, could be sidestepped.

Yet no such alternative is on the menu. In confronting the hole into which joining the euro has dropped them, the eurozone’s leaders seem determined to dig ever deeper. We can debate their rationale, in all probability a mix of cowardice, conviction, careerism, and delusion, but not the likelihood of the conclusion to which they will come. Speaking in Aachen—the burial place of Charlemagne, an early Eurocrat—on May 13, Merkel made clear that she was still drinking the Kohl-Aid: “If the euro fails,” she warned, “Europe fails too, [and so does] the idea of European unification. We have a common currency, but no common political and economic union. And this is exactly what we must change. To achieve this, therein lies the opportunity of this crisis.”

Long before Rahm Emanuel’s infamous dictum, the idea of a “beneficial crisis” (to borrow the terminology of Jacques Delors, a former president of the EU Commission) was common in Brussels. Indeed, there is evidence to suggest that some smarter Eurocrats saw the flaws in the way that the euro had been set up as a feature, not a bug. The crisis to come would create the conditions in which the nations of the EU could be persuaded to submit to further federation.

On May 12, the current president of the EU Commission, José Manuel Barroso, argued that “member states should have the courage to say if they want an economic union or not. Because without it, monetary union is not possible.” The commission’s proposals include greater macroeconomic supervision, increased emphasis on deficit reduction, and the establishment of a permanent emergency financing mechanism. The most controversial idea is the suggestion EU governments submit their national budgets for review by their counterparts within the union before presenting them to their own parliaments. Whether this review would be merely advisory or carries a veto power has been left conveniently vague.

Barroso also wants a more punitive regime imposed on governments that persist in breaking the budgetary rules that supposedly underpin the euro. There are limits, however. The commission did not back Merkel’s call for provision to be made to allow the eurozone’s more persistent reprobates to be expelled from the currency union. Permitting such a procedure, even in theory, would imply that the grand European project could sometimes go into reverse, and that would never do.

Most of these measures will edge forward at best. Not all member states are enthusiastic about the push for what Herman Van Rompuy, the president of the EU’s council, has referred to as a European “gouvernement économique,” an elastic term capable of, in Van Rompuy’s sinuous prose, “asymmetric translation” in different languages, from the comparatively nebulous English “governance” to something altogether more concrete.

But, if some governments are not enthusiastic, it’s difficult to see what else they can do—unless they are prepared to quit the eurozone. And they are even less enthusiastic about that.

The next stage of this drama ought to have been something of an anticlimax as nerves were soothed by that calming trillion. Instead, Merkel sent markets sliding by imposing, amongst other measures, a “temporary” ban in Germany on “naked” short selling (selling securities that you do not own and have not made arrangements to borrow) of eurozone government bonds and the stocks of some of her country’s leading financial institutions. This was accompanied by promises of further regulation and yet more railing against speculators, “out-of-control” markets, and banks.

The message sent by the new rules was grim. And it was received. By playing the populist card, Merkel had highlighted the extent of the political problems she faces back home. That’s not what investors wanted to hear. Some also fretted that the new restrictions were a hint that the finances of Germany’s banking sector were even worse than feared.

So, what’s next? Predicting short-term currency movements at a time like this is a mug’s game. I’ll just stick with the word “choppy” and the belief that a trillion dollars ought to buy the euro some time. It won’t be a huge surprise if some of that time—and some of that money—is eventually used to smooth the increasingly inevitable “restructuring” of Greek, and possibly Portuguese, sovereign debt. Nevertheless that will not be the end of the matter. A trillion dollar band-aid is still a band-aid. This spring’s crisis has demonstrated that the existing system cannot survive as it stands.

To succeed, a monetary union the size of the eurozone needs a high degree of central control, consistent and enforceable budgetary discipline, and spending (and thus taxing) powers sufficient to ensure that the cyclical imbalances in its constituent parts can be evened out. That reality has now essentially been accepted by the German and the French governments. Although negotiating the details of common economic governance will drag on for years, in the end the French and the Germans will, despite some truly fundamental differences, get there—and they won’t be alone. Faced with the prospect of being excluded from the EU’s tightening core, more countries than might now be imagined will choose to jump in notwithstanding its tougher disciplinary regime. While today’s “two-speed” union will continue to exist, the division will deepen, and on one side of it there will be something that looks suspiciously like a European superstate.

The financial markets could still disrupt this transition, which is one reason that the EU’s leadership is so keen to rein them in. Trouble may also come from a group often ignored in the saga of “ever closer” union—the electorates of Europe.

One of the more telling characteristics of the EU’s progress is the way it has been forced through regardless of the wishes of ordinary voters. The “reuniting” of Europe has been a project of the elites, the fruit of mandarin cabal and backroom deal. Voters have rarely been given much of an opportunity to demur. And when they have been asked their opinion and called for a halt to further integration, the results have been ignored or subjected to do-over until the “right” result came through.

That’s not to claim that Europe’s mainland is seething with euroskepticism. It’s not. There is, however, widespread apathy and a profound alienation. As the voters of North Rhine-Westphalia have just reminded us, there’s not a lot of fellow-feeling in that imaginary European family.

This might have mattered less in economically more comfortable times, or in the times when Brussels was not stretching so far, blithe times when voters (foolishly) and Eurocrats (realistically) could, for the most part, pretend that the other did not exist. That’s over now. Building an economic union is messy and intrusive. It’ll be hard to slip it through on the quiet. The PIIGS are being ordered to take a long hard road. The peoples of Northern Europe will be told to pay for its paving.

What if either says no?

Resistance Is Futile

The Weekly Standard, December 28, 2009

Bliss was it in that dawn to be alive--at least if you were Valéry Marie René Georges Giscard d'Estaing. The one-term president of France was awarded the job in 2002 of chairing the convention responsible for designing a constitution for the European Union. He compared his fellow delegates--a dismal, handpicked, largely Eurofederalist claque--with America's Founding Fathers, and, splendidly de haut en bas (however tongue-in-cheek), told this self-important rabble that, in the "villages" they came from, statues would be put up in their honor--"on horseback" no less.

But that's not quite how it worked out. When the villagers saw the hideous blend of bureaucratic centralism, transnational control, political correctness, and daft pomposity that slithered out of Giscard's convention, they were none too impressed. The draft constitution staggered its way to approval in some EU countries, but was killed off by referenda in France and Holland in mid-2005.

Except that's not quite how it worked out. Properly speaking, those two defeats should have put a stake through the heart of the constitution. Instead the ratification process was frozen "for a period of reflection"--a dignified term for buying time to cook up a scheme to bypass the awkwardness of voter disapproval. The scheme was the Treaty of Lisbon.

It preserved the content of the draft constitution, but junked its form. The constitution that had been rejected was scrapped, but its essence was preserved under the guise of a series of amendments to the EU's existing treaties that smuggled in most of the changes which would once have been incorporated in Giscard's monstrosity. It was a stroke of genius. Dropping the "c" word minimized the legal or political risk that referenda might once again be required. It was also an insult. Neither Giscard nor the key architect of the new treaty, Germany's chancellor Angela Merkel, made any attempt to conceal their view that the substance of the constitution was alive and well.

Channeling Louis XIV, Nicolas Sarkozy ruled that France's disobedient voters would be denied any further say on the matter. No surprise there, but I like to think that Merkel's coup might have caused a few pangs in the ranks of Holland's rather more respectable Council of State (the government's highest advisory body). Maybe it did, but the august if pliable Dutchmen somehow felt able to determine that the new treaty did not contain enough "constitutional" elements to require a referendum. Meanwhile, Britain's shameless Labour government just brazened things out. Labour had been reelected in 2005 on the back of a manifesto that included the promise of a referendum should the United Kingdom be asked to sign up for a revived constitution. The Lisbon Treaty was, however, cooed Messrs Blair and Brown, something completely different. There would be no popular vote.

In Ireland, though, significant changes to the EU's treaties require a constitutional amendment, and the Irish constitution can only be amended by referendum. The Irish government did not attempt to dodge its responsibilities. Nor did Irish voters. In June 2008, the Lisbon Treaty was voted down. As the treaty had to be ratified in each of the EU's 27 member states, the Irish snub should have finished it off. Except (you will be unsurprised to know) that's not quite how it worked out.

