Is This June 1940 All Over Again?

Rome, Italy. 5 December. I am back in Rome, the eternal city, under new management facing a €30 billion austerity plan. Rome, that is, not me.

Niccolo Machiavelli, that great sixteenth century Florentine strategist once said that “...every type of government...should consider beforehand what adverse times may befall him and on what people it may have to rely in times of adversity, and should in its dealings with them act in a way in which it judges that it will be compelled to act should misfortune befall”. As €-Day approaches, 9 December, 2011, there is a lot of ‘befalling’ going on at present. Make no mistake, at this week’s Euro-Armageddon Summit a new power map of Europe will be drawn.

The failure of Europe’s institutions to cope with Euro-stress is leading to a power shift of historic proportions as a new/old balance of power re-asserts itself. It will be a Europe of a winner and losers, of ‘ins and outs’, of creditors and debtors. Even if enacted in the name of the European Union paradoxically forced integration could well mark the beginning of its end. Listening to some of the rhetoric flying around got me thinking; are we facing the economic equivalent of June 1940?

Germany is dominant (by default – no master plan), France subordinated, Britain isolated and puppet governments installed in both Greece and here in Italy. For a historian it all has a very familiar ring to it. There are some anomalies. Polish Foreign Minister Radek Sikorski has told Britain that, “we would prefer you in, but if you can’t join please allow us to forge ahead”. Minister Sikorski once accused me across a Washington table of being too pro-European. Politicians are always ‘pragmatists’ with principle. And, I really wonder if the Polish people identify as readily as He does with His ‘we’ and His ‘us’?

Of more consequence Chancellor Merkel has said rather ominously that “politics has failed” in Europe. Steady, Chancellor. And, President Sarkozy has called for a new EU treaty “re-founding and rethinking the organisation of Europe”. Meanwhile, out-manoeuvred British Prime Minister Cameron has said at one and the same time that a) if the greatest British-marginalising shift in European power politics since 1945 takes place outside a new treaty Britain is happy to acquiesce in its own demise (Churchill is spinning in his grave); whilst b) murmuring darkly that “Britain will defend its national interests” in the wake of last Friday’s failed Paris meeting with Sarkozy.

Two scenarios are likely to emerge from 9 December. Scenario one would see a new German-led core operating at the expense of Europe’s periphery. The forced German-led hybrid integration that Merkel favours will see all the European debtor nations forced to accept a fiscal straightjacket under Berlin’s direction with France and the Commission providing a fig-leaf of legitimacy. In time there will be no alternative but to create a European Finance Ministry. In the absence of effective Europe-wide political oversight democracy will be progressively eroded to the point where the only election that really matters concerns who gets elected in Berlin.

In such a scenario the British will stay out and no doubt fight – politically. Over time London would probably slowly get its act together and begin to build a counter-coalition around Europe’s periphery and beyond and reconstitute old strategic relationships in pursuit of a new strategic end – the containment of German influence. London and Berlin would thus once again find themselves strategic political adversaries.

Scenario two would see Berlin reach out not only to Britain and the EU peripherals but also to those in the wider European Economic Area (EEA) in pursuit of a new pan-European political and economic settlement. Germany would express grave concern about the legitimacy of the Eurozone and the implicit dangers to democracy therein if Berlin is seen to lead overtly for too long. Berlin might even suggest national parliamentarians replace Euro MPs in the European Parliament as part of a new European Constitution (yes, it will return). Euro-MPs are so far distant from the European peoples the X-Factor has more political legitimacy than they do.

Critical will be the relationship between London and Berlin because Germany understands that there are many Europeans within the Eurozone deeply disturbed by Germany’s power and Britain’s exclusion. If Berlin can do a deal with London then that will ensure the all-important strategic reassurance both Berlin and Europe needs to legitimise the profound change from which there is now no escape. Strategic reassurance would also be reinforced if Britain and France together strengthened their leadership of European defence. To that end, London needs to raise its strategically-illiterate, Treasury-driven eyes from the current account balance sheet and recognise that in its armed forces it possesses its one of two tools of critical strategic influence. The other being the City of London.

