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Thread: Niall Ferguson: "Why E.U. collapse is more likely than the fall of the euro" and "The New Europe"

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    Default Niall Ferguson: "Why E.U. collapse is more likely than the fall of the euro" and "The New Europe"

    Why E.U. collapse is more likely than the fall of the euro

    European politics has become a giant Jenga game. Since June 2010 governments have fallen in the Netherlands, Slovakia, Belgium, Ireland, Finland, Portugal, Slovenia, Greece and Italy.

    The question is not: Who will be next? That’s easy. (Spain’s Socialist government will be pulverized in this weekend’s elections.) The real question is: When will the Jenga tower topple?

    Many people assume that the tipping point will come when one country — most likely Greece — leaves or is ejected from Europe’s monetary union. But the scenario that worries Eurocrats is different. They fear that a country could leave the European Union itself.

    This is by no means an irrational anxiety. Under E.U. law, it would be much easier for Britain to leave the European Union than for Greece to leave the euro zone.

    Thus the process of European integration has reached a richly ironic point: The breakdown of the European Union is now more likely than the collapse of the single currency that was supposed to bind it together.

    This is not surprising. In March 2000, Larry Kotlikoff and I wrote in Foreign Affairs, “History offers few examples of successful adjustments on the scale necessary in certain European countries today. What it does offer are several examples of monetary unions disintegrating when fiscal strains became incompatible with the unpleasant arithmetic of a single currency.” The euro, we predicted, “could degenerate — not overnight, but within the next decade.”

    Our timing was not bad. The degeneration of the single currency began in 2010, though the crisis has certainly intensified in recent months.

    We specified “degeneration” to highlight the generational imbalances arising from Europe’s combination of aging populations and over-generous welfare systems. Even if there had been no financial crisis emanating from the U.S. subprime mortgage crisis that began in 2007, the European monetary system would still have degenerated as public debts soared.

    But we also struggled to see how, once assembled, the euro zone could be dismantled. The costs of exit would be prohibitive for a small peripheral country such as Greece, which would overnight lose access to any source of external credit. And a Greek departure would raise the probability of others leaving, causing contagion throughout Southern Europe.

    Finally, if all the weaker brethren were to leave the monetary union except Germany, Austria, the Netherlands and Finland, the strengthening of the euro would cause significant pain to the exporters of those countries. In short, almost nobody would gain from a breakup of the euro zone.

    This is why I am not among the growing throng of pundits predicting the degeneration of the euro — a number of whom argued with equal self-confidence a dozen years ago that the euro would be a great success.

    Anyone who closely followed events of the 1990s had a clear idea of what a monetary union with the Federal Republic of Germany would entail: short-term spending power but long-term unemployment mitigated by handouts.

    Some doubt that German taxpayers will be as ready to pay doles to Lesbos and Livorno as they were to pay doles to Leipzig. But if the alternative is a breakup of the euro zone, they will do it. Chancellor Angela Merkel made that clear Monday when she urged her Christian Democrats to accept “not less Europe but more. . . . That means creating a Europe that ensures that the euro has a future. Our responsibility no longer stops at our countries’ borders.”

    Those betting on a euro breakup believe that the inflation-phobic Germans will never permit large-scale bond purchases by the European Central Bank — the policy known in the United States as quantitative easing. But this needs to happen to bail out not only the Mediterranean governments but also insolvent banks — including German banks — throughout the euro zone.

    In short, the European monetary union survives, albeit with a gloomy future of higher unemployment for southern Europe and higher taxes for the North.

    But the fate of the European Union itself will be very different. The creation of the single currency — obeying the law of unintended consequences — set in motion a powerful process of European disintegration. The fact that not all 27 E.U. members joined the monetary union was its first manifestation. Today we have a two-tier system, with 17 member-states sharing the euro, but 10 other states — notably Britain — retaining their own currencies.

    The result is that key decisions today — particularly those about the scale of transfers from core nations to the periphery — are being made by the 17, not the 27. But the 10 non-euro members may still find themselves on the hook to help fund whatever combination of bailout, haircut and bank recapitalization the 17 decide on. They may also face more stringent financial regulation or a financial transaction tax, ideas that are much more popular in Berlin than in London.