Within minutes of the Irish vote, the EU's top bureaucrat, Commission president José Barroso, announced that the treaty was not dead. When it comes to the European project, no does not mean no--as Danish and Irish voters had already discovered in the aftermath of their rejection of earlier EU treaties. Ratifications of Lisbon rolled in from elsewhere, the Irish government secured some placatory legal guarantees, setting the stage for a mulligan this October. In the event, however, the result of this second vote was determined not by the changes won by the Dublin government, but by the global financial meltdown, a blow that had brought Ireland's over-leveraged economy to its knees.

There was something almost refreshing in the lack of subtlety with which Barroso traveled to Limerick to announce--just weeks before the second referendum--that Brussels (in other words, the EU's conscripted taxpayers) would be spending 14.8 million euros to help workers at Dell's Irish plant find new jobs. In case anyone missed the point, Barroso also reminded his listeners that the European Central Bank had lent over 120 billion euros to the battered Irish banking system. Frazzled by financial disaster and fearful of the consequences of alienating their paymasters, Ireland's voters reversed their rejection of the Lisbon Treaty just a couple of weeks later.

Being a realist means knowing when to fold. In the wake of the Irish vote, a nose-holding, teeth-gritting Polish president committed his country to the treaty. This left the Czech Republic's profoundly Euroskeptic president, Václav Klaus, as the last holdout. If Klaus could delay signing the treaty (which had, awkwardly for him, already been approved by the Czech parliament) until after a likely Conservative victory in the upcoming British general election (due no later than next June), then the whole process could be brought to a halt. The Tories had vowed to withdraw the U.K.'s existing ratification and hold a referendum on the Lisbon Treaty before proceeding any further. Given most Britons' views (quite unprintable in a respectable publication), the result would have been to kill the treaty. The U.K. isn't Ireland. The U.K. isn't Denmark.

If, if, if .  .  .

It didn't take long for the blunt Klaus to dash those hopes: "The train carrying the treaty is going so fast and it's [gone] so far that it can't be stopped or returned, no matter how much some of us would want that."

Klaus signed the treaty on November 3. Shortly thereafter the EU's leaders began maneuvering to fill two new jobs: "president" (actually president of the European Council) and "foreign minister" (the latter will rejoice in the grandiloquent title of High Representative for Foreign Affairs and Security Policy). Following a couple of weeks of intrigue, backstabbing, and secretive quid pro quos, it was agreed the new president would be Herman van Rompuy--Belgium's prime minister and thus a man who knows a thing or two about unnatural unions. But the somewhat obscure van Rompuy (what Belgian prime minister is not?) is a world historical figure when compared with the woman who has become High Representative, a Brit by the name of Baroness Ashton of Upholland, a dull hack known--if at all--for her loyalty to the Labour party. The treaty finally came into force on December 1. The age of van Rompuy had begun.

Some commentators are presenting the emergence of the Belgian and the baroness as a triumph for the EU's member states over its bureaucracy's more federalist vision. The thinking goes that by securing the appointment of two nonentities to what are (notionally) the most prestigious jobs in the union's new structure, Sarkozy, Merkel, and the rest of the gang successfully defended what remains of their countries' prerogative to decide the most important matters for themselves. To believe this is to misread just how lose-lose the situation was. In reality, the nonentities will be as damaging (maybe even more so) to what's left of national sovereignty as better-known candidates such as the much-anticipated Tony Blair. Blair would have given the presidency more clout. He would have done so, however, at the expense not only of the EU's member states, but also of the Brussels bureaucracy.

The EU's new president is, as mentioned above, technically the president of the European Council, a body formally incorporated within the EU's architecture by the Lisbon Treaty after years in a curious organizational limbo. With a membership now made up of the union's heads of government, van Rompuy, and the inevitable Barroso, it is theoretically the bloc's supreme political institution. And theoretically therefore, the stronger it is (and with a heavyweight president it would supposedly have been stronger), the more it would be able to operate as a counterweight to the bureaucrats of the EU Commission. I suspect that this would never have been the case, but with van Rompuy, a housetrained federalist (he has already told a meeting arranged by--let a hundred conspiracy theories flower--the Bilderberg Group that he favors giving the EU tax-raising powers), at its helm, the point is moot. The key, van Rompuy reportedly claimed, to high office within the EU is to be a "gray mouse," and so, to the chagrin of Blair and those like him, it has proved. Sarkozy, Merkel, and all the rest of their more colorful kind will continue to prance and to parade, and power will continue to leach away from the nation states and into the unaccountable oligarchy that is "Brussels."

"It's all over," my friend Hans told me when Klaus threw in the towel, "Brussels has won." Hans, thirtysomething, a native of one of the EU's smaller nations, and a former adviser to one of the continent's better-known Euroskeptics, comes as close to anyone I have ever met from the European mainland to being a Burkean Tory--and Hans has now given up. He would, he sighed, have to move on with his life.

With Lisbon in force, little is left of the already sharply curtailed ability of any one member-state (or its voters) to veto the inroads of fresh EU legislation. In Hans's view, the treaty means that the momentum towards a European super-state is now irreversible. With their sovereignty emasculated and, in many cases, their sense of identity crumbling under the linked assaults of multiculturalism and mass immigration, the old nation states of Europe have neither the ability nor the inclination to say no. Euroskepticism will now be portrayed (not always inaccurately) as the mark of the crank or the Quixote. "And that," added Hans, a man still at a relatively early stage in his career, "is not the way to go either politically or professionally."

Signing up, however unenthusiastically, for the orthodoxies of the European Union is now de rigueur in the continent's ruling class. And if there was once idealism behind the Brussels project it has long since been overwhelmed by another of the beliefs that lay behind it--that neither nations nor their electorates could be trusted to do the right thing. Sovereignty, whether national or democratic or both, is being replaced by oligarchy, technocracy, and the pieties of the "social market." If you live in an oligarchy, it's best to be an oligarch.

This realization is one of the reasons that the EU has got as far as it has. It has provided excellent opportunities for some of Europe's best, brightest, and lightest-fingered to move back and forth between the union's hierarchy and those parts of the private sector (and indeed the national civil services) that feed off it.

Yet all was not gloom, said Hans. A stronger sense of their own identity and a still distinct political culture meant, he thought, that it wasn't too late for the Brits to do the right thing (as he sees it) and quit the EU. He is too optimistic. While correct that most Britons are irritated by the EU and its presumptions, he overlooks the fact that they have not yet shown any signs of wanting to end this most miserable of marriages. Hans also underestimates the subtler factors standing in the way of the long-promised punch-up between any incoming Tory government and Brussels--an event that in any case has now been postponed. David Cameron's party has shelved its plans for a referendum on the Lisbon Treaty. Now that it has come into force, modifying the treaty to accommodate the U.K. would require the assent of all the other member-states and that won't be forthcoming. A British referendum, Cameron claims, would therefore be pointless. How convenient for him.

Cameron has also made it clear that he has no intention of revisiting the U.K.'s relations with the EU in any serious way for quite some time. With Britain's economy in ruins, any incoming government will have more pressing priorities. And the passing of time only further entrenches the EU's new constitutional settlement deeper into the U.K.'s fabric--and especially the landscape in which the country's able and ambitious build their careers. That's something that Cameron may also have recognized. He appears to have concluded that it is better to win a premiership diminished by Brussels than no premiership at all, and a major row over Britain's role within the EU could yet cost the Tory leader the keys to 10 Downing Street.

The additional complication is debt-burdened Britain's dependence on the financial markets as a source of fresh funds. Investors are averse to uncertainty. They are already twitchy about Britain's disintegrating balance sheet, and a savage row between Britain and the rest of the EU would set nerves even further on edge. Then there's the small matter that such a conflict is hardly likely to help Britain persuade its European partners to bail the U.K. out in the event that this should prove necessary--and it might.

The more time passes, the more an empowered EU will insinuate itself within national life (rule from Brussels is a fairly subtle form of foreign occupation: No panzers will trundle down Whitehall). It will come to be seen as "normal," not perfect, by any means, and certainly the cause of sporadic outbreaks of grumbling, but if handled with enough discretion (it will be a while before the Commission resumes efforts to sign Britain up for the "borderless" EU of the Schengen Agreement) and enough dishonesty, it will benefit from the traditional British reluctance to make a fuss. As on the continent, protesting deeper integration within the union, let alone trying to reverse it, will be depicted--and regarded--as the preserve of the eccentric and the obsessive.