For Britain this moment is defining. After years of drift and spin the strategic incompetence of its political and bureaucratic elite has left London faced with the most awful set of choices since 1940 when all it could do was fight on at great cost or surrender. If the Eurozone integrates the British economy will escape mass destruction, but British influence in and over Europe will be non-existent and Britain will be reduced to a second-class European state and we British second class European citizens. If the Euro collapses Britain’s influence will be strengthened ,but only over an economically-devastated Europe.

So, is it time to dust of the Spitfires? Certainly, the crisis is leading to old reflexes as Europe’s post-war institutions fail under Euro-stress. And, as an Englishman there is something deep, beguiling and tempting about standing on the White Cliffs of Dover, shaking my fist and bellowing defiantly, “very well, alone then”. But such a fantasy must be resisted – that was then and this is now.

December 2011 is not June 1940 and we need to ensure it does not become so. No, whilst similar power relations can be implied by the shift that has taken place it is important to limit references to Europe’s destructive past. It is most certainly a power struggle but the use of power today is very different. What we need is legitimate and shared grand strategy, the effective organisation of huge means in pursuit of an urgent end. Sadly, what we will I fear get is grand tactics; badly organised and insufficient means leading to a disastrous end.

Therefore, we must all be vigilant but avoid the stereotypes of history that stress always provokes. Otherwise, we may in time be condemned to relive our history and I would not wish that on anyone. For as Machiavelli said, “...in the actions of men, when there is no court of appeal, one judges by the result”. Today, Machiavelli might have added the actions of women...one woman.

Julian Lindley-French

€-Day: Just How Broke Are We Europeans?

Oslo, Norway. 2 December. €-Day approacheth and with it the Onion’s day of reckoning. Norway is not in the EU and yet strangely there is no visible sign that civilisation is about to collapse. Quite the reverse! Indeed, it is nice to be in a country that works. Being a once vaguely red-haired Yorkshireman Viking blood courses of course through my veins. That explains a lot you say. Göll (battle cry), as we Vikings say.

Of course, being a small country (population 4.9 million) with large natural resources helps. Even accounting for depletion Norway controls some 54% of North Sea oil reserves and 45% of gas reserves. More importantly the Norwegians have used the oil and gas bonanza sensibly for when Oslo can no longer call upon nature’s bounty. This sits in stark contrast with much of the rest of Europe which prompted me to pose a rather serious question at this rather serious moment; just how broke are we Europeans?

Someone should ask the question. British Chancer Osborne has just delivered his Autumn Suicide Note and the finance ministers of the Onion’s No-Go Zone met this week to fail to inject a trillion mythical and not enough Euros into the equally mythical European Financial Stability Fund (EFSF). Therefore, your faithful blogonaut pillaged six well-known havens of the dismal economics science to bring you the answer. The six dens of iniquity are in order of self-importance Euro stat, the Economist, the UK Office for National Statistics, Nation Master, the CIA (which knows everything, but tends to forget when it matters) and the Organisation for Extremely Careful Digits (OECD).

Right, pay attention. Apparently we must first distinguish between a national debt and a budget deficit. Still with me? The national debt is the accumulation of all budget deficits since the Battle of Trafalgar, or maybe even before (was there ever a ‘before’ Trafalgar?). The budget deficit, on the other hand, is the shortfall (for that read massive, gaping black hole) between what income a European government generates over a single year and what it spends. To me both seem pretty bad but then again I am only a Viking.

Now, according to Norse legend it is precisely the interaction between debt and deficit that is so exercising the Dark Lords of the Market Universe who seem so determined to bring the halls of Valhalla crashing down. They do this by lending their ill-gotten gains to the very politicians (the Dark Lords (and Lady) of the Political Underworld) who caused this mess in the first place. It is the no-longer electable in pursuit of the utterly corruptible.