    This is an unsustainable imbalance. If the euro countries are intent on going down the road to federalism — and they don’t have a better alternative — the non-euro countries will face a stark choice: giving up monetary sovereignty or accepting the role of second-class citizens within the E.U.

    Under these circumstances, the logic of continued British membership in the E.U. looks less and less persuasive. British public opinion has long been deeply Euro-skeptic. If it came to a referendum, as many Conservatives would like, Britons might well vote to leave the E.U. And under Article 50 of the Treaty of European Union, withdrawal would simply need to be approved by a qualified majority of E.U. members.

    In the great game of European Jenga, most people expect the French government of Nicolas Sarkozy will fall next year. But the thing that could cause the European Union to topple, or at least shrink in size, would be the outright withdrawal of Britain. And that has started to look quite possible.

    Niall Ferguson, a professor of history at Harvard University, is most recently the author of “Civilization: The West and the Rest.”
    Washington Post

    The New Europe



    Map illustration by Peter Arkle

    'Life is still far from easy in the peripheral states of the United States of Europe (as the euro zone is now known).'


    Welcome to Europe, 2021. Ten years have elapsed since the great crisis of 2010-11, which claimed the scalps of no fewer than 10 governments, including Spain and France. Some things have stayed the same, but a lot has changed.

    The euro is still circulating, though banknotes are now seldom seen. (Indeed, the ease of electronic payments now makes some people wonder why creating a single European currency ever seemed worth the effort.) But Brussels has been abandoned as Europe's political headquarters. Vienna has been a great success.

    "There is something about the Habsburg legacy," explains the dynamic new Austrian Chancellor Marsha Radetzky. "It just seems to make multinational politics so much more fun."

    The Germans also like the new arrangements. "For some reason, we never felt very welcome in Belgium," recalls German Chancellor Reinhold Siegfried von Gotha-Dämmerung.

    Life is still far from easy in the peripheral states of the United States of Europe (as the euro zone is now known). Unemployment in Greece, Italy, Portugal and Spain has soared to 20%. But the creation of a new system of fiscal federalism in 2012 has ensured a steady stream of funds from the north European core.

    Like East Germans before them, South Europeans have grown accustomed to this trade-off. With a fifth of their region's population over 65 and a fifth unemployed, people have time to enjoy the good things in life. And there are plenty of euros to be made in this gray economy, working as maids or gardeners for the Germans, all of whom now have their second homes in the sunny south.

    The U.S.E. has actually gained some members. Lithuania and Latvia stuck to their plan of joining the euro, following the example of their neighbor Estonia. Poland, under the dynamic leadership of former Foreign Minister Radek Sikorski, did the same. These new countries are the poster children of the new Europe, attracting German investment with their flat taxes and relatively low wages.

    But other countries have left.

    David Cameron—now beginning his fourth term as British prime minister—thanks his lucky stars that, reluctantly yielding to pressure from the Euroskeptics in his own party, he decided to risk a referendum on EU membership. His Liberal Democrat coalition partners committed political suicide by joining Labour's disastrous "Yeah to Europe" campaign.

    Egged on by the pugnacious London tabloids, the public voted to leave by a margin of 59% to 41%, and then handed the Tories an absolute majority in the House of Commons. Freed from the red tape of Brussels, England is now the favored destination of Chinese foreign direct investment in Europe. And rich Chinese love their Chelsea apartments, not to mention their splendid Scottish shooting estates.

    In some ways this federal Europe would gladden the hearts of the founding fathers of European integration. At its heart is the Franco-German partnership launched by Jean Monnet and Robert Schuman in the 1950s. But the U.S.E. of 2021 is a very different thing from the European Union that fell apart in 2011.

    * * *
    It was fitting that the disintegration of the EU should be centered on the two great cradles of Western civilization, Athens and Rome. But George Papandreou and Silvio Berlusconi were by no means the first European leaders to fall victim to what might be called the curse of the euro.

    Since financial fear had started to spread through the euro zone in June 2010, no fewer than seven other governments had fallen: in the Netherlands, Slovakia, Belgium, Ireland, Finland, Portugal and Slovenia. The fact that nine governments fell in less than 18 months—with another soon to follow—was in itself remarkable.

