Europe's original sin

Blame It on Berlin

 The euro bailout caucus wants the Germans to write a blank check.

By WSJ Editors

Which century is this anyway? We ask because elite opinion is once again blaming Germany for ruining the rest of Europe, if not the entire world economy. All that's missing are references to the Kaiser or Herr Schicklgruber, but we hope the Germans don't fall for this global guilt trip.

Berlin's alleged sin is its reluctance to write a blank check to save the euro—either by underwriting a new euro-zone fiscal union, or granting permission for the European Central Bank to buy trillions in sovereign debt. The chant comes in unison from the debtor nations themselves, the bailout caucus in Brussels, an Obama White House concerned about its re-election, and liberal pundits worried that their welfare-state economic model is under assault. Like the "rich" in America who must pay their "fair share," the Germans are supposed to pay up to save a united Europe.

The reality is that the Germans—along with the Dutch and the Finns—are the rare Europeans who understand that saving the euro requires more than a blank check. It requires a new political commitment to better economic policy. Chancellor Angela Merkel and her cabinet are as euro-centric as the French, but they realize that money alone won't solve Europe's more fundamental debt and growth problem.

It's certainly true that the Germans have benefited from the euro, which is one reason they want to preserve it. Their exports have flourished, often to other European countries, thanks to a stable currency and free-trade zone. But one reason for their relative economic success is that Germany is a rare European country that used the early years of the euro to reform its labor markets and improve fiscal policies. While the Greeks and Italians used their years of near-German borrowing rates to live beyond their means, the Bavarians became more competitive.

Until the crisis hit Italy, the rest of Europe still didn't think it had a problem. Politicians said the markets were acting in predatory fashion, rather than sensibly recalibrating the risk of sovereign default. Even now, 18 months into this euro mess, only the recent jump in sovereign bond yields has caused Italy and France to realize they have to shape up.

Europe's original sin in this crisis was not letting Greece default, remaining in the euro but shrinking its debt load as it reformed its economy. The example would have sent a useful message of discipline to countries and creditors alike. The fear at the time was that a default would spread the contagion of higher bond rates, but those rates have soared despite the bailouts of Greece and Portugal.

By now the policy choices are more painful. One option is to let the euro zone break up, one country at a time or all at once, but the costs of dissolution would be very high. At best it would mean a deep recession, as debts and contracts were recalculated in national currencies, and savers and investors fled to the safest havens. This is something no one but doctrinaire devaluationists should want.

The second option is the blank check, starting with the ECB printing trillions in euros to buy up sovereign debt. This might crush bond yields, at least for a while, but the minute those yields fall the pressure for economic reform will also ease.

Meanwhile, the ECB will have sacrificed its independence under political duress, while gambling that printing trillions of euros won't lead to inflation down the road. This would be a short-term palliative to get the French and Americans past the next election.

The third option, and the one the Germans seem to prefer, is a closer fiscal union across the euro zone with stricter rules on debt and deficits. This is the essence of the tentative Franco-German plan leaked over the weekend. In return for issuing euro bonds or perhaps granting countries access to ECB bond purchases, Germany would require those nations to live by German-approved fiscal rules. This has the virtue of distinguishing between countries that follow the rules and those that don't, enforcing good behavior with carrots and bad with sticks.

This is better than the other options, but it too is no panacea. Germany isn't about to send the Wehrmacht to Rome or Athens to enforce fiscal policy. So enforcement would still largely depend on the political will of the countries themselves. Such debt and deficit rules could also be counterproductive if they led to growth-killing tax increases instead of spending cuts and entitlement reforms.

It's no accident that Ireland, with its 12.5% corporate tax rate that has attracted export businesses, is climbing out of its debt hole faster than are Portugal, Spain or Greece. Any new fiscal rules need to allow for tax and labor-policy competition.

The tragedy is that the euro-zone countries failed to abide by their original fiscal rules, a failure that has brought them to this unhappy pass. The Brussels-Washington bailout caucus now wants to extend the damage to monetary policy by printing more euros and worrying about the consequences later.

In opposing that option, the Germans are said to be imposing their Prussian morality on everyone else. But without reforms, the countries of southern Europe will never pull out of their downward debt spiral.

The Germans are at least telling the truth.

"And great was the fall of it"

Official: Panic Time in Europe

By Walter Russell

Olli Rehn, the European Union’s Commissioner for Financial and Monetary Affairs, has a level head and has occupied the hottest seat in Europe during the long financial crisis;  Reuters reports him saying earlier today that:

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.”

