Category Archives: Modern Europe

The owl and the pussycat 2.

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After Libya collapsed, power passed to the hands of various militia groups.[1] Politics soon merged with crime. Italian criminal organizations—the Mafia—struck a deal with many of the militia commanders to move people from Libya to Italy. Some 31 percent are refugees from the civil war in Syria. Some are refugees from Iraq, either from the earlier fighting following the American invasion or from the more recent disaster following the rise of ISIS. Most are “economic refugees” from the failed or failing states of Sahelian Africa. In 2014, about 170,000 illegal immigrants paid an estimated $170 million to reach Europe from Libya.

Responsibility for dealing with this problem fell first to the Italians. After 300 migrants drowned near the island of Lampedusa in October 2013, the Italian Navy and Coast Guard launched Operation “Mare Nostrum.”  Italian vessels collected about 140,000 migrants during 2014. The death toll fell from 300 in October 2013 to 56 in April 2014.

While this might be regarded as a remarkable humanitarian achievement, not everyone was best pleased. “Mare Nostrum” (“Our Sea”) cost almost $10 million a month at a time when Italy was trying to fend off recession and imposing a degree of budget austerity. Operation “Mare Nostrum” started to look like Operation “Tasse Nostrum” (“Our Taxes”). Northern Europeans weren’t happy with Italy serving as an open door for illegal immigrants. The Navy landed the immigrants in mainland Italy. Most of them then continued their search for better lives by heading for Northern Europe.[2] Britain argued that “Mare Nostrum” created a kind of insurance policy for the migrants: the boats might not be sea-worthy, but the captains could always hunt up a rescue ship soon after leaving port. Once they were “rescued,” the migrants were put ashore in a country that maintained no serious watch over their further movements. Inevitably, they flooded North. These arguments resonated with other EU countries. When the Italian government asked the European Union for financial assistance, the EU called on the Italians to stop giving the immigrants a free lift. “Mare Nostrum” ended with the return of winter weather to the Mediterranean.

In place of “Mare Nostrum,” the EU both strengthened its controls on land border and launched “Operation Triton.” “Triton” restricted the rescue zone of naval patrols to within 30 miles of the Italian coast. “Make it more dangerous. That’ll stop them.”   It didn’t.

By early 2015, perhaps as many as a million potential immigrants were waiting in Libya to cross the Mediterranean to Italy. In economic terms, Demand vastly outstrips Supply. There are critical shortages of vessels, crews, and competent captains. Older and smaller vessels are used, crewed by men working beyond their skill-level, and packed to the gun-whales with passengers. A ticket on one of these death traps has risen from $1,000 in 2014 to $2,000 today.

Over-loaded and under-ballasted vessels are top heavy. Even passenger movements can lead to a capsizing, but so can heavy seas or a collision with another vessel or taking on water. In the first four months of 2015, an estimated 1,750 people drowned from the sinking of boats carrying illegal immigrants from North Africa to Europe.

The appalling death-toll caused an up-roar and a belated response from the EU. Two realities present themselves. First, while an aging Europe needs immigrants, the cultural resistance to increased diversity is very strong. Second, the core problem here is the failure of many African states to provide security and prosperity to their citizens. Even taking the risks of crossing the Sahara, then crossing the Mediterranean seems preferable.

[1] “Europe’s migrant crisis,” The Week, 8 May 2015, p. 11.

[2] A further 45,000 reached Europe by other routes.

Peenemunde.

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Usedom is an island of the shore of Germany in the Baltic. Peenemunde is a little town on Usedom. In 1936 the Luftwaffe bought a big chunk of the island to use as a weapons development and testing facility; in 1937 the German Army took over most of the site for the same purpose; and by the end of 1938 the Germans were engaged in rocket development projects at Peenemunde.[1] The V-1 and V-2 long-range weapons and the “Waterfall” air-defense systems were meant to be war-winning devices. Britain’s “Operation Crossbow” attacked these efforts.

By June 1943 a combination of Polish resistance reports and aerial photographic interpretation had persuaded the British that the Germans were conducting important rocket development at Peenemunde. Prime Minister Winston Churchill ordered an attack.

