Default Setting II.

Between 1775 and 1825, the revolts against the British and Spanish Empires in the Americas created a host of new nations.  In the minds of European leaders, formal “empire” sold at a deep discount.  However, the “empire of free trade” arose as a far more appealing idea.  If non-European countries would pursue Western economic[1] and legal[2] policies, then you could get the same benefits of empire without the costs and heartbreak.  The Western capital generated by industrialization could then safely flow toward the economic development of the rest of the world.[3]  All would benefit.

The world of international investment brimmed with challenging opportunities in the later Nineteenth Century: Latin America, the United States, the Ottoman Empire, Japan, and China for example.  However, a willingness to fulfill commitments to Western economic and legal doctrines in exchange for Western investment varied from society to society.

Russia came late to industrialization and wanted to hurry the process forward.  Russia possessed rich natural resources, but its primitive agriculture generated little wealth.  Where to find the capital for rapid industrialization?  Two solutions offered themselves.  Either the country could borrow from rich foreign lenders or the peasantry could be squeezed very hard.  Fearful of peasant unrest, Russian leaders sensibly opted for foreign borrowing.

Foreign lenders could discern positive and negative features in Russian borrowers.  On the plus side were two essential factors.  Russia’s gigantic territory housed vast amounts of minerals and other natural resources.  In the middle of the century, the Tsar Alexander II had shoved through a series of “Great Reforms” intended to begin the modernization of Russia.  Those reforms had not yet taken full hold, but they provided a foundation for further progress.  On the negative side the “Great Reforms” had compounded the turmoil inside Russia.  Rapid industrialization would intensify the strains.  Then, Russia remained an absolute monarchy.  After the death of Alexander II, the quality of leadership declined markedly.

Between 1890 and 1920 political considerations, rather than purely economic ones, exerted a growing influence over foreign investments in Russia.  First, seeking escape from the diplomatic isolation into which it had been forced by Bismarck’s diplomacy, the French government encouraged lending to the Tsarist regime.  This lending supported the eventual Franco-Russian alliance that surprised and alarmed German statesmen.  Second, during the First World War, the French and British tried to prop up their tottering ally by ample credit.  Third, the Bolshevik regime repudiated the Russian external debt.[4]  The Bolsheviks understood the Red default as a stroke against global capitalism.  It would—and, in France, did—gravely weaken the middle class savers who formed a vital support for bourgeois democracy.

At the same time, default contributed to making Soviet Russia an international pariah.  Within a decade, the Soviets turned to the alternative strategy of squeezing assets out of the peasantry.  As late Nineteenth Century leaders had foreseen, the human cost would be terrible.

[1] Raise no barriers to imports and exports; pursue “sound” money.

[2] Practice Western notions of the rule of law, especially the sanctity of contracts.

[3] See, David Landes, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (1958).

[4] See: Hassan Malik, Bankers and Bolsheviks: International Finance and the Russian Revolution, 1892-1922 (2018).

Franco-Jihadis.

French Muslims have been bent out of shape for some time.[1] In theory, France is a “secular” country that pays no attention to religion and allows no obvious expression of religious affiliation. In 2004, the government banned the wearing of veils by school-girls. As an afterthought, they also banned the (visible) wearing of crucifixes and yarmulkes, but everyone knew it had been directed against Muslims. In 2005, rioting broke out in the Parisian “banlieues” (suburbs) after the police chased a teen-age punk to his death in an electrical power distributor.[2] More than 10,000 cars were burned in the rioting—unemployed young Muslims not owning many cars. In 2011, the government banned wearing the “niqab” or the “burka” (which cover a woman’s face). It is illegal to deny the Holocaust, but is acceptable to mock the Prophet Muhammad. In January 2015 came the “Charlie Hebdo” massacres and in November 2015 came the attacks in Paris that killed 130 people. Now, an estimated 1,200 French Muslims have gone to join ISIS. Is France a hot-bed of radical Islam, and, if so, why?

