Vlad The Conservative

National Review, January 9, 2014 (January 27, 2014 issue)

Putin Pop-Up Store, East 20th St, NYC, October, 2014 © Andrew Stuttaford

Back in the mid 1980s, Pat Buchanan was the communications director for the Reagan White House, and Vladimir Putin was a KGB officer in East Germany. Times change: The former Soviet secret policeman — if there is such a thing as a “former” Soviet secret policeman — is, after a bogus intermission, now serving a third term as Russia’s president, and the old Cold Warrior seems to have become something of a fan. Writing in his syndicated column in December, Buchanan wondered whether, “in the culture war for mankind’s future,” Putin was in fact “one of us.”

The immediate trigger for Buchanan’s comments was Putin’s state-of-the-nation address just a few days before. Stung, probably, by criticism of gay-bashing legislation in Russia, Putin had taken aim at “the destruction of traditional values” elsewhere in the world — by which he meant the West — and, just so there could be no doubt about what he was referring to, had thrown in a reference to “so-called tolerance, neutered and barren.” No stranger to chutzpah, Putin, an unlikely champion of the ballot box, noted that these changes to “moral values and ethical norms” had come “from above” and were “contrary to the will of the majority.” As such, they were “essentially anti-democratic.”

After years of aggressive judicial activism and dramatic social change at home, those were words likely to appeal to quite a few American conservatives, some of whom might perhaps already have found themselves in unexpected agreement with the Kremlin not so long ago. After all, it was only last summer when Republican congressmen Steve King and Dana Rohrabacher made it clear that Buchanan was by no means the only figure on the American right to be offended by what he has somewhat histrionically described as “half-naked” (by Iranian standards, perhaps) and “obscene” (not so much) protest in Moscow’s Cathedral of Christ the Savior by the feminist punk-rock group Pussy Riot.

It is, of course, hardly surprising that a protest by an altar — even if brief, and largely mimed (a soundtrack was recorded later for a music video using footage from the protest) — would appall many, and not just the religious, in this country. But Pussy Riot’s critics should have taken a closer look before jumping onto Putin’s sleigh. America is not Russia, a country where an authoritarian regime has suborned the national church for its own purposes, and where that church, bribed with privilege (ask bullied Russian Baptists how that works), a degree of power, and no small amount of mammon, has for the most part gone along. That is why Pussy Riot was protesting in a cathedral. Theirs was an infinitely lesser blasphemy.

Putin may well be a Christian of sorts (the influence of his supposed dukhovnik — spiritual father — Archimandrite Tikhon Shevkunov is a source of much speculation), but then again so were the Borgias. Divorce and all the rest aside, Putin might even quite genuinely, if in a rather rough-and-ready fashion, be a social conservative, but his public declarations on these topics are likely more a matter of political calculation than moral conviction. Corruption, economic slowdown, and increasingly dictatorial rule have eroded Putin’s support among the intelligentsia and in the more metropolitan centers, and so, Orthodox Church in tow, he has — what’s the term these days? — “pivoted” toward Russia’s “silent majority” (Pussy Riot didn’t have too many local fans), a maneuver that the Buchanan of the Nixon White House would have both recognized and appreciated for its savvy.

It was also a move that dovetailed neatly with a longer-term theme running through the Putin years. The defining mistake of post-Communist Russia has been an unwillingness to come to terms with the reality of its Soviet past. Putin himself infamously referred to the break-up of the USSR as “the greatest geopolitical catastrophe” of the 20th century. Historical truth — uncomfortable, divisive, and shameful — has been replaced with a patriotic confection designed to reconcile the irreconcilable and soothe the national ego. Some excesses and mistakes — too mild words, those — are included, but other horrors are downplayed or have simply gone missing. There is, however, room for both the preservation (or restoration) of Soviet iconography and a lavish biopic about Admiral Kolchak, one of the most prominent of the anti-Bolshevik commanders in the Russian Civil War. In a large national poll organized in 2008, Stolypin, the tough, authoritarian reformer who was the last czar’s most effective prime minister (significantly, Putin gave him a shout-out during his speech), was rated the second-greatest Russian of all time. Stalin (a Georgian and a mass murderer, but no matter) came in third.

It is a narrative intended to put together what history in reality has torn apart, a fable in which czar and commissar can coexist, united in their love for the motherland and a shared sense of the messianic destiny that Holy Russia — home of Moscow, the “Third Rome,” and also the birthplace of Lenin’s radiant future — has long felt is its due, a fantasy reinforced by physical as well as intellectual distance from the Enlightenment West. The fact that such ideas have proved most congenial to authoritarian rule has not escaped Putin’s notice.

Regardless of the nods to the country’s Soviet heritage, the Commies — fear not — will not be coming back anytime soon. Too much loot is being amassed by those in charge for that. Instead, the philosophy that underpins the current regime (an admission of crude self-interest wouldn’t really do the trick) looks more and more like an updated, more subtle, more capitalist variant of the “Orthodoxy, autocracy, and nationality” first devised as a Russian state ideology for Czar Nicholas I (1825–55) as a response to the liberal challenge at home and abroad.

Well, Orthodoxy is back, what’s left of Russia’s nascent democracy is under pressure, and “nationality” never went away. In his speech Putin acknowledged the multi-ethnic nature of the Russian Federation (albeit with a swipe at “rowdy, insolent people from certain southern Russian regions”), but he went on to emphasize “the all-encompassing, unifying role of Russian culture, history, and language,” terminology that harks back both to czarist-era Russification and to the brutal Soviet approach to “lesser” nationalities.

But as he hymned the rebirth of a strong Russian state, Putin was careful (as Buchanan noted approvingly) to stress that Russia “does not encroach on anyone’s interests . . . or try to teach others how to live their lives.” Unfortunately, the first of those claims is nonsense. To take just a few instances, Russia has been throwing its weight about in northeastern Europe, it has grabbed a slice of Georgia, it is bullying Moldova, and, in what may be Putin’s most impressive coup yet, it may just have “bought” Ukraine. Russia is on a roll, with sporadic humiliations of a directionless America — from Snowden to Syria — for added spice. Yes, Putin’s grip may well be more fragile than it looks, but when Forbes magazine recently designated him as the most powerful person in the world, it was not without reason. The recent release of two Pussy Rioters and Mikhail Khodorkovsky was a declaration of strength, not weakness.

For a retro great power to behave like a retro great power is not particularly shocking, but it is essential to remember that Russia (even more than the U.S.) is a nation that considers that it has the right to play by its own rules. Thus Putin’s insistence that his country is not interested in trying to “teach others how to live their lives” is not only a rebuke (as Buchanan correctly notes) to Western universalism, but also a reminder that Russia has no intention of yielding its sovereignty to the emerging supranationalist order. That’s a reasonable, even commendable, position, but it is no reason for those on the foreign-policy right to think that they have found a friend in Putin. There are areas where American and Russian interests overlap (something that Buchanan has also highlighted). The fault for not taking better advantage of them lies on both sides and so far as is possible should be remedied, but a degree of rivalry, sharpened by Russia’s refusal to accept its loss of empire, is inevitable, natural, and, if handled with an appropriate degree of realism, not particularly dangerous.

And (hesitant as I am to give advice to this constituency) social conservatives should be warier still. To Buchanan, Putin “is seeking to redefine the . . . world conflict of the future as one in which conservatives, traditionalists, and nationalists of all continents and countries stand up against the cultural and ideological imperialism of what he sees as a decadent west,” a piece of wishful thinking on Buchanan’s part that gives Putin’s pronouncements an international significance that they do not deserve and could not sustain.

History, Mark Twain is said to have observed, doesn’t repeat itself, but it rhymes. Almost exactly two centuries ago, the devout if possibly unhinged Czar Alexander I (1801–25) was peddling the notion of a reactionary “Holy Alliance” between the nations that had seen off Napoleon. When the czar explained this idea to Lord Castlereagh, Britain’s conservative foreign minister (the no less conservative Duke of Wellington was also in the room), the meeting did not go well. “It was not without difficulty,” wrote Castlereagh later, “that we went through the interview with becoming gravity.”

Translation: It was difficult to keep a straight face.

There’s a lesson there.

Republicans Cannot Go On As 'The Party of No'

Standpoint, January 1, 2014

Times Square, New York City, October 2013 © Andrew Stuttaford

Wakes are not only for rainy days. The weather outside was glorious in that New England fall way, but the mood inside a room in Yale’s Linsly-Chittenden Hall was a touch funereal. We were a bunch of rightwingers there for a conference on the future of conservatism but, to quite a few of those attending, the past seemed altogether more promising.

The timing was not the best. Just a few days before, the ill-conceived and unpopular effort by congressional Republicans to defund Obamacare, a ploy that made the charge of the Light Brigade look well thought-out, had collapsed in an eminently predictable fiasco. This stoked fears that the 2014 midterm elections were now doomed to end in disaster. Always implausible hopes of retaking the Senate looked delusional and even GOP control of the House of Representatives appeared to be at risk.

But not long after, Republican hopes began to rise. The end of the shutdown left the Obamacare website, launched a week or two earlier amid general derision, alone in the coconut shy. As I write, healthcare.gov is a gift that is still giving. Obama’s approval ratings have sunk below 40 per cent.

But the site’s issues are being ironed out, and with the help of  supportive media, will be reclassified as teething problems to be rapidly forgotten. Nevertheless, there is a decent chance that lingering recollections of the cack-handed roll-out will poison the way in which many voters will still be viewing Obama’s signature legislation when the mid-term elections come round next November. That might give the GOP a helping hand then, but the idea that this will also be enough to propel a Republican into 1600 Pennsylvania Avenue in the 2016 elections is a stretch.

That said, Obamacare — never a particularly popular plan — may give Republicans something they can exploit in their campaign to retake the White House. The Obama administration shies away from the word, but the Affordable Care Act (ACA) is redistributionist, not only in the narrow sense (higher taxes on the wealthy), but in its broader operation: it directly or indirectly transfers healthcare resources away from a majority of Americans and reallocates them to the much smaller number previously shut out of the system. Crudely understood, there will be more losers than winners.

Simply undertaking to repeal Obamacare will not be enough to do the trick. The system being transformed by the ACA may have been better than usually understood in the UK, but it was nonetheless restrictive, bureaucratic and expensive and, thanks to the way it was often linked to employment, alarmingly tenuous to the millions of Americans who worry how secure their jobs really are. If Obamacare is to go, the GOP will have to explain what it will put in its place. Journalists and think-tank denizens on the Right have been offering up their suggestions for a while, but as two of the most recent to do so, Ramesh Ponnuru, a senior editor at National Review, and a visiting fellow at the American Enterprise Institute (AEI), and Yuwal Levin, the editor of National Affairs and a fellow at the Ethics and Public Policy Center, observed in a November article in the Wall Street Journal, congressional Republicans have “with a few honourable exceptions” failed to join in.

That’s a problem. Bobby Jindal, the governor of Louisiana and something of a Republican star, warns that the GOP cannot just be the “party of no”. Maybe, but to attempt to define what it is for is, for the Republican politician who dares to try, dangerous ground indeed.

To start with, it will involve recognising that there is rather less remaining of the America that elected Ronald Reagan than many Republicans seem prepared to accept. The US population has ballooned by more than 90 million since 1980. It has changed in ways that reflect more than the passing of the years. Usefully didactic memories of the 1970s have faded. Recollections of the Lehman collapse are all too fresh. New generations have reached voting age after a lifetime immersed in the soft-left certainties of the American education system. Meanwhile, stagnating household incomes and what look like permanently higher levels of unemployment or underemployment threaten to chip away at support for America’s free market(ish) model. Democrat Bill de Blasio’s success in winning the mayoralty of New York City was (mostly) a Gotham thing, but obvious public concern over rising inequality — the Occupy movement was an early harbinger — signals a coming shift in the ideological landscape that will not help the Republicans one bit.