With Britain hogtied, the Lisbon structure will endure unchanged unless a prolonged economic slowdown (or worse) finally shatters the gimcrack foundations on which the EU rests. That cannot be ruled out, but if Lisbon holds, the implications will be profound for the international environment in which the United States has to operate. There is already chatter (from the Italian foreign minister, for instance) about a European army. Can it be long before there is a drive by Brussels to replace the British and French seats on the U.N. Security Council with one that represents the entire EU, a move that would eliminate the one vote in that body on which the United States has almost always been able to rely?

And to ask that question is to wonder what sort of partner the EU will be for the United States. One clue can be found in the fact that the new High representative for foreign affairs and security policy was treasurer and then a vice chairman of Britain's unilateralist Campaign for Nuclear Disarmament at the end of the Brezhnev era. Another comes from remarks by Austria's Social Democratic chancellor Werner Faymann in response to the speculation that Tony Blair would be appointed to the new presidency during the fall: "The candidate .  .  . should have an especially good -relationship with Obama and not stand for a good working relationship with Bush."

Leaving aside the minor matter that George W. Bush has not been president for nearly a year, it's not difficult to get Faymann's drift. The Obama administration will find the EU a reasonably congenial partner, even ally, so long as it sticks to the sort of transnationalist agenda that could have been cooked up in Turtle Bay, the Berlaymont, or Al Gore's fevered imagination. If on the other hand, Obama, or any subsequent president, should turn to policies that are more avowedly in this country's national interest, the EU could well turn out to be an obstacle. After all, in the absence of any authentic EU identity, its leadership has often defined their union by what it is not. And what it is not, Eurocrats stress, is America.

Washington will have to learn to accept surly neutrality, if not active antagonism, from the oligarchs of Brussels. The EU may not be able to do much to hinder the United States directly, but, as its "common" foreign (and, increasingly, defense) policy develops, there's a clear risk that it will be at the expense of NATO. Shared EU projects will drain both cohesion and resources away from the Atlantic alliance, not to speak of the ability of America's closer European allies to go it alone and help Uncle Sam out.

Some of this will be deliberate, but more often than not it will be the result of institutional paralysis. As a profoundly artificial construction, the EU lacks--beyond the shared prejudices of some of its elite--any sense of the idea of us and them that lies at the root of a nation or even an empire, and, therefore, the ability to shape a foreign policy acceptable to enough of its constituent parts for it to take any form of effective action. But if the EU might find it difficult to decide what it will do, it will find it easy to agree what its members cannot do. The days when Britain will have the right, let alone the ability, to send its troops to aid America over the protests of Germany and France are coming to a close.

Bowing, but this time to the inevitable, Obama has welcomed the completion of the Lisbon Treaty process, saying that "a strengthened and renewed EU will be an even better transatlantic partner with the United States," an absurd claim that one can only hope he does not believe.

Ah yes, hope.

Tough Times in EUtopia

The Weekly Standard, March 30, 2009

Sometimes truth just has to speak to powerlessness. Addressing the EU's sham parliament in mid-February, the Czech Republic's refreshingly tactless and refreshingly Thatcherite president, Václav Klaus, raised the awkward topic of what the EU euphemistically refers to as its "democratic deficit" and told MEPs that they were part of this problem, not its solution:

 "Since there is no European demos-and no European nation-this defect cannot be solved by strengthening the role of the European parliament either. This would, on the contrary, make the problem worse and lead to an even greater alienation between the citizens of the European countries and Union institutions."

Klaus's listeners were predictably outraged. They ought to have been terrified. With the EU economies falling apart at an unprecedented pace, there is nothing that these toy-town parliamentarians can do-except get out of the way.

The EU's insultingly undemocratic nature is not news (indeed, it is part of its rationale), but it remains the key to grasping how those who run the EU have, for better and worse, had so much success in ramming their agenda through. Not having to bother too much about national electorates has been a great boon to Brussels. As the continent's economies slide ever deeper into the mire, however, that once handy feature could end up crashing the entire system.

An economic debacle on the current scale is going to shake any political structure, however securely moored, but the EU's persistent recourse to a form of soft authoritarianism has left it peculiarly ill suited to weather the storm to come. After decades of routinely bypassing its voters the union may well no longer have what it takes to secure their approval for the harsh medicine and painful sacrifices necessary to bring the EU through this ordeal in one piece. After all, it can barely even get them to vote: Turnout for the most recent (2004) elections for the EU parliament sank to a record low of 45.5 percent. Admittedly that total was dragged down by massively uninterested Eastern Europeans (only 16.7 percent of Slovaks voted and 20.4 percent of Poles), but it was sparse almost everywhere: Only 39 percent of Brits showed up, about the same percentage as made it to the voting booth in the Netherlands, one of the EU's founding nations.

As the history of the union's occasional, grudgingly granted referenda-a sorry saga of chicanery, rejection and do-overs-reminds us, appeals to the supposed solidarity of that imaginary European demos have never really worked. And that was in the good times. They surely won't do the trick now, nor will arguments based on the logic of a free market ideology widely, if inaccurately, said to have failed. Yet to steer a course through what may become hideously hard times without much in the way of popular consent threatens to push already alienated electorates in the direction of the extremist politics of left or right.

The story of this slump is too familiar to need repeating here, but it is worth pausing to consider how the introduction of the euro has left the EU marooned on a circle of economic hell all of its own making. Imposed on most of the European heartland by a characteristic combination of bullying, bribery, conclave, and legerdemain, the single currency was put in place with as little regard for the real world as for the ballot box. To squeeze a wide range of vastly divergent economies (and to do so with few safety nets) into one monetary system made little sense except when understood as a matter of politics, not economics. But economics has a nasty habit of biting back.

Up until the eruption of the present crisis, the European Central Bank's interest rate policy primarily reflected the needs of France and Germany, Euroland's largest economies. This left rates "too" low for naturally faster growing countries like Ireland and Spain, which in turn inflated unsustainable housing bubbles. These have now burst-in Ireland's case taking much of the banking system down with it. On some forecasts Irish GDP may shrink by 10 percent between 2008 and 2010, a dismal number that could eventually prove too optimistic. Gloomsters joke bleakly that the difference between Ireland and Iceland is six months and one consonant. Spain meanwhile now boasts an official (in other words, understated) unemployment rate of 14 percent. Over 600,000 migrant workers have been laid off. This is not a recipe for social peace.

In other countries, most notably a horribly in-hock Italy (public sector debt over 100 percent of GDP and expanding fast), low interest rates allowed governments to put off long overdue structural reforms. Instead of forcing the introduction of the badly needed discipline that was allegedly one of the principal reasons for its adoption, the euro (a hard currency when compared with shabbier predecessors such as the lira or drachma) was treated as a free pass. It has been anything but. Even before the current mess, Italy's crucial export sector was finding it difficult to cope with the brutal combination of rising cost inflation and a currency far stronger than the accommodating, and periodically devalued, lira. On some estimates, this latest recession is the fourth that Italy has suffered in the last seven years. Back in 2005 Silvio Berlusconi described the euro as a "disaster" for his country. He was not exaggerating.

Devaluations are to GDP what steroids are to sport. In the long-term they may be unhealthy, but in the short-term they frequently work miracles. The problem is that the option is no longer so easily available for the nations that adopted the euro. Italy, Ireland, and a number of other countries are in the grip of a one-sized currency that could never fit all, and the euro is now for them little more than a straitjacket or, more accurately, a noose. They have theoretically retained enough sovereignty to quit the euro, but for one of them to do so, especially if other states stick with the common currency, would be to risk something close to complete economic meltdown.

Money would pour out (so much so that capital controls would probably be required), interest rates would soar, and the reborn national currency would plummet. In the absence of a bailout from the eurozone it had just abandoned, the exiting country itself would probably be driven to renege (either de facto or de jure) on its foreign debt-as would much of its private business. In its consequences, this could be a Lehman-plus trauma with possibly devastating effects on already chaotic international capital markets. No less critically, it could set off a crisis in confidence in the credit of those weaker nations that had kept faith with the single currency, not to speak of feebler economies elsewhere. The cure, therefore, could well be worse than the disease.

In the meantime, in a damned-if-you-do, damned-if-you-don't spasm, the markets are fretting that the disease is turning ever more dangerous-and, in a process that feeds upon itself, ever more infectious. Spreads on sovereign debt yields within the eurozone (between German Bunds, say, and paper issued by Spain, Greece, Portugal, Italy, and Ireland) have widened noticeably. This is a warning that investors are beginning to think a once unthinkable thought: that one or more of the zone's less resilient members might go into default. On this logic these countries can neither afford to keep the euro nor to junk it. Rock, meet hard place.