After the First World War France recruited a lot of foreign labor from southern and eastern Europe (Russkies, Poles, Spaniards, Italians) to make up for the huge wartime casualties.[3] After the Second World War, France recruited a lot of labor from its North African colonies to make up for a short-fall in births in the Thirties and Forties.[4]

France is a “secular” country that pays no attention to religion. So, it is hard to tell exactly how many Muslims live in France. The best guess appears to be about 7.5 percent of the population. That turns out to be about 5 million Muslims, the largest Muslim population in Europe. So, 1,500 jihadists out of 5 million people is a pretty small share. Today there are about 1.5 million people of Algerian origins, 1 million of Moroccan origins, and 400,000 of Tunisian origin. Most of the so-needed immigrants ended up in the tower housing blocks on the outskirts of French cities, especially Paris.[5]

How well do European countries assimilate Muslims? It varies. If you look at unfavorable views of Muslims (not Islam), then 63 percent of Italians and 46 percent of Spaniards, but only 27 percent of Frenchmen have an unfavorable view. However, 74 percent of Frenchmen also thought that Islam is incompatible with France’s secular values. (Curiously, in November 2015, only 56 percent of Americans thought that Islam’s values were “at odds” with America’s values.[6] Marine Le Pen, head of the National Front party, compared the Muslim population to the German occupation of France during the Second World War.

This may be the source of concrete phenomena. One 2010 inquiry found that job applicants of African origin who claim to be Christian are 2.5 times more likely to be asked back for an interview than are Africans who claim to be Muslim. The national unemployment rate in France is 10 percent, but the unemployment rate in the “banlieues” heavily populated by the descendants of Muslim immigrants is 20 percent. The unemployment rate in the “banlieues” for those aged 15-24 is 40 percent. Some 60 percent of the prisoners in French prisons are Muslims. “Religion is all we have left,” said one French Muslim.

[1] “France’s alienated Muslims,” The Week, 30 January 2015, p. 11.

[2] As is the case in the United States, being a punk is not formally a capital crime.

[3] So much for the Republican chicken-hawk derision of France. “How many troops does it take to defend Paris? No one knows. It’s never been tried.”

[4] OK, French people who “aren’t in the mood” is not a cultural stereotype. Still, it happened.

[5] Just for fun, see, “B-13:”: https://www.youtube.com/watch?v=VHSoPTJNfPE

[6] “Poll Watch,” The Week, 27 November 2015, p. 17.

Annals of the Great Recession III.

Years ago, back before the world economic slowdown, Germany overhauled its economy to make it more competitive and flexible. This overhaul built on earlier German strengths: an excellent educational system, a commitment to quality production, and a cultural predisposition to sound finances. The successful reforms put Germany in a strong position to first weather the initial storm and then exploit the inflationary policies pursued by other countries.

Not everyone pursued similar policies. Many European countries opted for social protection over economic growth. Their labor and management systems are encrusted with regulatory barnacles that slow growth and hinder employment; they run high levels of debt that become increasingly difficult to support with stagnant economies; and they are broadly change-averse. In the worst case, the Greeks spent years living off grants and loans from the European Community while cooking their books to disguise the fact that the money was being consumed rather than invested. The demographic crisis of an aging population across much of Europe bodes ill for the survival of the welfare states. Reforms to increase innovation, productivity and competitiveness are essential for the long-term future.

With the onset of economic crisis in 2009, the Germans seized upon the crisis as a device to force other countries to make fundamental reforms to improve the long-term position of the whole group.[1] Germany rejected expansionary policies at home while leading the imposition of severe conditions upon Greece in exchange for further aid. Behind the disreputable Greeks stood the more reputable Spaniards, Italians, and Frenchmen. Many countries didn’t want anyone saying that they resembled the Greeks, so they went along with the German policies.

However, even under pressure most countries have not made the kinds of reforms to entitlements, labor market regulations, and budgeting needed to create dynamic economies. Europe continues to limp along behind the United States in recovering from the “Great Recession.” Indeed, the danger that Europe will slide into a deflationary-spiral is very real.

