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.

The Euro Endgame

The  Weekly Standard, August 1, 2011

Billion by billion by billion, showdown by argument by ultimatum, Greece’s latest bailout is being put together by those who run the eurozone. The country’s finances are so bad, and its prospects so poor, that even the new $159 billion rescue package announced on Thursday will (assuming it comes into effect) probably only prove to be a reprieve.

Never mind. Buying time is the name of the game. If Greece can be kept going, and Portugal and Ireland too, financial markets might, fingers crossed, calm down, and the threat that panic might engulf Spain and Italy—two economies too big to bail out—and the banks that have lent to them might recede. Then, come July 2013, the $1.1 trillion European Stability Mechanism will spring to life. It will be backed by the 17 members of the eurozone, be policed by Brussels, and it will inherit the proto-IMF powers now being proposed for the European Financial Stability Facility that it will succeed. Well, that is the plan (at the time of writing), complete with a hint of Ponzi, a dash of Micawber, and dire warnings of what the alternative might be.

There’s a lot that needs not to go wrong, but of all the elements that could, the most dangerous may come from a source that Brussels has long tried to write out of the plot: the ballot box. There’s an irony to that. If there was anything (other than misplaced Carolingian nostalgia) at the heart of the project for a European union it was the idea that, after the wars of the first half of the twentieth century, the peoples of the old world could no longer be trusted with their own sovereignty. It’s never been much of an argument, but it’s worked well enough for the EU’s emerging technocratic elite.

The establishment of the euro is thus best understood as just another stage in the progressive disenfranchisement of Europe’s voters. The replacement of domestic currencies with what was, in effect, foreign money meant that, as a practical matter, the countries (and particularly the weaker countries) of the eurozone lost much of what was left of their fiscal and economic autonomy. Previously a nation with subpar finances and/or an uncompetitive cost base could allow the depreciation of its lira, its drachma, or its escudo to restore some balance. Its standard of living might fall relative to its international competitors’, but it could usually muddle along in the fashion that its people had, one way or another, chosen.

Now that option was closed. Forget the voters; once a country could no longer print its own money it had to run itself in ways that ensured it could keep international creditors—which is to say all creditors—happy. More generally, it had to manage itself in a manner that allowed it to keep reasonably close to the pacesetters of the monetary union in which it now dwelt—and if that country was Greece and the pacesetter was Germany, that was only going to be possible (if at all) with wrenching political and cultural change. That change might have been desirable, but to think that external discipline alone would be enough to set it in motion was a fatal conceit.

After 10 years in the currency union, Greece needs to devalue its currency by perhaps 50 percent. With no drachma to debauch, the only alternative is drastic austerity, and that is where politics may spoil the unlovely technocratic party that is now being thrown for the Hellenic Republic. In early July, Jean-Claude Juncker, the Luxembourger who presides over the organizing committee of the eurozone’s finance ministers, announced that Greece’s “economic sovereignty” would be “massively limited.” But what if the Greeks say no?

So far, their parliament has voted through what it has to, but the opposition is not on board, and the economy is being pulled down ever further by debts that cannot be repaid and a currency that Greece cannot afford. With unemployment at an official 16 percent (or 43 percent of those under 24) and further street disturbances a certainty, how long will it be before Greece decides that it has less to lose than its creditors from the “selective” default it is now to be permitted? The crisis has already brought down the Irish and Portuguese governments and contributed to the humiliation of Spain’s ruling Socialists in recent local elections. For all the Brussels chatter of additional “structural funds” to be deployed in the “relaunch” of the Greek economy, how much do Greece’s politicians really have to lose by calling Juncker’s bluff?

Faced with a future that offers, at best, a bleak and humiliating road ahead, their counterparts in other PIIGS (Portugal, Ireland, Italy, Greece, and Spain) may come to feel the same. Thus the Irish are reexamining the wisdom of guaranteeing the liabilities of their broken banking system to the extent that they have—a promise that, at this stage, may be worth more to foreign creditors than anyone at home.

Those who have found themselves feeding PIIGS are unhappy too, nowhere more so than in Germany, the country that is effectively underwriting the euro, a currency that—true to Brussels form—its electorate was never truly asked to endorse. As for the risks, they were barely discussed with voters, and when they were discussed, they were denied. German taxpayers would not be on the hook for anyone else, oh no. But that’s not how it has turned out for them, and they are not well pleased.

This has put German chancellor Angela Merkel in a spot. Without German support for the eurozone’s crumbling periphery, decidedly unselective defaults will trigger the financial contagion that policymakers are trying to avoid. For all her disapproval of PIIGS sty failings, the pragmatic Merkel understands this perfectly well, but her power to force through another round of assistance is not what it was. She still commands a comfortable majority in the Bundestag, but, in part thanks to the controversy over German participation in earlier bailouts, she has lost her grip over her country’s upper house. There may be worse to come. Polls taken before the announcement of the latest rescue plan showed that over 60 percent of Germans opposed extending further money to Greece, and this discontent is penetrating her governing coalition.

And opposition to bailouts has been mounting amongst voters elsewhere in the eurozone’s richer north for quite some time. That’s ominous. The new Greek package, and the changes to the European Financial Stability Facility that accompany it, require the approval of every member of the coalition of the unwillingthat is meant to be providing the funds. Earlier bailouts have already riled voters in Austria, divided the ruling Dutch coalition, and helped propel the True Finns, a once-small populist party, to third place in April’s Finnish general election with 19 percent of the vote. Under the circumstances the notion that the Greek rescue plan will sail smoothly through all the national parliaments involved looks like fantasy.

The politics will be rough, and they will get rougher. Neither this bailout, nor the expanded European Financial Stability Facility, nor its successor, will be enough to unwind the imbalances now ravaging the eurozone’s periphery. The best chance of achieving that will be to move on to a quasi-federal budgetary, fiscal, and “transfer” union. That will be a hard sell to electorates in those countries that will be footing the bill (probably in excess of an annual $150 billion), and after the fiascos of the last year or so it will be politically too dangerous to try, once again, to bypass them.

Voters may well start to count after all.

Q&A: Stieg Larsson's Ghost Speaks

Bookforum, June  21, 2011

Stockholm, November 2010 © Andrew Stuttaford

STIEG LARSSON: What model Ouija board are we on?

BOOKFORUM: Hasbro.

SL: I like to know the hardware. I always kept my readers informed about the technology Lisbeth was using. Always.

BF: They certainly liked something that you were doing. More than thirty million copies sold. Shocked?

SL: Well, we Swedes try to be modest. Still, read the books carefully. You can see that I liked what I had written. I’d planned ten Salander books in all, you know.

BF: She’d have been your Miss Marple. Some say—how can I put this?—that your death, nearly seven years ago now, boosted sales.

SL: Like Elvis?

BF: Elvis? Well, you both liked junk food, but I was thinking about the freedom that unpleasant event gave international publishers to toy with your text—and to scrap that terrible first title. You must agree that The Girl with the Dragon Tattoo sounds better than Men Who Hate Women.

SL: But there are plenty of men who hate women, no? That’s not fiction, even in that Swedish paradise everyone so likes to talk about, and I wanted to remind my readers of that with a fact or two.

BF: Like the unsourced statistic that “eighteen percent of the women in Sweden have at one time been threatened by a man”? Whatever that vague term threatened may mean . . .

SL: What are you saying?

