By John C. Dyer, UK Correspondent
I suffer from writer’s block recently. It is not the lack of subject matter. It is the abundance and complexity of stories with momentous stakes. I struggle to portray any one in less than a book composed of sentences that defy fog quotient.
The biggest news maker among them is the Eurozone. Once again markets and leaders within and without the Eurozone pile pressure on Germany and France in advance of a scheduled meeting of Eurozone leaders later this week. Leaders and analysts declare as if from script “only 7 days to save the Euro” (a reference to the upcoming meeting), just as leaders and analysts declared a couple months back “only 6 weeks to save the Euro” prior to the last meeting. That meeting failed to achieve what the analysts and leaders advocated. Angela Merkel warned not to expect anything quick, but the pressure mounts.
How an amorphous “market” can form a script I must leave to historians and conspiracy buffs. But whether orchestrated or spontaneous, the markets ratcheted up rhetoric and interest rates on sovereign debt. Reporters from BBC to Reuters interpreted this as a signal that “the markets” want a “credible” plan and mechanism to “finally, once and for all, restore confidence.” That plan and mechanism is fiscal union with a “big bazooka” bailout fund, coupled with “austerity” or, alternatively phrased, “fiscal discipline.”
On 5 December German Chancellor Angela Merkel and French President Nicholas Sarcozy announced the measures they will propose to the other members at Friday’s meeting. Simply because they propose these measures does not mean they will be adopted or the only measures that are adopted. But, the measures proposed do not appear to offer a “big bazooka.” The translation job was difficult to follow, but the following measures appeared to be agreed by the two figures:
- A New Treaty between 17 Eurozone members, not 27 European members.
- Future changes to require only 85% approval of 17 instead of 100% of 27.
- Deficits capped at 3% of GDP.
- Constitutional changes in each country to require balanced budgets in the future.
- Unspecified sanctions for failure to balance to the figure.
- Sanctions NOT administered by European Court.
- NO Euro Bonds.
- NO Big Bazooka (large bailout fund). Unspecified sized EMF fund.
- But also, NO further "controlled defaults" ala Greece.
- European Central Bank (ECB) will be encouraged to act but not required.
The stakes are high.
Economists differ on the value of austerity, the big bazooka, and fiscal union. But there is an almost universal consensus that the Eurozone has a serious problem that, if it remains unsolved, may collapse the economies of the Zone. Such a collapse would also threaten, in order of immediacy, the economies of the UK and the US, and even have a knock on effect in China and India.
The UK is particularly vulnerable, having for 300 years increasingly put all of its eggs in the basket of The City (London’s financial district). The Eurozone collectively owes The City a great deal of money.
Although everyone seems to recognize the stakes, the political leadership faces a social-political “Kobayashi Maru,” especially in Germany and the UK.
Kobayashi Maru = No Win
For those of you who are not Star Trek fans, the Kobayashi Maru is the “no win scenario.” In Star Trek Kobayashi Maru is an exercise designed to force the Academy Plebe to face fear and responsibility. But the rebellious and imaginative Kirk refuses to accept such a scenario. This test becomes a major narrative theme, challenging Kirk to every greater acts of courage and imagination. My personal favourite is the Slingshot Maneuver. In the Slingshot Maneuver Kirk orders the Enterprise around the sun at light speed at the edge of no return from the sun’s gravity, propelling the ship into time travel. The ultimate escape from the ultimate dilemma.
Germany has gained most from the Eurozone, including from the very dysfunction in its design. A principle designer, Jacques Delors, recently spelled out that dysfunction in an interview with the Daily Telegraph (which interestingly published only a small portion of the interview, imagine that). The Eurozone amalgamated trade and currency among unequal partners of dissimilar socio-economic systems without requiring a common political superstructure to govern the effect of these dissimilarities. This created creditor nations (Germany) who benefited by the spending habits of debtor nations (Italy and Greece).
But it also created a millstone of debt that weighed down the currency.
Germany wants the great benefits to continue, but does not want to be saddled with the debt of the spending nations. Chancellor Merkel understands that Germany needs the Eurozone to survive and along with France, the two are creditor nations which must bail out the debtors in order for the Eurozone to survive. But the Chancellor also “gets” that public opinion is not very happy with the idea. Many have felt free to expose the hypocrisy of the German position, but that does not change the intensity of the dilemma.
The UK’s Prime Minister and Chancellor also have a political-social Kobayashi Maru.
The City is deep into the Eurozone. A disaster for the Eurozone would be a disaster for The City, and therefore, the City and the Prime Minister reason, the UK’s fragile economy, already at the brink of the “d” word. Indeed, with 40% of what exports the UK can manage purchased by the Eurozone, a failure of the Eurozone would be very bad for the UK economy as well as The City.
But as important as the effect on the country, the displeasure of The City is important to the Prime Minister. The City pays the Tory bills. The Prime Minister and Chancellor have not hesitated to tell the Eurozone how to solve its problem, and the British public how important it is to the UK for the Eurozone to survive.
However, much of the country and much of the Prime Minister’s party want the UK out of the European Union. Long term Euroskeptics relish pointing at the current situation in the Eurozone (of which the UK is not a member) as vindication of their position on the European Union (in which the UK is a member). The Prime Minister has already faced a back bench rebellion on this issue this year. As the pressure on the Eurozone ratchets up leading into next week’s meeting, the rebellion within the Tory Party is once again surfacing, and UKIP, whose reason for being is hostility to the European Union, is growing in public support.