Being a tad miffed the Dark Lords are hiking the cost of ‘their’ money to remind our Dear Leaders that they will have to pay for at least one lunch in their lives. Trapped in the middle are the so-called ‘squeezed’, you and me, who have to service the interest on innumerable, clearly innumerate and quite probably inebriate free lunches by paying more tax, selling off the state that apparently we use to own to someone else or having our savings crushed by the rapacious banks that caused this almighty mess in the first place.

So, Great Hammer of Thor, here are the facts! Let me start with the Americans by way of Euro-comparison. Johnny Yank now has a budget deficit of some $15 trillion or €11.3 trillion which is some 10.7% the size of the US economy with a national debt of 65.2%... Believe me that is big. So, the Yanks are loud, proud and broke, but I suspect we have not heard the last of those people and if anyone seriously expects them to pay they will be nuked – pay-back for the Americans will mean Armageddon. Go ahead, make my day!

Then there is that mythical island long spoken about around Viking fires. The British budget deficit will peak at around 12% of the size of the economy in 2011-12 (Europe’s largest). However, there is some debate over the size of the national debt. The CIA puts it at 59% the size of the economy, the UK’s Office for National Statistics at around 61%, whereas Eurostat has it at some 76.5% (the Euro-Aristocracy could never count properly). This is due mainly to disagreement about how the British account for defence expenditure. However, as I am not aware the British are any longer spending money on defence I will stick to the lower estimate. Either way Britain is broke, weak and confused. Situation normal, all fudged up. Keep calm and carry on.

The great fortress of the Dark Lady Germany has a budget deficit some 5.3% the size of the economy and a national debt at 57.4%. For some reason this apparently means the Germans are rich. However, Berlin has decided that as the centennial of the sinking of the Titanic is fast approaching (April 2012) a re-enactment will then take place. Berlin will sink the good ship Euro with a new treaty. Germany will thus not be rich for long. Meanwhile, Europe’s other ‘leader’ France has a budget deficit some 8% the size of the economy and a national debt at 85%. France is not of course broke but suddenly will be after next May’s presidential elections. Then paying off of French debt will be then deemed by Paris to be Europe’s historic duty. Nous sommes tous Europeens maintenant, mais vous devez payer! Thankfully, we Vikings control Normandy.

The ‘best’ of the Onion’s rest speak for themselves. Belgium has a budget deficit at 5.6% and a national debt some 85.4% the size of the economy. At the very heart of the Onion Belgium now has an historic opportunity to make Europe an image of itself; utterly broke, utterly divided with no effective government and doomed to fall apart unless by some miracle it can persuade all other EU states to scrap themselves and create a federal Europe. I suppose it is the time of seasonal good will and we are approaching Christmas and there are certainly enough turkeys around these days to vote for their own demise. Ireland meanwhile has a budget deficit of 12.2% with a national debt of 38%, which is an awful lot of Guinness. Dublin is thus broke but thankfully has a time-honoured alibi; blame the British.

And what about Club Med? Spain has a budget deficit of 8.5% and a national debt of 41.6% - good at football and tennis, sadly not so good at economics. Portugal has a budget deficit of 7.6% with a national debt of 62.6% with absolutely no means to pay it back. Hasta la vista, baby, or whatever the Portuguese equivalent. Meanwhile, Italy has a budget deficit of 5.4% but a national debt of 100.8% (one set of figures has it as high as 120%). Chaos reigns in a very broke Rome – so it is business as usual then. Meanwhile, the poor old Greeks will bear no gifts for many a Trojan moon. Athens faces a budget deficit of 9.8% and a national debt some 94.6% the size of the economy.

Norway? The Norwegians have a budget surplus (yes a surplus) some 11% the size of the economy. And even though Oslo has a national debt some 60% the size of the economy it also has the world’s largest sovereign wealth fund.

So, just how broke are we Europeans?  Well and truly muggered! So, either Norway offers a fellow Viking asylum, or I invade.

Just call me Sven!

Julian Lindley-French

Does Germany Really Want to Save the Euro?

