"Will Nationalism in Europe Trump Unity?"
Sydney M. Williams
The natural tendency for those whose job or inclination is to make predictions is to extrapolate recent experiences. Thus, for a skeptical reader of predictions it is important to understand the circumstances in which they are made. Europe, in that regard, represents a conundrum. While political leaders like Angela Merkel are doing what they can to maintain a common currency, an increasing number of pundits have joined Niall Ferguson in predicting its failure.
Martin Wolf wrote in Wednesday’s Financial Times, that a failure would mean Germany, the engine of Europe’s economy, would experience soaring exchange rates, a massive decline in exports and a sharp fall in GDP. Through their export-dominated economy, Germany has been the principal beneficiary of the Euro. The global slump has kept all interest rates relatively low and they have profited from a currency kept down because of the PIIGs nations. They would be a significant victim should it fail. Besides the impact on their economy, as Mr. Wolf elucidates, the effect on their banks would be damaging, as they carry loans that would have to be written down substantially. Should the Euro fail, which seems at least a possibility, markets would become chaotic. In that eventuality, creditors will suffer alongside debtors.
Recently, Poland’s Finance Minister Jasek Rostowski warned that the European Union would be unable to withstand a breakup of the Eurozone. Such an event, he suggested, could make wars in Europe imaginable again. While it is hard to conceive that such a seemingly impossibility could become reality, it is worth recalling the attitudes as the “long Edwardian summer” was coming to an end in 1914 Europe. A few years earlier, in 1902, the American economist John Bates Clark wrote an essay imagining himself in 2002 looking back over the century. He wrote that only the uninformed would predict war, “as if nations bound together by such economic ties as now unite the countries of the world would ever disrupt the great industrial organism and begin fighting.” The American economist Irving Fisher infamously agreed with him, writing in early 1914 that there would be no war, because the nations were economically as one.
George Friedman, in the September 13 issue of Stratfor, raised the question: “Does Greece or Portugal really want to give Germany a blank check to export what it wants with it, or would they prefer managed trade under their control?” The deeper worry for Mr. Friedman, though, is nationalism. In the same essay, he writes: “European nationalism has always had a deeper engine than simply love of one’s own. It is also rooted in the resentment of others.” The consequences have been wars that have swept across the continent for centuries. “Historically,” Friedman adds, “the Europeans have hated well.”
When a country (just like an individual) gets in over their head financially there is no simple or painless exit. Bankruptcy, default or a work-out are the only options. In all cases, bondholders suffer. And, of course, skeptical creditors will be slow to extend future credit and, when and if they do, will demand higher rates. A work-out or default without bankruptcy implies that income must go to debt repayment, rather than for investment to fuel future economic growth. The effect is not dissimilar to the U.S. where deleveraging has been the principal cause of slow U.S. economic growth. In a world in which goods and money chase one another around the globe, it is in everybody’s interest that the crisis gets resolved; so it is unsurprising that both Germany and France have been sounding out that Greece will remain in the Eurozone. It is also not a surprise that the BRIC nations are debating possible Eurozone aid. But it is also true that none of these nations are naive. Like Shakespeare’s Shylock in Merchant of Venice, they will demand their “pound of flesh.”
Despite the fact that the crisis in Europe has been going on for some time, it is only now beginning to impact the lives of their citizens. The FT reported yesterday that Mr. Papandreou is expected to announce further reductions in public sector workers next year, suggesting they may lay off another 40,000. To put that number in perspective, that would be the equivalent of the U.S. laying off about 1.2 million employees – an event, while necessary, that will unlikely occur quietly. You can bet that angry Greeks will lay the blame not on themselves or their own government which indulged their demands, but on the Germans and the French – another match striking the timber that is nationalism.
This refusal to accept the inevitability of change, which will manifest itself in increased poverty and perhaps lessened civil rights, is seen in the strikes that plague many European nations. It is the fear that nationalism may trump acceptance of a new normal in incomes and living standards for the vast majority of people that risks anger turning to defiance and defiance turning to arms.
The best news regarding Europe, unlike a century ago, is that very few are speaking in the rosy terms they were a century ago. A hundred years ago Europe had experienced four decades of peace (since the Franco-Prussian War in 1870-71) and the British had not had armies in Europe since the Napoleonic Wars ended at Waterloo in 1815. The Twentieth Century was the most costly, in terms of human life and dollars, the world has ever known. That fact has made us more cynical. Cassandra-like, not Panglossian, would better describe most economic and financial commentators today. That is not to say a failure of the Euro would not have repercussions. It would. But it is also possible that a German-centric Euro might lend strength.
The recent deep economic recession and near credit collapse have magnified weaknesses in the European Union and the Eurozone. Importantly, these events have affected our psyche and therefore our predictions. We are conditioned for bad news. A rise in nationalism does seem inevitable, but it may be no more than growing pains. While it bears watching, it certainly does not necessarily end in armed conflict. Historically, common currencies have never come quickly or without conflict. In the United States, it did not happen until the conclusion of the Civil War. It certainly seems possible that the composition of Eurozone members may change, but it does not seem to me that its end is written on the wind.