These worries are made even more pressing by concern over the impact of Eastern Europe's spiraling economic woes on the already shattered finances of the western half of the continent. Contrary to some of the more excitable headlines, not all the countries of formerly Warsaw Pact Europe are, yet, in deep trouble, but the problems of those that are (notably Hungary, Ukraine, Romania, and Latvia) threaten to wreck confidence in those that are not. And those problems will not be confined safely behind the Oder-Neisse line: Two of Sweden's largest banks, for instance, are frighteningly overexposed to the faltering Baltic States, while their counterparts in Austria, seemingly lost in nostalgic Habsburg reverie, have reportedly lent out the equivalent of 70 percent of their country's GDP to once Kaiserlich und Königlich territories and parts nearby.

Eastern Europe's problems are Western Europe's and, given Eastern Europe's dependence on Western capital flows, vice versa, a state of affairs that neither side appreciates. Infuriated by the impression that they were being sidelined by the upcoming "G-20+" summit in London, nine of the EU's former Soviet bloc members held their own breakaway meeting earlier this month to discuss what to do. Meanwhile, led by Germany's indignant Angela Merkel in full prudent-Hausfrau, Thatcher-handbag mode, the Westerners have tried to damp down the East's increasingly aggressive demands for assistance. Good luck with that. Demonstrating a keenly cynical awareness of which buttons to press, the Hungarian prime minister warned that a severe slowdown in the East could lead to "a flood of unemployed immigrants traveling to Western Europe in search of jobs."

If you suspect that all this leaves the EU looking somewhat stuck, you would be right. But then this is no accident. The lack of democratic responsiveness so thoroughly ingrained into the union's architecture was always intended to stop the bloc's politicians from succumbing to the temptations of protectionism, beggar-thy-neighbor devaluations, and other questionable devices often found in the toolbox of an economically desperate national government. That's all very well, and all very praiseworthy, but it doesn't do anything about the desperation, a desperation that will be felt all the more sharply by electorates looking for their leaders to do something, anything, in response to this crunch-only to discover to their chagrin (to use too gentle a word) that there is little that the EU will, legally or politically, allow those leaders to do.

To take just one example, earlier this year Britain saw a series of wildcat strikes protesting the importation of cheap foreign workers from elsewhere in the union as a means of undercutting the locals. The facts that triggered the dispute are murky, but what is certain is that even if the British government had wanted to intervene under EU law it could not. Equally, while the opposition Tories grumbled, nobody was fooled. If the Conservatives had been in charge, they would have done just the same as Labour: nothing. If you want to drive voters to the political extremes, stories like this are a good place to start.

Except that "start" is the wrong word. Parties of the extreme, whether of left or right, already have more than a foothold in Germany and France. "Populists" of every description can be found in the legislatures in countries from Belgium to Denmark to Latvia to Austria to Poland to Hungary. Take your pick: There are plenty to choose from. Even in never-so-sedate-as-it-seems Britain, a country that has made a fetish (if not always convincingly) of its moderation, the much-reviled far rightists of the hitherto tiny British National party are showing some signs of evolving from being useful bogeymen for the left into a party with demonstrable political clout within elements of a white working class that has been neglected for too long.

The backgrounds and the prospects of these movements vary widely from country to country, as do the pasts and the resentments that have shaped them, but in recent years their appeal has begun to grow in sections of the electorate pummeled by the dislocations brought about by mass immigration and globalization-dislocations made all the more painful by the realization that the ruling elites who never really asked them for their opinion on these changes, let alone their agreement to them, couldn't give a damn about their plight. This is a perception that will only be sharpened when the populations of these countries, more and more of whom are losing their jobs, are told by that very same political class that protection is off the agenda and that austerity is on, that saving local industries is unacceptable, and that helping out foreign countries is a must. And, oh yes, none of this was our fault-it was all the bankers' doing-and, oh yes, they and their bonuses have got to be rescued too.

So what's next? The leaders of the EU countries will do their best to muddle through in rickety, unpopular unity. Here and there they will cheat both on each other and on the key EU principle of a single market. The warning signs are already there. In February, President Sarkozy attacked the way that French auto companies were supplying their home market from manufacturing facilities in the Czech Republic. The previous month, Britain's Gordon Brown had criticized the amount of overseas lending by the UK's beleaguered bailed-out banks. Nevertheless, however awkwardly, however reluctantly, the EU's members will attempt to hang together-for as long as (or indeed longer than) their domestic politics comfortably permit, an effort that will inevitably further boost the appeal of the wild men of the fringes.

That said, as the EU's leaders are all too well aware, the slump has so far brought down two European governments (in Latvia and non-EU Iceland). Nobody wants to be next, let alone run the risk of political and economic breakdown. The few remaining traces of the budgetary discipline that supposedly still underpins the euro will therefore probably be scrapped. The euro may hang on to its reach, but only at the cost of its integrity. To ordinary Germans this will be seen as a betrayal, a Dolchstoss even. A people haunted by memories of where a debauched currency can lead, they only agreed to part with their much-cherished deutsche mark on the understanding that the euro would be run with Bundesbank-style discipline. That was then.

So money will be thrown around, the imperiled brethren of both East and West will, after much shoving, screaming, and hesitation, be bailed out. Some protectionist measures (directed against those outside the EU) will be brought in and all fingers will be crossed. It won't be pretty, but with luck, it might be enough to stave off catastrophe. Pushing their luck, some glass-is-half-full Europhiles believe that the fact that no country can easily work its way through these tribulations alone will conclusively make the case for still closer European integration to some of the EU's more reluctant federalists. You can be sure that this is a rationalization that Brussels will look to exploit: Rahm Emanuel is not the only politician unwilling to waste a crisis. The EU's policy response to the slump is likely to have two objectives: the reconstruction of member-states' economies and the destruction of what's left of their autonomy. Going for the latter could well drive even more disaffected voters into the extremist fringe, though Brussels is arrogant enough to persist. There are already indications that the eurocrats may be pushing at an open door. In a startling example of mistaking the Titanic for the lifeboat, Poland has become just one of several nations speeding up plans to sign up for the euro-and the safe haven it is meant to represent.

On the other hand if, as appears disturbingly likely, the economic situation grows far darker, it's easy to draw an alternative picture in which both euro and union come under previously unimaginable stress, stress with unpredictable and potentially ominous consequences, stress that will be echoed and intensified by mounting political and social disorder in a Europe that discovers, too late, that there was something to be said for democracy after all.

Angela’s Ashes?

National Review Online,  June 16, 2008

LisbonNO1

If there were any last, few, pitiful remaining scraps of doubt about the depth of the disdain felt by the European Union’s leaders for the people of their wretched union, they ought, surely, to have been dispelled by the miserable saga of the Treaty of Lisbon, the sly, squalid, and cynical pact that has just been rejected by Irish voters, the only mass electorate given the chance to do so.

From its very beginnings, the Treaty of Lisbon was an exercise in deception, deliberately designed to deny the EU’s voters any more chances to slow down the construction of a European superstate that relatively few, outside an elite chasing power, privilege, and the chance to say “boo” to America, actually appear to want. Its origins can be found in the 2005 decision by some of those voters, the ones in France and Holland, to take the opportunity presented by two referenda to say non and nee respectively to the draft EU constitution that had been prepared so meticulously, so proudly, and so expensively on their behalf. Lesson learned: The voters were never again to be trusted. In future they would have to be bypassed.

Nevertheless, in a pantomime of responsiveness to that non and that nee, the constitution’s ratification process was suspended in the late spring of 2005. What ensued was officially described as a “period of reflection,” but was, for the most part, a period of frantic scheming. Its aim: To investigate how the draft constitution could be revived and, this time, be ratified. Sure enough, just about a year later German chancellor Angela Merkel announced that one of the objectives of her country’s upcoming EU presidency (the presidency currently rotates between different member states every six months) would be to “review” the constitution’s status. The message was clear: The people had spoken, and they were to be ignored. Chancellor Merkel was brought up in East Germany — and sometimes it shows.

Within two weeks of Germany assuming the presidency on January 1, 2007, Merkel declared the period of reflection to be over. She wanted, she said, a “road map” for the adoption of the constitution to be completed by the conclusion of the German presidency. And so it was, but with a clever twist. By the end of June, the EU’s governments had agreed to hold a conference to amend the union’s existing treaties in ways that mimicked much of the rejected constitution but without the bother of reintroducing the constitution itself, a bother that might run the risk of an extra referendum or two.