BF: You’re the investigative journalist. Something doesn’t add up. And the same could be said about some other tales you are said to have spun, about training the Eritrean lady guerrillas, say, or even the one about the gang rape of a “Lisbeth” that allegedly so influenced your development as a feminist. There’s even a book, The Larsson Scandal, that focuses on some of these, uh, inconsistencies.

SL: Jävlar! As you pointed out, I was an investigative journalist myself. I exposed threats, dangerous conspiracies, but this . . .

BF: Let’s return to the pleasanter topic of all those royalties—and, comrade, the contradiction they might represent. You are on the far left, a former Trotskyist, no less.

SL: Well, it was my estate that hit the jackpot, not me. Sure, I hoped to make a bit of money, but all Stieg wanted was a stuga—a cottage—in the country, and maybe to set aside a bit for retirement, the usual. I wasn’t one of those greedy financial types, overpaid for trading bits of paper with their yuppie pals. I created a product that people liked. No one was exploited. Taxes were paid. I have more than done my bit for the welfare state.

BF: And for a lot of other Nordic writers, too. The hunt for the next Stieg Larsson is proving lucrative.

SL: That’s fine. Per Wahlöö and Maj Sjöwall started it all decades ago, not me. They were leftists too, I might add, opposed to the Vietnam War. They made America tremble. Still, I wish that the first Stieg Larsson was still around. Fifty was too young to die.

BF: That’s why you never made a valid will?

SL: Yes, that was a mistake. Swedish intestacy laws hate unmarried partners. Eva deserves more than she’s getting. Then again, the law’s designated legatees, my father and brother, aren’t monsters.

BF: How do you rate the movie versions of your books?

SL: They cut too much of my story, but the girl who played Salander was terrific. As for the Hollywood remake, Mikael Blomkvist, who is, of course, me, will be played by Daniel Craig, James Bond himself. Makes sense, if not to our Mr. Fleming. That snob just laughed when he heard the news. Here he comes now. I’d better go. He can be rough.

BF: Stieg, wait! One more question: Is there really a fourth book, the one they say is on your laptop?

SL: Well, let’s just say if it appears, a ghostwriter will have been involved [laughs, fades].

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.

PIIGS to the Slaughter

National Review, December 2, 2010 (December 20, 2010 issue) 

Checking into a roach motel often seems like a straightforward decision.

Signing up for the euro, the shiny new currency supposedly saturated in German fiscal rectitude, not only pleased Ireland’s paymasters in Brussels (the country has benefited hugely from lavish dollops of EU “structural” assistance) but offered Dublin the prospect of riches far closer to hand than the end of the traditional rainbow. The combination of EU aid (amounting in some years to as much as 3 percent of GDP), domestic frugality, shrewd supply-side reforms, and (those were the days) a timely currency devaluation had already given birth to a Celtic Tiger nourished on export-led success. But that beast was now set to burn very bright indeed.

And so it did. Money poured in, bringing the traditional speculative excess in its wake. So far, so normal: Usually such festivities are brought to a more or less timely close by both external and internal pressure. Inflation heats up, the currency buckles, interest rates rise, fiscal policy is tightened, bank lending is reined in, and everyone is soon back on their best behavior — until the next time.

Joining the euro meant that much of this script was jettisoned. Market signals were muffled by membership in a unified monetary system in which one size truly did not fit all. In particular, Irish interest rates, determined primarily by the needs of the eurozone’s sluggish Franco-German core, were kept far too low (on average, they were negative in real terms between 1998 and 2007) for a roaring economy growing at an annual average rate of 6 percent between 1988 and 2007. Throw in a poorly regulated banking system, endemic cronyism, vast infusions of foreign cash (euro membership had dramatically reduced currency risk), a lending war led by the remarkably reckless Anglo Irish Bank, the genuine housing needs of a large new immigrant population (a striking phenomenon in this land once known for its emigrants), and briskly increasing wage rates, and the stage was set for a gigantic property boom. What could go wrong?

Just about everything; and it went so badly that (finally) doing the right thing may have made matters even worse. When the global financial crisis erupted and the Irish economy slumped (GDP fell by 7.1 percent in 2009 after a 2 percent decline the previous year), real-estate prices fell (they are now some 35 percent below their peak, and weaker still in Dublin), and the banks came down with them. The government’s response bore some resemblance to the approach taken so successfully by Sweden during a not-entirely-dissimilar banking crisis in the early 1990s. This included guaranteeing most of the liabilities of the country’s troubled banks (and troubled they were — by 2007, property-related lending accounted for some 60 percent of their loan books) and transferring toxic assets to NAMA, the National Asset Management Agency, a state-run “bad bank.”

But Ireland’s banking sector was far larger relative to its GDP than Sweden’s had been, and so was its real-estate bubble. The Irish government has also had to contend with a far less favorable economic climate, a difference made even more damaging by the fact that the Irish tax system is unusually sensitive to changes in economic activity. Tax revenues fell by almost 14 percent in 2008 and by 19 percent in 2009, bringing yet more misery to the republic’s previously respectable but swiftly deteriorating public finances.

Recovery from a mess like this is never plain sailing, but one way to lessen the pain is to arrange a currency devaluation (Sweden let the krona fall by 20 percent in late 1992) to give exporters a break. Unfortunately, membership in the eurozone had closed off that option. Ireland was thus stuck with an overpriced currency, an overpriced workforce, and a rapidly growing hard-money debt burden that could not be inflated away. All that was left was “internal devaluation.” That’s an ugly name for an ugly cure generally revolving around extraordinarily brutal public-sector austerity. The aim is to restore both the state’s finances and the nation’s international competitiveness, and it’s just what Ireland had been attempting since 2008 with a series of increasingly bleak budgets intended to reduce the deficit by over $19 billion.

Internal devaluation is a bitter pill to swallow even when it works, but when it doesn’t . . .

And in Ireland it may well not. As it has lurched its way through 2010, the government has fed ever more money into the country’s devastated banks (most notably the now-reviled Anglo Irish Bank), effectively canceling out the savings being generated by the austerity program and pushing the estimated 2010 public-sector deficit to some 32 percent of GDP (it would otherwise have been around 12 percent). This renewed the market’s worries about Ireland and, ominously, other fiscally fragile eurozone members. Exacerbating the rising tension, the European Central Bank appeared to be continuing with its effort to scale back the short-term support it had been extending to the eurozone’s financial institutions — support that was widely assumed to be vital to many banks in most or all of the notorious PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Perceptions of sovereign and banking risk were converging, not unreasonably so given the way that governments were standing (either explicitly or implicitly) behind their countries’ banks. To take one example, when Fitch cut Ireland’s rating from AA- to A+ this fall, it specifically cited the mounting cost of the bank clean-up.

All this made October a terrible month for German chancellor Angela Merkel to demand that the European Stability Mechanism, which is scheduled to replace the current European Financial Stability Facility in 2013, include a provision requiring private holders of government debt to share in the pain of future sovereign bailouts. The provision is common sense. To call for it at a time of jagged nerves over European sovereign risk was not. Merkel’s comments related only to arrangements that might be put in place in the future, but given her frequent tirades against “speculators” and Germany’s key role in funding any bailouts to come, many in the financial markets worried that they might herald an attempt to change the ground rules well before 2013 — and not in a way that would be in the interests of bondholders. Yields on PIIGS bonds rose, while money continued to drift away from Ireland’s banks, and investors from its debt. Theoretically, the country still had enough money to meet its financing needs until mid-2011, but, if panic was to be headed off (at least temporarily), its government had to be persuaded to accept the bailout that it was desperately claiming not to need.