It is crunch time in Europe.  By Christmas and perhaps much sooner we may know the fate of the single currency.

The lies and the half truths on which the euro has been based are quickly dissolving.  The much praised European Financial Stability Fund has turned into a bust as investors turn up their noses at its debt offerings.  Heinz the Ant is unwilling to pay the bills for Zorba the Grasshopper; after so many tricks and so many lies, nobody believes that Zorba will ever reform.

The euro is failing for technical as well as moral reasons; for years observers pointed out that ECB interest rate policies set to cope with conditions in Germany and France were causing credit bubbles in countries like Ireland and Spain.  Those bubbles, and the aftermath when they burst, have as much to do with the euro’s dire straits as the endemic chicanery in Greece.

Ultimately, the euro is in trouble because the peoples of Europe are not a single nation.  West Germans grumbled, but they paid the bills to integrate the former East Germany when unification came because when all was said and done it was a family affair.  They grumble and resist paying the bills for Greece, Italy, Portugal and Spain because those people are just neighbors.

The euro is not dead yet.  Indeed, if the pressures of the financial crisis are felt strongly enough, this could still work out the way the euro’s architects imagined it would.  Many of those who backed the euro understood very well that a monetary union without a political union would sooner or later fall into a crisis.  They assumed and expected that when that crisis came, the various countries in Europe would choose political union to save the currency.

We are going to see very soon whether this trillion dollar bet works out.  The signs now are not good, but this is only the eleventh hour.  Not until the twelfth stroke of midnight will we know whether the pressures of the crisis can force the Europeans into a political union that most of them still want to resist.

We are coming to believe that even a full fiscal union of the eurozone countries would ultimately fail.  The differences between South Carolina and Massachusetts led to a civil war in the American union; the differences among France, Germany, Italy, Spain, Finland, the Netherlands, Ireland and Greece are much deeper and more fundamental than the differences between northern and southern states in the early US.  Fiscal union among the eurozone countries would be as unhappy as their monetary union has been; in the end, the Italians simply cannot and will not live the way the Germans want them to.

We keep thinking of Abraham Lincoln’s riddle: how many legs does a sheep have if you count the tail as a leg?

The answer is four, because calling a tail a leg doesn’t make it one.

At the end of the day, facts speak.  All human institutions must be built on what is real.  Clever compromise, technical skill and sophisticated institution building are all very well, but the foundations must be solid or the building will fall.

Jesus of Nazareth warned about what happened to people failed to ground their construction on solid rock, pointing to the example of a foolish man who built his house on the sand:

And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it.

Mt. 7:27

If the euro is built upon sand, the time of its fall is at hand — and great will be its fall.

The beginning of the end of Fiat Money

Fed Lowers Interest Rate on Dollar Swaps

By Scott Lanman and Jeff Black 

Six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis.

Stocks rallied worldwide, commodities surged and yields on most European debt fell on the show of force from central banks aimed at easing strains in financial markets. The cost for European banks to borrow dollars dropped from the highest in three years, tempering concerns about euro’s worsening crisis after leaders said they’d failed to boost the region’s bailout fund as much as planned.

“It’s supportive but not necessarily a game changer,” said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford,Connecticut. “The impact is more psychological than anything else” as investors take heart from policy makers’ coordination, Girard said.

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. The so- called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

Starting December

The swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5. Seven-day loans would carry an interest rate of about 0.58 percent, down from 1.08 percent, based on the current one-week overnight index swap rate of 0.08 percent. OIS is a measure of expectations for the benchmark federal funds rate.

“This was in response to increased tension in global financial markets,” Bank of Japan Governor Masaaki Shirakawa said at a press conference in Tokyo today. “Coordinated action will give markets a sense of security.”

The action wasn’t aimed at supporting any specific financial institution, Canadian Finance Minister Jim Flaherty said in a Bloomberg Television interview in New York.

The Standard & Poor’s 500 index jumped 3.5 percent to 1,237.24 at 1:05 p.m. in New York, and the Stoxx Europe 600 Index surged 3.6 percent. The euro strengthened to $1.3449 from $1.3317 late yesterday. The yield on the 10-year Treasury note climbed to 2.06 percent from 1.99 percent.

“When there’s concerted action by central banks, it’s definitely good,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “But are liquidity injections a game changer when the heart of the problem is in European sovereign debt markets?”