Above all, decades of mass immigration have transformed the country’s ethnic, cultural and political make-up in ways that pose an enormous challenge to the GOP. It says something that if the America of 2012 had had the demographics of 1980, Mitt Romney would have won by a wider margin than did Ronald Reagan back then.

What to do? To begin with, the conventional wisdom is that Republicans need to scale back their opposition (much of it driven by the Right) to current efforts to “regularise” the position of the nearly 12 million illegal immigrants now thought to be present in the country. The argument — made with varying degrees of enthusiasm and cynicism both by the party establishment and erstwhile Tea Party darlings such as freshman Florida senator (and possible presidential candidate) Marco Rubio — is that an anti-immigration stance makes it easy for the GOP’s opponents to caricature the Republicans as a “white” party hostile to minorities. With Democrats and the media trumpeting just that tune, it’s an argument that has some weight.

Throw in some of the more inflammatory talk sometimes heard from the Tea Party and other sections of the “nativist” Right, as well as the clumsy language of Republicans often tone-deaf to ethnic sensitivities (Mitt Romney’s 2012 reference to “self-deportation” for one) and it’s easy to understand why the Republican share of the growing Latino vote fell from some 40 per cent in 2004 to 27 per cent in 2012 (Asian-Americans were even less enthusiastic: only 26 per cent voted for Romney). That minorities are more sceptical about immigration than often assumed only reinforces the point that what matters is not the policy itself, but the message that it is believed to deliver.

Yet the electoral mathematics will deteriorate still further if anti-immigration Republican congressmen who, for now, are holding the line, agree to an amnesty for illegals. For all the talk about Latinos’ attachment to enterprise and family values (more nuanced than the stereotype would suggest), their votes will tilt heavily Democratic for decades, just as did those of the Italian-Americans with whom they are so often compared. The same is true of the other immigrant groups now reshaping America, a disturbing prospect for the GOP given that the country is accepting something like one million new legal immigrants a year. That’s an inflow that the Democrats have every reason to welcome, but there is little sign that many Republicans will be prepared to stand in the way of those arriving legally, quite possibly even if that total is — as is also being proposed — significantly bumped up. The idea of the nation of immigrants has an emotional appeal that stretches across America’s ideological divide. More prosaically, there is also a bipartisan understanding that business donors appreciate the cheaper workers and increased demand that immigration brings in its wake.

Republicans are thus running up an escalator that is moving down. Resisting amnesty will slow the pace somewhat, but the longer-term trend is clear: to win, the party will have to win over more minority voters. Quite how to do so remains a mystery. The greater number of high-profile GOP leaders (Jindal, Texas senator Ted Cruz, Rubio, South Carolina governor Nikki Haley and New Mexico’s promising Susanna Martinez, to name a few) drawn from ethnic minorities is a start, but no more than that.

To be sure, the Taft-sized Chris Christie — in the derogatory sense of the word — secured re-election as Republican governor of strongly Democratic New Jersey with some 60 per cent of the vote in November, a tally boosted by his success in attracting the support of over 50 per cent of Hispanic and (it’s sad that this counts as an achievement) around 20 per cent of African-American voters.

This was a feat that owed as much to his refreshingly blunt persona as to his attempt to steer his state in a more frugal direction. For while there is still a very distinctively American constituency for smaller government — check out the “don’t tread on me” flags brandished at any Tea Party rally — it is unlikely to be enough to return the White House to Republican management. In part, this reflects the fact that the country’s finances have deteriorated to a point that leaves little room to make a good case for Reagan-style tax cuts. The number is distorted by a sluggish economy, but federal tax receipts as a percentage of GDP (approaching 17 per cent) are lower than when the Gipper left office. Meanwhile publicly- held federal debt as a percentage of GDP has risen from 26 per cent in 1980 to around 73 per cent today, nearly half of which is now held by intrinsically more jittery international investors.

Total federal debt (roughly $17 trillion) is calculated before factoring in the contingent liabilities arising out of underfunded entitlement programmes such as Social Security and Medicare that, according to Republican deficit hawks such as Oklahoma senator Tom Coburn or former vice-presidential candidate Congressman Paul Ryan, could amount to four, five or more times that figure. To be fair, those estimates are hotly disputed, but still . . .

On the other side of the ledger, that the sequester (a crude budget-bludgeoning device triggered by the current impasse in Washington) has so far not proved anything like as damaging as the Obama administration originally predicted should not be allowed to conceal the fact that any attempts to take America back to fiscal respectability on the back of expenditure cuts alone would involve taking a chainsaw to entitlements. According to a Bloomberg News poll last February, most Americans accept (or claim to accept) that Medicare and Social Security must be overhauled, but they view tax increases as part of the solution.

That’s anathema to many on the Right, an attitude enshrined in, and enforced through, the “Taxpayer Protection Pledge” designed by Americans for Tax Reform, a pressure group formed by the influential libertarian-leaning Republican activist Grover Norquist. The pledge is essentially an undertaking to reject any net increases in tax, and it has been signed by the overwhelming majority of Republicans in the Senate and House. Sadly, even if the pledge has sometimes been interpreted more sinuously than its stern wording might suggest, it no longer is in tune with economic reality, but the political reality is that declining to sign it (let alone reneging on it) is likely to cause trouble for any Republican at primary time. That will change, probably at about the time that seniors (56 per cent of the over-65s voted for Romney in 2012) realise that their benefits are in jeopardy, but that moment has not arrived.

All this almost certainly dooms the faint chances of a bipartisan grand bargain over the federal budget at least for now. Given the current balance of political forces, this may not be such a bad thing. But it also discourages Republicans from mounting any serious effort to redesign America’s archaic and destructive tax system in ways that would make it generate more revenues while inflicting, at least in some respects, less pain. In that connection, one avenue worth exploring is the introduction of some sort of federal consumption tax, partially offset by a lower, flatter, simpler income tax. From time to time, some Republican leaders have floated variants of this, including Ryan and former Indiana governor Mitch Daniels (one of the more disappointing absentees from the 2012 race). Even Mitt Romney refused to rule out the introduction of a value added tax, a position that led a staffer from the reliably shrill Newt Gingrich campaign to snipe that Romney had been looking at “European socialist ideas”. A somewhat more subtle critique has come from Norquist, long suspicious of a tax that he believes to be too efficient a money-raising machine to be trusted.

So what else is there? Republican Senator Mike Lee (Utah), cheered on by the likes of Ponnuru and the AEI’s James Pethokoukis (someone, incidentally, open to a consumption tax) is arguing for a redrawing of the tax system that incorporates a very substantial expansion of child tax credit. This family-friendly move, part of a broader drive in, to quote Ponnuru, a more “communitarian” direction, is unlikely to fly this time round, but it points to a possible future for the GOP as something closer to Western Europe’s Christian Democrats. Such an evolution in my view is not particularly desirable, but given America’s changing political environment, may be wise.

A better guide to what may come next comes from Pethokoukis’s observation in National Review Online that the 2012 campaign saw a plethora of tax-cutting proposals by Republican hopefuls seemingly “more interested in signalling their supply-side bona fides to primary voters than in offering realistic blueprints for governance”.

Ah yes, the primaries: the road to the nomination runs, of course, right through them, and I mean Right. White evangelicals and Tea Party supporters (they are not always the same people) represent a very large percentage — well over a half — of the primary vote. They are not in the mood for compromise. According to a July 2013 Pew Center survey, 69 per cent of Tea Partiers believe that the best course of action for the GOP is to move in an even more conservative direction. To design an alternative to Obamacare and a plausible budgetary fix that both manage to appeal to those voters and have a chance of convincing the wider national electorate is a very tall order, and that’s before we have begun to look at the question of the so-called “social issues” (primarily abortion and same-sex marriage) that weigh so heavily in Republican primaries.

The rise of the Tea Party was a classic populist insurgency, a revolt of country against court, propelled by disgust over the bailouts that followed the financial crisis, anxiety over the state of America’s finances, contempt for the Republican establishment and fear of what Obama might be planning. It revitalised a party sunk in deep depression after Obama’s trouncing of John McCain, and made an enormous contribution to the GOP’s bounce in the 2010 midterms. The contrast with the not entirely dissimilar folk at UKIP “pissing into” (to borrow LBJ’s entertaining terminology) the Tory tent is one that British Conservatives tut-tutting over the Tea Party would do well to note. As revolts tend to do, however, the Tea Party has not infrequently overshot, most notably by promoting candidates more on the basis of their ideological purity than their ability to win.

In doing so, they were encouraged by a segment of the conservative hierarchy already, ironically, well entrenched in Washington. To a degree unimaginable in the UK, the Right in America has a lively, powerful and well-financed intellectual, media and political infrastructure. That’s generally to the good, but it has come at a price. One or two speakers at the Yale conference complained about conservative neglect of that most essential of political skills — persuasion. Instead of reaching out to the unconvinced, conservatives have primarily been pursuing a conversation with themselves. Such conversations have a way of degenerating into a contest designed primarily to show who can be more pur and who more dur.

There was no better example of this than conservative (and famously socially conservative) South Carolina Senator Jim DeMint’s comment in early 2009 that he “would rather have 30 Republicans in the [100-strong] Senate who really believe in principles of limited government, free markets, free people, than to have 60 that don’t have a set of beliefs”, an expression not of conviction, but of a fanaticism unmoored to any realistic plan for winning back power. When the Tea Party moment dawned, DeMint and others like him jumped in front of the parade, reinforcing the revolutionaries’ zeal to purge so-called RINOs (Republicans In Name Only) and throwing some money their way too. To be sure, this has led to the injection of useful new blood into the party’s ranks, but it has also led to the selection of some candidates so inept, unsuitable or outright strange that the GOP threw away hopes of winning or retaining a series of crucial senate seats — from Nevada to Delaware to Indiana and beyond — that could have transformed the political calculus of recent years. Regrettably, there are signs — not least in the aftermath of DeMint’s move to the Heritage Foundation, formerly the most influential of all the conservative think-tanks — that excesses are not yet through.

No less destructively, some of the more outlandish candidates on the Right have tarnished the broader Republican image, especially when they have sounded off on social issues. Would-be senator Todd Akin blew his chances of winning a Missouri seat in 2012 when, in defending his opposition to abortion in cases of rape, he explained that victims of “legitimate rape” rarely became pregnant, a view that held some sway in the Middle Ages, but is today something, shall we say, of an outlier in obstetric circles.

Social issues have for years been essential to the Republican party’s ability to compete (there is no majority for the socially liberal, economically conservative programme favoured by libertarian-leaning or many moderate Republicans) but they have come with costs, hitting the party’s capacity to attract elite support and its appeal to women (particularly single women), the young and voters in the north-east and west. These costs are likely to rise. Same-sex marriage has won the acceptance of roughly half of all voters, and in another reminder of how the country is changing, roughly a third of all under-30s describe themselves as “religiously unaffiliated” (Pew Research, October 2012), the highest total ever. On the other hand, roughly 50 per cent of Americans now claim to be “pro-life” (Gallup, May 2012), although that’s a stance that comes with plenty of loopholes: more than half of these pro-lifers believe that abortion is acceptable under certain circumstances.