The attack faced formidable difficulties. For one thing, the British intended to destroy the knowledge base of the program. That is, they meant to kill scientists, engineers, and technicians. Destroying the material base—machine shops, assembled rockets—formed a distinctly secondary object. Therefore, the bombing would be done from 8,000 feet, instead of the customary 19,000 feet. For another thing, the power of German air defenses had long since forced the Royal Air Force (RAF) to bomb at night. The RAF had developed radio guidance beams (Gee) to direct the bombers, but Peenemunde fell beyond the range. Therefore, the precision bombing require to destroy the German base would have to be done by moonlight. This meant that German night-fighters would have favorable conditions. Recognizing the dangers, the RAF committed all of Bomber Command to the attack. To improve the chances of the bombers, the RAF planned to launch a simultaneous mock diversionary attack on Berlin by “Pathfinder” units and fighter attacks on German airfields.

The attack—“Operation Hydra”–stepped off on the night of 17-18 August 1943. The 596 RAF bombers dropped 1,800 tons of bombs on a geographically limited area. Navigational, target-marking, and human errors cropped up. They killed 2 German scientists and 730 others, most of whom were Polish slave-laborers. (The RAF lost 40 planes and 215 aircrew killed.)

The attack did a lot of damage to the material base (machine shops, rocket components), but not a lot of damage to the intellectual base. However, the Germans could not afford to risk a second attack that might succeed. By the end of August 1943, the Germans began evacuating the Peenemunde operations to more secure locations. This delayed the German weapons programs by six to eight weeks.[2] V-1—“flying bomb” attacks on Britain began on 13 June 1944. V-2 rocket attacks began in September 1944. So, perhaps the V-1s might have begun flying in mid-April 1944 and the V-2s in July 1944.

How should we think about this historical event?

First, the British had a short time period in which to act. They had to stave-off some catastrophic event for a couple of years at the outside. After that, Germany would be defeated by other means. They did not have to resolve the problem of a long-term threat.

Second, in a short time-frame, attacking the intellectual base can work because it will take a while to get the successors up to speed. An educated nation, can fill holes eventually.

Third, attacking the physical weapons infrastructure didn’t do much good because it was viewed as secondary. Making it primary wouldn’t have changed much.

Fourth, the movie “Operation Crossbow” (1965) has Sophia Loren. Jus sayin’.

[1] Thereafter, all the guards made it difficult to for ordinary Germans to vacation on the “Sunny Isle,” sylph around in the nude as part of that weird German cult of the sun thing.

[2] Nevertheless, the Germans continued to test rockets at Peenemunde until February 1945.

Yalta.

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From 4 to 11 February 1945, Josef Stalin, Winston Churchill, and Franklin D. Roosevelt met at Yalta in Crimea to “decide” the fate of post-war Europe. In fact, Europe’s fate had already been decided by the course of military operations. The agreements reached at Yalta merely tried to paper-over some of the ugly realities.

During 1944 the Red Army had plowed forward from inside the Soviet Union to a position forty miles from Berlin. In the process, the Red Army—three times the size of the combined British and American armies in Europe–had waded through a sea of blood—their own and that of the German army. The Russians had occupied almost all of Eastern and Central Europe. Meanwhile, from mid-1944 on, the British and Americans had occupied France, the Low Countries, much of Italy, and Western Germany. The war itself had divided Europe into spheres of influence.

The three leaders pursued their own agendas at the conference. Stalin wanted the Western powers to acknowledge Soviet power in the East. Churchill hoped to limit the scope of Communization there and to protect the interests of Britain’s Polish ally. Roosevelt wanted Soviet assistance in the war against Japan and Soviet participation in a post-war United Nations. In the end, Stalin got all of what he wanted; Roosevelt got all of what he wanted, but it turned out to be worthless; and Churchill got nothing of what he wanted, beyond fair words and promises.