European Banks

European banks gained, with Barclays Plc (BARC) climbing as much as 9.4 percent in London trading. Deutsche Bank rose as much as 7.3 percent in Frankfurt, while BNP Paribas SA and Credit Agricole SA gained in Paris.

Today’s move echoes coordinated actions from the financial panic starting in 2007 to create and expand the currency-swap lines, whose use peaked at about $583 billion in December 2008. The central banks also jointly lowered their benchmark interest rates in October 2008.

Fed policy makers voted 9-1 for the swap action in a Nov. 28 videoconference, with Richmond Fed President Jeffrey Lacker dissenting, Michelle Smith, a Fed spokeswoman, said in an e- mail. Lacker voted in place of Philadelphia Fed President Charles Plosser, who was unavailable for the meeting, Smith said. Laura Fortunato, a spokeswoman for Lacker at the Richmond Fed, didn’t immediately respond to a request for comment.

No Current Difficulties

The Fed said U.S. financial companies “currently do not face difficulty obtaining liquidity in short-term funding markets.”

“However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the central bank said in the statement.

U.S. House Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, said in a statement that the move “is a recognition of the interconnected nature of the global economy” and that it’s in America’s interest to see Europe recover. At the same time, the action “should not and cannot absolve European policymakers from the need to resolve their own problems,” Bachus said.

China Move

Two hours before the Fed announcement, China cut the amount of cash that the nation’s banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

While today’s move by the six central banks is likely to ease tensions in money markets, it falls short of some calls for the ECB to step up and act as lender of last resort for the governments of the 17-member euro area and buy unlimited amounts of government bonds. Germany, Europe’s largest economy, has resisted the idea, arguing it isn’t the ECB’s job to do so and would only be a temporary fix.

The ECB unexpectedly cut its benchmark interest rate Nov. 3 by 25 basis points to 1.25 percent as the turmoil threatened to drag the euro area into recession. ECB policy makers next meet Dec. 8, while Fed officials gather Dec. 13.

Seven-Day Refinancing

Yesterday, the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros ($357.5 billion). The ECB offers unlimited funding to euro-area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Fed statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.

Dollar Tender

European lenders asked for a total of $395 million in the ECB’s 84-day dollar tender conducted in coordination with the Fed on Nov. 9. In the first offering on Oct. 12, the ECB lent six banks $1.35 billion for three months. The next three-month loan will be offered on Dec. 7.

The coordinated action “lowers the cost of emergency funding and increases the scope,” Mohamed El-Erian, chief executive officer, of Pacific Investment Management Co. said in a radio interview today on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene.

Central banks “are seeing something in the functioning of the banking system that worries them,” El-Erian said.

It is happening right now

Should the Fed save Europe from disaster?

The dam is breaking in Europe. Interbank lending has seized up. Much of the financial system is paralysed, setting off a credit crunch just as Euroland slides back into slump.

By AMBROSE EVANS-PRITCHARD

The Euribor/OIS spread or`fear gauge’ is flashing red warning signals. Dollar funding costs in Europe have spiked to Lehman-crisis levels, leaving lenders struggling frantically to cover their $2 trillion (£1.3 trillion) funding gap.

America’s money markets are no longer willing to lend to over-leveraged Euroland banks, or only on drastically short maturities below seven days. Exposure to French banks has been slashed by 69pc since May.

Italy faces a “sudden stop” in funding, forced to pay 6.5pc on Friday for six-month money, despite the technocrat take-over in Rome.

German Bund yields have risen to 59 basis points above Swedish bonds since Wednesday’s failed auction. German debt has been relegated suddenly against Swiss, Nordic, Japanese, and US debt. As the Telegraph reported two weeks ago, Asian central banks and sovereign wealth funds are spurning all EMU bonds because they have lost confidence in a monetary system with no lender of last resort, coherent form of government, or respect for the rule of law.

Even if EU leaders could agree on fiscal union and joint debt issuance – which they can’t – such long-range changes cannot solve the immediate crisis at hand. The push for treaty changes has become a vast distraction.

Unless Germany agrees to the full mobilization of the European Central Bank very fast, the eurozone will spiral out of control. As The Economist put it, “The risk that the currency disintegrates within weeks is alarmingly high.”

Theoretically, EMU can limp on though the Winter until the Italian debt auctions of €33bn in the last week of January, and €48bn in the last week of February. The reality is that sovereign contagion to the financial system may well bring matters to a head more swiftly.

If break-up occurs in a disorderly fashion, with Club Med states and Ireland spun into oblivion one by one, the chain reaction will cause an implosion of Europe’s €31 trillion banking nexus (S&P estimate), the world’s biggest and most leveraged. This in turn risks an almighty global crash – first class passengers included.