What seems to matter to centrist voters is how social issues are framed. They are prepared to vote for anti-abortion candidates, say, but not for those who push the issue beyond what is rather mistily defined as reasonable, or if they detect a wider agenda at work, such as the distaste for contraception displayed by former senator Rick Santorum, an oddball Beltway Savonarola who enjoyed a brief and alarming surge in the 2012 primaries. When they notice executive competence, as so often they do in the ranks of the GOP’s expanding tally of governors (30 in all, close to the record set in the 1920s), they appear to be willing to live with a conservative social agenda so long as it is not pushed à l’outrance.

So what now? More budget fights in 2014 will enable the Democrats to rekindle memories of this past autumn’s shutdown and, with them, images of the Republicans as mad, bad and dangerous to vote for. A dose of class warfare is sure to be on the agenda too. Against that, the fallout from Obamacare’s uncertain launch may still be reverberating and the programme’s deeper problems may be coming into sharper focus. The economy is likely to be walking rather than running-the labour force participation rate is the number to watch-and a foreign policy foul-up cannot be eliminated. The best guess at the moment is that the midterms will leave matters pretty much as they are now.

The ideological divisions between and within the Right and the remaining “moderates” in the Republican Party, stirred up further by would-be presidential candidates out for primary votes, will mean that a credible alternative to Obamacare and a sound fiscal plan will both remain elusive even after the midterms. Being the “party of no” may well have to do. The longer-term outlook for the GOP will continue to deteriorate, but if “events” co-operate, nay-saying buttressed by at least some ideas on what might replace the ACA could, fingers-crossed, just possibly be enough to do the trick in 2016 if the primary process can avoid the own goals of 2010 and 2012. At the presidential level, the primaries need to avoid attracting the clown posse that we saw last time (Santorum is said to be contemplating another run), or selecting a candidate (Cruz, say, or Kentucky’s Senator Paul) too hardline to have any prospect of winning back the White House, a temptation made more difficult to resist (what’s to lose?) by the failures of establishment Romney and establishment McCain. Even a more conventionally viable candidate will have to avoid being dragged into unelectability by the positions he has to take to prevail at the primaries. Despite conservative suspicion, some baggage from his past, and an occasionally spiky and difficult personality, Chris Christie might just be tough enough to pull it off.

But 2016 is a long way off. And then there is Hillary.

 Note: Bridgegate broke about two days after this article went to press in late December, but before the issue appeared on newsstands. Them’s the breaks.

Wilkommen, Bienvenue

The Weekly Standard, December 30, 2013

Riga, Latvia, November 2013 © Andrew Stuttaford

They take austerity seriously in Latvia. After each meeting with a government official he or she would turn off the lights as we walked out of the room. More than five years after the global financial crisis finally burst Latvia’s fragile economic bubble, scrimping is second nature. Given the direction this small, resilient Baltic country took after Lehman fell, that’s no surprise. The usual prescription for cleaning up the mess that overheating leaves behind, particularly in an export-oriented economy (exports amount to some 60 percent of Latvian GDP), centers around a sharp devaluation of the currency to restore international competitiveness. There were quite a few (including within the IMF) who suggested that Latvia should break the peg fixing its currency—the lats—to the euro, leaving the lats to sink to a level that more accurately reflected uncomfortable new market realities.

Riga, Latvia, November 2013 © Andrew Stuttaford

That’s not what Latvia did. The relatively low value added within Latvia to its exports, and the difficulty that it would have faced in satisfying domestic demand with domestic production, meant that a conventional devaluation would have struggled to work its naughty magic, even if the export markets had been there (by no means assured after the slump in the international economy). Tipping the scales further, local business and the nascent middle class—most of whose boom-bloated -borrowing had been in euros—would have faced catastrophe had they had to repay those debts in suddenly depreciated lati. That would have threatened both social disaster and a dangerous breach with the Nordic banks responsible for a large portion of that lending—banks that would now have a vital role to play in maintaining financial liquidity in the country (the only sizable Latvian bank had foundered).

Base of Freedom Monument, Riga, Latvia, November 2013 © Andrew Stuttaford

So Latvia stuck with the peg and opted for “internal devaluation,” shorthand for an attempt to mimic the competitive benefits of a traditional devaluation, but by squeezing costs (primarily labor costs) and excess demand out of the local economy rather than by depreciating the currency. This won Latvia financial backing from a group comprising the World Bank, the IMF, the EU, and the Nordic countries, support that had to sugar some very bitter medicine. Government expenditures were slashed (large numbers of public sector employees were fired and many of those who hung on saw their salaries cut by 20 percent or, indeed, much more) and, to a lesser extent, taxes increased. Between 2008 and 2012 total fiscal consolidation amounted to some 17 percent of GDP.

Most of the pain was front-loaded, both as a matter of practical politics (better to strike before austerity fatigue set in) and a matter of practical economics: Latvian interest rates had soared to damaging heights and confidence had to be rebuilt.

Central Market, Riga, Latvia, November 2013 © Andrew Stuttaford

Seen in that context, the 2009 declaration by Valdis Dombrovskis, the dourly impressive center-right prime minister, that Latvia would continue to seek membership in the eurozone (and, more specifically, get there by 2014) made sense. Whatever the mounting problems in the EU’s gimcrack currency union, it appeared to offer a comparatively safe haven from the Baltic storm. For investors and lenders, the obvious seriousness of this commitment, together with the external support that the government had won, significantly reduced the exchange-rate risk associated with doing business in Latvia. It was no coincidence that with the “devaluation ghost” (as the central bank delightfully puts it) held at bay, lats-denominated interest rates started to tumble.

On top of that, targeting eurozone membership provided a benchmark against which the performance of the Latvian economy could be measured. The country would only be eligible to switch over to the euro if it met the currency union’s “Maastricht criteria.” Its budgetary position would have to be on a sound footing, its inflation subdued, and so on.

Perhaps most important, the march towards the single currency signaled to Latvians that their reconnection with Europe would not be derailed by the economic crisis. Austerity was a means to an end, not just an end in itself. Many Latvians had (and have) their doubts about the wisdom of adopting the single currency (over half are still—to a greater or lesser extent—opposed), but the broader aim of anchoring their state more firmly in the West helped them to stay the course through the brutally tough times that followed the financial collapse.

Central Market, Riga, Latvia, November 2013 © Andrew Stuttaford

There are plenty of dismal statistics to choose from, but unemployment stood at over 20 percent in early 2010 (compared with an average of 6.5 percent in 2007), and GDP shriveled by 18 percent in 2009, after a 4.2 percent decline the previous year. Despite this, Dombrovskis was able to prevail in the October 2010 general election and then weather (albeit precariously) a snap election called in slightly murky circumstances the following September. The fragmented and incomplete development of political parties in Latvia means that general elections are not the best gauge of public opinion, but Dombrovskis’s survival (he went on to become Latvia’s longest-serving democratically elected prime minister) says something. He resigned only in late November, after the deadly collapse of the roof of a Riga supermarket, a tragedy for which he took “moral and political responsibility.”

But by then the economy was well on the mend, bolstered by a revival in global demand partly stimulated, of course, by less austere policies elsewhere. Quite why Latvia was able to resume its pre-boom trajectory as quickly as it did remains the subject of lively academic debate, but a low level of public debt was one crucial advantage: Latvia could persist with its tough approach without falling into the debt-deflationary trap that is crippling recovery in Greece and other grisly corners of the eurozone’s ER.

Latvia’s GDP growth began to turn positive during 2010, coming in at a total nicely above 5 percent for both 2011 and 2012, and is on schedule to be comfortably over 4 percent in 2013, the fastest growth in the EU. The current account deficit is again at a manageable level, the unemployment rate has shrunk to a number marginally below 12 percent, inflation is running at less than 1 percent (as opposed to nearly 18 percent in May 2008), and the budget deficit has returned to respectability after coming close to 10 percent of GDP in 2009. In 2012 it was only a little above 1 percent, while government debt stood at around a modest 40 percent of GDP, easily below the Maastricht requirement of 60 percent.

It is no surprise that Latvia’s formal application to join the euro in March was approved by the relevant EU authorities within a few months. Ordinary Latvians were not given an equivalent say. Calls for a referendum were rejected, not least on the grounds that the matter had long been decided. Any country joining the EU after the Maastricht Treaty came into force in 1993 (Latvia became a member in 2004 after—it is fair to note—a referendum) is obliged to sign up for the euro as soon as it meets the Maastricht tests, a proviso that the Swedes (joined 1995)—who wisely retain their krona—have ignored. Some seats at the EU’s table are more equal than others.

Central Market, Riga, Latvia, November 2013 © Andrew Stuttaford

In any event, Latvia will swap the lats for the euro on January 1 at the rate, to be precise about it, of 0.702804 lati per euro, although it will still be possible to pay for goods and services in lati for another two weeks thereafter. The conversion process within the public and private sector is well under way, as is an extensive program of public education (meetings, leaflets, advertising). Most visibly to the visitor, all prices now have to be given in both lati and euros, and from what I could see in Riga, that was happening everywhere. Even in the converted zeppelin hangars (history here is complicated) of the capital’s picturesque (and somewhat law-unto-itself) central market, everything was properly priced: I had been issued a nifty lenticular currency conversion card and could check that that was so. Watchdogs are in place to stop the changeover being used to hike prices (a common, if exaggerated, fear that has accompanied the introduction of the euro in other countries). To reinforce this, dual pricing will be mandatory until the end of June.

After the changeover, lati will be convertible into euros (at the fixed rate) at rural post offices for three months, at commercial banks for six months, and at the central bank in perpetuity. This matters. Ask officials why there is still so much opposition to the switch, and—perhaps a little condescendingly—they cite folk-memories of the damage caused by previous currency conversions, especially the abrupt introduction of a “new ruble” in 1961 during the Soviet era.

But there is more to it than that. Geopolitical realities (yes, we are talking about Russia), the size—and open nature—of the Latvian economy, and inadequate domestic capital formation all make a decent, if downbeat, case for Latvia to enter the eurozone, despite that currency union’s profound problems. Its flaws (to use a gentle word) have not escaped the attention of the man in the Latvian street. He also does not appreciate the fact that if there is another eurozone bailout (Greece, yet again?), frugal, hardscrabble, post-Soviet Latvia, one of the poorest countries in the EU, will have to chip in.

For a country to abandon its own money is to throw away an essential attribute of sovereignty. In a lovely but manipulative gesture, Latvian 1 and 2 euro coins will bear the image of Milda, the “Latvian maiden” who adorned prewar Latvia’s gorgeous—and emotionally resonant—5 lati piece. This time she is decorating a symbol not of hard-won independence but of a sadly withered autonomy.

And the eurozone’s long agony may bring with it another twist of the knife. The convenient fiction that made it politically possible to establish the euro in the first place was that this was a shared currency that could work with a minimum of pooled sovereignty, a stretch at the best of times, an impossibility in the case of a monetary union that is very far from being an optimal currency area; Germany is not Greece, Finland is not Portugal. If the euro is to survive in its current form, the eurozone will require much deeper fiscal and budgetary integration. Quite what will be left of Latvia’s low tax, fiscally responsible regime or, in any real sense, its self-determination, by the time this process is finished is anyone’s guess.

And what is to remain of Latvia itself? It emerged from nearly half a century of cruel Soviet occupation with its identity savagely battered—not least by the presence of a large Russian settler population (even today ethnic Latvians account for only some 62 percent of the country’s two million inhabitants)—but its heart intact. Membership in the EU has represented a kinder, subtler challenge. The opportunities it has brought to live in lusher lands to the west has led to a steady stream of emigration, a stream that became a torrent during the slump before dwindling again today. All told, the population has shrunk by over 10 percent since 2000. Exporting surplus labor helped Latvia manage the crisis, but at what longer-term cost?