In essence, a number of largely cosmetic alterations were made (thus the proposed EU foreign minister was now re-dubbed a “High Representative”), and the new document generally avoided repeating those provisions of the old draft constitution already enshrined within EU law (why remind voters of what they had already given up?). Most of the changes were meaningless, flimflam designed to minimize the risk that ratification might be subject to the whims of a popular vote. Meanwhile, the “substance” of the rejected constitution had, boasted Merkel, been “preserved.” Indeed it had. The constitution was dead, long live the “Reform Treaty.” Six months and a few concessions later, the treaty was signed in Lisbon at a ceremony notable mainly for the absence of British prime minister Gordon Brown. He signed the paperwork a discreet few hours later.

For a while it looked as if Merkel’s coup would proceed without too much democratic interruption. This time around the French and Dutch governments were able to avoid consulting the electorates they supposedly represented. Holland’s Council of State, its government’s highest advisory body, helpfully decided that a referendum was not legally required. The Reform Treaty did not, apparently, contain sufficient “constitutional” elements, a ruling that undoubtedly pleased a large majority of Holland’s establishment politicians on both left and right: Off the hook! The lower house of parliament approved the Treaty of Lisbon earlier this month. The senate was expected to follow suit later in the year. In France, President Sarkozy made it quite clear that, whatever French voters might want (opinion polls suggested that a majority favored a referendum), he had no intention of consulting them. Last November he warned that a referendum “would bring Europe into danger. There [would] be no treaty if we had a referendum in France.” There was no referendum. Both national assembly and senate approved the treaty in February.

As for Britain, that perennial member of the EU’s awkward squad, departing Prime Minister Tony Blair was unable to resist giving one more kick to the country he had already done so much to trash. He announced that there would be no referendum, and so did his successor, Gordon Brown. Sure, a referendum had been promised in Labour’s 2005 manifesto, but only in the event of a revived constitution. The new treaty didn’t count. The argument was, typically for both men, absurd, dishonest, and insulting, something later highlighted by two parliamentary committees, not that it made any real difference.

In October 2007, the (cross-party) European Scrutiny Committee concluded that the Reform Treaty was “substantially equivalent” to the original constitution, a statement of the obvious – but one, under the circumstances, well worth making. Additionally, the committee had a few tart observations about the way that Merkel’s team had handled the crucial June negotiations. It highlighted their secrecy and timing: “texts [were] produced at the last moment before pressing for an agreement.” Meanwhile the compressed timetable then being arranged for the discussions in Portugal “could not have been better designed to marginalize” national parliaments. In January 2008, the Labour-dominated foreign-affairs committee concluded “that there is no material difference between the provisions on foreign affairs in the Constitutional Treaty, which the government made subject to approval in a referendum, and those in the Lisbon Treaty, on which a referendum is being denied.” Not to worry, soothed Britain’s glib young foreign minister, the Reform Treaty would “giv[e] Britain a bigger voice in Europe and enshrin[e] children’s rights for the first time.”

Ireland’s leading politicians behaved better. Under Irish law, significant changes to EU treaties require an amendment to the Irish constitution and all amendments to the Irish constitution have to be approved by referendum. No serious attempts were made to argue that the changes encompassed within the Treaty of Lisbon were too trivial to warrant a referendum. The “substance” of the rejected EU constitution had, admitted Prime Minister Bertie Ahern, survived. He added later that it was “a bit upsetting . . . to see so many countries running away from giving their people an opportunity [to vote]. . . . If you believe in something . . . why not let your people have a say in it?” That’s easy to answer. Those who now direct the EU project believe in it too much to accept placing the union’s future in the hands of its voters.

Mind you, when Ahern made those comments, he was probably confident that his electorate would approve the treaty. Despite a bout of recalcitrance a few years back (Irish voters had rejected an earlier EU treaty in 2001 before being bullied into changing their minds the following year), his countrymen were, and are, reasonably enthusiastic supporters of the EU. The EU has been good for – and to – Ireland, and the Irish know it. But gratitude is not a blank check and that, increasingly, is what the electorate came to believe that it was being asked to sign. In many respects, such as its notorious passerelle clauses (it’s a long story), that’s what the treaty is, but growing suspicions that the whole thing was nothing more than an elaborate con were also sharpened (sometimes unfairly) by the complexity of the treaty’s language.

Ironically, the treaty’s supporters had once regarded that complexity as an asset. As one of them, former Irish Prime Minister Garret FitzGerald, put it in June 2007:

The most striking change [between the failed EU constitution and the Reform Treaty] is perhaps that in order to enable some governments to reassure their electorates that the changes will have no constitutional implications, the idea of a new and simpler treaty containing all the provisions governing the Union has now been dropped in favor of a huge series of individual amendments to two existing treaties. Virtual incomprehensibility has . . . replaced simplicity as the key approach to EU reform.

At a meeting in, tactlessly, London the following month, another former premier, Italy’s Giuliano Amato reiterated the advantages of incomprehensibility: “If it is unreadable, it is not constitutional, that was the sort of perception. Where they got this perception from is a mystery to me. . . .  But, there is some truth [in it]. . . . the U.K. prime minister can go to the Commons and say “Look, you see, it’s absolutely unreadable, it’s the typical Brussels treaty, nothing new, no need for a referendum.” Amato may have been speaking fairly light-heartedly, but he was also quite right. Legislators everywhere are accustomed to approving laws they don’t understand. The man in the street is not. The opaque language of Merkel’s deceptively crafted treaty was a brilliant device to help those politicians looking to dodge a referendum, but a disaster for those who had no choice but to win one.

But last Thursday’s Irish “no” was a rejection of more than elaborately misleading drafting. As the EU’s bureaucracy has extended its reach deeper and deeper into territory once reserved to the nation state, it is bound to provoke opposition, even among many of those who broadly support European integration. Much of that opposition is reasonable, but much of it is not, and who is to blame for that? The EU’s political class has made a mockery of truth for so long that we should not be surprised that some Irish “no” voters preferred to believe (as, reportedly, some did) that the Treaty of Lisbon would pave the way for a pan-European draft.

The “no” coalition was wide, messy, crazy, sane, pragmatic, romantic, all-embracing, and self-contradictory, sometimes well-informed, sometimes not, sometimes paranoid, sometimes prescient, sometimes socialist, sometimes free market, sometimes high tax, sometimes low tax, sometimes honest, sometimes not, sometimes more than a little alarming (Sinn Fein was the only official party of any size to lend their support) and sometimes more than a little inspiring. Marvelously, miraculously, they won, and they won well, 53.4 percent to 46.6 percent (on a respectable turnout of 53.1 percent). If you think that sounds like democracy, you’d be right. And if you think that sounds like a nation, you’d be right too.

But if you think that it’s too soon to declare victory, you’d also be right. Early indications are that the ratification process will continue. As Jose Barroso, the EU’s chief bureaucrat, announced within minutes of the Irish result, “the treaty is not dead.”

And that tells you much of what you need to know about the EU.

Constitutionally Indisposed

National Review Online, February 22, 2005

A little over two centuries ago, a small group of planters, landowners, merchants, and lawyers met in Philadelphia to decide how their new country was to be run. Within four months this remarkable collection of patriots, veterans, pragmatists, geniuses, oddballs and the inspired succeeded in agreeing the extraordinary, beautiful document that, even with its flaws, was to form the basis of the most successful nation in history.

On February 28, 2002, another constitutional convention began its work, in Brussels this time, not Philadelphia. Its task was to draw up a constitution for the European Union. The gathering in Brussels was chaired by Giscard D'Estaing, no Hamilton or Madison, but a failed, one-term president of France best known for his unseemly involvement with Jean-Bedel Bokassa, the cannibal "emperor" of central Africa. Giscard's convention was packed with placemen, cronies, creeps, and has-beens to make up a body where to be called second rate would have been an act of grotesque flattery. Only a fool, a braggart, or a madman would have compared this rabble with the gathering in Philadelphia. Needless to say, Giscard managed to do just that. The rabble returned the compliment. At ceremonies held to celebrate the conclusion of the convention's work, one over-excited Austrian delegate compared Giscard to Socrates, a remark that would undoubtedly have reduced that ancient, and unfortunate, Greek to yet another swig of hemlock.