    But not only had the euro become a government-killing machine. It was also fostering a new generation of populist movements, like the Dutch Party for Freedom and the True Finns. Belgium was on the verge of splitting in two. The very structures of European politics were breaking down.

    Who would be next? The answer was obvious. After the election of Nov. 20, 2011, the Spanish prime minister, José Luis Rodríguez Zapatero, stepped down. His defeat was such a foregone conclusion that he had decided the previous April not to bother seeking re-election.

    And after him? The next leader in the crosshairs was the French president, Nicolas Sarkozy, who was up for re-election the following April.

    The question on everyone's minds back in November 2011 was whether Europe's monetary union—so painstakingly created in the 1990s—was about to collapse. Many pundits thought so. Indeed, New York University's influential Nouriel Roubini argued that not only Greece but also Italy would have to leave—or be kicked out of—the euro zone.

    But if that had happened, it is hard to see how the single currency could have survived. The speculators would immediately have turned their attention to the banks in the next weakest link (probably Spain). Meanwhile, the departing countries would have found themselves even worse off than before. Overnight all of their banks and half of their nonfinancial corporations would have been rendered insolvent, with euro-denominated liabilities but drachma or lira assets.

    Restoring the old currencies also would have been ruinously expensive at a time of already chronic deficits. New borrowing would have been impossible to finance other than by printing money. These countries would quickly have found themselves in an inflationary tailspin that would have negated any benefits of devaluation.

    For all these reasons, I never seriously expected the euro zone to break up. To my mind, it seemed much more likely that the currency would survive—but that the European Union would disintegrate. After all, there was no legal mechanism for a country like Greece to leave the monetary union. But under the Lisbon Treaty's special article 50, a member state could leave the EU. And that is precisely what the British did.

    * * *
    Britain got lucky. Accidentally, because of a personal feud between Tony Blair and Gordon Brown, the United Kingdom didn't join the euro zone after Labour came to power in 1997. As a result, the U.K. was spared what would have been an economic calamity when the financial crisis struck.

    With a fiscal position little better than most of the Mediterranean countries' and a far larger banking system than in any other European economy, Britain with the euro would have been Ireland to the power of eight. Instead, the Bank of England was able to pursue an aggressively expansionary policy. Zero rates, quantitative easing and devaluation greatly mitigated the pain and allowed the "Iron Chancellor" George Osborne to get ahead of the bond markets with pre-emptive austerity. A better advertisement for the benefits of national autonomy would have been hard to devise.

    At the beginning of David Cameron's premiership in 2010, there had been fears that the United Kingdom might break up. But the financial crisis put the Scots off independence; small countries had fared abysmally. And in 2013, in a historical twist only a few die-hard Ulster Unionists had dreamt possible, the Republic of Ireland's voters opted to exchange the austerity of the U.S.E. for the prosperity of the U.K. Postsectarian Irishmen celebrated their citizenship in a Reunited Kingdom of Great Britain and Ireland with the slogan: "Better Brits Than Brussels."

    Another thing no one had anticipated in 2011 was developments in Scandinavia. Inspired by the True Finns in Helsinki, the Swedes and Danes—who had never joined the euro—refused to accept the German proposal for a "transfer union" to bail out Southern Europe. When the energy-rich Norwegians suggested a five-country Norse League, bringing in Iceland, too, the proposal struck a chord.

    The new arrangements are not especially popular in Germany, admittedly. But unlike in other countries, from the Netherlands to Hungary, any kind of populist politics continues to be verboten in Germany. The attempt to launch a "True Germans" party (Die wahren Deutschen) fizzled out amid the usual charges of neo-Nazism.

    The defeat of Angela Merkel's coalition in 2013 came as no surprise following the German banking crisis of the previous year. Taxpayers were up in arms about Ms. Merkel's decision to bail out Deutsche Bank, despite the fact that Deutsche's loans to the ill-fated European Financial Stability Fund had been made at her government's behest. The German public was simply fed up with bailing out bankers. "Occupy Frankfurt" won.