At Yalta, the three leaders agreed that Poland would be kicked westward from its pre-war borders, yielding the Soviet conquests of September 1939 in return for territory taken from Germany. The Soviet puppet government in Poland would be reconfigured on a “broader democratic basis” by the admission of members of the government-in-exile in London. Stalin agreed to democratic elections in post-war Poland and in the other Eastern European countries at some unspecified date. Stalin agreed to enter the war against Japan within two or three months after the end of the war in Europe. He also agreed that the Soviet Union would join the United Nations. The Soviet Union would receive reparations in kind and in forced labor from Germany. France would receive occupation zones in Germany and in Berlin, but these would have to be carved out of areas previously assigned to Britain or the United States. Soviet citizens found in the West would be repatriated, regardless of their own preferences.

Filled with hatred and distrust of Western capitalist democracies, Stalin had no intention of honoring his weak commitments to democracy in Eastern Europe. Where the Red Army stood, it would remain. Where the Red Army remained, Communist dictatorships would be imposed by any means necessary. A hard-headed pragmatist, Stalin meant to honor his promise to make war on Japan and to take a seat on the Security Council of the United Nations.

Churchill first, and Roosevelt subsequently, came in for considerable criticism and abuse for their failures to achieve the liberation of Eastern Europe. In fact, this liberation depended entirely upon the balance of power in the area. This tipped heavily in favor of the Soviet Union. The best the two men could have hoped for was to encourage future Soviet co-operation on essential issues. No one wanted a further war after so much blood-shed and with more still to come. Nor would the democracies fight for the “rights” of small states.

Yalta, like Roosevelt’s earlier “destroyers-for-bases deal” in 1940 and Richard Nixon’s Vietnam War peace agreement in 1973, was an “executive agreement,” rather than a treaty approved by the Senate.

 

Ukraine1.

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I’ve been reluctant to write about the Ukraine. I find myself totally out of step with opinion. I don’t like Vladimir Putin[1], but I think that someone should try to make a fair case for understanding his actions.[2]

For one thing, if you look at maps of Ukraine, you see that Crimea and the two eastern “oblasts” (administrative districts) of Donetsk and Luhansk are predominantly Russian-speaking: 77.0%, 74.9%, and 68.8%. In the referendum on independence from the Soviet Union the south-eastern “oblasts” all voted for independence like the rest of Ukraine, but the opposition vote was much higher than elsewhere and so was the abstention rate. In the 2006 and 2007 parliamentary elections, Viktor Yanukovich’s Russian-oriented “Party of Regions” carried a huge swath of south-eastern Ukraine. The Yulia Timoshenko bloc had carried a huge swath of western and central Ukraine. In the presidential elections of 2010, Yanukovich narrowly defeated Yulia Timoshenko by mobilizing the same pro-Russian electoral base in the south-east.

The opposition to the Yanukovich government’s decision to halt the process of integration with the European Community (EU) centered in the west and center of the country. These regions had voted for Timoshenko in the 2010. In contrast, there were few demonstrations or protests in the southeast. Only five protests were identified for the two eastern “oblasts” and Crimea combined. In contrast, there were large pro-Russian protests in the two eastern “oblasts,” Crimea, and elsewhere in the southeast. Finally, supporters of the “Euro-Maidan” protests seized control of local governments in western and central Ukraine, but never even made a stab at it in Crimea or the two eastern “oblasts.”

According to “polling data by [the German polling agency] GfK taken from 4-18 March [2014] in all regions of Ukraine (including Crimea), 48% of Ukrainians support[ed] the change in power while 34% oppose[ed]. In the Eastern and Southern regions the revolution is supported by 20% of the population, whereas 57% or more of the population in the rest of the country supports the change in government. Also, only 2% of those polled said they fully or partially trusted former president Viktor Yanukovych.”[3] So, while Yanukovich was widely unpopular, a clear majority of people in the southeast opposed the revolution in Kiev.

Crimea has been annexed to Russia; the continuing “insurgency” in eastern Ukraine is limited to the two eastern “oblasts” where real opposition to the Kiev revolution was very strong for ethno-cultural reasons.

Is it possible that Vladimir Putin is doggedly[4] pursuing very limited aims with regard to Ukraine? His aims at the moment appear to be to take control of the two eastern-most “oblasts.” Will he desire to push beyond this to open a land bridge to Crimea? Would he wish to take all of the territory that voted for pro-Russian parties? Would he settle for a Ukraine “neutralized” as was Austria[5] during the Cold War? It’s hard to know unless someone asks him.