Once the convention had completed the draft constitution, there was further haggling over the text by the governments of the EU member states. A final version was agreed in June 2004, and what a sorry, shabby work it is, an unreadable mish-mash of political correctness, micromanagement, bureaucratic jargon, artful ambiguity, deliberate obscurity, and stunning banality that somehow limps its way through some 500 pages with highlights that include "guaranteeing" (Article II-74) a right to "vocational and continuing training," "respect" (Article II-85) for the "rights of the elderly... to participate in social and cultural life," and the information (Article III-121) that "animals are sentient beings." On the status of spiders, beetles, and lice there is, unusually, only silence.

All that now remains is for this tawdry ragbag to be ratified in each member state, a process that is already well underway. In some countries ratification will depend on a parliamentary vote, in others a referendum. The final outcome remains difficult to predict, and it is a measure of the current uncertainty over the constitution's ultimate fate that there is now open discussion of the idea that the document may be forced through even without ratification by one or two of the smaller countries. In an editorial over the weekend, the Financial Times, a generally reliable mouthpiece for the latest Brussels's orthodoxy explained, "in theory, one state's rejection is enough to kill [the constitution]. In practice, it will depend on the state." Within the EU, it seems, some nations are more equal than others. Rejection by one of the union's larger members, however, will be enough to throw the whole process into richly deserved chaos. We can only hope.

And it is at this point that, rather surprisingly, the Bush administration has come into the picture. Speaking a few days ago to the Financial Times, Condoleezza Rice appeared, weirdly, to give the constitution some form of endorsement: "As Europe unifies further and has a common foreign policy—I understand what is going to happen with the constitution and that there will be unification, in effect, under a foreign minister—I think that also will be a very good development. We have to keep reminding everybody that there is not any conflict between a European identity and a transatlantic identity..."

In a later interview with the Daily Telegraph, President Bush himself appeared to steer discussion away from the proposed constitution, but he did have this to say: "I have always been fascinated to see how the British culture and the French culture and the sovereignty of nations can be integrated into a larger whole in a modern era," he said. "And progress is being made and I am hopeful it works because one should not fear a strong partner."

How can I put this nicely? Well, there is no way to put it nicely. Even allowing for the necessity to come out with diplomatically ingratiating remarks ahead of a major presidential visit to the EU, the comments from Bush and Rice are either delightfully insincere or dismayingly naïve.

The project of a federal EU has long been driven, at least in part, by a profound, and remarkably virulent anti-Americanism, with deep roots in Vichy-era disdain for the sinister "Anglo-Saxons" and their supposedly greedy and degenerate culture. Throw in the poisonous legacy of soixante-huitard radicalism, then add Europe's traditional suspicion of the free market, and it's easy to see how relations between Brussels and Washington were always going to be troubled. What's more, the creation of a large and powerful fortress Europe offered its politicians something else, the chance to return to the fun and games of great power politics.

They have jumped at the opportunity. Speaking back in 2001, some time before 9/11 and the bitter dispute over Iraq, Swedish Prime Minister Göran Persson (who then also held the EU's rotating presidency) provided a perfect example of the paranoia and ambition that underpins this European dream. The EU was, he claimed "one of the few institutions we can develop as a balance to U.S. world domination."

Brandishing the American bogeyman was always inevitable. Condoleezza Rice may claim to have discovered a European "identity," but outside the palaces, parliaments, and plotting of the continent's politicians such an identity is a frail, feeble, synthetic thing. The preamble to the EU constitution refers to a Europe "reunited after bitter experiences," a phrase so bogus that it would embarrass Dan Brown. Unless I missed something in my history classes "Europe" has never been one whole. There is nothing to reunite. A Swede, even Göran Persson, is a Swede long before he is a "European." Naturally, the framers of the constitution have done their best to furnish a few gimcrack symbols of their new Europe (there's (Article I-8) a flag, a motto ("United in Diversity), an anthem, and, shrewdly in a continent that likes its vacations, a public holiday ("Europe Day") and perhaps in time these will come to mean something, but for now they are poor substitutes for that emotional, almost tribal, idea of belonging that is core to an authentic sense of national identity.

But if the EU has had only limited success in persuading its citizens what they are, it has done considerably better in convincing them as to what they are not: Americans. Writing in 2002 about the "first stirrings" of EU patriotism, EU Commissioner Chris Patten could only come up with two examples: "You can already feel [it], perhaps, in the shared indignation at US steel protection...You can feel it at the Ryder Cup, too." It's significant that when Patten gave examples of this supposed European spirit, he could only define it by what it was against (American tariffs and American golfers) rather than by what it was for. It is even more striking that in both cases the "enemy" comes from one place—the U.S. If Patten had been writing in 2005 he would, doubtless, have added opposition to the war in Iraq to his list—and he would have been right to do so.

This is psychologically astute: The creation of a common foe (imagined or real) is a good way to unify a nation, even, possibly, a bureaucratically constructed "nation" like the EU. Choosing the U.S. as the designated rival comes with two other advantages. It fits in nicely with the existing anti-American bias of much of the EU's ruling class and it will strike a chord with those many ordinary Europeans who are genuinely skeptical about America, its ambitions and, yes, what it stands for.

Insofar, therefore, as it represents another step forward in the deeper integration of the EU, the ratification of the constitution cannot possibly, whatever Secretary Rice might say, be good news for the U.S. How deep this integration will be remains a matter of dispute. In Euro-skeptic Britain, Tony Blair's government has denied that the document has much significance at all, but without much success. At the same time, claims that the ratification of the EU constitution will of itself represent the creation of a European superstate are overblown. It won't, but it will be another step in that direction, and, based on past precedent, we can be sure that the EU's fonctionnaires will use the vacuum created by all those helpful ambiguities in the constitution's text to push forward the federalizing project as fast and as far as possible.

It is, of course, up to Europeans to decide if this is what they want. Any attempt by the Bush White House to derail the ratification process would backfire, but that does not mean that the administration should be actively signaling its support for this dreadful and damaging document. Secretary Rice argues that the integration represented by the passing of the constitution would be a "good development." The opposite is true. If the EU (which has a collective agenda primarily set by France and Germany) does increasingly speak with one voice, Washington is unlikely to enjoy what it hears.

The constitution paves the way for the transfer of increasing amounts of defense and diplomatic activity from Europe's national capitals to Brussels. Article 1-16 commits all member states to a "common foreign and security policy." "Member states" are required to "actively and unreservedly support the Union's common foreign and security policy in a spirit of loyalty and mutual solidarity and shall comply with the Union's actions in this area. They shall refrain from action contrary to the Union's interests or likely to impair its effectiveness." In a recent radio interview, Spanish prime minister Jose Zapatero explained how this might work: "we will undoubtedly see European embassies in the world, not ones from each country, with European diplomats and a European foreign service...we will see Europe with a single voice in security matters. We will have a single European voice within NATO."

And the more that the EU speaks with that one voice, the less will be heard from those of its member states more inclined to be sympathetic to America. And as to what this would mean, well, French Green politician Noel Mamère put it best in the course of an interview last week: "The good thing about the European constitution is that with it the United Kingdom will not be able to support the United States in a future Iraq."

And would that, Secretary Rice, be a "good development"?

As Rome Starts to Smoulder

National Review Online, December 9, 2003

Human nature never disappoints in its capacity to dismay. The fact that, six decades after Auschwitz, there is, once again, anxiety about rising anti-Semitism in Europe is proof enough of that. Vandalized synagogues, desecrated graveyards, torched schools, tales of beatings, bullying, and thuggery in the streets bring a touch of the pogrom to 21st-century headlines. And then there are all those words, speeches, articles, and opinion pieces in the better papers. They are subtler than 60 years ago, with a more discreet viciousness, carefully calibrated and coded, no Stürmer stridency, no conspiratorial Protocols, just hints and insinuations — well sometimes a little more than that — of something altogether more primitive. In Holland, for example, there's Gretta Duisenberg, grim Wim's grimmer wife. Until recently, old Wim was in charge of the European Central Bank, busily presiding over economic stagnation and a destructive interest-rate policy. Compared with Gretta, however, he was a paragon of good judgment. Asked how many signatures she hoped to gain for a petition calling for economic sanctions on Israel, the charming Mrs. Duisenberg laughingly settled on this number: Six million.

A coincidence, she said later. Perhaps, but Europe has recently seen quite a few such coincidences, evidence, it is alleged, that the lessons of the Holocaust have yet to be learned in the continent that gave it birth. The thought that an old evil may be about to return is disturbing, but, for some, it's an image that is as convenient as it is frightening. To Europe's Left, the specter of the Third Reich has long been useful political theater, a bloody brown shirt to wave at its opponents and, these days, a handy device for suppressing any attempt at serious debate over mass immigration. Take Pim Fortuyn. He was a libertarian free spirit, but, for his comments on immigration and multiculturalism, he found himself denounced as a "xenophobe" and, mark of Cain, a "fascist." End of discussion and, as it turned out, end of Fortuyn too.

