The end of European exceptionalism?

by | May 10, 2010 | Cooperation and coherence, Economics and development, Europe and Central Asia, Global system, Influence and networks, South Asia

While there’s a lot of talk about the sheer size of the EU stability package agreed yesterday, doubts are already mounting about how much good it can do – as David describes below.  A familiar theme is coming through a lot of today’s analysis: the Eurogroup’s ability to react to future crises is still seriously compromised by its lack of real fiscal and political unity. Here’s Wolfgang Munchau:

This deal is going to be ineffective beyond the very short term, unless it is followed up by substantive reforms – the introduction of a single European bond, an agenda to co-ordinate economic reforms with specific relevance for the monetary union, policies to reduce economic imbalances, much tighter supervision of fiscal policies that kick in well before budgets have already been announced, and, in my view also a kernel of a fiscal union – in essence all the things over which the EU has been, and still is, in denial.

Ouch. Over at the Economist, Charlemagne rams the point home:

Is this the start of a fiscal union or political union, a great leap forwards in EU integration? I have been saying for ages that I did not sense such a leap in integration, and I stick to that. I think political will is increasing, but it is in the direction of intergovernmentalism, not federalism. In fact, as a wise colleague pointed out to me just now, this crisis has actually shattered the idea that the eurozone as a whole is a single unit. It is, in his words, the return of country risk, as markets test and probe the credit-worthiness of each member.

Another striking factor is that, like the Greek bailout, the new stability package offers the IMF a big role in propping up the Eurozone.  As I note in a short piece for Global Europe today, this is not what eurozone purists hoped for:

On Sunday, the International Monetary Fund’s board signed off on its part of the Greek bailout — a cool €30 billion, nearly a third of the total. The IMF’s involvement is arguably essential to securing the markets’ confidence in the deal and to reassuring the European governments providing the rest of the cash. It may be the only institution hard-hearted enough to hold the Greeks to account or turn up the heat if they start to go astray.

But if the IMF’s presence is reassuring, it’s also rather embarrassing for the EU. Two months ago Germany, France and the European Central Bank were against any major IMF role in Greece. The idea of an organization traditionally dominated by the U.S. propping up a Eurozone member (and so the Euro) was too much to bear. That was then.

Now there’s recognition that the EU simply can’t match the IMF’s experience in disciplining dysfunctional economies — not to mention ignoring the street protests this often involves. While European finance ministers discussed a “stabilization mechanism” to fend off future crises this weekend, this also relies on a promise of further funding from the IMF, potentially passing €200 billion. It would be an exceedingly confident EU or IMF official who entirely ruled out another IMF intervention in southern Europe this year.

All of which raises deep and difficult questions about the EU’s place in the world:

The Greek bailout marks a blow to European exceptionalism: the idea that the Union, although a friend of multilateral institutions like the IMF and UN worldwide, can run its own affairs without these organizations’ assistance (or interference).

This annoys many African, Asian and Latin American observers who complain that the EU urges them to do what multilateral organizations tell them on everything from finances to human rights. They’ve taken some grim satisfaction from events in Greece.

Pramit Pal Chauduri, a commentator for India’s Hindustan Times, summarized his view of Europe’s Mediterranean economies with a quotation from an African diplomat based in Switzerland: “Africa begins south of Geneva. The southern Europeans are just like us.”

Europe’s zombie countries

by | May 10, 2010 | Economics and development, Europe and Central Asia


It was a momentous weekend in Brussels, as the European Union struggled to get to grips with the latest episode in the long financial crisis.

Fascinating to see how close it all came to the wire. At midnight, journalists milling around outside the negotiating room were wondering whether “good-quality farmland in neutral, wealthy countries” would be the best place to stash their money if the Euro collapsed.

When the package was finally announced, they were astounded by its size. “We have numbers, and they are much larger than promised,” wrote the Economist’s Charlemagne at 3 am this morning. “We are in shock and awe territory here.” Markets have been duly impressed (it will be interesting to see if this holds as analysts dig into the fine print).

At best however, the deal is a stopgap . There’s been a consensus for months now that Greece will be unable to avoid an eventual restructuring of its debt (hopefully, a planned default). Many believe the same holds for some, or all, of the other PIGS (Ricardo Cabral for one, or Morgan Stanley’s Paolo Batori for another).

My question for Europe’s finance ministers – will you now get ahead of the curve on the Eurozone’s chronic problems, or are you going to drift towards another crisis?

In the wake of Japan’s lost decade, it became fashionable for the British media to excoriate the Japanese government for failing to deal with its zombie banks (and the zombie companies on their balance sheets that had consigned the financial system to the realms of the living dead).