    Yet the opposition Social Democrats essentially pursued the same policies as before, only with more pro-European conviction. It was the SPD that pushed through the treaty revision that created the European Finance Funding Office (fondly referred to in the British press as "EffOff"), effectively a European Treasury Department to be based in Vienna.

    It was the SPD that positively welcomed the departure of the awkward Brits and Scandinavians, persuading the remaining 21 countries to join Germany in a new federal United States of Europe under the Treaty of Potsdam in 2014. With the accession of the six remaining former Yugoslav states—Bosnia, Croatia, Kosovo, Macedonia, Montenegro and Serbia—total membership in the U.S.E. rose to 28, one more than in the precrisis EU. With the separation of Flanders and Wallonia, the total rose to 29.

    Crucially, too, it was the SPD that whitewashed the actions of Mario Draghi, the Italian banker who had become president of the European Central Bank in early November 2011. Mr. Draghi went far beyond his mandate in the massive indirect buying of Italian and Spanish bonds that so dramatically ended the bond-market crisis just weeks after he took office. In effect, he turned the ECB into a lender of last resort for governments.

    But Mr. Draghi's brand of quantitative easing had the great merit of working. Expanding the ECB balance sheet put a floor under asset prices and restored confidence in the entire European financial system, much as had happened in the U.S. in 2009. As Mr. Draghi said in an interview in December 2011, "The euro could only be saved by printing it."

    So the European monetary union did not fall apart, despite the dire predictions of the pundits in late 2011. On the contrary, in 2021 the euro is being used by more countries than before the crisis.

    As accession talks begin with Ukraine, German officials talk excitedly about a future Treaty of Yalta, dividing Eastern Europe anew into Russian and European spheres of influence. One source close to Chancellor Gotha-Dämmerung joked last week: "We don't mind the Russians having the pipelines, so long as we get to keep the Black Sea beaches."

    ***
    On reflection, it was perhaps just as well that the euro was saved. A complete disintegration of the euro zone, with all the monetary chaos that it would have entailed, might have had some nasty unintended consequences. It was easy to forget, amid the febrile machinations that ousted Messrs. Papandreou and Berlusconi, that even more dramatic events were unfolding on the other side of the Mediterranean.

    Back then, in 2011, there were still those who believed that North Africa and the Middle East were entering a bright new era of democracy. But from the vantage point of 2021, such optimism seems almost incomprehensible.

    The events of 2012 shook not just Europe but the whole world. The Israeli attack on Iran's nuclear facilities threw a lit match into the powder keg of the "Arab Spring." Iran counterattacked through its allies in Gaza and Lebanon.

    Having failed to veto the Israeli action, the U.S. once again sat in the back seat, offering minimal assistance and trying vainly to keep the Straits of Hormuz open without firing a shot in anger. (When the entire crew of an American battleship was captured and held hostage by Iran's Revolutionary Guards, President Obama's slim chance of re-election evaporated.)

    Turkey seized the moment to take the Iranian side, while at the same time repudiating Atatürk's separation of the Turkish state from Islam. Emboldened by election victory, the Muslim Brotherhood seized the reins of power in Egypt, repudiating its country's peace treaty with Israel. The king of Jordan had little option but to follow suit. The Saudis seethed but could hardly be seen to back Israel, devoutly though they wished to avoid a nuclear Iran.

    Israel was entirely isolated. The U.S. was otherwise engaged as President Mitt Romney focused on his Bain Capital-style "restructuring" of the federal government's balance sheet.

    It was in the nick of time that the United States of Europe intervened to prevent the scenario that Germans in particular dreaded: a desperate Israeli resort to nuclear arms. Speaking from the U.S.E. Foreign Ministry's handsome new headquarters in the Ringstrasse, the European President Karl von Habsburg explained on Al Jazeera: "First, we were worried about the effect of another oil price hike on our beloved euro. But above all we were afraid of having radioactive fallout on our favorite resorts."

    Looking back on the previous 10 years, Mr. von Habsburg—still known to close associates by his royal title of Archduke Karl of Austria—could justly feel proud. Not only had the euro survived. Somehow, just a century after his grandfather's deposition, the Habsburg Empire had reconstituted itself as the United States of Europe.

    Small wonder the British and the Scandinavians preferred to call it the Wholly German Empire.