Meanwhile, to some Americans, particularly on the right, the notion of a Europe flirting with the worst of its past fits in nicely with their portrayal of a continent as depraved as it is decadent. Think back to the dramas of earlier this year. With the grotesque spectacle of the French foreign minister cynically articulating the case for "peace," what better way to puncture his country's pretensions of moral superiority than to focus on the apparent reappearance of anti-Semitism in the land of Dreyfus, Laval, and Le Pen? Anti-Semitism is bad enough in its own right, but it is also the sin forever associated with Vichy's moral squalor. To highlight its rebirth, particularly at a time when France was under fire for deserting old allies, was a useful way for Chirac's critics to conjure up memories of the period in French history with which it is usually associated, that epoch of white flags, a railway carriage at Compiègne, and, at times, all-too-enthusiastic collaboration.

And to complete that picture of treachery, betrayal, and capitulation, who should turn out to be France's closest ally in the struggle against U.S. "hegemony"?

The Germans.

Bringing this shameful era into the debate may have proved an effective, and not entirely unfair, tactic but it runs the risk of reducing the discussion to crude (if entertaining) stereotypes (full disclosure: I've done a bit of this myself). In reality, France's policy in the face of Baathist tyranny and Islamic extremism has been, like Vichy, a fascinating blend of spinelessness and realpolitik, repellent but more complicated than just another display of cowardice by a nation of cheese-eating surrender monkeys.

While it is, alas, true that Europe has seen some recurrence of "classic" (if that's the word) anti-Semitism, the idea that the continent is somehow moving towards a repetition of the nightmare of 60 years ago is an exaggeration even more absurd than France as chicken supreme. For proof, look no further than the furor over what is still a relatively small number of violent incidents. Despite this, however, there can be no doubt that something wicked is indeed afoot. To understand it, we should look closer at two topics often obscured by propaganda, prejudice, and political correctness. The first is European attitudes towards Israel, the second, extremism among Europe's Muslim population.

When a recent opinion poll found that nearly 60 percent of EU citizens believed that Israel was a threat to world peace, comfortably ahead of those doves in Pyongyang (53 percent), it seemed yet more proof that an old virus was already abroad in the land. Perhaps, but check the numbers and you'll see that the U.S. (also on 53 percent) was rated as just as dangerous as crazy little Kim. That's ludicrous too, of course, but it's evidence that this polling data reflects not gutter prejudice but something almost as insidious: Europeans' desire to accept any compromise so long as it could buy them a quiet life — at least for a while.

It's an attitude that used to show itself in the argument, once popular among large sections of the European Left, that there was a broad degree of moral equivalence between the Cold War's American (Holiday Inn, McDonalds) and Soviet (Gulag, mass graves) protagonists. It's an attitude that regards "peace" (that word again) as a good that trumps all others — so when Israel is labeled the worst threat to world peace, or the U.S. and North Korea are described as being as dangerous as each other, it shows only that Europeans, left powerless by years of relative decline, falling self-confidence, and shrunken military budgets, have realized that both Israel and America are more interested in self-defense than suicide. That these two countries may be fully entitled to take the positions they do is, naturally, quite irrelevant.

This is the context in which Ariel Sharon has taken to talking about "a great wave of anti-Semitism," but Americans — and Israelis — need to acknowledge that it is quite possible to be critical, indeed severely critical, of current Israeli policies without being in any way anti-Semitic. Indeed, even when they are manifestly unreasonable, contemporary European attitudes to Israel are generally best seen not as anti-Semitic, but rather as an extension of that self-loathing that seems increasingly to define Western cultural and political life. Go back to the 1960s and an impressed and remorseful Europe tended to see Israel as a plucky little country, filled with the survivors of the worst that Europe could do to them, cheerily working on their cheery kibbutzim to build a cheerily collectivist future that would in itself be a living rebuke to the reactionary attitudes that had made the Holocaust possible.

Prompted in no small part by Soviet propaganda efforts, that attitude began to change, particularly after the Six Day War and, even more so, in the wake of the 1973 conflict. Conveniently, some might say, in the light of OPEC threats to Europe's oil supply, Israel came to be seen as the oppressor, not the oppressed, a colonialist, "racist" (evil Zionists!) outpost of European savagery, rather than a refuge from it. As such, condemnation of Israeli policy was not so much an expression of European disdain for "the Jews" as yet another manifestation of Europe's hatred for itself. Combine that sentiment with today's televised images of the hard-line response of the Sharon government to the revived Intifada and it's easy to see that the anger now directed at Israel was almost inevitable.

But if it's a mistake to attribute all this hostility to anti-Semitism, it is also a mistake that to deny that European vituperation of Israel has now reached such a level that it may be tapping the wellsprings of a very ancient psychosis, as well as, it should also be admitted, the more "modern" anti-Semitism long associated with Europe's hard Left. Under these circumstances, it is unfortunate, to say the least, that so much of the imagery and the language used by Europe's harsher critics of the Jewish state recalls the anti-Semitism of an earlier era. Coincidence? Doubtless Mrs. Duisenberg would say so.

It is unlikely, however, that there can be any such merciful ambiguity (however stretched) about the curious behavior of the EU's "Monitoring Centre for Racism and Xenophobia," an organization that, appropriately enough given its rather Orwellian name, allegedly decided to shelve publication of a report commissioned from Berlin Technical University's highly respected Anti-Semitism Research Institute on the causes of the increased number of attacks on Jews in Europe. Why? The institute had come up with the wrong answer.

Naturally, that's not the center's explanation. Under intense pressure from its critics (which, with characteristic arrogance, the center is trying to spin as evidence of "how important and sensitive [its] work is"), it has now released the draft report on its website, while continuing to maintain that it is not "fit for publication." It is, they sniff, "neither reliable nor objective," This is a stance in line with its earlier claims that the report was of "insufficient quality," a view, unsurprisingly, the institute rejects. In essence, the Berlin researchers argue that the real objection to their report, which found, plausibly enough, that young Muslims (particularly immigrants from the Middle East and North Africa) were responsible for much of the rise in anti-Semitic incidents, was its lack of political correctness.

This rings true. The EU pursues a relentlessly multiculturalist agenda. Under these circumstances, the publication of data showing that young Muslims, rather than old Nazis, ought to be starring in Brussels's morality play was highly awkward. Inconvenient reality had, therefore, to be changed, or at least ignored, no big deal for a fraudulent (in all senses) "Union" that has long shown its contempt for the marketplace, the nation, history, tradition, and democracy.

So, it's no surprise that the EU's hacks ("independent experts...in the field of racism and xenophobia") repeatedly (according to the Daily Telegraph) attempted to persuade the Berlin Institute to tone down its conclusions. To its credit, the institute refused and we have seen what happened next. To the EU, combating anti-Semitism, it seems, is less important than preserving the dangerous illusions of multiculturalism, and, probably, recognizing the demographics of a Europe where there are more Muslims to appease than Jews to protect.

As a symbol of the dishonesty and confusion that surrounds this issue, that's hard to beat, but in the meantime, France's chief rabbi is concentrating on more practical matters. He's advising young Jews to wear baseball caps rather than skullcaps. Wearing a yarmulke, apparently, might make them a target for "potential assailants."

Not that Brussels would care.

Bullying Berlusconi

National Review Online, July 22, 2003

As Silvio Berlusconi has now discovered, publicly comparing a German politician to a concentration-camp guard is a really, really dumb idea, but the row that has followed has been out of all proportion to one very bad-tempered remark. With something approaching relish, Europe's grandees are citing this gaffe as another reminder that the Italian premier is not up to the supposedly immense responsibilities of the presidency of the EU council. Of course, critics of Berlusconi claim to have more to their case than one stupid joke. They grumble about his unpredictability, his imperiousness, and the way that he is said to use his extensive media holdings to influence the democratic process. Above all, they point to Berlusconi's continuing legal problems as evidence that he is unfit to represent that city on a hill, the Europe of Chirac, Schroeder, and the Common Agricultural Policy. Berlusconi's difficulties with the law — a tawdry, and seemingly endless, cycle of convictions, acquittals on appeal, and courtroom maneuvering — aren't pretty, to put it mildly, but they have to be seen in the context of a country where politically motivated prosecutions are far from unknown. What's more, they relate back to a period when Italy had yet to emerge from the grip of a political class so corrupt that, for many businessmen, the payment of bribes had become an inevitable, if unwelcome, part of everyday life.