Consequently the Prime Minister has made it as clear as political wiggle room allows that the UK is not going to contribute to the “big bazooka” he so very publicly demands the Eurozone create. Germany and France have not failed to point out the hypocrisy of the British position, nor to ratchet up counter pressure on The City and the Prime Minister by implying that a UK that does not want to help (IE, contribute money to the “big bazooka”) may be left out of the benefits once the Eurozone solves its problems. The Prime Minister certainly has been left to flutter anxiously on the sidelines, his advice very publicly rejected by Eurozone leaders.
This political dilemma within the UK confronts a politically vulnerable Prime Minister. The Coalition, without which the Prime Minister and Tories would not have gained power, includes the Liberal Democrats. The Liberal Democrats are staunchly pro-European Union. They are already stretched to the limits of patience by the nastier elements of Tory instincts. They seem in no mood to indulge Tory Right Wing Euro-bashing.
I have written previously about the dangers this divide over Europe in the Tory Party and the Coalition partners presents to 1) the continuation of not only the Coalition but Tory grasp on power, and 2) the existence of a consensus that can govern in the UK. I won’t repeat the analysis now. Suffice it to say the Prime Minister faces a distinct no win scenario.
The Eurozone presents the United States with an economic danger similar, if less intense, to that which it presents to the UK. It may not present the same political danger, but the geo-political problem is very serious.
Some news analysts in the UK (and those wishing to enlist the influence of the United States) have tried to link Obama’s political future to Eurozone success in solving its issues. But I wonder how serious the political risk really is.
Obama's political future tied to Eurozone success? Maybe not
From a distance it appears despite all the blah, blah and conventional wisdom that economic troubles doom incumbents, the GOP seems poised to snatch defeat from the jaws of victory. The slate of want to be contenders more resembles Snow White and the 7 dwarfs than the proverbial man on a white horse. The GOP can only pray a Dwight Eisenhower emerges. Perhaps that is why that perennial want to be, General Clark, was sighted nosing around the last GOP debate.
The politics of the lesser of a dozen evils aside, the economics are just not that clear either. First, it is by no means obvious that a breakup of the Eurozone would translate into serious economic disadvantage to the purchasers of US products. Second, it is not clear if any disadvantage to them is an overall disadvantage to the competitive position of the United States.
Third, it is abundantly clear that it is not in the interests of the US economy to buy in to the Eurozone austerity programme. The US appears to be doing better following its own course, and even were the current hopeful signs to evaporate, the US last year did better than its European counterparts by following its own plan.
But on the geo-political level the danger is nothing short of grave.
The US has been able to forge in Europe an alliance that has enabled the US to project power and protect its interests well beyond its sole capabilities. An economic disaster in Europe would leave the US, already approaching $15 trillion in debt due significantly in part to its international military adventures, feeling like it had lost its left flank. Because the US would have.
The picture for China is not nearly so clearly disadvantageous.
A Eurozone collapse could present bumps to the Chinese boom, but on the other hand, it also presents opportunities, both political and economic. China always takes the long view. Its greatest advantage. Perhaps that is why both China, like Brazil, has made it clear that the markets mustn’t count on them to save the day by loaning large sums of money to the Eurozone while the Eurozone remains structured as is.
China has made it clear it will help as it is mutually advantageous. But it has not been coy about requiring terms. Specifically China has made it clear Europeans must accept working longer hours for less, a refrain both France and Germany have picked up. Although France and Germany dutifully parrot the formula, China remains coy about putting up the money.
It remains unclear whether China is playing a waiting game for economic advantage (IE, better terms for its help) or political (IE, be nice to Mother China), or even, as some fear, geo-political (picking up the pieces in the global game of Risk). But whatever its’ motivations, China, like Brazil, is hanging back.
India? India seems to have perfected the art of disappearing in plain sight.
In the meantime, no Kirk emerges in Europe.
Although austerity failed, drove Europe from recession into depression (although the commentators have not officially blessed the term), and most of the world’s credible macro economists have so shouted for months, Germany remains committed to “fiscal discipline,” translated austerity. Commentators spill much ink analyzing the roots of this attitude in Lutheran doctrine equating debt with sin. But the deep seated reasons are for historians to sort out. The plain and simple is, Germany won’t consider fiscal union without fiscal discipline. End of Story.
The future is always difficult to predict. We have a hard enough time understanding the present. But seven things are clear to me as the inevitable grinds into the impossible: 1) beware, political as well as economic earthquakes and tsunamis still lie ahead, 2) free trade and risk finance not accompanied with regulation and a superstructure to enforce them is dangerous, 3) the West must reverse the current dynamic that the markets dictate government policy if the West is to recover, 4) reducing Western workers to Chinese pay standards will complete the devastation of the West, 5) a democratic society divided against itself and its poor cannot long endure as a democracy, 6) a “Yugoslavia” model solution to the Eurozone crisis will fail for the same reasons Yugoslavia failed, and 7) nothing less than a Slingshot Maneuver will rescue the West from the damage we in the West have caused- and are causing- itself.
Related WhirledView posts on this topic by John C Dyer:
The Tory Right Undermines the Coalition in its Hour of Triumph, November 21, 2011
Reality Check: Is David Cameron’s Government Poised to Explode, Not Yet, November 1, 2011
Was the EU’s Referendum Vote the Tories Bunker Hill, October 27, 2011