The risk posed by spreading financial contagion was simply too high, and not just for Ireland. The European Financial Stability Facility, which was created for the eurozone with such fanfare (there was talk of shock and awe) at the time of the Greek bailout, is not large enough to rescue Ireland and Portugal and Spain, the next two countries most likely to be hit should confidence fall any farther. Dublin caved. An outline rescue package was announced on November 21. The full details were released a week later. The total package will amount to $110 billion, including an immediate $13 billion injection of fresh capital into the banking system. In an unanticipated development, Ireland will chip in $23 billion from its pension reserve fund and various other pots of money. The balance is set to come from the International Monetary Fund, from the European Financial Stability Facility, and from three non-eurozone countries, the U.K., Sweden, and Denmark. The whole thing is conditional on the passing of yet another Irish austerity budget, one that contains an additional $20 billion in tax increases and spending cuts. These cuts, when added to the earlier bouts of slash-and-burn, amount to roughly 20 percent of GDP.

At the same time, more details were given of the planned new European Stability Mechanism, but — not insignificantly — with (some) dilution of Angela Merkel’s proposal for sharing the burden of future bailouts. It was also agreed that Greece should be given an extra four-and-a-half years to repay its emergency financing from earlier this year. Ireland, however, will no longer be obliged to contribute to Greece’s bailout. On a brighter note, and over the objections of some in the rescue party, Ireland was allowed to retain the 12.5 percent corporate tax rate that has served it so well.

The republic’s governing coalition, a dying partnership between the centrist Fianna Fail and the Greens, has to pass the new austerity budget within a few days with a parliamentary majority of only two and without much popular support. In a clear warning sign for the general election now set for January, Fianna Fail received a November 25 by-election shellacking from Sinn Fein, a party frequently described as the political wing of the IRA. The EU’s mandarins like to claim that their “ever closer” union is burying Europe’s old nationalisms. That’s not how it looked in Donegal South West that weekend.

Despite this, Ireland’s mainstream parties recognize that the deficit needs to be reduced soon — even if they disagree on the specifics of the rescue package. At the time of writing, things are very fluid, but the best guess is that the budget will probably squeak through, albeit with a great deal of shouting. If it doesn’t, there’s a clear risk that financial chaos will soon engulf some or all of the PIIGS, and, no less dangerously, the banks that have lent so much to them. Even if it does go through, don’t expect too much. The distinctly downbeat market reaction to both the initial announcement of an Irish bailout (yields on the PIIGS’ government debt rose; the euro fell) and its later confirmation reveals a widespread belief that this rescue is not the end of the story.

It’s not. More bailouts undoubtedly lie ahead, and, in the case of Greece and Ireland, so does a debt restructuring (that’s the polite word for default) at some moment when it is judged that the financial markets can cope with the news. So long as these countries are yoked to the euro, there is no feasible alternative. Their domestic demand will be crippled by the processes of internal devaluation. Their export sectors will be hobbled by a hard currency. Under the circumstances, they will struggle to grow their economies at a pace fast enough to reduce their debt burdens to manageable levels. There are good reasons the yield on their debt continues to rise.

Meanwhile, Brussels, apparently unshaken in its belief that one size can be made to fit all, will try to impose unified fiscal and budgetary rules across the eurozone. If this succeeds, it may reassure restless German voters that there are credible limits on the amount they will be asked to pay to support European monetary union. That the implementation of such zonal discipline will, if carried through, also deepen European integration is even more to the Eurocrats’ point. That it would doom a large swath of the continent to years of subpar growth is just too bad. The European project must move forward!

Splitting the single currency into a “northern” euro for Germany and those of its neighbors that want to come along and a “southern” euro for the rest is one more congenial, if risky, alternative route to take. It would retain important elements of the status quo while paving the way for the devaluations that the PIIGS so badly need. But to take this path would be an admission of defeat too humiliating for the EU’s leadership to accept, at least for now. And if that’s off the agenda, so, even more so, is a return by the nations of the eurozone to their old currencies.

The final alternative, for an Ireland or a Greece to exit the euro on its own, would involve national bankruptcy, the collapse of much of the domestic private sector, and Lehman Part Deux. 

It’s not always easy to check out of a roach motel.

Scapegoating les Anglo-Saxons

The Weekly Standard, June 21, 2010

Sutton Hoo

When America’s flimsier corporate colossi threaten to collapse, they tend to follow a wearyingly familiar script. Quarterly reports “disappoint,” the media begin to stir, and questionable financial dealings come to light. The CEO then emerges from his bunker to announce that all would be well but for the (vicious/ill-informed) press, (greedy/destructive) short-sellers, or both. Then all hell breaks loose. That’s how it was with Enron. That’s how it was with Lehman Brothers. And that, more or less, is how it’s going with the euro. A dangerous gamble with other people’s money, irresponsibly operated, and dishonestly sold, the European single currency has been showing signs of severe stress, and leading EU officials have been doing just what the Ken Lays of this world do: dodge.

There have been the “all is wells” from the likes of José Manuel Barroso, president of the EU commission—the man who boasted in February that the euro was “a protective shield” against the crisis. There have been the attacks on the press—often with an interesting twist. Spain’s transport minister, José Blanco, for instance: “None of what is happening including editorials in some foreign media with their apocalyptic commentaries, is happening by chance, or innocently. It is the result of certain special interests.”

Just who were those unnamed “special interests”? (Clue: Europeans traditionally believed that they wore Stetsons or bowler hats.) The Spanish prime minister reportedly ordered his country’s National Intelligence Center—the Inquisition no longer being available—to investigate. An alternative theory was conjured up at around the same time by Jürgen Stark, the European Central Bank’s chief economist. Asked by Der Spiegel whether he suspected that the “Anglo-American” media were “behind the attacks” on the euro, Stark replied that “much of what they are printing reads as if they were trying to deflect attention away from the problems in their own backyards.” That’s a nice try, but it’s also an answer of staggering disingenuousness. Can Stark really have been unaware of the long-running media furor in Britain and the United States over their domestic deficit disasters?

To be fair, the head of the ECB, Jean-Claude Trichet, did warn in May that “one should be wary” of talk of Anglo-Saxon conspiracies, but by then plenty of far-fetched plots had been dreamt up. Were those “apocalyptic commentaries,” for example, an ideological assault by diehard euroskeptics or were they, perhaps, part of a dastardly scheme to preserve the U.S. dollar’s position as the ultimate reserve currency? As conspiracy theories go, neither was bad, but such theories play even better when seasoned with a “speculator” or two. Maybe, the Anglo-Saxon media were in cahoots with Anglo-Saxon plutocrats looking to make a sleazy buck out of a sickly euro. By talking up the crisis, were these hacks simultaneously peddling a sexy story and filling the coffers of Wall Street and the City of London? Quelle horreur.

That there might actually be a crisis to talk about was only grudgingly conceded, and its true cause remained the stuff of denial. Far easier to blame the sons and daughters of Gordon Gekko. It was in this vein that Ireland’s minister of state for finance, Martin Mansergh, claimed last month to have gotten to the bottom of the market’s distaste for the euro: “If you had lots of separate currencies that would be more profits for the financial sector.” Let no one say that blarney is dead.