[1] As Joseph Joffe said on NPR: “he’s a nasty son-of-a-bitch.”

[2] “I have no special regard for Satan; but I can at least claim that I have no prejudice against him. It may even be that I lean a little his way, on account of his not having a fair show. All religions issue bibles against him, and say the most injurious things about him, but we never hear his side. We have none but evidence for the prosecution and yet we have rendered the verdict. To my mind, this is irregular. It is un-English. It is un-American; it is French.”—Mark Twain, “About the Jews.”

[3] Wikipedia. Reference misplaced.

[4] Putin isn’t much inclined to turn loose of something once he has engaged with it. Russians are still fighting in Chechnya in an insurgency that has gone on in fits and starts since 1994.

[5] See: http://en.wikipedia.org/wiki/Austrian_State_Treaty

Why is everyone hating on the 19th Century? 3.

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There were a lot of countries, but they were not equally powerful or important. Although the Big Ones had agreed not to eat the Little Ones, the Little Ones still walked softly around the Big Ones. The Great Powers were Britain, France, Germany, the Austro-Hungarian Empire, and Russia. Italy was a “Great Power” only by way of courtesy.[1]

The Minor Powers were the Scandinavian countries (Norway, Denmark, Sweden); the Low Countries (Belgium, Holland); the Iberian countries (Spain, Portugal); and the Balkan countries (Serbia, Rumania, Bulgaria, Greece).

Beyond Europe there were countries that were rising up into (the United States, Japan) or falling down out of (the Ottoman Empire) the ranks of the powers.

 

The core idea of 19th Century diplomacy was to maintain the five Great Powers in relative equilibrium so that no one state could dominate all the others. If one state or two allied states threatened to become too powerful, then the other states would align against it.

 

There were four key elements in maintaining this Balance of Power.

  1. “Compensation.” That is, the point of the balance of power was to keep everyone at approximately equal strength. If one Great Power increased its strength by adding territory, then the other Great Powers had to be “compensated” in order to increase their strength. Lots of times this compensation was purely symbolic, rather than substantial. Great Powers just didn’t want to be seen by other countries as not being important. Then, who paid the “compensation”? Little countries or faraway places, that’s who. That was one of the down-sides to being a Lesser Power or not a power at all. People took stuff away from you and you just had to lump it.
  2. Constant maneuvering. Most treaties were not permanent or open-ended. They had time limitations because states made arrangements to deal with specific problems that came up. Both countries had to agree to renew a treaty when it expired or to end it ahead of time. If one or both parties chose to not re-new a treaty, then it ended. In theory, both walked away with no hard feelings.
  3. Self-restraint. Just because you can do something right now, doesn’t mean that you should do it. A selfish pursuit of individual national interest will destabilize the system. Other countries will start thinking of your country as a problem. They’ll start thinking about how to re-direct you. If you get three or four other Great Powers thinking about how to re-direct you, then you will get re-directed. Look at Germany in the 20th Century.
  4. The absence of ideology as a factor in decision. Liberalism and Conservatism are ideologies. Communism and Fascism are ideologies. In Balance of Power politics, these don’t matter in deciding on international alignments. OK, probably you think Democratic countries are natural allies against Dictatorships. That isn’t true in Balance of Power politics. After 1870, Britain and France had the most democratic governments in Europe, but they were constantly at odds over colonial disputes. In 1894 Republican, democratic France formed an alliance with autocratic Tsarist Russia. Both had a need for an ally, so they made nice with each other in spite of the vast differences in their domestic politics. Countries didn’t have “permanent friends.” They had permanent “interests.”

[1] Usually, no one cared what the Italians thought. They just pretended that they did. This is called “having good manners.”

Why is everyone hating on the 19th Century? 2.

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There’s no such thing as international “law.” There is no higher authority to enforce a single code of conduct. In the 19th Century, what people called international “law” was really two things.