So the question arises, should the rest of the world take over management of Europe to prevent or mitigate disaster? Specifically, should the US Federal Reserve assume leadership as a monetary superpower and impose policy on a paralyzed ECB, acting as a global lender of last resort?

In essence, the US would do for EMU what it did in military and strategic terms for the Europe in the 1990s when Washington said enough is enough after squabbling EU leaders had allowed 200,000 people to be slaughtered in the Balkans. The Pentagon settled matters swiftly with “Operation Deliberate Force”, raining Tomahawk missiles on the Serb positions. Power met greater power.

Personally, I have not made up my mind about the wisdom of a Fed rescue. It is fraught with dangers, and one might argue that resources are better deployed breaking EMU into workable halves with minimal possible damage.

However, debate is already joined – and wheels are turning in Washington policy basements – so let me throw this out for readers to chew over.

Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about," he said.

This is not as eccentric as it sounds. The Fed’s Ben Bernanke touched on the theme in a speech in November 2002 – “Deflation: making sure it doesn't happen here” – now viewed as his policy `road map' in extremis.

"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.

Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.

One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany’s fiscal Puritans of reducing Europe’s periphery to “indentured servants” and driving the whole region into depression with combined fiscal and monetary contraction.

“We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them,” he said.

Some of the purchases could be achieved by tapping the Fed’s euro account at the ECB, flush with funds as a result of currency swaps provided by Washington to help Europe shore up its banks. Ultimately mass EMU bond purchases would cause a sudden and potentially dangerous spike in the euro against the dollar. There lies the rub. If the ECB failed to loosen monetary policy drastically to offset this, the experiment could go badly wrong.

A pioneering school of “market monetarists” - perhaps the most creative in the current policy fog - says the Fed should reflate the world through a different mechanism, preferably with the Bank of Japan and a coalition of the willing.

Their strategy is to target nominal GDP (NGDP) growth in the United States and other aligned powers, restoring it to pre-crisis trend levels. The idea comes from Irving Fisher’s “compensated dollar plan” in the 1930s.

The school is not Keynesian. They are inspired by interwar economists Ralph Hawtrey and Sweden’s Gustav Cassel, as well as monetarist guru Milton Friedman. “Anybody who has studied the Great Depression should find recent European events surreal. Day-by-day history repeats itself. It is tragic,” said Lars Christensen from Danske Bank, author of a book on Friedman.

“It is possible that a dramatic shift toward monetary stimulus could rescue the euro,” said Scott Sumner, a professor at Bentley University and the group’s eminence grise. Instead, EU authorities are repeating the errors of the Slump by obsessing over inflation when (forward-looking) deflation is already the greater threat.

“I used to think people were stupid back in the 1930s. Remember Hawtrey’s famous “Crying fire, fire, in Noah’s flood”? I used to wonder how people could have failed to see the real problem. I thought that progress in macroeconomic analysis made similar policy errors unlikely today. I couldn’t have been more wrong. We’re just as stupid,” he said.

Needless to say, reflation alone will not make Euroland a workable currency area. Nor will fiscal union, Eurobonds, and debt pooling down the road.

"Even if they do two years of fiscal transfers, and the ECB buys all the bonds, and the problems are swept under the carpet, we are still going to be facing a crisis at the end of it," said professor Scholes.

None of the “cures” on offer tackle the 30pc currency misalignment between North and South, the deeper cause of this crisis. What Fed-imposed QE for Euroland can do is make a solution at least possible stoking inflation deliberately.

This means inflicting a boomlet on the German bloc, while allowing the South to take its fiscal punishment without crashing further into self-defeating debt deflation. It forces up prices in the North, compelling the neo-Calvinists to accept their share of the intra-EMU price readjustment.

The Germans will not like this. If inflation causes them rise up in revolt and leave EMU to the Latins, so much the better. That is the best solution of all.

What we know for certain is that Europe’s current policy settings must lead ineluctably to ruin and perhaps to fascism. Nothing can be worse.

Get the troops back NOW

Calling things by their proper names

By Caroline Glick

Next month, America's long campaign in Iraq will come to an end with the departure of the last US forces from the country.

Amazingly, the approaching withdrawal date has fomented little discussion in the US. Few have weighed in on the likely consequences of President Barack Obama's decision to withdraw on the US's hard won gains in that country.