Riga Castle, Latvia, November 2013 © Andrew Stuttaford

I spent the evening of November 11 down by Riga Castle. It was Lacplesis Day, the anniversary of the victory in 1919 by freshly cobbled-together Latvian forces (helped by Royal Navy guns) over a Russo-German army (as I said, history is complicated here) in the battle that effectively secured the new state’s independence after centuries of foreign rule. An ever-swelling crowd, talking quietly, proud to be there, had gathered, lighting row upon row of candles that flickered against the old castle walls, a tribute to the men who had fought so courageously for their country’s right to be. Bonfires did their best against the cold, clear northern night; once-banned flags—carmine and white like the ribbons everyone seemed to be wearing—waved in the chill breeze. A group of children sang folk songs of simple, crystalline beauty.

Behind us a series of tiny vessels had been launched into the River Daugava. Each bore a candle and some a miniature flag, too. They formed a brave, bright, glowing flotilla that sailed off into the dark, its destination unknown.

A Case Of The Vapers

National Review Online, December 26, 2013

What was it again that Mencken once wrote? Google, enter, click. Ah yes, it was this: “Puritanism: The haunting fear that someone, somewhere, may be happy.”

On Thursday, the New York City Council made room in its legislative agenda — it was also busy commissioning a study on polystyrene foam — to pass by a vote of 43–8 (that lopsided majority an indicator of idiocy afoot) a measure that will, once Mayor Bloomberg signs it (oh, he will) shortly prohibit the vaping (that’s the word) of e-cigarettes anyplace where smoking is now banned in Gotham, bars, restaurants, offices, parks, the beach, you name it. Technically speaking, the ban will take effect as an amendment to the city’s Smoke-Free Air Act. That e-cigarettes do not emit any smoke was an irrelevance.

To vape is to inhale a vapor from a plastic facsimile of a cigarette, battery-powered, bought for $10 at a local store, and good, it is claimed, for 400 puffs. The business end is fashioned to look like a filter. In another nod to nostalgia, the tip typically glows as the user inhales. It’s not the real thing, nothing like. Plastic is neither leaf nor paper. It holds no memories of that old bar down on the Lower East Side, that conversation once upon when. There’s no tobacco, no combustion, none of the warmth, none of the evocative transience, none of the mouth-feel of cigarette or cigar, and it looks just a bit dumb. Walk into Rick’s with an e-cigarette and Rick would laugh. Then again, Bogie died at 57.

Whatever the aesthetics of e-cigarettes, as nicotine-delivery systems go, they are a lot safer than the cancer sticks of old. There’s no carbon monoxide, no tar, very little, in fact, of tobacco smoking’s carcinogenic stew. To be sure, the Food and Drug Administration has detected tobacco-specific nitrosamines (a carcinogen) in the e-cigarette cartridges that contain the treats to come. A 2009 study revealed about the same quantity of TSNAs in cartridges as might be found in a nicotine patch, a total about one-nine-hundredth of the level found inside Joe Camel. The vaper (I know, I know) will inhale an even smaller portion, a tiny fraction of a minuscule amount. Furthermore, TSNAs were the only carcinogens detected in this study. Boston University’s Dr. Michael Siegel, a 25-year veteran of tobacco-control work (and a Centers for Disease Control alumnus), has noted that smokers of conventional cigarettes may inhale maybe 40 other carcinogens, not to speak of “thousands of [other] chemicals.”

It is true that at the end of November a study by Holland’s National Institute for National Health (RIVM) triggered a few headlines like “Dutch sound alarm about possible risks of e-cigarettes” (Reuters), but within the body of that Reuters story there was this: “The institute said it was concerned about a lack of evidence on the possible health effects of e-cigarettes…”

As a reminder: Don’t know is not the same as know.

The RIVM did note that the dread nicotine was involved and referred to reports of nausea and throat irritation by some users. Indeed, it recommended (Reuters writes) that “as a precaution [e-cigarettes] should not be used by pregnant women or in the vicinity of children.” For a health warning nowadays, this is on the mild side. The scientific concerns it reflects are not enough to justify a heavy-handed ban of the type now headed New York City’s way.

But what about the antifreeze? This substance, more happily associated with autos than lungs, has seeped into the e-cigarette debate, setting up a scare or 50. The truth is that the FDA found some diethylene glycol — an important ingredient in antifreeze — in just one of the cartridges surveyed in the 2009 study, a dismaying result but almost certainly a rogue finding. E-cigarettes generally do contain, however, a base of propylene glycol to “hold” the nicotine and any added flavoring. Propylene glycol is used in antifreeze, but as a kinder, gentler alternative to its rough diethylene cousin, particularly when there is any danger of contact with food. As is explained in the compound’s Agency for Toxic Substances and Disease Registry toxicological profile (September 1997), “the [FDA] has classified propylene glycol as ‘generally recognized as safe,’ which means that it is acceptable for use in flavorings, drugs, and cosmetics, and as a direct food additive.” Move along, there’s nothing to see here.

As an alternative to propylene glycol, some e-cigarettes use vegetable glycerin as their base. This common food additive will affect their taste, but not your health.

And so far as the ingredients lurking in an e-cigarette are concerned, that ought to be about it. This is not, of course, a reason for arguing that research on these products should cease, or that stricter quality control should be opposed. Nor is it a claim that e-cigarettes are risk-free. They may, for example, inhibit lung capacity, at least temporarily. Beyond that and those pesky TSNAs, there is also the matter that most e-cigarettes will (as the astute folk at the RIVM had noticed) be used to deliver nicotine, a potentially addictive substance — albeit one that has been given up by tens of millions. Then again, much of nicotine’s famously powerful addictiveness can be attributed to the fact that it is being delivered via tobacco, a medium with naturally occurring monoamine oxidase inhibitors that seem to have a great deal to do (it’s a long story) with the difficulty of quitting smoking. Divorced from its leafy accomplice, nicotine is not that addictive, nor under those circumstances is it, to quote John Britton, who leads the tobacco advisory group for Britain’s Royal College of Physicians, even a “particularly hazardous” drug.

What about secondhand smoke, butcher of innocents, enricher of laundries? E-cigarettes give off little or no odor, and, although the research is still at an early stage, the health risks of secondhand vaping likely rest somewhere between zero and infinitesimal.

Considering all this (Dr. Britton has been quoted as saying that if everyone switched over to e-cigarettes it could save “millions” of lives), the medical world ought to be cheering the swift rise of a hugely safer alternative to demon tobacco. E-cigarettes are, so to speak, catching fire. In the U.S., sales are expected to hit $1 billion in 2013, twice the total of a year ago. That’s still only about 1 percent of the total spent on tobacco products, but it says something that Altria Group Inc. (parent company of Philip Morris USA), Reynolds American Inc., and Lorillard Inc. (which paid $135 million for blu eCigs in 2012) have all entered this market. Non-U.S. e-cigarette sales have been expanding rapidly too, reaching an estimated $2 billion in 2012.

But e-cigarettes have given tobacco’s fiercer foes, well, the vapors. Brazil, Norway, and Singapore have banned them. Others have imposed strict controls, including the prohibition of vaping in public places. Some British railway companies have exiled vapers from their carriages on the carefully considered grounds that they make other passengers “uneasy.” Such stupidities are not, as New Yorkers now know, confined to abroad. Their city is by no means alone. A growing number of America’s politicians, bureaucrats, and other nuisances are on the offensive against e-cigarettes. Thus bans similar to that now looming over New York City have already been introduced in New Jersey and Utah, states that would not normally agree on very much.

There are some legitimate concerns. There is a wide range of e-flavors, some of which, cherry crush, say, or chocolate (I’m not sure — on many grounds — about maple bacon), might appeal to a younger set. Meanwhile the anxious RIVM frets (according to Reuters) that e-cigarettes “might be attractive to young people because of bright colors, flashing lights and jewelry-like appearance.” Dutch e-cigarette design must have taken an exotic turn.

Such worries could be addressed by prohibiting the sale of e-cigarettes to minors, but that would not have been enough for New York councilman James Gennaro, a key promoter of the ban (and also a sponsor of legislation that recently increased the minimum age for buying tobacco in New York City to 21), who wants us all — of course he does — to think of the children. He worried (the New York Times reported) “that children who could not differentiate between regular and electronic smoking were getting the message that smoking is socially acceptable.” Combine the RIVM with Gennaro and the message is clear. E-cigarettes are a menace when they look like cigarettes. And they are a menace when they do not.

Other objections — that e-cigarettes might act as a gateway to the real thing (in reality, they are more likely to represent an exit from it) or that they might reglamorize smoking — are feeble stuff. This suggests that the real agenda is driven by the precautionary principle run amok, or, ominously, by something darker still.

And that something is not the prospect of the loss of valuable tobacco tax revenues (although that will not have gone unnoticed by some of those looking to bring vaping to heel). What is at work here is, at least in part, altogether more profound, and more disturbing, than that. The campaign against tobacco began with the best of intentions, but it has long since degenerated into an instrument for its activists both to order others around and to display their own virtue. And with that comes an insistence on a rejection of tobacco so absolute, so pure, that it has become detached from any logic other than the logic of control, the classic hallmark of a cult. So mighty is the supposed power of this anathematized leaf that anything — even when tobacco-free — that looks like a cigarette or provides any approximation of its pleasures is suspect.

It’s too much, of course, to expect any respect these days for the principle that adults should be left to decide such things for themselves, but the chance that the e-cigarette could save an impressive number of lives should count for something. Europe’s sad snus saga suggests that that might not necessarily be so. For generations Swedes have taken a form of oral tobacco, a snuff known as “snus,” cured in a way that sharply reduces its TSNA content. Snus is available in the U.S., land of dip and chaw, but, within the EU, where no such tradition exists, it can be sold only in Sweden. Taking snus is not without risk, but it’s far less harmful than smoking. Its popularity in Sweden, especially with the guys, goes a long way to explaining why that country has Europe’s lowest incidence of lung cancer among men. It has been estimated that introducing snus elsewhere in the EU could save some 90,000 lives a year, but the EU’s capnophobic leadership has rejected the idea. Anti-tobacco jihadists are quite content, you see, to accept that the perfect can be the enemy of the good.

As America’s vapers are now finding out.

Note: This article updates “Vaper Strain,” an article that appeared in the September 2, 2013 issue of National Review.

Yes, Conservatives Can Be Godless Too

Politix, December 8, 2013

Reading the jubilant response on the left to the news that Pope Francis appears to be one of them (the truth is much more complicated than that, but the lefty label will do for now), it’s easy to detect a strong note of Schadenfreude: God bites (conservative) man.

The argument runs like this: Right-wingers are forever proclaiming how devout they are, so how awkward for them that the leader of the largest Christian denomination has been badmouthing the free market.

Yes, that’s snarky, simplistic, and there are plenty of rebuttals available (for example, Christianity is an exuberantly syncretic faith, with room for multiple interpretations of its founder’s reported teachings). But judging by what some of my fellow rightists have been saying there is undeniably some – how shall I put this – discomfort on display.

Not where I’m concerned. My lack of any religious conviction – not a scrap, since you asked – may make for trouble with St. Peter at some future date, but, as the punch-up over the pope continues, it’s a plus. I don’t have a god in this fight.