One was the belief that treaties between countries were binding contracts. In 19th Century diplomacy, bi-lateral treaties (treaties between two countries) were important. Multi-lateral treaties (treaties between a bunch of countries) were more important. What you say that you will do, you must do. Otherwise, the contract is broken. Not only may the other party or parties make other arrangements, but they can beat up on you if they have the means and the mind to do so.[1]

The second was that there were standards of behavior. They weren’t particularly high standards. Even so, people often had trouble meeting them. Just as you were not supposed to cheat at cards in your personal life, you were not supposed to lie to another country. To lie to another country, you had to respond to a direct question in an untruthful manner. However, if you phrased things in such a way that they got the wrong idea all on their own, that wasn’t a lie.[2]

If you were going to try something new, you should talk to the other powers beforehand. Certainly, you should talk to the other countries with what was called an “interest” in the matter. An “interest” meant having a “common concern” with others in something, or a “right to a share” in something. If something that some other country did would have an effect on your country, you had an “interest” and a right to a voice. If your country had signed a treaty, your country had an “interest” in the operation of that treaty. If some country did something that had no effect on your country, then you didn’t have an “interest” and your country had no right to be consulted. If your country had not signed a treaty, your country had no right to a voice on the treaty.

That said, the various meanings of the legal term “interest” can conflict. For example, back in the 1990s, Iraq and Kuwait were at odds over a matter. The ruler of Iraq, Saddam Hussein, told the American ambassador, April Glaspie, about his grievances. Ambassador Glaspie responded that the United States couldn’t offer an opinion on the dispute because it had no “interest” in the matter. It wasn’t a party to the dispute. Then Saddam Hussein sent his army to occupy Kuwait and to threaten Saudi Arabia. Well, that’s where the oil comes from. So, that touched on an American “interest” of a different sort. If Saddam Hussein thought that the United States was going to let one country monopolize the oil supply of the Western world, he was very much mistaken.[3]

You were supposed to try to settle disputes peacefully, without resorting to war. War is an uncertain business. Lots of things can go wrong. Usually they do go wrong. Flunk a war and you can have all sorts of problems. Win a war too decisively and other countries will start to worry about you. So, dodging war in favor of talk served everyone’s interests.

[1] It is possible to discern two different attitudes at the core of this belief. On the one hand, until recent times, bankruptcy was seen as a form of fraud. You could get sent to prison if you could not pay your debts to people who had loaned you money in good faith. This happened to the father of Charles Dickens. Sir Walter Scott worked himself near to death out of the felt obligation to help pay off the debts of his publisher. On the other hand, diplomats were almost always aristocrats. They came out of a culture of personal honor and—if necessary—dueling.

[2] The American Secretary of State John Foster Dulles was particularly adept at this.

[3] Shamefully, Glaspie was made the goat during the panic in Washington that followed. She ended her career as Consul General in Cape Town, South Africa.

Why is everyone hating on the 19th Century? 1.

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President Barack Obama and Secretary of State John Kerry have denounced Russian President Vladimir Putin for attempting a return to 19th Century diplomacy in his handling of relations with Ukraine.[1] Everyone agrees that such a “return” is undesirable.

For a historian this attitude is puzzling. In comparison with what had gone before and what would come afterward, the 19th Century was remarkably peaceful. By 1815 Europeans had lived through more than twenty years of devastating wars and terrifying revolutions.[2] They wanted it to stop. Generally, they got what they wanted.

The Poles rebelled against the Russians (1830-1831).

The Revolutions of 1848-1849 led to much bloodshed in within the Austrian Empire and sphere of influence. The Austrians battered rebellious Italians, and Bohemians and Moravians into submission, and then called in the Russians to do the same with the Hungarians.

The Prussians and the Danes fought over the fate of Schleswig-Holstein (1848-1851).

Britain and France fought Russia in the Crimean War (1853-1856).

The German-speaking countries fought Denmark over Schleswig-Holstein (1864) .

France and the Italian states fought Austria (1859-1860).

The Poles rebelled against the Russians (1863-1864).

Prussia fought Austria (1866), with Italy piling-on.

The German states fought France (1870-71), with Italy piling-on.

Russia fought the Ottoman Empire (1877-1878).

Russia fought Japan (1904-1905).

Italy fought the Ottoman Empire (1911-1912).

Two Balkan Wars (1912-1913) finished the process of driving the Ottoman Empire out of Europe.