    —Mr. Ferguson is a professor of history at Harvard University and the author of "Civilization: The West and the Rest," published this month by Penguin Press.
    Wall Street Journal
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    Before the financial crisis there was a buzz in Germany that David Cameron was a dangerous Little Englander that would destroy the European Union. That seemed laughable then, but now...

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    This is by no means an irrational anxiety. Under E.U. law, it would be much easier for Britain to leave the European Union than for Greece to leave the euro zone.
    Britain leaving would allow Germany to bring about a federal Europe as they desire and would cut us free from EU diktats and plundering.

    The result is that key decisions today — particularly those about the scale of transfers from core nations to the periphery — are being made by the 17, not the 27.
    The Euro currency should be independent of the EU instead of treated as its official currency when 10 states don't even use it.

    But the 10 non-euro members may still find themselves on the hook to help fund whatever combination of bailout, haircut and bank recapitalization the 17 decide on. They may also face more stringent financial regulation or a financial transaction tax, ideas that are much more popular in Berlin than in London.
    Which are the main reasons for the disagreement between Britain and Germany at the moment. Why the hell should the ten members who were wise enough not to join and stated their opposition have to prop it up.
    Germany and France with their big ideas made wretched currency, many advised them against it but they liked playing with dominoes.
    A collapse of the Eurozone would of course hurt the non-Euro members but it would likewise hurt America or China or Russia and yet they aren't told they must help bail it out.

    "Better Brits Than Brussels."


    Before the financial crisis there was a buzz in Germany that David Cameron was a dangerous Little Englander that would destroy the European Union. That seemed laughable then, but now...
    He's not a little Englander, he is actually one of the few heads of state in the EU actually looking out for his own country's interests.
    He actually went back on his word to give the UK a referendum on the EU and has been against withdrawing from it since he came to power. To suggest that he is some Little Englander who wants out of the EU is quite laughable.

    It's quite a disgusting situation really. Anyone who just happens to be English and against the EU suddenly becomes a "Little Englander" even if they are against it for all the right reasons.

    McCarthy, personally your interest in a united Europe is as a counterweight to the BRICS and as an ally to America. This is total rubbish, there is no guarantee for a start that a united Europe would ally with America - if anything a united Europe could actually free itself of American interference more effectively or even turn against America.
    Not only that but it is also morally bankrupt, that you'd put the welfare of the individual states second to your ideas about how Euro-American geopolitics should work in the future.
    European states get used as pawns via a united Europe to keep the balance of power in a way which benefits American ideas of how the world should be.

    I don't know if Europe would federate, Russia for a start would try to undermine any attempts as such a federation could be easily used by America.
    Some states in the east, Scandinavia and of course Britain would also be against it.
    But with Germany and France it is hard to call.

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    The US relationship to Europe is underpinned by American military power, the basis of its hegemony. The same Niall Ferguson has noted that the EU is unlikely ever to become a serious geopolitical rival to the US, because to do so it'd need a military, which is unlikely to happen for a number of reasons. The only real way the EU could turn on the US is as an ally of Russia, and there are far too many political differences, particularly in the view toward democracy, for that to occur. If you notice, the Russophiles are inevitably hostile to or lukewarm toward democracy.

    Even in the US certain states get soaked at the expense of others. It's no different than the EU. In the EU though there is enough of a sense of the 'other' to make it noticeable and a cause of resentment.

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    Since June 2010 governments have fallen in the Netherlands, Slovakia, Belgium, Ireland, Finland, Portugal, Slovenia, Greece and Italy.
    Excuse me?

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    Quote Originally Posted by Eldritch View Post
    Excuse me?
    It's largely a fictional "what if". "Since June" could refer to anywhere in the future I suppose.

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    Quote Originally Posted by Eldritch View Post
    Excuse me?
    We also don't have 20% unemployment like it says on the text:

    Unemployment in Greece, Italy, Portugal and Spain has soared to 20%.
    My conclusion is: Wall Street Journal = made up crap.

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    Quote Originally Posted by AlexDelarge View Post
    My conclusion is: Wall Street Journal = made up crap.
    Well, there goes another one then. The BBC already went earlier this year.

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