Quickthink

Ouch!

No doubt you have heard about the terms of the Cyprus “bailout”. Bottom line:

Part of the deal, if it is approved by the Cyprus parliament is that bank deposits will be taxed in order to re-pay €6 billion of the bailout fund.

Say what you want, but this crosses a line that has not be crossed before. The government will take bank deposits directly from private citizens. Not surprising this has roiled markets and raised eyebrows.

It also says something about how Europe works these days. First it re-affirms that Germany calls the shots. The Germans decide how much and on what terms they will pay to preserve the Euro. Second, it shows that there are limits to how far the Germans will go to save the Euro. Those limits will be based on German politics. Joe Weisenthal makes these points and more and I agree.

Interesting story.

One day (quite some time ago) I was sitting at my desk in the Estonian Supreme Court when the Chief Justice walked up to me. He said that as Estonia would most likely join the European Union, I should start thinking about how to develop a training programme for judges about how to cope with European law. To make a long story very short, we did just that. During the first presentation of the first course, a very intelligent Swedish lecturer asked the question, “so, just what is Europe?” Good question. I am afraid that the answer was not very clear back then and is still not very clear today.

BTW, you might ask the same question about the US. There we get an answer or series of answers that date back to the revolution. The early US was mainly a security alliance against Great Britain, which was a rather dangerous external threat. Many years later, as that threat subsided, secession by the southern states challenged the notion that anything actually did hold the states together. And then came a truly horrific civil war. As leader of the union Abraham Lincoln faced a dual challenge. He had to put down the rebellion by force. Ok. After five years of bloody fighting this “to do” item was checked off on the agenda. But that was not enough to save the union. It was equally important that Lincoln re-formulate what would hold the states together after the war. Not just force, but something positive. I would argue that as the architect of the war and president of the union, only Lincoln could do this. And he did.

According to Lincoln, the US is a nation that is “dedicated to a proposition …”. Hmmm … not many people paid attention to that phrase at the time, but the idea stuck and I would argue is the best way of understanding the US today. The US is a reflection of a principle in action rather than an agglomeration of people with similar racial or ethnic roots.  This “dedication” gives the US its great mythical storyline that it is open to people from anywhere. Is it true? That doesn’t matter. It is a work in progress rather than an accomplished deed.

So what about Europe? Its initial union was also a response to threats, both internal and external. No more European wars! And no communism imposed from the east! But these threats seem less frightening now than they were thirty years ago. So what holds Europe together now? Using Lincoln’s phrase do we dare to ask, “what is Europe dedicated to?”

The Economist offers a short video that elaborates why answering this question is challenging. The main point of the video is that the descriptor “Eastern Europe” should be scrapped. I agree. But the larger point is that Europe itself is a shifting field of alliances and affinities. It is complex. This contrasts with the US storyline which places a strong emphasis on simplification. So what holds a complex system together?

Well, we shall see. But in the meantime, I think this complexity makes European politics (to the extent that this exists it all) rather difficult. And we see that this is not good in times of crisis, as we have now with the euro. But one idea inspires still. Despite our current problems, it is still relatively easy to say what Europe is not. Just look at Belarus.

This from BI about whether Italy may exit the Eurozone

Eurozone Impossible Politics: The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union.

Translation: There re some issues here.

The Greeks have gone to the polls and voted. But for what? NYT writes that the vote was for staying within the Eurozone and continuing with the bailout system. That is the position of the New Democracy Party, that led all parties with 29.6% of the vote. Hmmm … we can say that nearly 30% of the people who voted would like this policy outcome.

Unfortunately, we understand less about the positions of the other 60% of the voters, not to mention the people who chose not to vote. The situation gets more complex when we consider that the Syriza Party has said it will not join with New Democracy to form a government. Instead, they will stay out and oppose further austerity policy decisions. Who cares? Well Syriza won nearly 27% of the vote. And it gets worse. The Pasok Party won 12.3% of the vote and has said that it will not join in any government without Syriza. So we have a block representing around 39% of the voters who are essentially thumbing their noses at Europe.

What does this mean? Well, from a bargaining point of view, it means that the Greeks have been rather clever. Europe cannot work with Greece without a government. And to get a government, they will probably try to lure Syriza and Pasok in. That means more concessions.

But will this make any difference in the long run? Paul Krugman thinks not. He has lots to say about how the Greeks got into their mess. And then this

Which brings us to Sunday’s Greek election, which ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway.

The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris.

Hubris! It is a word that might offend some Europeans. In Europe, policy making based on hubris is usually associated with Americans.

I had a rather animated chat with an Irish colleague the other day about their referendum over the new EU austerity pact. Irish voters may accept the pact (and they go to the polls today), but I suspect that this is a side show.

