Here We Go Again

The Weekly Standard, April 30, 2012

Penas Blancas , Spain, 1972 © Andrew Stuttaford

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Not yet, I reckon.

Declarer of Independence

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

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

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

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

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

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

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

“You’re a bit of actor, aren’t you?”

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

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

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

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

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

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

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

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

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

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

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

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

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

A Bridge, but Leading Where?

The Weekly Standard, February 4, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Grade School

National Review, February 6, 2012

Niagara Falls, October 1989  © Andrew Stuttaford

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clickety-click.

Euro Melee

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

Brussels, July 1985 © Andrew Stuttaford

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To be continued . . .

Tango Lesson

The Weekly Standard, December 12, 2011

Casa Rosada, Buenos Aires, August 2011 © Andrew Stuttaford

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I know what the Argentine advice would be. Run.

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

Cristina’s Whirl

National Review, November 10, 2011 (November 28, 2011 issue)

Montserrat, Buenos Aires, August 2011 © Andrew Stuttaford

If you want to understand why Argentina’s Cristina Fernandez de Kirchner triumphed quite so conclusively (with 54 percent of the vote against 17 percent for her nearest challenger) in October’s presidential election, the University of Buenos Aires’s Museum of Foreign Debt is a splendid place to start. That such an institution exists says nothing good about Argentine financial history. What it contains suggests yet more turbulence ahead.

San Telmo, Buenos Aires, August 2011 © Andrew Stuttaford

The museum is a showplace for an unconvincing national alibi. Argentina is innocent and maligned, its tale not one of squandered wealth, but of victimhood, as it is repeatedly plundered by Anglo-Saxon (of course!) financiers, helped in later years by their stooges at the IMF. Under Juan Peron, however, things had been different. During the Peronato, the foreign debt was repaid. Indeed it was, but (as is not explained in the museum) that owed more to the capital surpluses built up during World War II than to Peronism’s autarkic economic model, which was in deep trouble by the time its creator was deposed in 1955. No matter, Peron’s curious mix of fascism, corporatism, and Evita has never quite lost its grip on a nation forever searching for a magical solution to its largely self-inflicted woes. And now, a decade of growth under a new generation of Peronists has convinced many Argentinians that the conjurer-caudillo was on to something.

It’s hard to blame them. Just ten years ago, the botched free-market experimentation of the 1990s had pushed Argentina into the abyss. It began well enough, but pegging the peso to the U.S. dollar (a key part of the process, and the wrong currency to choose) without sufficient structural reform left Argentina increasingly uncompetitive. Lower export prices and successive emerging-markets crises in the latter part of the decade made matters worse. The country’s budget swung wildly off-kilter. Spending was too high, tax revenues too low. Foreign lenders filled much of the gap. Today’s Greeks know how the story ends. They should also note this: Billions in additional borrowing and belated attempts at austerity were not enough to put things right. The economy plunged. Capital fled. In December 2001, the government introduced the corralito (later toughened into the corralon), a measure that (more or less) froze all bank accounts. Argentina went into default shortly thereafter.

This remains (fingers crossed) the largest sovereign-debt default ($95 billion) in history. The dollar peg was dropped a few weeks later; the peso crumpled. Dollar deposits in Argentine banks were swapped into hugely depreciated pesos, a precedent that ought to alarm savers in the eurozone’s PIIGS. If the drachma and its feeble kin are to return, there will be corralitos first. Depositors have been abandoning their banks in Greece, Ireland, and elsewhere. Who can blame them?

Image of Nestor Kirchner outside Casa Rosada, Buenos Aires, August  2011 © Andrew Stuttaford

San Telmo, Buenoa Aires, August 2011 © Andrew Stuttaford

Argentina’s financial breakdown had been accompanied by trouble in the streets and chaos in the corridors of power. Depending on how the term “president” is defined, the country had as many as five of them within two weeks. The last was Eduardo Duhalde, appointed interim president by the legislative assembly. After elections 16 months later, he was succeeded by Nestor Kirchner, a Left-Peronist governor from refreshingly distant Patagonia. The fever had broken. Argentina took a mulligan. Private savers had been crushed, and much of the middle class was pushed into poverty, but many businesses were saved by the effective “devaluation” of their debt. Peso collapse bailed out exporters and local manufacturers battered by the once-overvalued currency, as did a reviving economy fueled by the accelerating global commodity boom (Argentina is a major food exporter) and increased government spending. That spending was financed by the fruits of recovery, the windfall from taxes on those ever-more-valuable food exports and, in a sense, the lower debt burden that was default’s naughty reward. In 2005, Argentina repaid its IMF loans ahead of schedule. Kirchner no longer intended to listen to the organization’s nasty “neo-liberal” advice.