A lot of mostly small-scale fighting took place outside of Europe as Britain, France, Italy, Russia, Belgium, and Germany built empires. This race for empire only led to war between the powers on two occasions: Britain and France fought Russia over the fate of the Ottoman Empire (1853-1856), and Japan fought Russia over Manchuria (1904-1905). Although many other opportunities for war offered themselves, the powers composed their differences through diplomacy.

Civil strife within Europe did lead to shooting at times: the July Days (1830) and the Commune (1871) in France; the suppression of revolutions in Germany and Austria (1848-1849); the Carlist Wars in Spain (1833-1840, 1872-1876); and the “Risorgimento” in southern Italy (1859-1860).

The epically long and destructive wars of the 19th Century were civil wars fought outside of Europe over messianic causes (Taiping Rebellion in China, 1850-1864; American Civil War, 1861-1865).

Grim as this record may look, it has to be seen in context. Rapid population growth and industrialization de-stabilized European society and politics. Nationalism undermined the existing system of states. The competition for empire brought European states into conflict all around the globe. The potential for frequent, prolonged, and devastating wars was very great. In reality, the history of the 19th Century is the history of wars that never happened.

[1] Certainly, no one would accuse President Obama or Secretary of State Kerry, or the previous Secretary of State, Hillary Clinton, of being either Machiavellian or Bismarckian in their diplomacy.

[2] The French Revolutionary Wars (1792-1802); the Napoleonic Wars (1803-1815).

Playing Chicken.

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Architects of the Euro-zone sought a stronger, more prosperous, and more harmonious union.[1] The inauguration of the Euro in 1999 began a period of low interest rates for member countries. Low interest rate led to heavy borrowing by both public (Greece) and private (Spain, Ireland) sectors. When the world economy slowed down after the American financial crisis, debt-service became a problem.

The architects had not then—and have not yet—resolved all of the problems. One worm in the apple is that the single currency serves 19 sovereign states. Those states do not pursue uniform economic policies. Nor do all national cultures celebrate the same values.[2] German hostility to budget deficits closed off large-scale counter-cyclical spending as a policy tool. Instead, states were to pursue limiting deficits as a share of Gross Domestic Product (GDP).

The pursuit of austerity policies has had different effects in different countries.[3] The GDP of Germany has risen about 10 percent from 2009. The GDP of Portugal, Spain, and Italy are all down about 10 percent. The GDP of Greece is down more than 20 percent. The decline in GDP has increased the burden of the government debt financed by taxation. Government debt as a share of GDP has risen from about 30 percent to about 70 percent in Spain; from 90 percent to about 110 percent in Italy; and from 60 percent to about 120 percent in Portugal. Greek government debt as a share of GDP has risen from about 110 percent to about 170 percent. (Thus, austerity has pushed Italy and Portugal into the same territory from which Greece began.) This raises the danger that bigger, more severe crises lie over the horizon.

The the creditor countries could pursue expansionary policies that might fuel demand for goods from the debtor countries. Once again, different national politics and cultures come into play. The northern creditor countries don’t want to abandon the policies that they associate with their own success, least of all to bail out the improvident.[4]

The concept of the Euro-zone was that—like Mr. Lincoln’s theory of the Union—the members had formed an indissoluble bond.[5] The Greek crisis threatens that idea. If Greece was to be forced out, then any other country that got into serious financial difficulty in the future might suffer the same fate. Countries at risk would have to pay extremely high risk premiums for financing public debt. The whole Euro-zone could unravel from the bottom like a sweater. Crisis after crisis would gnaw at a union that seeks the benefits of stability.

Hard-liners have not said so, but it might turn out to be a way of finally enforcing the economic doctrines of the northern creditor countries on the southern debtor countries.[6] Any country that did not wish to pay high risk premiums to lenders would have to pursue “sound” finances. That, in turn, could force a reform of social and economic policies.

The Greek “Syritza” and Spanish “Podemos” parties have drawn strong support for demands to end austerity and for debt repudiation. Many American observers seem to think that the Germans and other creditors should be happy to get robbed by the Greeks and other debtors for the greater good. The long Republican counter-attack against high taxes since the Reagan Administration shows something different. People who feel victimized will fight back. Right now, the focus is on angry Greeks and Spaniards. In the future it’s likely to be angry Germans.