And that surprises people. To be sure, it’s well-known that the Ayn Rand crowd casts a cold eye on the idea of a deity, and there’s a widespread suspicion that those wacky libertarians will believe in anything or nothing, but, as for the rest, well, religious right. There’s something to that, of course: Many conservatives are indeed religious, but this is frequently as much a matter of culture as it is of ideology.

America is a religious country, and so traditionalists (and conservatives are by definition traditionalists) tend to be religious, a tendency that has been sharpened – and made much more visible – by the way society has been changing since the 1960s. Half a century ago you would not have noticed the religious believer who was opposed to same-sex marriage, because back then “everyone” was (if they thought about it at all).

But the idea that it is essential philosophically for conservatives to be religious believers is nonsense. Dig around a bit, and you will discover quite a few here in America who have declared that they are not (although none of them – how odd – hold significant elective office). Look across the Atlantic (I am British-born) and you will find many, many more.

Godless conservatives however are rarely anti-religious. They often appreciate religion as a force for social cohesion and as a link to a nation’s past. They may push back hard against religious extremism, but, unlike today’s “new atheists” they are most unlikely to be found railing against “sky fairies.” Mankind has evolved in a way that makes it strongly disposed towards religious belief, and conservatism is based on recognizing human nature for what it is.

That means facing the fact that gods will, one way or another, always be with us. They may not be real, but their followers will be. What they believe matters.

And how they treat those who don’t matters even more.

Vaper Strain

National Review, September 2, 2013

As I write, I am vaping — yes, that’s the word — inhaling an odorless vapor from a plastic facsimile of a cigarette, battery-powered, bought for $10 at a local store, and good, it is claimed, for 400 puffs. The business end is fashioned to look like a filter. In another nod to nostalgia, the tip glows as I inhale. It’s not the real thing, nothing like. Plastic is neither leaf nor paper. It holds no memories of that old bar down on the Lower East Side, that conversation once upon when. There’s no tobacco, no combustion, none of the warmth, none of the evocative transience, none of the mouth-feel of cigarette or cigar, and it looks just a bit dumb. Walk into Rick’s with an e-cigarette and Rick would laugh. Then again, Bogie died at 57.

Whatever the aesthetics of e-cigarettes, as nicotine-delivery systems go they are a lot safer than the cancer sticks of old. There’s no carbon monoxide, no tar, very little, in fact, of tobacco smoking’s carcinogenic stew. To be sure, the Food and Drug Administration has detected tobacco-specific nitrosamines (a carcinogen) in the e-cigarette cartridges that contain the treats to come. A 2009 study revealed about the same quantity of TSNAs in cartridges as might be found in a nicotine patch, a total about one-nine-hundredth of the level found inside Joe Camel. The vaper (I know, I know) will inhale an even smaller portion, a tiny fraction of a minuscule amount. Furthermore, TSNAs were the only carcinogens detected in this study. Boston University’s Dr. Michael Siegel, a 25-year veteran of tobacco-control work (and a Centers for Disease Control alumnus), has noted that smokers of conventional cigarettes may inhale maybe 40 other carcinogens, not to speak of “thousands of [other] chemicals.”

But what about the antifreeze? This substance, more happily associated with autos than lungs, has seeped into the e-cigarette debate, setting up a scare or 50. The truth is that the FDA found some diethylene glycol — an important ingredient in antifreeze — in just one of the cartridges surveyed in the 2009 study, a dismaying result but almost certainly a rogue finding. E-cigarettes generally do contain, however, a base of propylene glycol to “hold” the nicotine and any added flavoring. Propylene glycol is used in antifreeze, but as a kinder, gentler alternative to its rough diethylene cousin, particularly when there is any danger of contact with food. As is explained in the compound’s Agency for Toxic Substances and Disease Registry toxicological profile (September 1997), “the [FDA] has classified propylene glycol as ‘generally recognized as safe,’ which means that it is acceptable for use in flavorings, drugs, and cosmetics, and as a direct food additive.” Move along, there’s nothing to see here.

As an alternative to propylene glycol, some e-cigarettes use vegetable glycerin as their base. This common food additive will affect their taste, but not your health.

And so far as the ingredients lurking in an e-cigarette are concerned, that ought to be about it. This is not, of course, a reason for arguing that research on these products should cease, or that stricter quality control should be opposed. Nor is it a claim that e-cigarettes are risk-free. They may, for example, inhibit lung capacity, at least temporarily. Beyond that and those pesky TSNAs, there is also the matter that most e-cigarettes will be used to deliver nicotine, a potentially addictive substance — albeit one that has been given up by tens of millions. Then again, much of nicotine’s famously powerful addictiveness can be attributed to the fact that it is being delivered via tobacco, a medium with naturally occurring monoamine oxidase inhibitors that seem to have a great deal to do (it’s a long story) with the difficulty of quitting smoking. Divorced from its leafy accomplice, nicotine is not that addictive, nor under those circumstances, to quote John Britton, who leads the tobacco advisory group for Britain’s Royal College of Physicians, is it even a “particularly hazardous” drug.

What about secondhand smoke, butcher of innocents, enricher of laundries? E-cigarettes give off little or no odor, and, although the research is still at an early stage, the health risks of secondhand vaping likely rest somewhere between zero and infinitesimal.

Considering all this (Dr. Britton has been quoted as saying that if everyone switched over to e-cigarettes it could save “millions” of lives), the medical world ought to be cheering the swift rise of a hugely safer alternative to demon tobacco. E-cigarettes are, so to speak, catching fire. In the U.S., sales are expected to hit $1 billion in 2013, twice the total of a year ago. That’s still only about 1 percent of the total spent on tobacco products, but it says something that Altria Group Inc. (parent company of Philip Morris USA), Reynolds American Inc., and Lorillard Inc. (which paid $135 million for blu eCigs in 2012) have all entered this market. Non-U.S. e-cigarette sales have been expanding rapidly too, reaching an estimated $2 billion in 2012.

But e-cigarettes have given tobacco’s fiercer foes, well, the vapors. Brazil, Norway, and Singapore have banned them. Others have imposed strict controls, including the prohibition of vaping in public places. Some British railway companies have exiled vapers from their carriages on the carefully considered grounds that they make other passengers “uneasy.” Such stupidities are not confined to abroad. A growing number of America’s politicians, bureaucrats, and other nuisances are on the offensive against e-cigarettes, including — if recent reports are true — New York’s nanny-in-chief, Michael Bloomberg. And he won’t be the last.

There are some legitimate concerns. There is a wide range of e-flavors, some of which, cherry crush, say, or chocolate (I’m not sure — on many grounds — about maple bacon), might appeal to a younger set, but such worries are best addressed by prohibiting sales to minors. Other objections — that e-cigarettes might act as a gateway to the real thing (in reality, they are more likely to represent an exit from it) or that they might re-glamorize smoking — are feeble stuff. This suggests that the real agenda is driven by the precautionary principle run amok, or, ominously, by something darker still.

Cynics might point to the loss of valuable tax revenues as the motive, but there’s much more to it than that. The campaign against tobacco began with the best of intentions, but it has long since degenerated into an instrument for its activists both to order others around and to display their own virtue. And with that comes an insistence on a rejection of tobacco so absolute, so pure, that it has become detached from any logic other than the logic of control, the classic hallmark of a cult. So mighty is the supposed power of this anathematized leaf that anything — even when tobacco-free — that looks like a cigarette or provides any approximation of its pleasures is suspect.

It’s too much, of course, to expect any respect these days for the principle that adults should be left to decide such things for themselves, but the chance that the e-cigarette could save an impressive number of lives should count for something. Europe’s sad snus saga suggests that that might not necessarily be so. For generations Swedes have taken a form of oral tobacco, a snuff known as “snus,” cured in a way that sharply reduces its TSNA content. Snus is available in the U.S., land of dip and chaw, but, within the EU, where no such tradition exists, it can be sold only in Sweden. Taking snus is not without risk, but it’s far less harmful than smoking. Its popularity in Sweden, especially with the guys, goes a long way to explaining why that country has Europe’s lowest incidence of lung cancer among men. It has been estimated that introducing snus elsewhere in the EU could save some 90,000 lives a year, but the EU’s capnophobic leadership has rejected the idea. Anti-tobacco jihadists are quite content, you see, to accept that the perfect can be the enemy of the good.

As America’s vapers might be about to find out.

City Under Siege

The Weekly Standard, July 1, 2013

Take a visit to the cyber-belly of the beast, to a website run by the European Commission, the EU’s bureaucratic core, and you will be told that “the financial sector was a major cause of the [economic] crisis and received substantial government support.” Soon it will be payback time, in the form of Europe’s new Financial Transaction Tax (FTT), set to be levied at a rate of 0.1 percent on equity and debt transactions, and 0.01 percent on trades in derivatives. It will ensure that the financial sector “makes a fair and substantial contribution to public finances.”

We’ll see. This new “contribution,” potentially much more onerous than those fragments of a percent suggest, may or may not be substantial (taxes of this type have a record of backfiring), but the revenues predicted by the commission ($45 billion or so, but the math is fuzzy) could be eclipsed by the punch that the tax delivers to economic growth.

Whether the FTT is “fair” is fuzzier still. That’s because the real objectives of the tax​—​to be introduced by 11 eurozone countries in 2014​—​have little to do with that. To start with, the FTT is about​—​dread word​—​the narrative. Problems within the banks were the immediate cause of the crisis​—​it’s not called the financial crisis for nothing​—​but working out what caused those problems is a messier matter altogether. The number of plausible suspects rivals the haul on Agatha Christie’s Orient Express. Prominent among them is something for which the commission bears a great deal of responsibility​—​the euro, a reckless, politically driven piece of financial engineering that has outdone the worst of Wall Street’s mad science. With the single currency still the focus of potentially dangerous debate, it makes sense to keep attention focused on fat cat bankers and away from Brussels’s more discreet architects of financial destruction. Similar thinking helps explain why​—​when the euro’s troubles grew too big to ignore​—​there was so much talk of dodgy markets and dark Anglo-Saxon plotting.

Sadly, in a way, not all of this was​—​or is​—​deliberate disinformation. Much of continental Europe’s leadership class​—​across the political spectrum​—​distrusts “financial capitalism” of the Anglo-American kind, a venerable suspicion that appeared to have been vindicated by the fiascos of 2008. Why there is this distrust is a topic for another time​—​Roman Catholicism, socialism, and the twists of history have all played their parts​—​but that it exists is undeniable. The idea that free markets are the least bad way of allocating resources has limited appeal in a political culture still in thrall to the notion that some authority somewhere knows best, a belief that remains the essence of what the EU stands for. This is more than a matter of philosophical disagreement. So far as Brussels is concerned, Anglo-Saxon finance is not just objectionable, it’s in the way.

The euro was an attempt to override the market. A nation’s currency is a measure of its relative economic performance. If its value falls that’s a signal to investors and, in time, a chance to restore international competitiveness. By abandoning marks, francs, lire, and all the rest, the creators of the currency union junked a useful economic tool, replacing the collective sense of the market with crude administrative fiat. France was Germany was Portugal, and that was that.

As millions of jobless Europeans know, the market bit back. But the instinct of those managing the currency union was not to revert to market discipline, but to move farther away from it. There were bans on the short-selling of certain securities, attacks on credit ratings agencies that were at last telling some inconvenient truths, and, crucially, a vow by European Central Bank president Mario Draghi to do “whatever it takes” to save the euro, a declaration buttressed by the prospect of significant intervention in the sovereign bond market. Markets are far from perfect, and some of what has been done can be justified on pragmatic grounds, but it’s not difficult to notice the direction of a broader ideological current, one that is not good news for the City​—​London’s Wall Street​—​or, indeed, American financial firms interested in European business.