Wiser blamesayers have avoided conspiracy theories and stuck to abuse. Anders Borg, finance minister in Sweden’s (vaguely) right-of-center, (not so vaguely) Europhile government, grabbed headlines in May comparing market players to a “wolf pack.” The jibe might have had more weight had it not come from someone who had, just a few months before, sternly intoned that there was “no legal basis” for an EU bailout of Greece, exactly the sort of ill-starred comment that is now food for the wolf pack.

As zoological insults go, however, Borg’s lupine sneer was one of the best since the moment in 2005 when Franz Müntefering, then chairman of Germany’s Social Democratic party, compared foreign hedge funds and private equity groups to “locusts.” Yes, those investors had been buyers rather than sellers back then, but they had been the wrong sorts of buyers (short-term, asset-strippers, foreign).

To his credit, Müntefering spoke out when the times were good. Many of those now criticizing “speculators” held their peace when those wicked markets were betting on the “convergence plays” that kept interest rates down (and pushed asset prices up) in the countries now known as the PIIGS (Portugal, Ireland, Italy, Greece, and Spain).

But it was never more than an uneasy peace. The scapegoating of Wall Street and the City may be a diversionary tactic but there is nothing fake about the animus that lies behind it. The great majority of the EU’s political class disdains the Anglo-Saxon market capitalism that is, in its disorderliness, brutal competitiveness, and unembarrassed pursuit of profit, the product of an economic and political tradition that is the antithesis of its own. Americans expect that sort of thinking on Europe’s left, but it’s present on the continent’s right too. Outside the U.K., the dominant strain of thinking amongst the EU’s establishment right is in the Christian Democratic tradition. Its origins lie in Roman Catholicism—a creed never entirely comfortable with the free market. The mixed “Rhineland” model of capitalism is its model and “solidarity” its lodestar. For a very French example of this thinking, check out Nicolas Sarkozy’s Testimony (2006), where the future president attacked “stock market capitalism” and “speculators and predators.” (Note the date: Sarkozy was not one of those who kept quiet when times seemed to be good.)

Thus the rejection of the Wall Street way by European elites is philosophical and aesthetic as much as it is party political. Its roots are deep and its expression, sometimes, ugly. In November 1942, a French official wrote a piece for a pro-Vichy magazine (interestingly, the same issue features an article by one of the future architects of the euro, François Mitterrand) bemoaning those who would live “free” (his scare quotes) in the “soft, comfortable mud of Anglo-Saxon materialism.”

The “Anglo-Saxon” other (the Vichy crowd liked to throw in the Jews, as well) is a convenient target for European leaders looking for someone, anyone—other than themselves—to blame for the current shambles. But this is a scapegoat that the EU’s mandarins are also riding in pursuit of two long-standing objectives: crippling the City of London and, so far as possible, keeping Wall Street out of Brussels’s domain. Less than two weeks after the implosion of Lehman, Sarkozy announced that laissez-faire was “finished.” Wholesale reform of the global financial system was, he pronounced, essential.

Few would deny that some reform is needed. It’s even possible to assemble a respectable defense of the “anti-speculative” measures (such as certain restrictions on short-selling), if not their confidence-killing timing, recently put into place by German chancellor Angela Merkel. But look more closely at the underpinnings of Merkel’s actions and the picture darkens. The new measures can then be seen not as well-intentioned reform, but as the next step in Merkel’s populist crusade against the “perfidy” of international “speculators,” a crusade designed to mask the extent to which the current crisis (and the bill to German taxpayers) was brought on by the speculative scrip—the euro—that Germany’s politicians had forced upon their voters.

The fact that “speculators” have had little to do with the convulsions now shaking the eurozone means nothing to Merkel. It’s far easier to talk to the electorate about a “battle of the politicians against the markets”—a not unfamiliar tune to U.S. voters—than admit that the real battle that she has been fighting is against what remains of the political, democratic, and financial integrity of the European nation-state.

And we can be sure that the EU elite will continue to stand alongside Merkel in combating the bogeyman bankers, a wag-the-dog war that dovetails nicely both with short-term expediency and long-term belief, and is designed to cut the financial sector—specifically the Anglo-American financial sector—down to size. That doesn’t mean the death of the local big banks that have for so long been a part of the European financial landscape, but it does mean that their business will be reined in. They will see a return to the far tighter political control of the past with all the potential for abuse that can bring. Significantly higher taxes lie in their future, although increasing worries over the fragile state of many EU banks (not least because of their exposure to the PIIGS’ debt) may stymie such plans for now. The bonus culture will come under additional pressure (not all Americans will mourn that), and efforts will be made to ensure that the markets are just that bit friendlier to entrenched interests—such as those of governments that borrow too much. The news last week that France is falling in with Merkel’s recent initiatives and that both countries would like to see them extended across the EU, is an early indication of what is to come.

Much of this is bound to affect the business carried out by Anglo-American finance in Europe, but it is not directly protectionist. The same cannot be said of Brussels’s Alternative Investment Fund Managers Directive, a rough beast now slouching towards some kind of birth. The primary focus of the directive is much tougher regulation of “alternative” investments, such as hedge funds, private equity funds, and the rest of Müntefering’s locust class (funds, incidentally that have received no bailouts—but who cares about that in Brussels). That’s not good news for the players in this market—mostly in the U.K.—and it could also represent a major obstacle to U.S. funds operating within the EU. In neither case is this a coincidence.

Hogtied by recent changes in the EU’s rulemaking procedure, the U.K. cannot do much to stand in the way (should David Cameron’s new, not very City-friendly government even feel so inclined). That leaves Washington as the last line of defense. There are clear and reassuring signs that Treasury Secretary Timothy Geithner now recognizes the nature of the danger that American finance now faces.

That’s something. But will the Obama administration really be prepared to go to the mat for an industry that it too finds convenient to demonize? And even if it is, just how much will Brussels be prepared to listen?

As Rahm Emanuel once said .  .  .

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?

What Is Going on in Blighty?

National Review Online, May 10, 2010

Britain’s election has left the country’s politics in a chaotic, confused mess. With the situation in such flux, there’s a decent chance that much of what I might write now (Sunday afternoon) will be obsolete by the time that you read it. So here instead are the answers to nine questions that should be relevant for some time. Well, a few days, anyway.

HOW DID THE VOTE GO?

To use an understatement: inconclusively. The House of Commons now has 650 MPs, so for one party to secure a majority, it needs to win 326 seats (in practice one or two fewer, but let’s not worry about that). For the first time since 1974, no one party has won that absolute majority. Parliament is “hung.” So far, the Conservatives have won 306 seats in the 2010 election and are forecast to win another after a special vote later this month, but it still won’t be enough. Labour came in second, with 258, and the Liberal Democrats third, with 57. With the exception of the eight sturdy Ulstermen of Northern Ireland’s Democratic Unionist party, the remaining 28 seats (located in Scotland, Wales, Northern Ireland, and, in the case of Brighton — where a Green was elected — outer space) were mainly won by Celtic nationalists, few of whom have any time for the Tories. David William Donald Cameron has two Scottish names, but only one Tory MP in Scotland.

DID THE CONSERVATIVES BLOW IT?