Vienna, Austria. 28 November. Does Germany really want to save the Euro? The great Austrian strategist Count Metternich once famously said that when Paris sneezes, Europe catches cold. Today, he would probably substitute Berlin for Paris.

I have just spent the weekend with close German friends in beautiful Vienna. The sense of pending doom was everywhere. Much of the blame for this was placed on the very narrow legalistic approach Chancellor Merkel has adopted in this crisis. Her focus on a ‘new treaty outside the treaty’ is seen as the financial equivalent of discussing patio design as the house burns.

The Euro may be beginning the death-dive from which it is unlikely to recover. The costs of Italian borrowing reached record highs last week, Belgian and Hungarian national debt was reduced to junk status and even a bond auction for mighty Germany flopped. And yet Berlin continues to insist on disaster-defying ‘red-lines’ that seemingly have little or nothing to do with the danger of the moment.

Vienna knows a thing or two about death dives. In the nineteenth century the death-dive of the Austro-Hungarian Empire led to the ‘shot that rang round the world’. By trying to hold onto a swathe of the Balkans its final dying act led indirectly to World War One.  It was the mother of all unintended consequences that swept the ruling Hapsburgs away. A relatively minor shock brought the whole rickety edifice crashing down. Just like the Euro today. In fact it was a miracle Austria-Hungary endured as long as it did. This was due to a mixture of luck, geopolitical convenience and a few able leaders and statesmen such as Count Metternich. Absent of any of the above and the empire’s fate was sealed.

However well-meaning Chancellor Merkel may be, ‘able’ is not a word I would associate with her leadership thus far of what is fast becoming an existential European crisis. The French and Germans last week failed to agree a common strategy and thus failed to reassure the markets. In a clear sign of the times my sources within the European Commission tell me the minor ‘nobility’ of the Euro-Aristocracy who work therein have been told to say nothing that might harm the Euro, whilst being encouraged to consider how best they might protect their own savings. Nice people. Of course, the rest of we Europeans are being left to the dogs. That is what aristocracies do at times of crisis – look after their own. It is the Brussels Onion at its very worst, and there are some who actually want these people to run our lives.

The thing about crises is that the choices they generate are never comfortable.  I found last week’s picture of ‘Merkozy’ instructing Mario Monti, their new man in Rome, quite nauseating. Naked German and French power and electoral politics are clearly at play behind the pretence of Berlin and Paris to be speaking for Europe. As a Briton I also find it galling that the world’s fifth or sixth largest economy has been deemed by the disaster-defying duo simply not to exist. Although much of the blame for that I lay at the door of PR-Meister Cameron who has been ‘outed’ by this crisis as a very little leader of an increasingly irrelevant country. Above all, as a Dutch taxpayer, I find it particularly distasteful that two so narrowly-motivated foreign politicians are deciding the future fate of my hard-earned money.

That said someone has to act. The stakes are now simply too high. Debt defaults, bank failures, single-market destroying currency swings are just around the corner, maybe even widespread social unrest. Indeed, if the investors who have hitherto provided the bridge between what EU member-states can afford and what they spend really take fright the EU itself could be in danger. And yet Chancellor Merkel seems strangely immune to the immediate, the need to reassure the Dark Lords of the Market Universe and fight the fire which is threatening to engulf us. We get lots of strong posturing (finger-pointing, stern faces etc.) but little by way of strong leadership.

Maybe Berlin has made a secret choice; Germany would prefer the Euro in its current form to collapse, the unreformable southern Europeans to be pushed out and the currency rebuilt around a northern, western European core. Maybe it could even include the British. Now there’s a thought.  Did Cameron and Merkozy do a deal?

Certainly, Berlin's behaviour means the very real prospect now looms that the whole rickety Euro edifice will come crashing down. Just like Austria-Hungary. If Berlin does indeed have a Plan B it should perhaps consider one other truism of legalism; the law of unintended consequences. Vienna learnt that the hard way.

Nice patio, Chancellor. Shame about the house.

Julian Lindley-French