That current is sweeping an increasingly burdensome, increasingly made-in-Brussels regulatory regime, expensive and rigid, into the City and beyond. Much of it is profoundly antithetical to the intuitive, principles-based, flexible, and often self-regulatory approach that has done so much to transform Britain’s financial sector into a world-beating business. That some of these rules​—​such as the new Alternative Investment Fund Managers Directive​—​will (effectively) weigh even more heavily on enterprises headquartered outside the EU is bound to damage London’s status as a global financial entrepôt, diverting business beyond the reach of Brussels.

The commission doesn’t appear to be particularly concerned where that business goes. In fact, it would probably like much of it to go away altogether. Many of Britain’s continental partners agree. And jealousy is only a part of it. The inherently unruly (markets are like that) and, to them, morally suspect financial sector is an obstacle to the ideal of a technocratic, tightly controlled Europe. Meanwhile the “island sewer” (to quote a deputy director of the supposedly serious El País, Spain’s highest-circulation newspaper) acts as a low-tax, lucrative lure for some of the continent’s best and brightest: some 300,000 to 400,000 French citizens now live in the U.K., mainly in London. Perhaps most annoyingly of all, financial services’ large contribution to the U.K.’s ramshackle economy (directly and indirectly perhaps at least 14 percent of GDP, and a badly needed export earner) helps fund Britain’s fondness for going its own way, an independent-mindedness that its European partners could do without.

But if the pie is to be smaller, that doesn’t mean that those partners don’t want a larger slice of it. National rivalries still flourish beneath that shared EU flag. The mechanism of “ever closer union” is not infrequently used by one member-state against another. It is, of course, only a coincidence that the (Frankfurt-based) European Central Bank is seeking to introduce rules that would force the relocation of clearing houses that handle euro-denominated instruments (in any significant quantity) out of London into the eurozone, to Paris, say, or, uh, Frankfurt. The U.K. is suing to prevent this, but if the currency union deepens, or banking union comes into being, there will be more of the same to come.

Taken as a whole, Europe’s financial sector will shrink further​—​even after the bloodletting of the last few years. London, as its hub, is bearing, and will continue to bear, the brunt. Jobs in the City have fallen by roughly a third and now stand at a 20-year low. In part this is natural, the product both of hard times and the necessary reconnection of the financial sector to economic reality. In part too it’s a matter of mathematics. Tougher capital requirements and more restrictive limitations on leverage (and, possibly, areas of business) are a reasonable response to some of the disasters of recent years, but they will make much of the banking sector less profitable than in the mirage years, and that’s before we begin to factor in the costs of Brussels’s wider regulatory onslaught.

The FTT adds both further insult and injury. The belated realization that the tax may be even more destructive than its supporters intended (the governor of the Bank of France has warned of the damage it could do to the Frenchfinancial sector) may mean that it will be diluted prior to its planned introduction, but two key features​—​some targeting of trading volumes and extraterritoriality​—​will remain, and both will hurt London disproportionately. The extraterritoriality is particularly galling. A trade will bear the tax even if only one counterparty is in the FTT-zone, and so will a transaction where both counterparties are outside the FTT-zone (in London and New York, say) but trading a security (a Peugeot share, for example) where the issuer is based within it. The U.K. and the United States will be acting as the collectors of a tax that hurts one of their key industries​—​and they won’t get a penny for their pains.

As if all that were not enough, the intervention of Europe’s reliably authoritarian parliament means that new caps on bonuses have recently been approved. The bonuses of bankers classified as “material risk-takers” (including anyone who earns over $660,000 a year) will be capped at one times salary, or two times with the approval of a supermajority of shareholders​—​an arbitrary diktat at odds with more subtly designed measures preferred by the U.K. The possibility that similar limits may be imposed on asset management firms (a group that received no bailouts from the European taxpayer) gave the lie to the never convincing argument that these changes are about risk control. Rather, like the Swiss referendum in March that also imposed restrictions on executive pay, they are both an exercise in collective punishment and a manifestation of the neo-egalitarianism growing on either side of the Atlantic. There is something else at play. Members of the European parliament see themselves as the continent’s elite (check out the deeply discounted tax rates that most of them pay), the vanguard of a new Europe. Earning so much less than those arrogant, unnecessary bankers maddens them: The chance to put a brake on financial sector pay is difficult to resist.

That’s more bad news for the City. The cap will​—​surprise​—​hit London hardest (that’s where most of the EU’s “material risk-takers” are to be found) and will make it a less hospitable place for the type of international business that could just as easily be located in New York, Hong Kong, or Zurich. Not only that, mandating less flexible wage structures will discourage hiring, the last thing that London needs now. And if these changes do end up crimping total compensation, that will be a blow to Britain’s cash-strapped treasury, long accustomed to raking in a good bit of that income, among other large “contributions” (to use that fashionable word) from the financial sector.

And so British prime minister David Cameron finds himself in another European swamp. All he can do about the FTT’s extraterritorial reach is protest (the United States is also objecting) and maintain a fingers-crossed legal challenge. He could (very) arguably have vetoed the bonus cap under the Luxembourg compromise, a severely eroded understanding dating to 1966, which might still permit a veto in defense of a vital national interest even where no veto power formally exists. That would have been a long shot, but Cameron didn’t even attempt it. Going to the mat “against Brussels” in defense of bankers’ bonuses would have played no better in euroskeptic Britain than anywhere else.

But one important, and generally Conservative, section of the electorate might have supported him. Traditionally nervous about political uncertainty and understandably wary about being cut off from European markets, the City’s grandees have long endorsed​—​if on occasion through gritted teeth​—​British membership in the EU. That’s not going to change quite yet, but some of them must be beginning to see that staying in an EU fixed on its current course could well be riskier than taking their chances outside. Whatever he is now claiming, Cameron is not going to be able to nudge the EU in a different direction, and he does not have the imagination to see that Britain would be better off out. Sooner or later, the City will have to confront the fact that if the EU is the problem, Cameron is not the answer.

A sign that it may be starting to was a high-profile event hosted last month by London hedge funder Crispin Odey and designed to introduce Nigel Farage, the leader of the uncompromisingly Euroskeptic U.K. Independence party, and a former City trader himself, to financial types. A long-term and generous, if sometimes critical, member of the Conservative party, Odey has not switched his support to UKIP, but this looked a lot like a warning shot.

Cameron would do well to pay attention. The 3 percent scored by UKIP (which up until now has principally drawn its support from the right) in the 2010 general election cost his Tories their chance of an absolute majority. UKIP is now polling in the mid-teens or higher, a feat it has managed on a shoestring. If UKIP can begin to attract City money, and the credibility that can come with it .  .  .

It’s not easy being David Cameron.

An English Spring?

National Review Online, May 13, 2013

UKIP Conference, Birmingham, September 2012 © Andrew Stuttaford

They are still there, the English of an older England, frequently overlooked, frequently looked down upon, stubbornly hitched to an unruly history too grand just to be packed away.

On May 2, in local elections in a large swath of England (and a small slice of Wales), a good number of them did what the English — a less genteel lot than Masterpiece Theatre might suggest — do when provoked too far: They pushed back hard, casting their votes for the United Kingdom Independence party (UKIP), an eccentric homebrew of euroskepticism, “commonsense” conservatism, and anti-establishment mutiny.

Let’s get some caveats out of the way. Local elections halfway through the life of a parliament (the next general election is due in 2015) have long been used to protest against whoever’s in charge, and the scale of that protest is generally exaggerated by a low turnout. The angry vote. The turnout this time was some 31 percent, not so different from the tally (35 percent) for Britain’s last elections to the EU parliament in 2009, another contest in which UKIP, not so coincidentally, scored very well.

On May 2, this understaffed (a dozen paid employees in the U.K.), underspent, under-organized party won 147 of the roughly 2,300 seats that were up for grabs, compared with, um, eight in 2009, and took in around 23 percent of the vote, up from, well, no one was really counting last time round. It was (very) arguably the most sizeable surge by an outsider party since the Normans unexpectedly entered government in 1066. Labour topped the popular vote with 29 percent, the Conservatives followed with 25 percent, and their Liberal Democratic coalition partners trailed with 14 percent.

Now some more caveats: There were no elections in either Scotland — where voters dance to a very different tune — or the greater part of Labour-dominated Wales, or in most of England’s larger cities. This was an electorate that skewed right, something that helps explain the discrepancy between national polls (where UKIP has been scoring, not unimpressively, in the low-to-middle double digits) and the result of the May 2 vote.

And yet, something is going on.

The turbulent years that followed UKIP’s founding in 1993 are simple enough to decode: There’s the crankiness of obsessives at odds with conventional wisdom, and the infighting (long a UKIP trademark) that marks countless clusters of the opinionated. All the same, it is a measure of British unhappiness with Brussels that this odd little group took 7 percent of the poll in the 1999 elections to the EU parliament, when it was little more than the flag for an idea that no “respectable” party would embrace: Britain’s exit from the EU.

Five years on, UKIP had made little progress on the domestic front, but its share of the British vote in the 2004 elections for the EU parliament rose to 16 percent. Glory was followed by farce, a regular presence in the UKIP story, when one of its new MEPs and easily its most prominent face, a former Labour MP turned talk-show host, attempted to take over the leadership in a putsch that ultimately failed. He then quit the party. The voters were more loyal. In the next EU elections (in 2009), the 16 percent stuck with the only party willing to respond fully to the discontent that the supposedly euroskeptic Tories were too nervous to harness.

Much-derided Conservative “splits” over the EU (in reality a genuinely principled debate) had left the Tories with a reputation for feuding that proved to be electoral poison for the better part of two decades. This was made all the more deadly by the way that Tory unease over the EU was used by the Conservative party’s opponents to reinforce its reputation as an asylum for reactionaries with no place in the bright new Britain that Tony Blair was building. David Cameron had to do away with that caricature if he was to have a chance of returning the Tories to power. With little subtlety and some success, that’s just what he did. Climate change was in; “banging on about Europe” was out. As for UKIP, they were “fruitcakes and loonies and closet racists, mostly,” a dishonest and condescending jibe that played well — as it was designed to — with Britain’s metropolitan opinion-formers, but came to symbolize Tory carelessness with a right wing that, Cameron calculated, had nowhere else to go.

But that was before prolonged economic crisis drained the public’s confidence in a political class long known to be out of touch, but now seen to be out of its depth. The euro’s long agony and the EU’s increasingly  overt evolution into a nascent superstate have only helped reinforce the idea that those fruitcakes might have a few things right after all.

Britain has never been a hotbed of enthusiasm for the Brussels project, but it is striking to see some recent polls showing a majority in favor of U.K. withdrawal from the EU, a finding almost unthinkable just a few years ago. Tough times can force voters to confront reality, however uncomfortable. And in modern Britain there may be less to keep them reined in than in the past. Many Brits have become alienated from their country’s political process (a process that has, of course, been drained of much of its meaning by the intrusions of Brussels), an alienation bolstered by their all-too-justified suspicion of elite consensus, most strikingly, perhaps, in the area of immigration. UKIP’s much tougher line on immigration is a major element in its support.