Yes, if by less than some would claim. Thirteen years of Labour misrule capped by an economic and fiscal crisis ought to have paved the way for a solid Conservative victory. For most of 2008 and 2009, the opinion polls signaled that the Tories were set for an overall majority. Then something changed. In part this was the usual reversion of voters to their traditional voting habits in the run-up to a general election. And in part it was the fallout from a parliamentary expenses scandal that left the electorate disgusted by politicians of both the main parties. But there was something else. Looking at the support for David Cameron, it was striking how little enthusiasm for him there really was, even amongst the Tory faithful. To many voters, he came across as likable enough, even if he had a touch too much of the salesman about him, but that was it. In particular, he did not appear to be for anything worth getting excited about. I’ll go into the reasons for that in the answer to the next question, but let’s just note for now that in 2010 being Not-Labour was not quite enough.

But the word there is “quite.” Critics of David Cameron need to remember how far his party has come since the last election, in 2005, its third consecutive humiliating defeat. This time round, the Tories increased their tally of votes by 2 million, the same number by which their score exceeded Labour’s. They won more new seats than at any election since 1931, and they secured almost as big a swing against Labour as did Mrs. Thatcher in her legendary 1979 triumph. With 97 additional seats in the bag, the parliamentary party is roughly 50 percent larger than it was a week ago.

At the same time, the Conservative share of the popular vote only increased from a little over 32 percent to 36.1 percent. Financial crisis, broken borders, rising social disorder, and the peculiarities of that strange Gordon Brown ought to have been worth more than that.

WHAT DID THEY DO WRONG?

David Cameron took over a Conservative party that was, to put it bluntly, unelectable. Rightly or wrongly (in my view, wrongly) it was seen by many as the “nasty” party, not least thanks to the efforts and metropolitan prejudices of a media elite that is far more influential in Britain than are its counterparts in the United States. To tackle this, Cameron had to soften media hostility to a degree sufficient to enable his party to get its message out. He succeeded, but it meant dragging the Conservatives in an ostentatiously (to use the bleak newspeak) “inclusive” direction, a direction that (to be fair) at least partly reflected contemporary political attitudes amongst the wider population. Britain is no longer the Britain that elected Mrs. Thatcher.

Unfortunately, Cameron failed to realize he won the argument years ago. He had “decontaminated the brand,” and yet he went into the election still seemingly apologetic for it. He campaigned in 2010 as if it were 2007, afraid or unwilling to play those traditional Conservative tunes that — whatever they may say in Notting Hill — are still capable of pulling in the crowds. Instead, Cameron made clear that his faith in Al Gore’s gospel was undimmed by Climategate. He could barely bring himself to mention immigration, and his big vision was of a “Big Society” (I have no idea). Meanwhile, sending his most senior Europhile on a secret mission to Brussels added insult to the injuries of the Tories’ restless Euroskeptic core. In that context, it’s worth noting that Cameron’s lead at the polls started to decline almost immediately after he reneged late last year on a “cast iron” pledge to hold a referendum on the EU’s Lisbon treaty. This wasn’t an altogether unreasonable decision (the treaty had since come into effect, and would be extremely difficult to unscramble), but politically it was a serious mistake.

Perhaps this was simple miscalculation, the error of an out-of-touch individual surrounded by a small, like-minded clique. Perhaps. But there was another possibility: Had Cameron drunk too much of his own Kool-Aid? For the Tory leader to have changed his party’s course out of cynical political calculation is understandable; for him actually to believe the more obviously idiotic “progressive” nonsense he has been spouting would be unforgivable.

Either way, the base was unimpressed. In the most telling sign of this, over 900,000 people (roughly 3 percent of the popular vote, and an increase of 50 percent over 2005) voted for the euroskeptic UKIP, Britain’s fourth-largest party. To quote blogger Archbishop Cranmer, UKIP is a “lost tribe” of conservatism, made up of natural Tories whose politics are, to quote another blogger, the entertaining Guido Fawkes, those of the Conservative party “after a few gin and tonics.” Their votes may have cost the Tories as many as 20 seats, and thus a parliamentary majority. More than a few of those UKIP supporters might have returned to the Cameron fold had he been prepared to give them some sort of sign that he was, you know, just a little bit like them. Instead, he did the opposite.

IS THERE A LESSON FOR U.S. CONSERVATIVES?

When it comes to policy specifics, not so much. The U.K. is not the U.S. Its politics are very different (to start with, the British mainstream tends more to the center-left than is often understood over here). The challenge faced by David Cameron was very different from that now confronting the GOP. If there is one thing, perhaps, that Republicans could learn, it is this. Neither RINOs, nor the “reformers” of various hues, nor the various keepers of the conservative flame should drink too much of their different varieties of Kool-Aid. They should deal with the electorate as it is, not as they would like — or believe — it to be.

WHATEVER HAPPENED TO CLEGG?

Nick Clegg, the leader of the Liberal Democrats, Britain’s third party, shot to prominence after a strong showing in the first televised party leaders’ debate. According to one opinion poll, “nice Nick” had become the most popular politician since Winston Churchill. He was articulate, a fresh face, and, briefly, “none of the above.” Unfortunately for Clegg, he was also a Liberal Democrat, and he was unable to carry his reliably unsuccessful party along on his coattails. The Liberal Democrats ended up losing a net five seats. Their 23 percent of the vote, slightly more than in 2005, was well below the high 20s (and more) recorded in the giddy days of early Cleggmania.

Despite that, the hung Parliament has left Nick Clegg in the game, busy being wooed by David Cameron and shouted at by Gordon Brown (it’s a tough-love thing).

HOW BAD ARE THE LIB-DEMS?

Pretty bad. The Liberal Democrats are usually described as left-of-center, and so they are, but that’s not the end of it. Nine decades out of office will leave any party looking a tad strange, and Clegg’s crew has proved no exception. Their ideology is a ragbag of policies, some good, some bad, some plain loopy, some well-intentioned, some not, the flotsam and jetsam of nearly a century of passing fads, prejudices, and dreams untouched by the realities of government. What does unite this somewhat fractious party, however, is a belief in electoral reform.

ELECTORAL REFORM?

British general elections operate on a strict “first past the post” basis. The candidate with the most votes in each constituency wins. Historically, this simplest of systems has been a force for political stability, generally producing governments with a majority large enough to govern by themselves for the whole of their term. Thus, Tony Blair’s Labour party won 55 percent of the parliamentary seats in 2005 with only 35 percent of the national vote.

This extreme, but not entirely untypical result was just the latest in a series bound to raise questions of fairness, questions that have been asked with mounting insistence in recent decades. The old system worked well enough when the two major parties carved up most of the vote between them, but in the multiparty Britain that has been evolving since the 1970s, it has come to look increasingly rough-hewn.

Crucially, first past the post squeezes a third party with appeal across much of Britain, but lacking the regional redoubt enjoyed, say, by the Scottish Nationalists. In short, it squeezes the Liberal Democrats. With 23 percent of the vote in 2010, they only won 9 percent of the seats. That’s why they are yet again calling for some move towards proportional representation as the price for their support. Labour is now desperate enough to make a move in that direction. For the Tories, it’s not so easy. Not only are there good practical arguments for preserving the current system, but also, a change to proportional representation would almost certainly mean that the Right would never rule Britain on its own again.

HAS HER MAJESTY BEEN MINDING THE STORE?