After some six thousand Americans gave their lives in the struggle for Iraq and hundreds of billions of dollars were spent on the war, it is quite amazing that its conclusion is being met with disinterested yawns.

The general stupor was broken last week with The Weekly Standard's publication of an article titled, "Defeat in Iraq: President Obama's decision to withdraw US troops is the mother of all disasters."

The article was written by Frederick and Kimberly Kagan and Marisa Cochrane Sullivan. The Kagans contributed to conceptualizing the US's successful counterinsurgency strategy in Iraq, popularly known as "the surge," that president George W. Bush implemented in 2007.

In their article, the Kagans and Sullivan explain the strategic implications of next month's withdrawal. First they note that with the US withdrawal, the sectarian violence that the surge effectively ended will in all likelihood return in force.

Iranian-allied Prime Minister Nuri al-Maliki is purging the Iraqi military and security services and the Iraqi civil service of pro-Western, anti- Iranian commanders and senior officials. With American acquiescence, Maliki and his Shi'ite allies already managed to effectively overturn the March 2010 election results. Those elections gave the Sunni-dominated Iraqiya party led by former prime minister Ayad Allawi the right to form the next government.

Due to Maliki's actions, Iraq's Sunnis are becoming convinced they have little to gain from peacefully accepting the government.

The strategic implications of Maliki's purges are clear. As the US departs the country next month it will be handing its hard-won victory in Iraq to its greatest regional foe - Iran.

Repeating their behavior in the aftermath of Israel's precipitous withdrawal from southern Lebanon in May 2000, the Iranians and their Hezbollah proxies are presenting the US withdrawal from Iraq as a massive strategic victory.

They are also inventing the rationale for continued war against the retreating Americans. Iran's Hezbollah-trained proxy, Muqtada al-Sadr, has declared that US Embassy personnel are an "occupation force" that the Iraqis should rightly attack with the aim of defeating.

The US public's ignorance of the implications of a post-withdrawal, Iranian-dominated Iraq is not surprising. The Obama administration has ignored them and the media have largely followed the administration's lead in underplaying them.

For its part, the Bush administration spent little time explaining to the US public who the forces fighting in Iraq were and why the US was fighting them.

US military officials frequently admitted that the insurgents were trained, armed and funded by Iran and Syria. But policy-makers never took any action against either country for waging war against the US. Above the tactical level, the US was unwilling to take any effective action to diminish either regime's support for the insurgency or to make them pay a diplomatic or military price for their actions.

As for Obama, as the Kagans and Sullivan show, the administration abjectly refused to intervene when Maliki stole the elections or to defend US allies in the Iraqi military from Maliki's pro-Iranian purge of the general officer corps. And by refusing to side with US allies, the Obama administration has effectively sided with America's foes, enabling Iranian-allied forces to take over the US-built, trained and armed security apparatuses in Iraq.

ALL OF these actions are in line with the US's current policy towards Egypt. There, without considering the consequences of its actions, in January and February the Obama administration played a key role in ousting the US's most dependable ally in the Arab world, president Hosni Mubarak.

Since Mubarak was thrown from office, Egypt has been ruled by a military junta dubbed the Supreme Council of the Armed Forces. Because SCAF is comprised of the men who served as Mubarak's underlings throughout his 30-year rule, it shares many of the institutional interests that guided Mubarak and rendered him a dependable US ally. Specifically, SCAF is ill-disposed toward chaos and Islamic radicalism.

Here be dragons

SAINT GEORGE AND THE FLAGGIN'

By Mark Steyn

When it's not explicitly hostile, Western liberals' attitude to Ayaan Hirsi Ali is deeply condescending. One thinks of Nicholas Kristof in the New York Times, pondering the author's estrangement from her Somali relatives:

I couldn't help thinking that perhaps Hirsi Ali's family is dysfunctional simply because its members never learned to bite their tongues and just say to one another: "I love you."

In Somalia, they don't bite their tongues but they do puncture your clitoris. Miss Hirsi Ali was the victim of what Western hospitals already abbreviate to "FGM" ("female genital mutilation") or, ever more fashionably, "FGC" (the less judgmental "female genital cutting"). Group hugs may work at the Times op-ed desk when the Pulitzer nominations fail to materialize, but Mr. Kristof is perhaps being a wee bit Upperwestsideocentric to assume their universality. Miss Hirsi Ali has been on the receiving end of both Islam and the squishy multiculti accommodation thereof. For seven years, she has been accompanied by bodyguards, because the men who killed the film director Theo van Gogh would also like to kill her.