Immigration has been a contentious topic in the U.K., as elsewhere in Europe, for over 50 years, but there is now a real sense that Britain has lost control of its borders, not least as a result of EU rules. With very little in the way of genuine popular consent, an island nation marked by only gentle shifts in its ethnic balance for centuries is being radically and rapidly transformed by an influx that accelerated dramatically during the Blair years. For a long time, to express much more than the faintest concern over this was to risk being dubbed, well, to recycle an insult, a “closet racist” or worse. An academic study splashed across the British press shortly before the May elections predicted that the “white British” would become a minority of the population in the second half of this century, a status that they have lately achieved in London. Extrapolation can be an extremely unreliable tool, but data such as this help explain why many Britons believe that there has been too much change too soon.

The U.K. is not a country familiar with populist revolt. Both the Labour and Conservative parties have traditionally been broad enough churches to accommodate within their ranks populist strains of Left and Right respectively. Since the Blair and Cameron modernizations, that may no longer be so true as it was. Even so, any insurgent party in Britain still has to contend with another formidable obstacle: the electoral system. It’s not by chance that, until now, UKIP had notched up real success only in EU elections, which operate under a system of proportional representation. Domestically, elections are first-past-the-post, a set-up that squeezes smaller parties, and one that presented euroskeptics with a very specific problem. Voting for UKIP rather than the mildly euroskeptic Tories risks handing victory to the Conservatives’ far more europhile rivals on the left. UKIP took only 3 percent of the vote in the 2010 general election, but even that was enough to cost the Conservatives some 20 seats and a clear majority. An even better UKIP result  in 2015 will almost certainly hand the keys of 10 Downing Street to Labour, with consequences that many potential UKIP sympathizers would detest.

Persuading them to risk voting for UKIP nonetheless is going to take more than the accumulated discontents of recent years, but if anyone can pull that off, it will be Nigel Farage, UKIP’s leader, who has emerged as one of the most effective politicians Britain has seen for a long time, and without whom the result of May 2 would have been an impossibility.

Comes the hour, crumbles the euro, crashes the economy, comes the man. A smoker who enjoys a drink or three, Farage is a charmer and a chancer, an ebullient and eloquent speaker with a quick wit, a nice line in self-deprecatory humor, and a public persona that is the jaunty, Jack-the-Lad antithesis of Britain’s increasingly pharisaical political class. Farage can do anger when he has to, but he is a revolutionary who does not take himself too seriously. A clever operator, perhaps, but a back-of-the-envelope administrator, reassuringly contradictory qualities that have only added to his subversive appeal. As the Daily Telegraph’s Tim Stanley put it, people voted for UKIP “partly out of anger and partly for a laugh.” It was, he concluded, “a very British revolution.”

More a warning shot than a revolution, I reckon, and distinctly more English than British. But, whatever the future holds, the next few months are likely to be tricky for UKIP, which will now find itself subject to closer scrutiny than ever before. That may prove an uncomfortable experience for some of its newly elected councilors, political novices who may find themselves hopelessly out of their depth or burdened with résumés that won’t look so good under the media microscope. Even in the run-up to the election, it was evident that UKIP did not have the resources to properly screen its candidates. There will be more embarrassments to come.

Meanwhile the party will keep working on building its support from the bottom up, local election by local election, trying to establish the grassroots networks without which it has little chance of winning many (or any) seats in the Westminster parliament, playing the retail politics — opposition to a contentious high-speed railway here or an unwanted wind farm there — that is already contributing to UKIP’s appeal. And the outreach to what Farage often refers to as “patriotic old Labour” will continue. That’s an effort that is already coloring the agenda of a self-described libertarian party that has always had its (to return to that lazy adjective) populist elements (the emphasis on immigration control and law and order, say, and, more recently, opposition to same-sex marriage) and has now dropped its earlier commitment to a flat tax that allowed it to be smeared as too soft on the rich. There will be further nods in a leftward, statist direction, as UKIP’s mood music — that’s the best way to describe its program — shifts. It may be less of stretch than might be assumed. Even some of the former Tory voters who now support UKIP are perhaps better understood here in the U.S. as being (very) roughly equivalent to the Reagan Democrats of old, with all that that entails.

In May 2014, there will be new EU parliament elections, a contest in which on current form UKIP could possibly come top, boosting its momentum still further. But for now attention will revert to the impact that the party’s surge will have on the Tories. The results of the May 2 vote contained scraps of bad news for Labour and the Liberal Democrats, but it’s the Conservatives who are looking at catastrophe in the 2015 general election. David Cameron’s earlier attempts to head off the UKIP challenge — most notably his implausible promise of an improbable referendum on EU membership — have failed. Now the Tories have to try something else. It may be a far tougher line toward the EU (good luck with getting that taken seriously), and, although this comes with considerable electoral risks of its own, it may be a lurch to the right.

Who knows? What it will be is desperate.

Cyprus Sinking

National Review, April 3, 2013 (April 22, 2013 issue)

It says something about the lunatic calculus of Europe’s monetary union that the Republic of Cyprus, a slice of a Mediterranean rock known mainly, if not always fairly, for sunshine, no-questions-asked banking for murky Russian money, and a history of ethnic conflict, has shared a currency with Germany for the past five years. And it says perhaps even more that in 2010 and mid-2011 its two largest banks passed EU-wide “stress tests” that, revealingly and not so revealingly, hugely downplayed the risks that banks were running with their holdings of government bonds. And, yes, those two Cypriot banks had a lot of government bonds — Greek-government bonds — and a great deal of other business in the hard-pressed Hellenic Republic besides. Wait, there’s more: Together those two banks in 2011 had assets equivalent to over four times Cyprus’s GDP. Overall the country’s banking sector had assets that amounted to more than eight times GDP. What cannot go on, won’t. By the second half of 2011, Cyprus was in the grip of a growing financial crunch.

After securing an emergency loan of € 2.5 billion from Russia, Cyprus’s former AKEL government (“Communists,” but not really) turned belatedly, in June 2012, for help to the bailout-hardened troika of the European Commission, European Central Bank, and IMF. Negotiations dragged. It took the election of the new center-right president, Nicos Anastasiades, in February finally to break the logjam. Anastasiades had a clear mandate to agree to structural and budgetary reforms of the type that the troika was looking for, but he balked at demands that depositors with Cyprus’s banks share in the pain. The longer-term consequences for Cyprus’s banking sector, a mainstay of his nation’s economy, would, he knew, be disastrous.

That was not something that worried Angela Merkel. She was said to have said that Cyprus “must realize its current business model is dead.” Helping out the banks in an offshore tax haven was never a proposition likely to appeal greatly either to the chancellor herself — no friend of international finance at the best of times — or to German voters. They are due to go to the polls in September. After years of bailouts that they never liked and that were designed to rescue a currency that they never wanted, there was an obvious danger that coming too generously to the aid of an oligarchs’ playground would be a handout too far. And so Germany played a major role in insisting that any bailout be accompanied by a “bail-in” that would shift a good part of the cost of a rescue onto depositors with Cyprus’s banks.

The Cypriots caved. The euro-zone nations and the IMF would together provide € 10 billion in new loans, but depositors in Cyprus’s banks would have to chip in too, a grim first in the grim history of the euro-zone bailouts. Deposits of over € 100,000 would be subject to a one-off tax of 9.9 percent. Then came an additional, dangerous twist. Depositors with less than € 100,000 would also be taxed — in their case, at 6.75 percent, a levy that made nonsense of the understanding that, within the EU, such smaller deposits are meant to be insured. That breach of faith could easily be seen as an unsettling precedent, especially elsewhere in the euro zone’s troubled periphery.

The Cypriot leadership probably chose to penalize the smaller fry in this manner because they worried that taking too much from the high rollers risked damaging what was left of Cyprus’s offshore-banking business, but it created such an uproar — on the island and beyond — that its overwhelming rejection by the Cypriot parliament a few days later came as a surprise to no one.

It was back to the drawing board. What emerged on the second go-round a few days later was structured somewhat more sensibly. Bank deposits of less than €100,000 are protected, but Cyprus’s second-biggest bank, Laiki, will be restructured out of existence, quite possibly wiping out all uninsured deposits on the way. Its larger rival, the Bank of Cyprus, has been rescued, but this will come as cold comfort to its major depositors, who are likely to end up taking a shellacking so brutal that there will be little to choose between their fate and that of their counterparts at Laiki.

The good news was that this kept the troika committed to the €10 billion loan. That would, said Anastasiades, be enough to stave off bankruptcy. More modest than most euro-zone politicians, he did not claim that his particular chapter of the currency union’s interminable crisis was over, merely that it had been “contained,” an idea echoed by the fact that draconian “temporary” controls on the movement of money out of the country have been put in place. Even so, the president was being too optimistic. The banking sector is shrinking rapidly. Many other businesses have been badly damaged by the calamities of recent weeks and are now facing the prospect of operating in a near-siege economy — conditions that are, in addition, unlikely to attract the foreign investment that Cyprus will now desperately need. Making matters worse still, money will leak out, despite the controls. GDP will contract sharply, perhaps by as much as 20 percent over the next couple of years. Unemployment will soar.

With the economy in free fall and government debt-to-GDP set to rise to some 140 percent after the bailout, it will take a miracle for Cyprus to avoid a return to the begging bowl — a miracle so far-fetched that even Cyprus’s most senior cleric, Archbishop Chrysostomos II, cannot believe in it. The influential archbishop, admittedly long a strong nationalist, is urging abandonment of the euro, which would trigger the nation’s outright default. That won’t happen for now. Anastasiades has pledged to stick with the single currency. A majority of his fellow citizens are probably behind him in that, at least for the moment, for reasons that are easy to guess. A reversion to the Cypriot pound would mean a devaluation that would wipe out much of what’s left of the republic’s shredded savings, threaten massive inflation, and further disrupt an economy that has already lost its bearings. But the argument is not all one way: There’s a decent case to be made that an eventual exit from the single currency would, for all the pain, be the best possible way of repricing Cyprus back into the global economy. This is a debate that is far from closed.

In any event, the most intense phase of the Cypriot storm appears to have subsided for now, but it has left the euro zone even more battered than before. The two most dangerous threats to the survival of the currency union in its current form are a massive bank run and voter revolt. The disaster in Nicosia has made both more likely.

Let’s start with the banks. Depositors throughout the currency union have now been given a sharp lesson. Deposits above € 100,000 are riskier than they had previously assumed, a message reinforced by a series of comments from various euro-zone leaders who in the wake of the Cyprus deal, despite some hemming and hawing, made it clear that a new template is being put in place. Large depositors, bondholders, and other sources of wholesale money to a euro-zone bank are being warned that they should expect to take a hit if that bank runs into trouble. Properly tweaked, that’s a good principle — moral hazard and all that — but, with confidence in the euro zone and its often undercapitalized banks still shaky, now was not the moment to assert it. That was especially so in a week that had seen the introduction of strict controls on the free movement of capital — supposedly temporary (time will tell; precedents are not encouraging) — within a currency union that had allegedly consigned such restrictions to history.

This will mean that banks seen as vulnerable (or banks located in countries seen as vulnerable) will find it even more difficult — and more expensive — to attract funds. (Well, would you deposit more than € 100,000 with an Italian bank?) This is a perception that feeds upon itself, and, in the right wrong circumstances, can easily set the stage for panic. Even those with (supposedly insured) deposits below € 100,000 will have been left uneasy by those few days in which it appeared that the euro zone’s leadership was prepared to go along with a deal in which smaller depositors took a hit. Since then, there have been repeated reassurances that such deposits are safe. Protesting too much? Just maybe, and there’s no getting away from one uncomfortable truth: Those insured deposits are guaranteed at the national level, not by the euro zone as a whole. A guarantee is only as good as the guarantor. Insured depositors in Greece have, therefore, to hope that, in the event of a crisis, the Hellenic Republic is good for the money, or at least for a third bailout.

