Europe Is Burning, Slowly

shutterstockmonWalter Russell Mead reports: I just spent two weeks traveling across Europe, visiting France, Italy, Germany, and Romania. Everywhere I went, people wanted to talk about Washington’s dispiriting budget shenanigans, the European implications of the “pivot to Asia” and the mess in the Middle East. But while the Europeans are more or less united on the subject of America’s shortcomings (they like Obama but don’t think his foreign policy is working well, they hate and fear the Tea Party, and they just don’t understand why we do what we do about guns and health care), it was on the subject of Europe that I found them the most divided.

In Italy, I heard from a range of people: industrialists, foreign policy thinkers and policymakers, and journalists. One message came through loud and clear. The Italians feel caught in a cruel trap; the euro is killing them but they don’t see any alternative. When a German visitor gave the conventional Berlin view (the southern countries got themselves into trouble by bad policy, and austerity is the only way out; budget discipline and cutting labor costs are the only way Italy can once again prosper), a roomful of Italians practically jumped on the table to denounce his approach.

The Italian position is basically this: it’s crazy to blame Italy or the other southern countries (except Greece, which nobody seems to like very much) for the euromess; Germany played a huge role in designing the poorly functioning euro system in the first place and remains its chief beneficiary. When German banks lent billions to Spanish real estate developers and hoovered up the bonds of southern countries, where were the German bank regulators? German politicians, say the Italians, don’t want to admit to their voters that incompetent German bankers and incompetent German bank regulators wrecked the German financial system by making stupid loans worth hundreds of billions of euros. In a “normal” world, German politicians would have to go to their taxpayers to fund a huge bailout of insolvent German banks thanks to their cretinous euro-lending. Pain would be more equitably distributed between borrowers and lenders.

From an Italian point of view, much of Europe’s austerity isn’t the result of German moral principles; Italians think that a cynical absence of moral principles led the German political class to scapegoat garlic-eating foreigners in a desperate attempt to prevent the voters from noticing just how recklessly incompetent the German elite really is. Germany is using the mechanisms of the euro to force southern governments to bail out German (and French and other northern) banks at immense social pain and economic cost. The Italians, even sensible and moderate ones who want to cooperate with Europe, totally reject the logical and moral foundations of the German approach to the crisis, and they feel zero gratitude or obligation to make life easier for Germany as the drama unfolds.

Many of the Italians with whom I spoke also thought that the euro was too high, and that this was an additional complicating factor for Italian business. Italy’s prime markets—the domestic market and the markets of neighboring countries—have been gut shot by European austerity demands, and the high euro makes Italian exports uncompetitive beyond the eurozone and increases the attraction of, for example, Chinese goods to cash strapped customers in Italy and elsewhere in the zone. With all this as a background, the Italian businessmen I met were extremely interested in the proposed Atlantic free trade zone; they are desperate for anything that would give their enterprises a little bit of hope.

Small business in Italy is in even worse shape than big companies. Italian small business can scarcely get credit at any price, and interest rates for the lucky few able to borrow are often three times as high as the rates that businesses in Germany pay.

Now that the ECB is providing enough liquidity to keep the European financial system on an even keel from month to month, the rest of the world is losing interest in the slow moving European economic situation. We aren’t seeing scare headlines about bank runs anymore, and we aren’t watching bond rates of crisis-hit countries run up to astronomical levels. A lot of people have made a lot of money betting on returning stability in European financial markets in the past two years.

But we should not ignore the continual weakening of the bonds that hold Europe together as the long agony of the eurozone grinds on. It’s not just that many Italians now loathe what they see as arrogant German posturing and that many people in the two countries live in completely different mental universes with radically different interpretations of recent history. As I traveled through Europe I felt that both foreign and domestic issues are pulling Europeans away from each other. There was less excitement about the prospect of building a united Europe than I’ve seen in the past, and more of a sense of nations following their own interests without expecting much support or help from their EU partners.

