Photo above: The Hertford Bridge in Oxford, England. Used by Permission. © Tom Ley 01302 782837

Monday, May 10, 2010

Can Europe Save Itself?

Dr. Douglas O. Walker
Robertson School of Government

"Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity."

William Butler Yeats (1919)

In a recent speech to the Council on Foreign Relations, Jean-Claude Trichet, President of the European Central Bank, called for strengthening “global governance” to deal with financial problems that now plague Europe and other more economically advanced countries of the West. In his view, the existing set of rules, institutions, informal groupings and cooperation mechanisms are not adequate to the great problems now before the world economy.

Those international agencies concerned with the governance of the international capital flows, in particular, must be strengthened in order to improve the resilience of the global financial system and deal with the unknown and unpredictable impact short term capital movements have on the domestic stability of even the largest of the world's economies. Given the very high degree of interdependency that now characterizes the international economy, Trichet believes a stronger framework for global governance would yield better crisis management, especially if emerging economies could be brought into the process of global decision-making.

Without question, economic policy in the case of Europe has been turning and turning in a widening gyre with little to show for the efforts of the policy-makers at the ECB in terms of an improvement in the economies or the finances of the region. Indeed, policy throughout Europe has been late and ineffective, and Germany at the center, for all its economic power and financial strength, cannot hold back the more than 100,000 Greek protestors now rioting at the edge of the eurozone. Trichet and the other leaders of Europe are beginning to realize that the EU is falling apart, with anarchy in the streets of Greece and utter confusion in the policy-making offices and board rooms of its governments and banks. Their innocence drowned by The Fatal Conceit, the best of Europe lack the conviction of their heritage while the worse call louder and louder for a bailout that, in the end, is merely a stay of execution and not a pardon from the harsh demands to be made on each and every European. Yeats would not be surprised by the events and reaction of the best and the worst in Europe, and he would understand that the promises made by a privileged elite mean little to those who must bear the burden of their decisions.

Like many who have devoted their lives to the study and practice of international finance, Trichet is a true believer in European integration and coordination -- indeed, the setting -- of macroeconomic policy at the international level. He and other leaders in the European community are determined to see the EU and the Eurozone succeed as a mechanism of supranational governance. For them, it is an article of faith that, somehow, people in authority far removed from a problem and not directly involved in creating it can best set the policy course for overcoming it. To them, national problems necessarily require supranational solutions. Even this is not enough. Not content with the results of efforts toward greater European integration, from his speech we can now conclude Trichet thinks that the failures of the Eurozone can only be remedied by asking the next level of international authority to solve the problems the EU created for itself.

This of course is nonsense. If Europe is to be "saved", no one but the Europeans can save it. The reason European leaders are failing in this responsibility is that they have abdicated their role as leaders. The call for global governance is simply an acknowledgement of their own failure to lead and an insistence that others (read the IMF or the UN or the "international community") make the difficult decisions they were elected to make. They know very well Europe has been living well beyond its means and yet is unwilling to change in the face of the reality that the welfare state they erected is not sustainable and never was. Europe was built on a peace imposed and paid for by the United States through a half-century of Cold War and intra-European tensions. This allowed Europe to focus on its internal development as it cut back on its defense expenditures and built up its welfare state. All of Europe adopted universal health care, introduced a shorter workweek and longer vacations, a higher minimum wage with greater job security, and earlier retirements and generous pensions. All that mattered to the self-focused Europeans was consumption, supported by overspending and overborrowing. Europe never built the necessary capacity to sustain the generous entitlements and large public sector its appetite demanded, and it refused to acknowledge the disastrous incentives toward self-destruction it was building into its economy and polity.

Over time, in response to these incentives, an ever-increasing share of the labor force left the private sector for the security of the public sector and its less demanding job requirements. Special interests grabbed hold of the public purse in the name of “the poor and the elderly and the needy” and efforts to bring “fairness” to the distribution of income resulted in large-scale and expensive entitlements and a shrinking share of the population acting as taxpayers. Contraception, the pill, abortion on demand, and the greater acceptance of homosexuality brought with it lower natality and nuptiality and rising illegitimacy, and with failed family formation many children raised in single parent households without the needed direction of both a father and a mother. Large-scale immigration, combined with a cowardice to defend European culture, further sapped vitality from the Europeans.

In this environment, European political and social cultures declined markedly as its population aged and the young abandoned the faith and ideals of their forefathers. The demands on the public sector for unemployment insurance, old-age assistance and publically provided health care rose while its ability to meet those demands fell. Fiscal deficits widened as the willingness to pay for government programs shrank. Now the crisis is at hand. It is too late to save Greece, which will have to undergo severe hardships as its unemployment soars, public benefits are slashed, taxes become oppressive, and the economy declines markedly. Europe is scurrying to cobble together a rescue package to support the other highly indebted countries of the EU, that is to say, a rescue package designed to bail out German and French banks, which hold massive amounts of Greek debt. If the German and French financial systems collapse, there is no possible way to avoid a deep and long-lasting worldwide depression.

It is important to realize that however difficult the proximate and pressing economic and financial problems before Europe are they must be seen as mere reflections of much more fundamental troubles rooted in its declining culture and its unwillingness to defend itself and its civilization. Europe and the EU and its monetary union can of course be saved, if that is what the people of Europe really want. But if it is to overcome the crisis now at hand, Europe must take charge of its own faith and reject the call of Trichet and other European leaders for global governance as a substitute for its own need to sacrifice in defense of its own future. If the present leadership of Europe refuses to make the difficult decisions necessary to save Europe, they should step aside and make way for a new generation of Europeans committed to restoring the grand culture and authentic and true faith that brought it to greatness in the past.

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