No, the constitutional position is that Gordon Brown continues to serve as prime minister (basically as a caretaker) until a replacement is found. It would take a vote of the newly elected House of Commons to force his government out of office, but Parliament is not due to sit until May 18.

AND THAT DEBT BUSINESS?

The renewed spasm of global financial uncertainty could hardly have come at a worse time. With a public-sector deficit at a Greek 12 percent of GDP, the United Kingdom is highly vulnerable to market panic. International investors have waited for months to see what steps Britain would take to reduce its deficit and when. Neither the Liberal Democrats, nor Labour, nor the Conservatives have come up with a convincing plan, but many market players seem to have taken the view that such discretion was inevitable in a closely fought electoral contest. They appeared to have been reassured by the thought that the Tories would prevail and that somehow “something” would be done. That comforting illusion has now been dispelled. However you parse the election results, there was no majority for spending cuts on the scale that will be needed, and with another election almost certainly in the offing who now will be prepared to suggest them?

Hang onto your hats.

Can Cameron Lose?

The Weekly Standard, March 22, 2010

For a country to have its currency marked down against the Zimbabwean dollar is not generally a good sign. But that is what has been happening to Britain this year. And it got worse in the immediate aftermath of an early March opinion poll showing that the governing Labour party had pulled to within 2 percentage points of the Conservatives. For quite a while now, there’s been a widespread assumption—backed by opinion polls, local election results, the 2009 vote for the EU parliament, and the feeling that enough was enough—that the Tories after 13 years out of power would win a decent majority in the general election due no later than June.

That wasn’t unreasonable. The U.K. has been wrecked by Labour. For Britons to give Gordon Brown a new term would be about as sensible as Pharaoh inviting the locusts back for another snack. The Conservatives meanwhile had been given a fresh lick of paint by David Cameron, the young (43), loudly modernizing politician who took over the Tory leadership in 2005. They were revived. They were ready. What could go wrong?

Well, Cameron suddenly has a shot at being Britain’s Thomas Dewey. That March poll was just the most dramatic of a series showing that the robust Tory lead of last year—usually well into double digits—had dwindled to a toss-up. Thanks to the peculiarities of the U.K.’s electoral system, the Conservatives need to be around 10 points ahead of Labour to achieve the sort of parliamentary majority that they will need if they are to form a workable government. Not only would a 2-point lead not do the trick, it would actually result in Labour being the largest party in the House of Commons and, almost certainly, holding onto power.

The most common expectation of the chattering classes is now of a “hung parliament” in which the Conservatives would win the most seats, but fall short of an absolute majority. They still might be able to form a minority government, but it would be a weak, fragile thing, and in no position to do what needs to be done to restore Britain’s battered finances. The uncertainty that this would bring may spook the markets even more than a clear Labour win. A reelected Labour government ought at least to have the authority needed to tackle a budget deficit that threatens to set the bailiffs on Blighty. It might even use it.

But if international investors were alarmed by the turn in the polls, they were equally bewildered. To outsiders, not least in the United States, the thought that Gordon Brown could be allowed to continue in office beggars belief. That he might highlights just how much the reality of British politics differs from the fond Atlanticist myth. That reality is the reason David Cameron, new Tory, has done what he has done. It’s the reason he may yet fail.

The roots of America’s attachment to the free market and to individual liberty may be traced back to the sceptr’d isle, but the Old Country is today a nation of the center-left and has been for over six decades. Class resentment, greater respect for authority, the all too visible failures of British capitalism, and intellectual and physical proximity to the continent, have all helped push the U.K. in a direction very far from Adam Smith’s ideal, a process buttressed by the institutions, habits, and ways of thinking put in place by Labour after its landslide victory in 1945.

Browbeaten by memories of the scale of that defeat, postwar Tory governments preferred to focus their efforts on the more efficient management of the social democratic state rather than its replacement. That began to change with the election of Margaret Thatcher in 1979, but it’s telling how close that happy day came to never dawning.

Bought and paid for by the trade unions and blinkered by ancient leftist ideology, the Labour government of the 1970s presided over soaring inflation, penal taxation, rising unemployment, and endemic industrial disorder. Its crowning humiliation (there are many choices) was the moment it was compelled to go cap-in-hand to the IMF for a bailout in 1976. Despite all this, it might have won reelection had it gone to the polls in 1978—a fact that should make David Cameron shudder. Mercifully, Prime Minister James Callaghan blinked, and the strikebound “winter of discontent” was enough to hand Mrs. Thatcher a solid, if unspectacular win the next year. Her later majorities were far more substantial but, thanks to splits on the left side of the political fence, they were exaggerated by similar electoral dynamics to those that now operate against the Tories. She never won more than the 44 percent of the popular vote she received in 1979 (her narrowest victory in terms of parliamentary seats, incidentally), a showing that may explain why her reforms were more cautious and incremental than hagiographers now like to claim.

Her successor, John Major, had a less-successful encounter with the realities of a center-left nation. While his government made more than the usual number of blunders, the extent of its 1997 defeat by Tony Blair’s “New Labour” revealed a more profound phenomenon. It was almost as if the Tories had no legitimate role within the British body politic, a sensation magnified by extraordinarily antagonistic media coverage and the wholesale rejection of the Conservatives by the cultural elite, either highbrow or low. The journalist and novelist Robert Harris, a Blair supporter, reported with evident satisfaction in 1998 how he couldn’t think of one single “important” British writer, film director, theater director, composer, actor, or painter (“apart from Lord Lloyd Webber”) who was a Conservative.

Under the circumstances, it’s no great surprise that the Tories have struggled ever since. Britain’s natural center-left majority reasserted itself—bolstered by the favorable economy bequeathed to Labour by the Conservatives, basking in the approval of its amen corner in the media  and benefiting from the assumption running through popular culture that there was something not quite acceptable about the Tories. Blair was also hugely helped by Britain’s electoral arithmetic. In the 2005 election, for instance, Labour won some 35 percent of the vote, but took 55 percent of the seats. This was the period in which the candidacies of the three Conservative leaders to follow John Major were destroyed almost as soon as they began.

Basking in the memory of the Ronnie and Maggie show, and reassured by the continuing (if fraying) willingness of the U.K. to stand alongside the United States in battle overseas (Britain’s still living martial tradition is one of the key respects in which it differs from its social democratic neighbors), many on the American right either don’t know or prefer to downplay just how different things are across the pond. That makes it difficult for them to appreciate what Cameron has been trying to do.

To get a feel for the challenge he faced in 2005, imagine what it would be like to be a Republican politician in an America where the mainstream media dictated a largely unchallenged liberal political agenda but where there was no Fox News, no Tea Parties, no libertarians, Perotistas, Second Amendment vigilantes, Club for Growth types, religious rightists, Reagan Democrats, NASCAR folk, country music fans, and .  .  . well, you get the picture.

Cameron felt the only hope of getting his message out was to “decontaminate the brand.” This meant tackling the media. And so he did—in a Winston Smith way. Two plus two did indeed add up to five. The caricature of the Tories as elderly, racist, reactionary bitter-enders was, Cameron implicitly conceded, true. He would, he said, put that right. The result was a slew of policies—some good, some bad—designed to show that the party had mended its ways. It was now younger, kinder, gentler, “compassionate” (yes, there were distinct echoes of the 1999 vintage George W. Bush in all this), and more inclusive. It was an approach epitomized by the Conservative leadership’s ostentatious embrace (the party logo is now a tree) of environmentalism—the secular religion of the recycling classes of Middle England and a pervasive finger-wagging cult among Britain’s showbiz “luvvies.” And it worked. While the media (with the exception of sections of Fleet Street) and entertainment worlds remain almost entirely estranged from the Conservative camp, the hatred ebbed enough that the Tory message to the wider British public was no longer drowned out.