Thought of the Day
“Will Nationalism in Europe Trump Unity?”
September 15, 2011The natural tendency for those whose job or inclination is to make predictions is to extrapolate recent experiences. Thus, for a skeptical reader of predictions it is important to understand the circumstances in which they are made. Europe, in that regard, represents a conundrum. While political leaders like Angela Merkel are doing what they can to maintain a common currency, an increasing number of pundits have joined Niall Ferguson in predicting its failure.
Martin Wolf wrote in Wednesday’s Financial Times, that a failure would mean Germany, the engine of Europe’s economy, would experience soaring exchange rates, a massive decline in exports and a sharp fall in GDP. Through their export-dominated economy, Germany has been the principal beneficiary of the Euro. The global slump has kept all interest rates relatively low and they have profited from a currency kept down because of the PIIGs nations. They would be a significant victim should it fail. Besides the impact on their economy, as Mr. Wolf elucidates, the effect on their banks would be damaging, as they carry loans that would have to be written down substantially. Should the Euro fail, which seems at least a possibility, markets would become chaotic. In that eventuality, creditors will suffer alongside debtors.
Recently, Poland’s Finance Minister Jasek Rostowski warned that the European Union would be unable to withstand a breakup of the Eurozone. Such an event, he suggested, could make wars in Europe imaginable again. While it is hard to conceive that such a seemingly impossibility could become reality, it is worth recalling the attitudes as the “long Edwardian summer” was coming to an end in 1914 Europe. A few years earlier, in 1902, the American economist John Bates Clark wrote an essay imagining himself in 2002 looking back over the century. He wrote that only the uninformed would predict war, “as if nations bound together by such economic ties as now unite the countries of the world would ever disrupt the great industrial organism and begin fighting.” The American economist Irving Fisher infamously agreed with him, writing in early 1914 that there would be no war, because the nations were economically as one.
George Friedman, in the September 13 issue of Stratfor, raised the question: “Does Greece or Portugal really want to give Germany a blank check to export what it wants with it, or would they prefer managed trade under their control?” The deeper worry for Mr. Friedman, though, is nationalism. In the same essay, he writes: “European nationalism has always had a deeper engine than simply love of one’s own. It is also rooted in the resentment of others.” The consequences have been wars that have swept across the continent for centuries. “Historically,” Friedman adds, “the Europeans have hated well.”
When a country (just like an individual) gets in over their head financially there is no simple or painless exit. Bankruptcy, default or a work-out are the only options. In all cases, bondholders suffer. And, of course, skeptical creditors will be slow to extend future credit and, when and if they do, will demand higher rates. A work-out or default without bankruptcy implies that income must go to debt repayment, rather than for investment to fuel future economic growth. The effect is not dissimilar to the U.S. where deleveraging has been the principal cause of slow U.S. economic growth. In a world in which goods and money chase one another around the globe, it is in everybody’s interest that the crisis gets resolved; so it is unsurprising that both Germany and France have been sounding out that Greece will remain in the Eurozone. It is also not a surprise that the BRIC nations are debating possible Eurozone aid. But it is also true that none of these nations are naive. Like Shakespeare’s Shylock in Merchant of Venice, they will demand their “pound of flesh.”
Despite the fact that the crisis in Europe has been going on for some time, it is only now beginning to impact the lives of their citizens. The FT reported yesterday that Mr. Papandreou is expected to announce further reductions in public sector workers next year, suggesting they may lay off another 40,000. To put that number in perspective, that would be the equivalent of the U.S. laying off about 1.2 million employees – an event, while necessary, that will unlikely occur quietly. You can bet that angry Greeks will lay the blame not on themselves or their own government which indulged their demands, but on the Germans and the French – another match striking the timber that is nationalism.
This refusal to accept the inevitability of change, which will manifest itself in increased poverty and perhaps lessened civil rights, is seen in the strikes that plague many European nations. It is the fear that nationalism may trump acceptance of a new normal in incomes and living standards for the vast majority of people that risks anger turning to defiance and defiance turning to arms.
The best news regarding Europe, unlike a century ago, is that very few are speaking in the rosy terms they were a century ago. A hundred years ago Europe had experienced four decades of peace (since the Franco-Prussian War in 1870-71) and the British had not had armies in Europe since the Napoleonic Wars ended at Waterloo in 1815. The Twentieth Century was the most costly, in terms of human life and dollars, the world has ever known. That fact has made us more cynical. Cassandra-like, not Panglossian, would better describe most economic and financial commentators today. That is not to say a failure of the Euro would not have repercussions. It would. But it is also possible that a German-centric Euro might lend strength.
The recent deep economic recession and near credit collapse have magnified weaknesses in the European Union and the Eurozone. Importantly, these events have affected our psyche and therefore our predictions. We are conditioned for bad news. A rise in nationalism does seem inevitable, but it may be no more than growing pains. While it bears watching, it certainly does not necessarily end in armed conflict. Historically, common currencies have never come quickly or without conflict. In the United States, it did not happen until the conclusion of the Civil War. It certainly seems possible that the composition of Eurozone members may change, but it does not seem to me that its end is written on the wind.
Labels: TOTD
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