Europe has a political crisis. The economics are just symptoms.

July 14th, 2012
in Op Ed

by Fabius Maximus

Summary: The Euro-crisis is at root a political one. Like all such, there are several levels to it.  All different.  Mostly invisible in the analysis featured by the general media, which prefer to describe this in bogus fashion as a morality play. The economics are exhaustively covered; here we glance at the politics of the crisis.

Follow up:


Here we speculate about 4 levels to the political crisis gripping Europe. None of these observations are new. Links to more information are at the end.

1.  Banks are the health of the State
2. Unification is a political process not done by economic tinkering
3.  Austerity as a leash (or lash) to reform Europe (& America)
4. Are Europe’s leaders insane, like their predecessors in WWI?

(1)  Banks are the health of the State

{Trantor’s} dependence upon the outer worlds for food made it increasingly vulnerable … and Imperial policy became little more than the protection of Trantor’s delicate jugular vein.
"Foundation" by Isaac Asimov

Europe’s banks are politically powerful. But more important, Europe’s debt-laden governments (including Germany) rely absolutely on a delicate financing mechanism to rollover their loans and fund each year’s deficits. Europe’s leaders will allow nothing to put this system at risk, and their banks lie at its center. Hence the odd response to the series of crises that began on 23 April 2010: small, incremental — doing nothing to address the underlying problems. But they gain time for banks to write-down the vulnerable loans (eg, to Greece) to minimize the inevitable shock of defaults — and time for Europe’s institutions to prepare for the larger crises to come.

This also accounts for the open-handed loans by the Bundesbank to Europe’s other central banks via the Target2 system (details at the University Osnabruck’s Euro Crisis Monitor.  These loans eventually might create massive losses to Germany, but today they provide essential stability by facilitating the slow-motion exodus of funds from the PIIGS’ banks.

Why have Europe’s leaders not addressed Europe’s deep structural problems?

(2)  Unification is a political process not done through economic tinkering

Europe’s leaders have had 20+ conferences, small and large, each with its communique of decisions. Legions of economists have devised scores, hundreds, of simple plans to fix Europe. All futile.

Europe must move forward to unification or back to separate States.  While both elites and broad majorities favor unification, as yet there is no consensus on its form or nature. Who will drive the New Europe?  Who pays the bills?  How are the losses from the old Europe to be allocated?

Without agreement on these things, economists’ plans for a fiscal union, eurobonds, and a euro-FDIC remain dreams.

Europe’s politicians do not believe the moment is ripe for substantial steps, as even the small steps they’ve taken have been tentative and vague. Presumably they know their business, have correctly assessed public opinion, and will act when the opportunity arrives.  After so much dithering for so long, decisive proposals might clear the air like a sudden thunderstorm.  Implementation might occur with astonishing speed.

(3)  Austerity as a leash (or lash) to reform Europe (and America)

You never want a serious crisis to go to waste. … Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before."
—Rahm Emanuel (President Obama’s chief of staff) to a  conference of CEOs in November 2008. From an interview in the Wall Street Journal.

Whatever their plans to reform Europe’s economy, the crisis als0 provides an opportunity to reshape its political and social structures. Many economists see Europe’s austerity programs as incomprehensible, given austerity’s long history of failure (ie, ineffective or actually harmful). This ignores the beneficial aspects of austerity programs: their effectiveness as a leash or lash to force changes. Such as reducing the power of unions, reducing the social safety nets, and eliminating laws that force some degree of equality in the relations between employees and employers.

First they plan for the mutually reenforcing combination of austerity and a long economic downturn to work its magic, allowing “reforms for growth”.  But doing nothing that upsets the oligarchy that rules most of Europe’s nations.  For example, Greece has almost no functioning tax system. That must and will change.  Shopkeepers will pay their fair share; but will its rich do so?

Also, power might shift from Europe’s national democratic institutions to the elite-dominated EU machinery.

Only then will the necessary changes be made to address Europe’s structural problems, such as the lack of a true central bank and unbalanced competitiveness between regions.

“What does that get us?  A discontented, lazy rabble instead of a thrifty working class.  And all because a few starry-eyed dreamers like Peter Bailey stir them up and fill their heads with a lot of impossible ideas.”
– Mr. Henry F. Potter, leading banker and first citizen of Potterville, discussing America’s social safety net

(4)  Are Europe’s leaders insane, like their predecessors in WWI?

“Insanity is repeating the same mistakes and expecting different results.”
— Step 2: A Promise of Hope by James Jensen, by the Hazelden Foundation for Alcoholics Anonymous (1980). Available at Google Books.

The above analysis implies that Europe’s political leaders clearly see the situation and have crafted effective plans.  Consider an alternative: they are insane (in an operational but not clinical sense).  As in WWI, perhaps they refuse to see either the failure of their tactics or the cost in wrecked lives.  Instead they regard these ruined lives as downpayments to eventual success in a great project.

If so, they will continue to meet each crisis with tinkering until the terminal crash that forces a paradigm change to Europe’s vision of itself.

“The enemy undoubtedly has been severely shaken and he has few reserves in hand.”
— Said by General Haig (Commander in Chief of the British Expeditionary Force, aka “Butcher Haig”) on 1 July 1916: day one to the Battle of the Somme. Of the 100 thousand troops who attacked, 20 thousand were killed and 40 thousand were wounded. Haig’s optimism was unfounded; the eventual toll would be 624 thousand UK & French casualties.

Reference Links:

1.  The periphery of Europe – a flashpoint to the global economy, 8 February 2010
2.  Governments cannot go bankrupt, 2 April 2010 — But they can default.
3.  About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
4. The Fate of Europe, nearing the point of decision, 13 September 2011
5.  Europe drifts towards the brink of a cataclysm, 26 September 2011
6. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
7.  Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
8.  Today Europe’s leaders took another step towards the edge of the cliff,27 October 2011
9. Where to from here, Europe?  Some experts share their views., 8 November 2011
10.  Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
11.  Looking ahead to see the new shape of Europe, 22 November 2011
12.  Europe passes the last exit.  A great crisis lies ahead., 21 February 2012
13.  The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012

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