But appeasing the media in essence reduced the Tory strategy to the twin pillars of inoffensiveness and not being Labour. As the country careened into financial catastrophe and historic recession that ought to have been enough, especially against a government divided by infighting and led by a morose, uncharismatic figure with, as the phrase goes, “issues.” But with the party very publicly remaking its image, this reticence has begun to look a lot like incoherence—a perception only amplified by signs of disorganization at the top of the Conservative hierarchy.

That this is an election that will revolve around the economy is, moreover, not the straightforward winner for the Tories that one might suppose. Debilitated by years of Labour misrule, Britain’s economy was exhibiting severe signs of strain even before the financial meltdown. But the 2008 crisis provided a perverse alibi for Blair and Brown’s bungling. The slump is not Labour’s fault, you see, but the work of those wicked, overpaid bankers—sleek, pinstriped, prosperous predators who look a lot like the Tories of socialist legend. It’s no great stretch for Brown to argue from there that the Great Recession is the logical consequence and conclusion of Thatcherism. And it will be no great stretch for many voters to agree. The problems with that analysis are complicated to explain in the course of an election campaign, especially for a party trying very hard not to appear disagreeable.

The Tories have to get over themselves. They need to pin the blame for the mess on Labour—where it largely belongs—but they also need to demonstrate that they have the competence and the ideas to manage Britain’s way out of this jam. The last few weeks of the Conservative campaign have not been reassuring on the competence front.

The ideas haven’t been too great, either. For all their talk of restoring a measure of control to the nation’s finances, the Tories have spelled out relatively little in the way of expenditure cuts. That Cameron has also vowed to “protect” spending on the National Health Service, a cost that already represents around 18 percent of public expenditure and is set to rise higher, merely reinforces the idea that the Tories are not serious about the deficit. Yet Cameron really had no choice. To advocate cutting back the NHS is an act of political suicide in Britain. The NHS, a source of national pride for all its shortcomings, is the third rail of British politics, the great creation of Labour’s postwar settlement, and a powerful mechanism forever pulling Britain’s politics to the left and its people into ever deeper dependency on the state whether as employee (the NHS payroll is over 1.3 million strong) or patient.

Yet Britain’s growing budgetary crisis (government debt is slouching towards 100 percent of GDP by 2014) presents the Tories with a conundrum. An austerity program will be essential, and it will be painful, particularly in a nation where so many work for the public sector. For the Tories to give more details of how they plan to come to grips with the budget deficit is essential if they are to be believed as offering a credible alternative to Labour’s botching of the economy. At the same time, it could be electoral poison in a country where the (wildly exaggerated) “Thatcher cuts” of the 1980s still fester in political folklore.

Labour knows this. The government is doing everything it can to create the illusion that the U.K. can somehow muddle through this crisis without too much pain. Putting party before country, Chancellor of the Exchequer Alastair Darling has left spending plans broadly unchanged over the last year, a stance that owes more to political calculation than to the more respectable concern that domestic demand is too depressed for cuts now. That’s a stance that could easily be reconciled with detailing plans for the more frugal future that the markets want to see, but this is not the course that Darling has taken. His pragmatic irresponsibility has been rewarded: An ICM poll earlier this month showed that when it comes to trust in their ability to handle the recession, the Tories’ lead over Labour had fallen to 2 percentage points—down from 15 in October.

The sense that there is something missing from what the Conservatives are saying is not confined to the economy. Just take the example of immigration. One of the hallmarks of the Blair-Brown years has been the failure to control the U.K.’s borders, through negligence, indifference, and worse: Recently uncovered documents appear to suggest that some of the increase was the product of a deliberate effort to reshape the British population. The welcome mat was noticed. Immigrants have poured in a net annual rate that quadrupled between 1997 (the year of Blair’s first election victory) and 2007, bad news for an overcrowded island wrestling with endemic (if often disguised) unemployment and a sometimes volatile multicultural mix. Unsurprisingly, this issue is a major source of unease to many Britons. According to a DailyMail/BPIX poll of swing constituencies in early March, 45 percent of voters would be “more likely” to vote Conservative if the party were to take a tougher line on immigration, yet Cameron has said next to nothing on the topic. Reports last weekend that the leadership would no longer have any objections to Conservative candidates’ using the I-word in their election literature show just how far things had been allowed to slide. To some critics, the reason for such hesitation, which is by no means confined to the immigration issue, is that the Tories are still preoccupied with fighting a battle they have already won: the fight to show that they are indeed no longer the nasty party.

But there are other critics with a different explanation. Cameron’s policy shifts have won him few real friends among the Tory base. There is respect for his political skills and a grudging recognition that much of what he has done had to be done if the Conservatives were, after three consecutive general election defeats, ever to win power again. The party’s right-wingers accept that their guys had their chance in the 2001 and the 2005 elections and that it didn’t work out. They also know that British voters typically don’t opt for parties where the divisions are too obvious. So, if through frequently gritted teeth, the right has gone along, soothed by the prospect of victory.

As that prospect fades, there’s revived anxiety that Cameron is not, to borrow Mrs. Thatcher’s phrase, “one of us.” Are his attempts to drive the party in another direction as much a matter of conviction as of tactics? These fears have been boosted by a series of recent moves that made no electoral sense, or at the very least were evidence of a leadership that was badly out of touch.

They include an attempt by the Cameron clique (and it is a clique) to force local constituency associations to pick female parliamentary candidates through the use of women-only shortlists. This flew in the face of Tory meritocracy, made a mockery of Cameron’s alleged commitment to grassroots politics, and risked alienating the activists who need to be enthused ahead of the hard slog of a general election campaign. Adding to the irritation on the right has been the leadership’s refusal to use the obvious opportunity presented by the various Climategates to make clear that its commitment to Gore’s war against climate change was not, contrary to earlier impressions, a blank check.

And then, inevitably, there’s Europe. The decision last November by Cameron to renege on his “cast iron” pledge to hold, if elected, a referendum on the EU’s -Lisbon Treaty was logical (the treaty had since come into effect: A British rejection would not be enough to undo it) but dreadful politically. The Tory lead in the polls began to slide shortly thereafter. Making matters worse to a party and a country that is far from friendly to the EU’s ever-expanding reach, in February it emerged that the Conservatives were sending Ken Clarke, the last serving senior Tory still in the grip of europhilia, on a discreet mission to Brussels. Its presumed purpose? To reassure the EU elite that the Conservatives were suitably house-trained.

Cameron is running on a program of—wait for it—“change.” But the electorate is asking just what sort of change this would really be. While the Conservatives would be a considerable improvement on the sleazy and incompetent gang now running Britain, many voters suspect that voting for the Tories will simply mean swapping “progressive” rule by one metropolitan faction with that by another. This view has only been reinforced by the expenses scandals that have roiled parliament and shamed the entire political class. It’s a reasonable bet that small non-establishment parties will, along with “none of the above,” increase their share of the vote this time round. Nevertheless, not being Labour is still probably going to be enough—just—to hand Cameron the keys to 10 Downing Street. After 13 years of Blair/Brown, too much sewage has flowed under Westminster Bridge for voters to want to risk giving Labour another go.