The real event is happening in Spain right now, where bond spreads are getting rather out of control. This scare is producing a sea change in public opinion which is likely to produce a new “conventional wisdom” this year. The old idea is that austerity is a necessary virtue. And what is the new normal? Austerity in the face of a recession is stupid, unless of course you are German and benefiting from an artificially low valuation of your products due to the Euro.

The deeper issue here is a challenge to German leadership of Europe. Unless the Germans come around to the new idea, sad to say, me thinks we will see a very deep split in the European polity.

Well, the French run off for the presidency is over and Sarkozy is out. Mr. anti-austerity Hollande is now the top man. What will it mean? Who knows. But one thing is clear. The political support for austerity is not what it was.

And I won’t even mention what is going on in Greece.

Paul Krugman weighs in, celebrating this as a victory for common sense.

With French presidential elections coming up, it is a good moment to reflect on where the country is going. Olivier Guez thinks it is going to the dogs. He writes

Transfuge, a Parisian literary magazine, offered a harsh assessment this month: French literature, obsessed with the past, is entering the 21st century walking backward. Indeed, the French don’t like the 21st century, and would gladly give it back. Their desire has its roots in a confluence of failures (the defeat in 1940 and the loss of their colonial empire) and the rejection, by other European nations, of building a Europe à la française — France on a bigger scale. France has become a middling power, with a mass culture and a society of consumption like everyone else. Gaullism and Communism kept up the illusion that a great history, a great destiny were still France’s to be had. It didn’t pan out that way. So as the world heeds France less, the French long to shut themselves off from it, to turn toward olden days and protect themselves.

Is Olivier being a bit too harsh?

My own take - sure, France has issues these days. The biggest one is called Germany. France gave away the crown jewels to build a Franco-German alliance that would lead Europe. The alliance has forced France and most of the rest of the European Union into a German style monetary union. This is great for Germany but not the rest of us. And we all will continue look bad until this is undone.

FOLLOW -  Indeed, France is not the epicenter of European malaise. Things are much worse in Portugal. Check out Frank Bruni’s article to get a sense of the lost hope. Very sad. And I guess things are worse still in Greece and maybe in a few other places. There is a nagging sense that the future has been squandered.

This quote caught my eye the other day from NYT

As they began to feel better about themselves, Poles began to explore their past in a variety of ways, from historical documentaries to retro crime novels. Zakaskas bistros fit right into that trend. More than a dozen opened up in the capital alone, and the rest of Poland followed suit.

Very interesting.  And what are zakaskas?

They try to recreate the Soviet-era ambience, with intentionally shabby décor, little or no furniture and cheap eats.

Why?

“Everything associated with Polish tradition was identified as being trashy and crude, an indicator of Poles’ alleged low socioeconomic background,” said Tomasz Szlendak, a sociologist. “So people tried to recreate the world from ‘Dynasty,’ ” the former prime-time American soap opera, he said.

What!Rejecting a world based on soap opera style values! That is heresy! Way to go!

Some years ago, it was a matter of debate whether the European Union economic policy making apparatus would work better than its American counterpart. Some argue that it has. And some aspects of European Union policy making are wise.

But in one big, big area, the European Union economic policy making system is breaking down. Too bad, because the break down should have been avoided, could have been avoided, but simply is not being avoided. I refer to economic policy of managing the EURO. That great flagship of European Union political integration. There are two disasters brewing for the European Union just now. The first is the immediate effect within the European Union of failed policy - hardship in member states caused by insisting balanced budget policy despite trade imbalances. The second is the after effect - distaste for all things European.

To get the full flavor of this, check out three well known experts who are throwing their hands up in despair about European Union economic policy and the management of the EURO.

Paul Krugman rants about economic suicide and driving off a cliff. Strong words.

George Soros warns that things are about to get worse because there is no European economic growth strategy.

Nouriel Roubini laments that imposing austerity is not a solution to the underlying imbalances in the system.

So why do we have a policy impasse? Very simple. Germany, like China, is wedded to a mercantilist export policy. It believes it must run trade surpluses. Germany will not do anything that would threaten this policy. And it believes that allowing a small amount of inflation could have that effect. So Europe becomes all mercantilist or it will go bust. Not all Europe can or will do that, so you can draw your own conclusions.

BTW, as Joe Stiglitz points out, mercantilism works only in the short term. Sooner or later, the rest of the world starts to compete and you get a race to the bottom. Ugly.

From Charlemagne in the Ecnoomist

“The Germans think that the only way to make countries reform is to dangle them out of the window,”

He offers a rather sober overview of the policy options and policy making barriers in his article. It is worth reading.