She was speaking in Calgary the other day and, in the course of an interview with Canada's National Post, made a sharp observation on where much of the world is headed. It's not just fellows like Mohammed Bouyeri, the man who knifed, shot, and, for good measure, near decapitated van Gogh. She noted the mass murderer Anders Breivik, who killed dozens of his fellow Norwegians supposedly as a protest against the Islamization of Europe — if one is to believe a rambling manifesto that cited her, me, Jefferson, Churchill, Gandhi, Hans Christian Andersen, and many others. Much media commentary described Breivik as a "Christian." But he had been raised by conventional Eurosecularists, and did not attend a church of any kind. On the other hand, he was very smitten by the Knights Templar.

"He's not a worshiping Christian but he's become a political Christian," said Ayaan, "and so he's reviving political Christianity as a counter to political Islam. That's regression, because one of the greatest achievements of the West was to separate politics from religion." Blame multiculturalism, she added, which is also regressive: In her neck of the Horn of Africa, "identity politics" is known as tribalism.

That's a shrewd insight. We already accept "political Islam." Indeed, we sentimentalize it — dignifying the victory of the Islamist Ennahda party in post–Ben Ali Tunisia, the restoration of full-bore polygamy in post-Qaddafi Libya, and the slaughter of Coptic Christians in post-Mubarak Egypt as an "Arab Spring." On the very day Miss Hirsi Ali's interview appeared, the mob caught up with the world's longest-serving non-hereditary head of state. Colonel Qaddafi had enlivened the U.N. party circuit for many years with his lavish ball gowns, but, while he was the Arab League's only literal transvestite, that shouldn't obscure the fact that most of his fellow dictators are also playing dress-up. They may claim to be "pan-Arabists" or "Baathists," but in the end they represent nothing and no one but themselves and their Swiss bank accounts. When their disgruntled subjects went looking for something real to counter the hollow kleptocracies, Islam was the first thing to hand. There is not much contemplation of the divine in your average mosque, but, as a political blueprint, Islam was waiting, and ready.

Multicultural Europe is not Mubarak's Egypt, but, north of the Mediterranean as much as south, the official state ideology is insufficient. The Utopia of Diversity is already frantically trading land for peace, and unlikely to retain much of either. In the "Islamic Republic of Tower Hamlets" — the heart of London's East End, where one sees more covered women than in Amman — police turn a blind eye to misogyny, Jew-hatred, and gay-bashing for fear of being damned as "racist." Male infidel teachers of Muslim girls are routinely assaulted. Patrons of a local gay pub are abused, and beaten, and, in one case, left permanently paralyzed.

The hostelry that has so attracted the ire of the Muslim youth hangs a poignant shingle: The George and Dragon. It's one of the oldest and most popular English pub names. The one just across the Thames on Borough High Street has been serving beer for at least half a millennium. But no one would so designate a public house today. The George and Dragon honors the patron saint of England, and it is the cross of Saint George — the flag of England — under which the Crusaders fought. They brought back the tale from their soldiering in the Holy Land: In what is now Libya, Saint George supposedly made the Sign of the Cross, slew the dragon, and rescued the damsel. Within living memory, every English schoolchild knew the tale, if not all the details — e.g., the dragon-slaying so impressed the locals that they converted to Christianity. But the multicultural establishment slew the dragon of England's racist colonialist imperialist history, and today few schoolchildren have a clue about Saint George. So the pub turned gay and Britain celebrated diversity, and tolerance, and it never occurred to them that, when you tolerate the avowedly intolerant, it's only an interim phase. There will not be infidel teachers in Tower Hamlets for much longer, nor gay bars.

The "multicultural society" was an unnecessary experiment. And, in a post-prosperity Europe, demographic transformation is an unlikely recipe for social tranquility. If Ayaan Hirsi Ali is right, more than a few Europeans cut off from their inheritance and adrift in lands largely alien to them will seek comfort in older identities. In the Crusaders' day, the edge of the maps bore the legend "Here be dragons." They're a lot closer now.

I'm rooting for the free market

Europe's Two Endgames

by Gary North

On November 22, the New York Times published an interactive chart on which governments owe how much money to which foreign nation's banks. The chart reveals the fault lines in Europe's economy. The debts are owed above all to French banks. The biggest debtor is Italy. If Italy defaults, France's largest banks go down. Overnight.

On Monday, November 28, there was a Financial Times article speculating that the Eurozone has less than two weeks to survive. The headline: "The Eurozone really has only days to avoid a collapse." It was written by an associate editor of the publication.

