Quickthink

A few days ago, I posted on the political problems Europe is having in managing the Euro. I argued that the core problem is that there is no firm European consensus on what the Euro is and therefore no firm commitment to protect it. Here is a link to that post. Today, NYT notes that speculators are starting to bet against the Euro and focus their attention on Portugal. Here is the link. Here is a quote

Some analysts think the Greek bailout may have … (a) harmful long-term effect. Instead of ushering in a period of lower rates and market calm, it could prompt investors to test Europe’s — and in particular Germany’s — stomach for a rescue of other troubled European economies, beginning with Portugal.

Oh dear. Dreadful. Simply dreadful. But predictable.

Regular readers of QT will know that we are just a bit skeptical about the European project. That does not mean that we are Euro-skeptics. To the contrary,  a united Europe has already proven its value and could do much, much more. But … there is a troubling sense that Europe — as it is now — has been oversold. Political union has not followed neatly after the so called “completion” of the single market project. And BTW, we might keep an open mind whether the single market has been completed.

Case in point on political union problems — the European attitude towards the single currency and the policies that support it. There is none. It is essentially a German attitude that a strong currency with low inflation is the key to prosperity over time. But tell that to the Greeks, the Italians, the Spaniards, the Portuguese, the Irish, the Latvians, and hmmm … did I leave anyone out? I was somewhat persuaded by Krugman’s argument that the German approach imposes too much pain and offers too little gain to claim policy coherence for Europe overall. Here is a link to Paul’s article (which BTW is mainly about the Greek messtoid).

One cannot blame the Germans for pushing a German agenda. But there is no mechanism to test whether this agenda will be accepted as the correct European model over time (other than treaty revision). Thus, from a political point of view, we continue to sail in uncharted waters, knowing that the “one size fits all” currency policy is a very blunt instrument that might at some point lead to mutiny.

Would that be a disaster? Well, the US had terrible problems in its early days developing a single currency and it survived them. Though its civil war — ostensibly about slavery, but in fact, equally about states’ rights — shows that large political unions can and do explode. More recently the disintegration of the Soviet system teaches us how quickly explosions can take effect. Let us hope that in fifty years, pundits far more wise than me will call our problems with the Euro, growing pains. But meanwhile, it is frustrating not to know how to get beyond them.

Here is a link to a NYT article about the current stress in the German/French relationship due to the above.  It will be interesting to see how these stresses are to be smoothed over.

Greece is back in the headlines — as investors push interest rates on Greek debt up, up, up making a bankruptcy likely. This could have been avoided by the Germans if they had made a deal to back the Greeks, but the Germans decided tough love would be better.

What does this tell us about the EURO? Paul Krugman has a few thoughts about this. His basic point is that the way the EURO is managed imposes very nasty choices on policy makers which may not be sustainable.  Not sure about that. But the argument raises the fear that the current economic blahs that we are feeling in the Baltics could persist for far longer than we would like. Here is a link to his article.

Oh dear. Yet another European effort to crack down on file sharing by forcing ISP’s to cut off persistent copyright infringers. Ugggh. Here is a link to an article from Giga discussing why this is not a great idea.  Perhaps ISP’s who do not wish to operate in this new regime should move to Estonia …. Just a thought.

In her new book, George, Nicholas and Wilhelm: Three Royal Cousins and the Road to World War I, Miranda Carter re-tells the old story of how the major figures of European royalty were unfit to deal with the realities of the 20th century. Here is the link to the NYT review by Miranda Seymour.

But we already know the tale. We know that from a historical perspective, these three were either irrelevant or colossal  failures. But we do not so easily understand the dynamic that caused monarchy as an institution to become a side show in the 20th Century. After all, it had been essential to every aspect of political life for a millennium. How had it lost its dynamism and power so quickly?

I believe that the answer is simple. To exercise control, European royalty depended on monopolizing the power to reward and punish royal vassals. When royals lost their monopoly of this power, their positions were compromised. This was one of the great story lines of the 19th Century. The diffusion of power away from the landed aristocracy. Yet the royals and their vassals had to continue playing the game as if nothing had changed. They had to pretend to control events, even though they no longer had the tools to do it.   And this pretense was accepted. Indeed, it was embraced, leading to a bizarre and nearly universal sense of overconfidence. This overconfidence was at the root of the foolish miscalculations that led to the sufferings of the war. This was Tuchman’s main point in The Proud Tower, and she was right.

It is another example of complex system collapse (See Shirky below). And there is a lesson here for us. Those who are most invested in complex systems tend to be the last to see new realities (if they ever do). It is a dreadful mistake to listen to them during system breakdown.

So — here is the million dollar question. How do we discover in time that we are in the midst of a complex system breakdown? That, BTW, was one of Peter Drucker’s obsessions. He wrote an interesting book about it called The New Realities.