In France, the people I spoke with worried about the rise of the National Front. According to some polls the ultra-right could emerge as the biggest party in France in the next round of regional and European elections. The French Socialists under the increasingly unpopular President Hollande don’t seem to have much idea about how to move forward; their most popular politician at the moment is a Minister of the Interior who is trying to compete with the National Front for the anti-immigrant vote by breaking up encampments of Roma and denouncing them as immigrants who don’t want to assimilate.

For Americans who don’t follow Eurospeak, “Roma” is the current preferred term to describe the people formerly known as gypsies. There are more than a million mostly impoverished and uneducated Roma in Bulgaria and Romania, many now free for the first time to head west. In Europe today, it is considered unspeakably rude to call these people “gypsies” even as prominent politicians in several countries call for police raids to break up their living settlements and deport them. Calling them gypsies or other names is a sign of racism and no one will do that; breaking up their encampments is called “populism,” and politicians will do it when the electoral calculus is right. Meanwhile, in Romania, people worry that calling gypsies Roma will lead to more prejudice against “real” Romanians across the EU.

So the French socialists are hoping to head off the National Front by preemptively bashing the Roma. (If we don’t bash you mildly, then the people who really hate you will bash you a lot.) It’s not surprising that the socialists are flailing about looking for popular policies. With the next budget subject to inspection by the redoubtable Olli Rehn (a Finn who heads Europe’s new budget process), and with all available taxes already pretty much raised to the max, France’s socialists don’t have many good domestic policy choices left as they look for new cuts.

(One of the reasons Europeans are so fearful of the Tea Party is that they assume that because it is right wing and populist it is like the National Front in France or Golden Dawn in Greece. Today’s small government American Tea Partiers are much farther from Huey Long and Father Coughlin in their political views than some European right wingers are from the darker demagogues of Europe’s bloody past, and until the European establishments understand this, they will likely continue to misjudge the state of American politics.)

If there’s a baseline French approach to Europe, as far as I can make out it seems to be to nudge the Brits out and then bring the strength of the Club Med countries to bear on Germany and the remaining northern countries to shift the EU to a more Latin approach to political economy. This, some hope, would create a tighter, less liberal European Union that could fight effectively for French interests on the global level and would be more favorable to French interests and priorities at home. There’s a certain logic to this vision. The steps necessary to prop up the eurozone involve the kind of centralization most likely to drive the Brits out, and at that point the balance of power in the EU might well shift from Berlin back toward Paris.

There are many people in France who understand the desperate need for economic reform, but there are many more who would rather reshape Europe than reorganize France. The dream that a united and strong Europe can work effectively at the global level to beat back the forces of “Anglo-Saxon capitalism” is nowhere near dead.

Some battles to expect as the French move down this road: they will resist the efforts of Europeans seeking to craft attractive offers aimed at encouraging a “yes” vote on the expected British referendum on EU membership, and they will dig in their heels on the transatlantic trade talks now under way. The French fear that a transatlantic trade agreement will cement “liberal” economic and regulatory policies on Europe; they will fight this kind of development with all the skill and wiliness they can muster.

On foreign policy the French feel isolated in Europe. They are much more worried about jihadi violence and political unrest in the Middle East than the Germans seem to be. They resent that their expenditures in Mali—where they are fighting Islamist rebels in what they see as an operation that protects all of Europe—aren’t getting much support or respect from other EU members. Germany is not only failing to support France in Mali, they observe; the costs of France’s Mali expedition will add to the French spending counted against the European Union’s strict deficit levels. And several people mentioned to me that France fears that a big shock could be brewing in the Arab world. Algeria’s President Bouteflika is older and sicker than ever, and for both economic and political reasons the French fear the spread of instability and violence to the most important of the North African states. They fear that neither Germany, supremely uninterested in the Mediterranean and unwilling to go there, nor the United States will be ready to do anything if Algeria begins sliding toward chaos. Given France’s immigration patterns and its economic connections with Algeria, serious trouble in Algeria would be much worse for France that the problems in Syria or Libya.