In 2002, the Economist bemoaned ‘the sadness of Japan‘:

From the Japanese government, there will be strenuous efforts to claim that reform is under way, that problems are being solved, that new measures are being considered. The claims will even be true, in a sense: there are plans aplenty, with stages and pillars and fine aspirations. But in a rather stronger sense they will be false: reforms are not being implemented, problems are not being solved, new measures are likely to make as little progress as the old ones. Japan is in a slow, so far genteel decline.

Perhaps the saddest thing is that there is nothing new about this. The turn in Japan’s fortunes began in 1990 with the crash in its stock and property markets, and then took firm hold in the mid-1990s when banks started to crumble and public borrowing lost its ability to keep the economy growing. As long ago as September 26th 1998, The Economist lamented on its cover about “Japan’s amazing ability to disappoint”.

But doesn’t Europe now have at least one zombie country in its midst- and possibly more (and zombie banks too, exposed to these countries’ debt)? And won’t the Eurozone continue to suffer almost indefinitely if it fails to take decisive action to take these countries through an orderly bankruptcy and get them back on a sustainable track?

(As an addendum, what about the UK? Could it become a zombie too? No. If markets stop funding British government debt, then the end will be swift. The IMF may ease the restructuring, but there’s no Eurozone for the UK to hide in. Relatedly, pre-election thoughts on how a Cameron-led government should deal with Europe, the economic crisis, and a volatile world.)

After the vote: negotiate first with your base

by | May 9, 2010 | UK

One lesson I took from from the Northern Irish peace process was that, when building a complex agreement, trouble results if any party forgets this rule: the first negotiation is with your own base.

Republicans understood this well:

Sinn Féin has emphasised that it is involved in a double negotiation – with its political opponents on the one hand, and with its supporters on the other. ‘For the IRA’s position to have been released or made public without its grassroots having had the opportunity to engage … would have been a total disaster,’ Gerry Adams has argued.

But David Trimble failed to keep his base on side, leading to a long period where Unionists were unable to project a credible position at the negotiating table. Their leaders weren’t taken seriously, because no-one could be sure who they were really speaking for.

Back in 2003, the British government was terrified that stalemate was allowing Ian Paisley’s hard liners to grab power – expecting this to lead to a titanic (and fruitless) ‘battle of the bottom lines’. Their pessimism was misplaced. The DUP was able to advance the talks, precisely because it had a much firmer bond with its own supporters.

How does this lesson apply to today’s post-election shake out in the UK?

Nick Clegg has been forced to by his party’s constitution to keep in close contact with his party – he needs 75% of MPs and 75% of the federal executive to approve any deal. He also went out onto the streets to talk directly to demonstrators backing PR.

[youtube]http://www.youtube.com/watch?v=vp_51lFvRvU[/youtube]

Clegg may end up failing to take his party with him – but at least he seems to be trying to keep them on board.

David Cameron, however, seems much more isolated. The Guardian, of course, has an enormous incentive to sow dissent on Tory ranks (it badly wants a Lib-Lab pact that leads to PR), but its account of rebellion within the Conservative Party has a ring of truth about it.

Most damaging was that not all the dissent came from the backbench MPs (who are said to have heard little from their whips). One ‘senior frontbencher’ was prepared to dish the dirt (off the record, of course):

He ran his campaign from the back of his Jaguar with a smug, smarmy little clique – people like Osborne, [Oliver] Letwin and Michael Gove. He should get rid of all of them. The party will settle for nothing less.

For Cameron, there’s an enormous attraction in binding his enemies, the Lib Dems (or as Alex prefers, ‘the frenemy‘) into a formal coalition. He can dump unpopular policies foisted on him by the grass roots, implicate his coalition partners in all the hard decisions about spending, and leave the Lib Dems too unpopular to ever win the argument on PR.

But he is making a big mistake if he gets out too far in front of his party. He’s going to need every single of his MPs to back his first Queen’s Speech. And he’ll then be vulnerable to any subsequent rebellion turning into a confidence issue.

And what about Labour? I wonder if here, too, the interests of the ruling Brownite clan diverge from those of a (currently silent) faction in the party.

Assume Brown goes, I simply cannot see how a new leader will have any legitimacy to lead a Lib-Lab coalition and take power as PM. For a start, there’d be a messy and lengthy succession process. After that the new leader would be damaged goods from the get-go – tarred with the ‘unelected’ brush that so damaged his (or her?) predecessor.

Maybe, maybe, they might hope to wait out the storm that would accompany them taking office and wait for better economic times to heal the wounds – but they’d have a referendum on PR to fight, and that – as I argued last week – could well get ugly.

Surely better to head into opposition with a decent share of the seats and fight a government that – whether its Tory minority or LibCon – will struggle with some of the hardest political decisions of a generation.

But Gordon Brown has no incentive at all to see things that way – opening up a gulf between the leader and a party he still (just about) leads…

[Read the rest of our After the Vote series.]