From a dispassionately economic perspective, the best solution appears to be a combination of monetary stimulus by the ECB, higher public spending by Germany and other creditor countries, deficit-reduction in the debtor countries, and a wide application of the reforms that the Germans have been pushing.        The rival policy to that of Germany has been inflation by the European Central Bank (ECB) and higher spending by the creditor countries in order to ease conditions in the debtor countries. The hard times have led to the rise of “anti-austerity” parties, like the Syriza party in Greece and the Podemos party in Spain. Commentators can’t prove it, but they suggest that the growth of anti-European parties like the French Front National and the British United Kingdom Independence Party (UKIP) and of anti-immigrant feeling are all tied to “austerity.” Until recently, Germany managed to fend off calls for inflation.

The German strategy is founded on a misconception. The Germans have assumed that other countries could alter their politics and culture to become German-like. Most countries are not like the Germans and do not want to pay the costs of becoming more German-like. They have aging populations that are set in their ways. They have lived for decades with public discourse that disparages entrepreneurs and American-style capitalism. The costs of transition will be paid by entrenched interests and will benefit chiefly their descendants.[2]

Will the Greeks be forced out of the European Community? Or will the Germans?

[1] Marcus Walker, “Analysis: Double Blow to Germany’s Leadership,” WSJ, 26 January 2015.

[2] As Groucho Marx once asked, “What’s the future ever done for me?” The United States faces something of the same dilemma. See: “College costs: the old eat the young.”

Rivers of Blood I.

Muslim immigration to Western Europe began by stages after the Second World War as labor-short economies and the end of empires combined to draw non-Europeans toward the “mother country.” A great deal of thoughtlessness went into these migrations. All host countries were ill-prepared to deal with the immigrants.

In January 2015 there are an estimated 20 million Muslims in Europe. About 5 million are in France, where they make up 8 percent of the population. (See: “The other land of liberty and opportunity.”) In Britain and Germany they make up 5 percent of the population. One of the things that eats at European countries is the feeling that immigrants have come to their countries to prey on the generous social welfare provision of enlightened countries. In the 1970s, two-thirds of the immigrants in Germany were in the labor force, while one-third were not. Thirty years later scarcely more than a quarter of immigrants were in the labor force.[1] Another problem, revealed by a poll in L’Express in January 2013 is that 74 percent of those polled said that Islam “is not compatible with French society.” Yet this feeling finds no expression in the “mainstream” or “respectable” French political parties. Why not?

Christopher Caldwell argues that the European left has made discussion of the problems raised by immigration almost impossible.[2] On the one hand, they have evoked European historical crimes—the Holocaust above all—to justify repressing unwelcome speech. He implies that they have undermined the foundations of democracy in the process. In France, he sees the “SOS Racisme” group created in the 1980s as a puppet of the Socialist Party intended to shout-down conservative voices and the 1990 Gayssot Law against Holocaust-denial as an entering wedge for people who want to stifle discussion of other historical events—many of them highly unpleasant and non-Western. Most recently, the anti-immigrant Front National Party got left out of the post-Charlie Hebdo parade on the grounds that it was not “republican” enough.

On the other hand, people on the left have failed to understand that, whatever was done to European Jews, it wasn’t done by Muslims. Just as Palestinians have felt free to reject the State of Israel as European expiation of European crimes at the expense of Arabs, so too have Euro-Muslims felt free to reject European progressive thought as an alien set of values intended to curb their own beliefs. If one adds these forces to the failure to integrate the immigrants and their French-born descendants into French society, one can begin to understand some of the impulses that set the Kouachi brothers and Amedy Coulibaly on the path to terrorism. They are not alone in their alienation, hostility, and religious fervor.

Caldwell understands that Europe’s aging and declining non-Muslim population makes immigration essential. He is less quick to say that the anti-immigrant and anti-Muslim sentiments expressed by parties like the Front National can have no practical expression in public policy. Yes, the Jews were expelled from Spain in 1492. Is that what the Front National or other parties expect to repeat with Muslims? Some of the Front National voters undoubtedly do want that, but the program of the party calls for a halt to further immigration and a defense of “secular values.” France already has more police per capita than any other European country. Even so, security lapses allowed the Kouatchis and Coulibaly to escape detection of their plans to kill.

There is going to have to be a third way between “political correctness” and stupidity.

[1] Two million out of three million in the early 1970s versus two million out of seven-and-a-half million in th early 2000s.

[2] Christopher Caldwell, “Europe’s Crisis of Faith,” WSJ, 17-18 January 2015.