In Germany, things are complicated. It’s not clear what the new government will look like or even what its priorities will be. Most people think that a “black-red” coalition between the Christian Democrats and Christian Social Union on the one hand and the Social Democrats on the other would take a slightly less hawkish stand on European financial matters—but still won’t want to spend more German taxpayer’s money on “unworthy” Greeks and “ungrateful” Italians than is absolutely necessary. Discussions of a European banking union, under which governments across the eurozone would be jointly responsible for the bank problems in all member countries, look like a major point of contention. The Germans do notwant a banking union that could end up with Germans forced to dip into the kitty to support failed or mismanaged banks across the eurozone; nor does the German political class welcome the kind of pan-European bank regulation that would scrutinize Germany’s somewhat dodgy but politically well connected state banks connected to the governments of federal Germany’s powerful states.

There are Germans who sympathize with the Italian critique of EU austerity policy, but Germans on the whole seem to feel that in pushing a tough reform agenda in Europe, and linking further payments and bailouts to that reform agenda, they are doing their neighbors a favor. They sincerely believe that their own relatively strong economic performance is the result of their willingness to accept some liberalizing reforms coupled with a commitment to fiscal prudence. They think that by exporting this model they are helping other European countries on the path to lasting prosperity, and they believe that with some patience, the other European countries will soon begin to experience the benefits of German-style economic reform.

Despite French fears of isolation, there are some very smart Germans who think a lot about the Middle East. (Support Morocco is the advice I heard from some of them, and despite French fears, there is at least some German awareness that Algeria could be the next bomb to go off, and that this would be a very bad thing if it were to happen.) But the Germans don’t look at the Middle East through quite the same lenses that the British and the French use; in particular Germany does not seem as concerned about or responsive to the opinions of the Gulf monarchies. Those countries channel a lot of money through the City of London and are good customers for many things that important French companies build. While Germany has commercial ties with the Gulf, its historic links with the Middle East are more toward Turkey and Iran. The Mediterranean feels farther away from Berlin than it does from Paris—and Moscow and Warsaw feel much closer. Berlin is pulling out all the stops to align Ukraine with the EU and against Russia’s effort to rebuild a rival Eurasian bloc; Paris seems pretty “meh” about Ukraine, but really wanted European support for military action in Syria.

Energy pulls France south and Germany east; that is one of the basic realities in the EU today that undermines the EU’s ability to develop and project a coherent and forceful foreign policy. Germany wants Russian gas and oil, and it also wants to check Russia’s ability to use its energy resources as a geopolitical tool. Berlin is only an hour’s drive from Poland, and Germany is deeply engaged with the Scandinavians, the Baltic republics and other easterners for whom relations with Russia are both difficult and important. Germany doesn’t want a quarrel with Russia, but Moscow’s habit of playing games with energy supplies and its evident tendencies to bully smaller neighbors have forced the Germans into a more vigilant stance than they prefer.

For France, the eastern fringes of the EU are a long way off and frankly not very interesting. Latvia and Moldova don’t figure largely into the fashion industry’s expansion plans, and North Africa is better positioned than Siberia to meet France’s energy needs.

On UK membership, the Germans are as irritated as the French by cries of British exceptionalism and the constant demands for special treatment and exemptions. Germans also (and especially members of the SPD) blame reckless lending by the loosely regulated London financial sector for the financial crisis. But from a German point of view, the French can also be vain and irritating partners. The German method seems to be to accept the shortcomings of its partners—things that cannot be changed—and nevertheless work patiently and systematically to find a way forward. Germany still wants a united Europe and it still wants compromises that will keep the French and the British in the same boat. It does not want the kind of EU the French would like to see, and as a strong exporting economy it is more interested in a transatlantic trade deal than France. From Berlin, it appears that keeping Britain in the EU will offer a balance to French protectionism and state-centric ideas.

What all this seems to be suggesting is that at least right now the two things that ought to be pulling Europeans together if they were really headed toward building a much stronger union—money and foreign policy—are instead pulling them apart. The creation of the euro is responsible for more hatred and suspicion among Europeans than any other event since World War Two, and the bloc seems unable to agree on an international strategy.

Over the decades, many English-speaking analysts have looked at phenomena like these and predicted that the European experiment would ultimately fall apart. That seems unlikely to me. In spite of their differences and their quarrels most Europeans—and especially most of the elites in those countries—are much too committed to the “European Project” to let it break up. Many economists looked at the deep design flaws of the euro, for example, and predicted that this unwieldy currency would never get off the ground. Those skeptics were right that the euro wouldn’t work well, but they underestimated the depth of the commitment to putting the euro in place, disaster or not.