There have been lots of these articles over the last few weeks. They all offer the same formula: "The end is near, unless. . . ." Unless what? Unless Western Europe's largest governments unilaterally abolish the treaties that created the European Union in the 1990s. This will involve the following: (1) the consolidation of the Eurozone into an unconstitutional super-state, and (2) the European Central Bank buys bonds issued by this new entity, which is also unconstitutional, according to the existing treaties.

The first solution is consistent with over 90 years of behind-the-scenes planning to centralize Europe politically, thereby destroying individual national sovereignty. I have written about this many times. The mastermind of this was Jean Monnet. Monnet started working for political unification when he and Raymond Fosdick, John D. Rockefeller, Jr.'s agent, sat together at the Versailles Peace Conference in 1919.

In July 1919, Fosdick sent a letter to his wife. He told her that he and Monnet were working daily to lay the foundations of "the framework of international government." [July 31, 1919; in Fosdick, ed., Letters on the League of Nations (Princeton, New Jersey: Princeton University Press, 1966), p. 18.] Fosdick returned to New York City in 1920, where he took over running the Rockefeller Foundation for the next 30 years.

Monnet was the #1 front man for the New World Order for the next five decades. He promoted political unification by wrapping it in the swaddling clothes of economic unification. The first institutional manifestation of this plan was in 1951: the creation of the European Economic Coal and Steel Community. It was extended in 1957 with the creation of the Common Market.

The second aspect of this unification process was the creation of a unified currency and a single central bank. The NWO did not get all of this, but they got most of it in 2000: the Eurozone and the euro.

We are now facing the clash of these two endgames: (1) Monnet's political endgame, which could easily become a reality in the next few weeks vs. (2) the monetary endgame, in which Monnet's original vision is not consummated, because the Eurozone collapses in a wave of big bank failures. The world then goes into a recession . . . or worse.

STOCK MARKETS RALLY

Also on November 28, European stock markets had an enormous rally, between 3% to 5.5%, depending on the market. I see three possible explanations:

1. The article was dead wrong: no Eurozone crisis.
2. Monnet's political endgame in about to happen.
3. Investors grab at straws.

There was a rumor over the weekend that the IMF was going to lend Italy's government €600 billion. Here is how one news outlet reported it.

Rome – The IMF could bail out Italy with up to €600bn ($794bn), an Italian newspaper reported on Sunday, as Prime Minister Mario Monti came under pressure to speed up anti-crisis measures.

The money would give Monti a window of 12 to 18 months to implement urgent budget cuts and growth-boosting reforms "by removing the necessity of having to refinance the debt", La Stampa reported, citing IMF officials in Washington.

The IMF would guarantee rates of 4.0% or 5.0% on the loan - far better than the borrowing costs on commercial debt markets, where the rate on two-year and five-year Italian government bonds has risen above 7.0%.

Either the article was wrong, or else the author's alternatives – fiscal union and European Central Bank inflation on a massive scale – are a slam dunk, to use an American phrase.

Early Monday morning, the IMF had denied that any such plan existed. The markets paid no attention to the denial. The rumor had to be true. It was only right that it be true. It was too good not to be true. All day, they soared upward.

Investors want to believe that Santa Claus will come early this year.

For weeks, the volatility of Europe's stocks has been enormous. Wild waves of pessimism are followed by equally wild waves of optimism. The pessimism is driven by free market forces: the relentless upward move of interest rates for PIIGS government bonds. Greece is paying well over 100% on its two-year bonds. Italy and Spain are facing 7%, which is regarded as some sort of tipping-point figure – why, we are not told. It just is. Greece pays almost 20 times this, but we are reassured that Greece will not default. However, Spain and Italy may default as a result of 7%.

I do not buy either story. Greece will surely default, contrary to all assurances to the contrary, but Italy and Spain may not, if they cut government spending fast enough and deep enough. But they won't.

So, are the investors wiser than the columnists? Is the IMF going to come through, even though (1) Europe is not yet consolidated politically, and (2) the ECB will continue to refuse to inflate? Is the IMF Santa Claus? Or will it turn out that the ECB is going to play Santa this year?

The investors don't care. One of these scenarios has to be true, because the alternative is a crash. France will have its credit rating downgraded. Sarkozy's government will fall.