Growth continued to soar. Kirchner would have won comfortable reelection in 2007, but stood aside for his wife, Cristina, an abrasive would-be Evita, but without her cult appeal. Only a few months after taking office, she lost a brutal fight with farmers over plans to hike export taxes, a defeat that contributed to her allies’ taking a hit in nationwide legislative elections in 2009. In a tango variant of the Putin-Medvedev waltz, Nestor Kirchner was due to succeed his wife as their party’s candidate in the presidential elections in 2011, but ended up doing something even more useful for the cause: He died last year, aged only 60.

Eternauta Kirchner, Buenos Aires, August 2011 © Andrew Stuttaford

Tragedy is often a vote winner, and particularly so in a place like enthusiastically morbid, histrionic Argentina. Cristina’s approval ratings jumped 25 points. As a character in a novel by Argentine author Tomas Eloy Martinez once said, “Every time a corpse enters the picture in this country, history goes mad.” A black-clad Cristina threw her widow’s weeds into the political battle with aplomb, gusto, and tears. Nestor (“he is watching, he is here, isn’t he?”) haunted her speeches and her rallies, transformed into the lost leader who sacrificed all. It worked. Wander around Buenos Aires, a city more skeptical about the Kirchners than most, and you will see numerous stenciled graffiti of Nestor as El Eternauta, an iconic Argentine cartoon figure who traveled through time and space, and to the left. Cristina, already Evita, also became Juan to Nestor’s Evita, keeper of the martyr-spouse’s flame.

Nestor Kirchner, Buenos Aires, August 2011 © Andrew Stuttaford

The economy lent a large hand. By year’s end, GDP will have grown by over 90 percent since its 2002 nadir. The spoils of success have been spread around. Thanks to better times, unemployment has been more than halved from 2002’s 20 percent. The number of those in poverty has fallen sharply. Income inequality has shrunk. Social spending has leapt. The descendants of Evita’s descamisados (the shirtless) knew whom to thank. Throw in a divided and uninspiring opposition, and the rest was victory.

The worry is what comes next. Growth is forecast to ease to a still impressive 4–5 percent in 2012 (after a little over 8 percent this year), but envious PIIGS should be aware that there’s plenty of snake oil in the Kirchner cure, and danger too. Revving up the demand side can work (and has worked), as can devaluation, but, like steroids, such policies are best not overdone. And they have been overdone. Officially running at a fantasy-math 10 percent, inflation is now thought to stand at around 25 percent, a level that has been eroding the devaluation advantage (the trade balance has deteriorated in recent years). Price controls, whether direct (such as those on utilities) or indirect (export taxes), have merely forced this inflation to express itself through shortages and underinvestment, a variant of the distortions now emerging as a result of the country’s growing protectionist tilt.

Buenos Aires, August 2011 © Andrew Stuttaford

Recoleta, Buenos Aires, August 2011 © Andrew Stuttaford

With public spending still roaring ahead, a cash crunch is drawing closer, exacerbated by the way that the 2001 default and its heavily litigated aftermath have (and perhaps this is just as well) constrained access to international capital markets. The government has taken to raiding the central bank’s foreign-currency reserves to pay those overseas debts it does acknowledge. In a different smash-and-grab, private pension funds worth $24 billion were nationalized in 2008 (in the pensioners’ best interest, of course), a move that also boosted the state’s ability to meddle in some of the country’s largest companies, a temptation that it will probably find difficult to resist: The Kirchner years have already seen the outright nationalization of a number of enterprises.

The markets have read the runes: Foreign direct investment in Argentina has slowed sharply and the locals have followed suit. Capital flight is accelerating and is now estimated at $3 billion per month, something that has provoked a draconian response, even if reserves (for now) remain reasonably healthy. Just after the election, Kirchner launched a new series of initiatives designed to bring dollars back home. These included ordering the country’s energy and mining businesses to repatriate their export revenues, and compelling insurance companies to cash in their foreign investments by year’s end.

These diktats were another display of an authoritarianism that has become more visible as the economic miracle comes under pressure. Economists have been fined for publishing inflation data that differ from the official spin. The inconveniently independent president of the central bank was forced out with the assistance of questionably legal maneuvers. The tactics deployed in the long struggle against the giant Clarín media group have become ever rougher, and show little respect for the idea of a free press. Under the circumstances, Kirchner’s fondness for Hugo Chávez is no surprise, nor is her recourse to conjuring up a handy foreign devil: that “crude colonial power in decline,” Malvinas-stealing Britain.

This is unlikely to end well.

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.