Besides, it's not as if Berlusconi went around beating people up. That distinction is reserved for German foreign minister Joschka Fischer. These days he's a darling of the EU's elite despite (or, perhaps, partly because of) his extremist past. Back in the late 1960s and early 1970s, Fischer was part of a radical Left that was all too prepared to cross the line that divides legitimate protest from outright political violence. In 1973, Fischer took part in the brutal beating of a young policeman at a riot in Frankfurt. That moment of 'revolutionary struggle' was caught on camera, but most of his activities in those years remain clouded in somewhat sinister mystery. To take one example, after initial denials (attributed to 'forgetfulness') we now know that Fischer attended a 1969 PLO Conference in Algiers that passed a resolution calling for the extinction of the state of Israel. Fischer was there — an ugly place to be for a German less than twenty-five years after Auschwitz, and a gesture far more 'insensitive' than Berlusconi's ill-judged insult.

Ancient history, you say? Well, let's take a look at Lionel Jospin, a man widely respected across the EU for his "integrity." He was France's prime minister until last year, and the Socialist contender in that country's presidential elections — until he was beaten into third place by a neo-fascist (and people call Italy's politics a disgrace?). At about the time young Joschka Fischer was beating up a policeman young Jospin was an activist in a revolutionary Trotskyite group known as OCI. A youthful mistake? Perhaps, except that it was a youthful mistake that Jospin was to continue making into middle age. He maintained discreet links with OCI for another two decades. Jospin has said that he has no need to feel "red-faced" about his red past, but, strangely, he never chose to mention it to the electorate. Lionel's affection for Leon (a mass murderer, lest we forget) was only discovered a few years ago — after Jospin had become prime minister).

And then there's money. The wicked Berlusconi is not alone in having allegations of bribery and corruption thrown his way. Take a glance at Giscard D'Estaing, the man the EU hired to cobble together its new "constitution." This squalid blueprint for permanent bureaucratic rule was unveiled recently amid scenes of choreographed rejoicing that reached their apogee when one brown-nosing Green MEP hailed Giscard as a new Socrates, a description that would have had the Greek sage reaching again for the hemlock.

The notoriously vain Giscard was, doubtless, delighted to have a second chance to leave a mark on history. These days his one, rather lackluster, term as president of France is best remembered for a widely rumored affair with sexy Sylvia Kristel (Emmanuelle) and, less impressively, for his habit of accepting hundreds of thousands of dollars worth of diamonds from Central Africa's cannibal-emperor Bokassa. Giscard has never really had much to say about those glittering pebbles, but then he has never had to. The French establishment looks after its own — Giscard was never charged with any crime.

Ah yes, some might say, and that's why Berlusconi is different. He has actually been prosecuted. Fair enough, but then so has Jean-Claude Trichet, the next chief of the European Central Bank. He was charged with approving false accounts for Credit Lyonnais, a bank that has cost the French taxpayer billions of dollars. He has, however, just been acquitted and is, therefore, free to take up his new job at the ECB in November. Now, an acquittal is an acquittal (unless it is Berlusconi who is being acquitted, in which case it doesn't seem to count), and we must--of course--assume that the unfortunately-named Trichet is innocent, but it says something about the EU that it is prepared to appoint a man with this shadow over his past to one of the most sensitive--and powerful--financial jobs in the world.

Matters may not end so happily for Edith Cresson. She is an undistinguished former French prime minister best known for her suggestion that one in four Englishmen are homosexual. She was the EU's 'research and education' commissioner between 1995 and 1999 and she is now facing criminal charges in Belgium of forgery and conflict of interest relating to her time in office in Brussels. The case has been under investigation for four years (not so long by Belgian standards for politically sensitive prosecutions) and is forecast to last at least another twelve months or so, after which the EU Commission will then decide whether to seek additional administrative penalties against her.

The commissioner responsible for investigating Cresson is, with nice symmetry, an undistinguished former opposition leader. Neil Kinnock led the Labour party to defeat against Mrs. Thatcher and, more remarkably, John Major. He is a man in a good position to know that the Cresson scandal was no isolated incident: Berlusconi's alleged wrongdoing is small beer compared with what has been going on in Brussels. In 1999 Kinnock and all his fellow commissioners, "accepted responsibility" by resigning after the publication of a highly critical report detailing fraud and corruption within the Commission then led by another undistinguished former prime minister — Luxemburg's Jacques Santer. The report had been prompted by the persistence of Paul van Buitenen, a Dutch whistle-blower from the commission's control department. He was suspended on half-pay and labeled a madman, but eventually his complaints grew too noisy for even the EU parliament to ignore and, somewhat reluctantly it authorized the independent inquiry that was to doom the Santer Commission.

Santer continued to describe himself as "whiter than white," but despite that, he was replaced by a slightly more distinguished former prime minister — Italy's Romano Prodi. Prodi remains "president" of the Commission today and is, we must presume, "whiter than whiter than white." Only boors will choose to mention that, like Berlusconi, the pristine Mr. Prodi was under criminal investigation on at least two occasions in the 1980s and 1990s. No charges were ever brought, but it's worth remembering that just as there tends to be something a little political about prosecutions in Italy, there can also be more than a touch of the political about decisions not to prosecute.

But back to Kinnock. As we have seen, he accepted his share of "responsibility" for the failings of the Santer Commission by resigning. He then agreed to accept even more "responsibility" by being appointed to the new Prodi Commission, promoted and being put in charge of "administrative reform." This is why the Cresson case has ended up in his in-tray.

Madame Cresson, meanwhile, is not going quietly. Her prosecution by the Belgians is, she says, an attempt to "damage the name of France" (no cheap jokes, please) and she has sent a letter to Jacques Chirac asking for the "protection of the Republic." That "protection" is something that Chirac, the toast of the EU parliament during the Iraq crisis, knows a bit about himself. The French government has now endorsed a law that will safeguard Saddam's old pal from prosecution for as long as he is president. This isn't unique (Berlusconi has secured similar immunity in Italy), but it may come in handy given certain characteristics of Chirac's time as mayor of Paris, which reportedly included both traditional and more exotic misbehavior including some $2,000,000, for example, claimed in reimbursement for food and drink expenses.

Neil Kinnock's "reforms" have, meanwhile, proceeded at a predictably leaden pace, prompting a despairing Van Buitenen to resign from the Commission in 2002, saying it was "unreformable." The EU's Court of Auditors probably agrees. It has been criticizing the commission's accounting for years. One of the few people who seem to really care about this is Marta Andreasen, the new chief auditor appointed to the EU last year. She went public with claims that the commission's chaotic and confusing 'system,' which is meant to track around $100 billion a year, might be open to fraud. She was promptly suspended, but on full pay — there has been some progress). In fact, Andreasen's comments were relatively restrained. The Court of Auditors has estimated that losses from fraud account for around five percent of the budget. To add to the drama, it turned out that the EU's internal auditor (another determined Dutchman, this time by the name of Muis) had been preparing a report of his own. It backed up much of what Andreasen was saying, not that that did her much good.

To his credit, Muis persisted, but only for a while. He has tendered his resignation citing the now traditional "slow pace of reform." There are suggestions that he was also frustrated by the Commission's reluctance to allow him to investigate the growing scandal at Eurostat, the EU's statistical office, a place where, it seems, nothing quite added up. The details are murky, but there's talk of secret bank accounts and siphoned-off funds. As usual the whistle-blower, (Danish, this time, not Dutch), was left twisting in the wind. She claims to have been bullied out of her job. Requests to that great reformer Kinnock for legal assistance were rejected. That, at least, has now changed. The case, a spokesman for Kinnock told the Financial Times, is "more complicated than we originally thought." Indeed it is.

Now, the point of reciting these tales of hypocrisy and corruption within the EU (and there are plenty of other stories where they came from) is not to exonerate Berlusconi. All those wrongs don't make a right. At the same time, they do make the indignation over the Italian prime minister look a little, well, selective. For an explanation, forget the dodgy dealings back in Italy. Berlusconi's real crime is something far worse — he is a capitalist, a conservative (of sorts) and, horrors, an Atlanticist, and in today's increasingly intolerant Europe the reward for such heresy is meant to be political and legal destruction.

And that's the real scandal.