[1] Eduardo Porter, “Local Politics Are Fracturing European Unity,” NYT, 3 February 2015.

[2] Flexibility, thrift, and probity, for example.

[3] See the charts in Porter, “Local Politics.”

[4] The limited historical knowledge of many economic commentators leads them to make frequent references to the post-First World War inflation as a formative experience. They ignore the “cigarette economy” that flourished after the Second World War and the heavy burdens carried by West Germans after absorption of the defunct German Democratic Republic in 1989. Germans today have a far more vivid set of memories shaping their behavior.

[5] Stephen Fidler, “Europe Weights Costs of Casting Greece Aside,” WSJ, 6 February 2015.

[6] As Voltaire quipped after the Royal Navy executed Admiral John Byng, “They shoot one to encourage the others.”

 

QE by the ECB.

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The United States, Britain, and Japan all eventually responded to the “Great Recession” with “Quantitative Easing”—central bank purchases of public and private bonds in order to pump money into the economy.[1] Europe resisted this policy[2] and its economic recovery has trailed most other places. The ECB’s goal has been to see an annual inflation rate of 2 percent. It hasn’t worked. In December 2014 the inflation rate hit minus 0.2 percent. Economists feared that Europe would descend into a deflationary spiral. Therefore, on 22 January 2015, the European Central Bank (ECB) announced an initiative to buy 60 billion Euros worth of public and private bonds every month :until we see a sustained adjustment in the path of inflation.”[3]

Will the ECB action be sufficient to propel the European Community on the road to a solid recovery? When combined with the unanticipated fall in world oil prices and a depreciation in the exchange value of the Euro, Quantitative Easing might get the European economy moving. Still, there is a great deal of uncertainty going forward.

At the same time that he announced the program of bond-buying, ECB chief Mario Draghi urged the need for “structural reforms” to create the basis for the “confidence” among investors that is needed to encourage investment.[4] Will European governments be willing to implement such reforms after resisting them for so many years in crisis conditions? Or will they hope that QE can provide enough stimulus to allow them to ignore unpleasant choices? Jens Weidmann, president of the German central bank, worried in public that this might be the case.

How will the ECB initiative affect exchange rates between the Euro and other currencies? The dollar has been rising against the euro and gained another 2 percent after the ECB policy announcement; the Swiss ended their “peg” of the franc against the Euro and the franc rose 17 percent in value in one day. The change in exchange rates will make Euro-zone goods more competitive in foreign markets, but they will make Swiss and American goods less competitive in those same markets. Countries that borrowed in dollars will find it more difficult to repay those loans now that the value of the dollar is rising. In short, it creates a drag on the world economy at a critical time for the recovery.

One thing that now seems impossible to foretell is the effect of important central banks creating so much liquidity. Will it affect the basic stability of the world economy over time? No one is talking about this problem at the moment. They have more pressing business at hand.

[1] In the United States, “QE” pushed up asset prices like those for stocks and homes. This had the unintended effect of adding to the sense of an unequal sharing of the economic recovery.

[2] In large part the resistance stems from people in the northern “creditor” countries who feel that they “were had” by the Greeks and fear that southern “debtor” counties may try to stick them with the real costs of the bail-outs. This feeling comes on top of a long-standing belief that weaker economies suffer from the self-inflicted wounds of overly generous welfare states and a hostility to business.  The complicated governing system for a central bank serving nineteen sovereign states, each with their own central bank, allowed the “creditor” countries to hold the “debtor” countries at bay for years.  Both the emotional and the institutional components to economic policy-making seem incomprehensible to some leading American academic economists.

[3] Neil Irwin, “Fear That Eurozone Stimulus May Be Too Little or Too Late,” NYT, 23 January 2015.

[4] German Chancellor Angela Merkel immediately emphasized this point to the Italians. Dutch prime minister Mark Rutte then piled-on to the same effect. See: Jack Ewing, “Compromise and Persuasion Won Grudging Support for Bond Buying,” NYT, 24 January 2015.

Annals of the Great Recession III.

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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.”