These days, the euro is held up partly by sheer political will, but partly also by the sober realization that the pain of dismantling the currency would be intense under the best of circumstances and that the political and economic issues involved would make it impossible to get out of the euro adroitly. Europe is a very wealthy continent and if it wants a common currency it has the wherewithal to pay for one for a long time to come.

I can imagine a future in which the EU resumes a steady progress toward an “ever closer union,” but it seems more likely at this point that we can expect it to look more and more like the Holy Roman Empire in its prime: a complicated assemblage of many different kinds of states, with a weak executive and legislature, a somewhat stronger judiciary, and a great many offices and authorities that work in their own way and time.

If things work out along these lines, I would expect the euro to muddle along, but perhaps with many forms of parallel money operating in the nooks and crannies of the system. Ingenious workarounds would mitigate the strict official rules as smart lawyers and accountants worked through the treaties in search of loopholes. The currency union would be like an unhappy Italian marriage in the old days: no divorce or official breakup, but mistresses on the side. This would be an expensive and messy system, and it might well permanently slow Europe’s growth, but a flawed currency union could limp along for a long time.

EU foreign policy would also be more of the same. Germany would work on German issues from a German perspective, and France would continue to focus on the Mediterranean. On issues where there was a European consensus, the EU foreign office would play a more significant role, but Brussels would have no power to impose a foreign policy on the stronger member states.

Developing in this way would not make Europe a completely ineffective power. Americans should not forget that the divided and squabbling EU is on the cusp of decisively frustrating Putin’s geopolitical ambitions. Between detaching Ukraine from Russia’s new customs union and hacking at Gazprom’s position through the application of European antitrust law, the EU is in the process of wrecking Russia’s hopes to rebuild its standing as a world power. Europe’s importance as a market gives it real leverage in world affairs, even if its institutional design and its internal divisions sometimes weaken its hand.

If the future of European foreign policy is more of the same, America is likely to find Europe a sometimes frustrating but basically positive force. (Europeans are likely to view the United States in much the same way.) This would not be a Europe that would grow as a military power, or be a forceful ally on a range of global issues. Nevertheless, US and EU interests would often be reasonably closely aligned and Europe will still matter even if EU institutions aren’t particularly strong. Resisting Russian expansionism and seeking stability in the Mediterranean are US goals as well. Europe might be, from an American point of view, flabby and indecisive, but its heart would mostly be in the right place. And while Europe might not be a dynamo of economic innovation and growth, it would remain a very rich and attractive market and a source of investment capital.

All this is modestly encouraging, and I returned from Europe feeling that if the US and Europe remain doomed to disappoint one another’s greatest hopes, the basic Atlantic partnership looks durable and sound. But there’s a caveat. The bitter public feelings generated by the euro crisis and its long, painful aftermath are still working their slow and ugly way through the European political system. In country after country we are seeing steady gains by political movements that bear a superficial resemblance to the American Tea Party, but in fact flirt much more with the kind of dangerous nationalist and chauvinist ideas that have proven so destructive in Europe’s past.

The Germans are betting the ranch on the hope that the Italians and others can and will reform enough to make the euro viable before patience in the north and south runs out. They are willing to put more money into the system than they have yet done — but aren’t willing to cut Club Med much slack on reforms that they deem truly essential.

Meanwhile, the good ship Euro sails tragically on. We aren’t looking at anything as spectacular as a shipwreck: Europe is becalmed in the horse latitudes rather than striking an iceberg. It is seething rather than sinking, but while that means there is no immediate danger of a financial crash (barring external shocks), it also means that there aren’t many chances for a quick improvement in its economic condition.

This isn’t good news. The longer the euro crisis blights the lives of the rising generation of Europeans, the more we must worry about the political health of countries like Hungary, Greece, the Balkan states and even France. And as the political culture inside different European countries continues to erode, the difficulties in the path of European integration will be harder to overcome.

Via Meadia

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