The problem for Cameron is that, in the absence of a massive financial crisis breaking between now and election day, his majority will be small. This will leave him vulnerable when things start to turn rough. And the U.K.’s desperate financial straits ensure that they will. Britain is already brutally taxed. Sooner rather than later the next prime minister will have to slash government spending, and he will have do so against a backdrop of high unemployment, sustained economic underperformance, and the rising opposition of a center-left nation. You can guess where the media will stand on all this.

Mrs. Thatcher found herself in a not dissimilar predicament within a year or so of taking office in 1979. Many of her senior colleagues panicked, but what saved her was the loyalty of much of the Conservative base, a base that the parliamentary party could not risk defying, however much they might want to. She, party loyalists knew, was one of them.

As things are currently going, they won’t feel the same way about David Cameron in 2011.

EUbris

National Review, February 18, 2010 (March 8 2010, issue) 

It’s a cliche to use the word “hubris” in an article involving Greece, but when that article is about the single European currency, what else will do? From its very beginning, the euro was a project of monstrous bureaucratic ar­rogance, a classically dirigiste scheme cooked up by an elite confident that it could ignore the laws of economics, the realities of politics, and the lessons of history. While the exact contours of the current crisis could not have been foreseen, the certainty that there would be a crisis could have. To build a monetary union without a political union (or something close to it), or, failing that, an extraor­dinarily high degree of economic con­vergence, was asking for, to use another Greek word, catastrophe.

But that’s what the Eurocrats did. And instead of having the humility to launch their new currency on a relatively small scale in, say, the genuinely converging economies of northwestern Europe — of Germany, say, and the Bene­lux — they redefined convergence. Any EU country that satisfied certain economic tests — the Maastricht criteria — would be eligible to sign up. In the first round (1999), eleven countries did, to be followed later by Greece and four others. The tests were tough, but not entirely unreasonable; yet in applying them as mechanically as they did, the architects of the single currency were in effect arguing that all it took to gauge an economy was something akin to a snapshot. This had the virtue of simplicity, but then so did Five-Year Plans.

Largely uninvestigated suspicions that some of those snapshots may have been photoshopped (there have long been doubts about the quality of the data submitted by Italy and, yes, Greece) were an early warning that the Maastricht criteria, which were also meant to be rules by which countries would continue to play once ensconced within the eurozone, would be enforced less vigorously than first agreed. As it turned out, there was little choice in the matter. The new rules were too rigid for the uncomfortable realities of the ordinary economic cycle, let alone the financial meltdown of the last two years. As things currently stand, they rank somewhere between a promise and a dream. That said, the revelation that Greece may have paid Wall Street’s sav­viest financial engineers to pretty up its national accounts is unlikely to play well in Brussels, except as ammunition for the claim that “speculators” are to blame for the mess in which the eurozone now finds itself.

The real culprits are closer to hand. The most important were those who in­sisted that convergence had been achieved when plainly it had not. The interest rates set by the European Cen­tral Bank were about right for the eurozone’s core, but they were too low for the nations on its periphery. The econ­o­mies of the latter may have had more capacity for growth, but they were also more vulnerable to inflation. One size did not fit all. Bubbles ballooned, then burst. Making matters worse was the damaging effect that the historically unusual combination of in­flation and a strong currency has had on the already shaky competitiveness of these countries’ industries. Nations with high inflation traditionally try to maintain their competitive position by devaluing their currency, but that option was not open to those now yoked to the euro. On some reckonings, Italy, Greece, and the other “Club Med” countries need to de­value by at least 30 percent to return to the competitive positions they held at the end of the 1990s. They need to, but they cannot.

If the hit to private business has been bad, that to the state sector has been worse, albeit to some degree self-inflicted. For countries with weaker public finances, the euro offered both carrot and stick. The carrot was the lower borrowing cost that came from adopting a currency im­plicitly backed by the stronger econo­mies at the eurozone’s core. The stick was the fact that debt could no longer be repaid by the printing press. Un­fortunately, a number of governments, most notably Greece’s, ate the carrot and ignored the stick, but even those that tried to improve or maintain budget­ary discipline found their best efforts swept away in the financial tsunami of 2008–09.

The immediate trigger for the current crisis was panic over the prospect of a Greek default. That’s understandable. Greece’s debt-to-GDP ratio stands at 125 percent (more than double the notional Maastricht ceiling). The budget deficit is now projected at 12.7 percent (more than four times the Maastricht cap), compared with the mysteriously “low” 6 percent claimed by the outgoing government in October. It may still be understated. Nevertheless, however dysfunctional the Augean Greek state may be (did I mention the endemic tax evasion?), it is not alone in its woes, nor — despite the fact that it accounts for just 2 percent of the EU’s GDP — can it be treated as some inconsequential Balkan outpost.

If Greece defaults, a crisis of confidence in the credit of the eurozone’s other highly indebted nations is inevitable. Even in the unlikely event that default could be confined to Greece, a financial collapse in Athens would bring further devastation to Europe’s already battered banking system, both directly and, as sovereign debt was marked to market across the continent, indirectly. Ger­many’s banks have loaned a total of perhaps 20 percent of Germany’s GDP to Greece, Por­tu­gal, Spain, Italy, and Ireland, and French banks have loaned even more of France’s. “Con­ta­gion” is back. Greek withdrawal from the eurozone is legally possible, but it is no solution. The result would almost certainly be default.

Whatever the legal issues (a direct EU rescue may be illegal under the Union’s law), political complications (hard-pressed Eu­ro­pe­an taxpayers do not relish the thought of paying up for Greece), and risks of a dangerous pre­ce­dent (how will the other debt-struck countries react?), the only feasible short-term solution will be some sort of bailout, ideally involving the IMF (whatever the supposed blow to EU pride) acting in conjunction with the EU or a group of some of its richer member-states. For now, nemesis will not be allowed to follow hubris. The legalities will be dubious, the politics a charade, and the deal last-minute, but that’s EU business as usual. “In­ter­na­tion­al spec­ulators” will be blamed for just about everything. Angela Mer­kel will make the necessary fierce speeches re­fusing to pay and will then pay. The Greeks will agree to the necessary fierce cuts in public spending and will then be paid. Whether these cuts (currently targeted at 4 percent) could, should, or will be made in a climate of collapsing domestic demand will be a decision left for another day.

The euro will endure, somewhat de­bauched (it has already weakened since the Greek panic began), but not all Ger­mans will be upset by that. Germany’s economy is driven by its export sector, and in tough economic times a little devaluation can come in very handy indeed.

Looking farther ahead, the Greek crisis and the fragility of the balance sheets of so many countries within the eurozone suggest that, absent some dramatic re­covery in the global economy, the single currency is reaching a point where muddling along is no longer an option. One alternative might be for Germany and some of the other strong­er countries to quit the euro, leaving it as a currency more suited to the needs of the eurozone’s weaker breth­ren. What’s more likely is that those in charge in Brussels will grab the opportunity presented by this mess to move forward with two items on their long-term agenda. The first will be to push for stricter controls on global finance. The second will be to forge the closer fiscal union without which their monetary union cannot endure. If they succeed in the latter, the European superstate will be even closer to birth.

What was it that someone once said about a crisis being a terrible thing to waste?