One possible, partial response to that part of the problem would be to institute a deposit-insurance scheme jointly guaranteed by all euro-zone members, but that would risk inflaming the source of the second great threat now stirring within the euro zone: democratic politics. One reason that deposit insurance has not expanded beyond national borders is the suspicion, most notably in Germany, that signing up for a broader European scheme would be signing yet another blank check, something that would be not only bad housekeeping but a quick way to antagonize the voters. The bailouts have long been unpopular among the electorate in the euro zone’s (reasonably) solvent north, but the eurofundamentalism of most of its political class has meant that, despite some heroic efforts in Finland, this sentiment has done little to derail the trainloads of cash and commitments heading toward the currency union’s embattled periphery.

That’s not to claim that relatively frugal sorts such as Chancellor Merkel have enjoyed making the handouts. They have not. The tough line that they are taking on Cyprus and, by extension, on banks throughout the euro zone is clearly intended to show that there are limits to their generosity with their taxpayers’ money and to the risks that they are prepared to take with their voters’ patience. In a recent poll, some 26 percent of German voters said they “could imagine” voting for a party that was opposed to the single currency. In late February, a new, achingly moderate center-right party, Alternative für Deutschland, was formed to appeal to just such voters. AfD won’t win, but if it takes even a few percentage points in September’s vote, it could make the election rather closer than Mrs. Merkel would like. She won’t want to give AfD any more ammunition than she has to over the next few months, which is just another reason to think that the next bailout drama (keep an eye on Slovenia) may be even uglier than the last: Bank depositors in the euro zone’s other struggling regions will, doubtless, be watching carefully — and anxiously.

But while politicians in the euro zone’s north have to contend, for the most part, only with the threat of voter revolt, those in the periphery have to contemplate dealing with far tougher opposition. If parliamentary approval for the final memorandum of understanding that seals the deal is required, there may be some sweaty interludes in Cyprus (the parliament’s speaker has already signaled his opposition), but the best guess must be that Cypriots are likely to be too traumatized to do anything but go along with the terms of their rescue for now. But the spectacle of their pauperization will not play well with their kin in Greece, already radicalized by years of slump and increasingly hostile to the idea of sticking with the painful austerity that many of them regard (not always completely incorrectly) as self-defeating. That austerity is the price of continued support from the north, not least because, without it, voters in Finland and elsewhere would likely finally say that they had had enough. Rock, meet hard place. For now the somewhat unwieldy Greek coalition government is sticking to the troika’s script, but its leaders can read the opinion polls — and their message of growing anger — as well as anyone else. Meanwhile, in Italy the success of Beppe Grillo’s insurgent (and anti-austerity) Five Star Movement (M5S) in the February elections has led to political paralysis. At this writing, there is still no government in Rome, and the prospect of new elections cannot be ruled out. M5S continues to ride high in the polls. The humiliation of Cyprus will be unlikely to have hurt its case. Meanwhile, Silvio Berlusconi’s PDL, itself deeply skeptical of the troika’s agenda, is also polling well. In the aftermath of the Cypriot deal, Italian bond yields rose, and Italian bank shares fell.

To repeat myself, if you had a deposit in an Italian bank, what would you do?

Tick tock.

Just Say No

National Review Online, February 14, 2013

Have we just witnessed a cynical attempt to induce an old ally to sacrifice itself for the benefit of the United States? Possibly: Foreign policy is not for the morally squeamish.

Look no further than Philip Gordon, the U.S.’s assistant secretary of state for European and Eurasian affairs. In January, Mr. Gordon hurled himself into Britain’s contentious debate over the EU with the observation that America viewed the U.K.’s continued participation in that wretched union as “essential and critical to the United States.” This did not play well with Blighty’s euroskeptic hordes, a crowd all too willing to suspect that Uncle Sam takes John Bull for granted. An indignant Nigel Farage, leader of the insurgent euroskeptic United Kingdom Independence party (UKIP), snarked that, as the U.K. had rejected the Americans’ suggestion that it might lend a hand in Vietnam, the U.K. would also “say no to them over the EU.”

Undeterred, Barack Obama waded into the controversy a week or so later, releasing some comments shortly before David Cameron was due to deliver a much-anticipated speech on Britain’s role in the EU. The timing was intended to stiffen the back of a prime minister under immense domestic political pressure from his euroskeptic critics. The president began softly enough, politely underscoring “America’s close alliance with the United Kingdom,” but then came to the point: The United States values “a strong U.K. in a strong European Union.” Following Cameron’s speech, that message was echoed by Joe Biden, never a man afraid to repeat the words of others, during the course of a visit to Europe earlier this month: “We believe the United Kingdom is stronger as a result of its membership [in the EU]. And we believe the EU is stronger with the U.K.’s involvement.”

On one level, that was not so far from what Cameron had ended up saying. In his speech, he called for a reformed, “leaner, less bureaucratic union . . . with the single market at its heart,” a union open for business with the rest of the world, a decentralized union that would return powers to its member states but that would have room within it for a smaller group of countries on a pathway to “much closer economic and political integration,” but no sin bin for those who did not. If that is a vision in any way connected with reality, the State Department ought to be able to relax.

Of course, it is not. Fears among the EU’s leadership (alluded to by Cameron in his speech) that a restructuring on the lines he proposed could lead to the union’s unraveling will mean that it will never take place. If Britain is to loosen its ties to Brussels, it will have to do so on its own. That would involve persuading all the other 26 EU countries to go along (since changes to the EU treaty require unanimity). That’s not going to happen either.

No matter, Cameron has guaranteed British voters a referendum once his implausible negotiations for an impossible deal have been concluded. It will, he explained, be “a very simple in or out choice. To stay in the EU on these new terms; or come out altogether.” So would that be something for the White House to worry about? Not really. The Conservative manifesto for the general election, due in 2015, will include a promise to hold a referendum. But here’s the catch. The Conservatives will almost surely not win that election, for any number of reasons that we don’t need to go into now.

Even in the astounding event of a Tory victory, what then? Doubtless there would be an elaborate pantomime of negotiation — there is still a large constituency within the EU (including, most importantly, Germany) that would like the Brits to stay in — and doubtless a few crumbs of concession would be tossed Cameron’s way. Indeed there were sections in his speech where the prime minister already seemed to be signaling his willingness to find a way to accept them. For older Britons, this brings back memories of the 1975 referendum that rubber-stamped a cosmetically “renegotiated” deal with the precursor to the EU. And a rerun of that would probably be what they would get.

Disregard the polls currently showing that a majority in the U.K. would opt for Brexit (yes, that’s the term). That’s just venting. Given their druthers, because of anxiety about what lies outside, reinforced by skillful scaremongering (and there’s been quite a bit of that lately), most Brits would prefer to remain within the EU, albeit one that is less intrusive. The nature of the EU — an “ever closer union” — means that that is not on offer. But presented with a prettily packaged excuse to avoid confronting that unpleasant reality, and battered by warnings from the great and the good of the supposedly hideous implications of quitting, the British electorate would almost certainly stick with the devil it knows.

So Cameron’s gambit is highly unlikely to get anywhere, let alone lead to Britain’s escape from the EU, and yet the Obama administration still seems oddly concerned. In part this may be a feint, aimed not at London but at Brussels, Berlin, and Paris, crafted to demonstrate to a bloc of some consequence that the Brits might be euroskeptic but their cousins across the pond most definitely are not.

And in part it may be caution. Cameron is right: “Democratic consent for the EU [within the U.K.] is now wafer thin.” If the Labour party were to shift in a more euroskeptic direction, the political equation would change dramatically. Despite electoral logic and some tentative maneuvering, that’s not likely for now. The party’s leader is firmly in the Brussels camp. But its supporters are rather less so. All things considered, the White House may have thought that spreading a little of what euroskeptic blogger Richard North has dubbed FUD (fear, uncertainty, and doubt) over the consequences of a Brexit might be a sensible preemptive step.

More than that, the EU is in a tense, febrile state. The underlying structural failings of its monetary union, combined with a nutty determination to dig that hole still deeper, may well force the countries of the euro zone (and perhaps others) into a degree of integration that will, however much they might try to avoid it, necessitate amendments to the EU treaty. Those will be amendments to which the Brits will have to give their assent (unanimity, remember). At that moment, whatever the fate of Cameron and his referendum, the U.K.’s relationship with the EU will be up for discussion. As matters now stand, it is, to put it mildly, unlikely that the country will opt to join any inner core, but, by spreading a little FUD in advance (with more, unquestionably, to come), the U.S. is obviously trying to contribute to the creation of a climate of opinion within Britain that will prevent the U.K. from wandering too far from the heart of Brussels’s realm.

And as to why the administration should try to do this, well, that (if it is thinking straight) is where the cynical sacrifice of an old ally would come in. The EU is fundamentally anti-American. Designed as a counterweight to American power, it is a project that, lacking any genuine positive identity of its own, defines itself by what it is not. What it is not, its grandees like to emphasize, is America. Economically, the ideas of its founders were rooted in central planning at home, and, in dealings with the outside world, mercantilism. But British membership (and the example set by the success of Thatcherite reforms within the U.K.) has helped nudge the EU on a somewhat different (but not irreversible) course, more open to free markets and free trade and thus more to Washington’s liking (for instance, talks on a U.S.-EU free-trade deal are set to start in June). Similarly, Britain has acted as a brake on the construction of a common — and overarching — EU foreign policy that would, almost by definition, make the union an increasingly awkward partner for the U.S.

The problem is that the EU’s original suspicion of free enterprise has never disappeared, and hard times have given it fresh life. There are clear signs that Britain can only block so much for so long (the evolution of EU financial regulation is just one harbinger among many of trouble to come). The trudge toward a common foreign policy continues. Nevertheless, so long as the Brits stay relatively close to the center of the EU’s decision-making, there remains a decent chance that Brussels’s more damaging initiatives can be diluted, delayed, or derailed. Seen from an American viewpoint, there is thus a brutal logic to convincing the U.K. to hang in there, even if, from a British angle, it makes no sense at all.

But what if the White House is not looking at this question in the coldly Machiavellian way that Americans have a right to expect? One alternative interpretation of Obama’s effort to insert himself as a counselor into Britain’s unhappy European marriage is that his administration is still in thrall to the Cold War calculation that regarded (Western) European unity as a strategic good in its own right, an obsolete notion kept alive today by intellectual laziness in Washington and, somewhat more legitimately, by an appreciation of the genuinely useful role played by the EU in the transformation of the post-Communist part of the continent. It’s a mindset that has led successive White Houses — Republican and Democratic — to view the EU’s progress toward that ever closer union with insouciance, or even, sometimes, enthusiasm. A more tightly unified EU, gushed Condoleezza Rice back in 2005, would be a “positive force.” Maybe the Obama administration has simply succumbed to this delusion, and cannot grasp why Britain would not wish to sign up for the ride.

Then again, there could be a yet more troubling explanation. Does Obama look across the Atlantic to Brussels and rather like what he sees, an entity developing in a supranational, “progressive,” environmentally correct, corporatist, and technocratic direction that is not so far removed from his own agenda for this country? If he does — and it’s not so far-fetched an idea — he won’t have much sympathy for a bunch of what he doubtless sees as “bitter” Brits clinging to what’s left of their independence.

But whatever the reasons Messrs. Obama, Biden, and Gordon had for saying what they did, from the British perspective it is clear what David Cameron’s response should be. He should pay absolutely no attention.