The Eurozone needs a lot more than €600 billion. It needs something in the range of €2 trillion in a TARP-like bailout. And this doesn't include however much the ECB must inflate to keep the banks solvent. This is the opinion of the other Sarkozy: Nicholas' half brother, who is a senior manager of the Carlyle Group, the third largest private hedge fund on earth. Among its investors are George H. W. Bush and the rich bin Ladens.

How soon is this enormous infusion of capital needed? A lot sooner than most people think, he says.

Stock market investors on November 28 were saying, "No problem!" The money will be forthcoming. From whom? No one knows. From bonds issued by a unified government that does not exist and which most voters oppose? Bonds purchased by whom? By the ECB, which has held out against major increases? By nearly insolvent large banks? By private investors?

Who is the Santa who will come in the night with toys for good politicians? Who are these good politicians? Politicians who say that the two European Union treaties need not be honored, since they do not authorize fiscal union or central bank purchases of bonds issued by such a political entity.

Τhe rule of a cosmopolitan elite

How the EU oligarchy has downsized democracy

So-called liberals and leftists have become obsessed with constructing a political firewall between the elite and the multitude.

By Frank Furedi

Over the past month, it has become clear that the European Union doesn’t simply suffer from a democratic deficit; rather, it has decided that in the current climate of crisis and uncertainty, the institutions of government must be insulated and protected from public pressure. In Brussels, and among an influential coterie of European opinion-makers, the idea that ordinary people have the capacity to self-govern is dismissed as at best a naive prejudice, and at worst a marker for right-wing populism.

As we shall see, this desire to renounce the politics of representation is by no means confined to EU technocrats. To no one’s surprise, many businesspeople and bankers also prefer the new unelected governments of Greece and Italy to regimes that are accountable to their electorates. And such elitist disdain for nations’ democratic representative institutions is also shared by sections of the left and the intelligentsia, too. So in his contribution on the crisis of democracy, Jürgen Habermas, the leading leftist German philosopher, writes off national electorates as ‘the preserve of right-wing populism’ and condemns them as ‘the caricature of national macrosubjects shutting themselves off from each other’.

Indeed, it isn’t the old-fashioned conservative detractors of the multitude who are at the forefront of the current cultural turn against democratic will-formation – no, it is liberal advocates of expert-driven technocratic rule who are now the most explicit denouncers of democracy. The current political attack on the principles of representative democracy is founded on three propositions. First it is claimed that the people cannot be trusted to support policies that are necessary for the preservation and improvement of society. Secondly, it is suggested that there is an important trade-off to be made between democracy and efficiency, and that in a time of crisis the latter must prevail over the former. And finally, anti-democratic ideologues believe that governments, especially democratic governments, have lost the capacity to deal with the key problems facing societies in today’s globalised world.

The inconvenience of democratic accountability

Governments across Europe fear talking openly to their electorates about the scale of the problems in their societies. They believe that if they introduce the punitive austerity measures required to stave off the disintegration of the economy, their people will turn against them. Consequently, their principal objective is to insulate themselves from public pressure.

Numerous commentators have mistakenly argued that this project of constructing a political firewall between the people and the institutions of government is simply a response to the pressures of market forces. So, the soft technocratic coups in Greece and Italy have been attributed to ‘neo-liberalism’ and the global markets. ‘The world’s statesmen no longer shape events but merely respond to them, in thrall of market forces’, says a columnist for the Observer. In the same vein, the Independent’s Paul Vallely wrote of a ‘market coup’, which has ‘suspended, if not overthrown, democracy in Greece’. No doubt the financial markets placed tremendous pressure on the governing institutions of Greece and Italy. But the EU’s political elites did not need to be ‘dictated’ to by the markets; they were more than happy to evade their responsibilities by hiding behind technocrats and experts.

As usual, it was the European Commission president José Manuel Barroso who explained the necessity for technocratic, insulated decision-making. He explained that the non-democratically appointed governments of Italy and Greece have been installed ‘not just because they’re technocrats, but because it [is] easier to ask independent personalities to construct political consensus’. Barroso did not need to spell out what these ‘personalities’ were independent of, because it is pretty evident that their main virtue is that they are independent of the electorate. For Barroso, effective policymaking means getting rid of the distractions thrown up by the process of public accountability.

The tendency to depict democratic accountability as a deeply flawed, unpredictable thing is based on the belief that ordinary people lack the intellectual resources to deal with the complicated challenges facing policymakers. According to the traditional aristocratic version of this argument, since people will inevitably react against taking difficult decisions, it makes far more sense simply for someone else to take those decisions on their behalf.

In recent decades, this claim has been supplemented by a new thesis: that ordinary people are so misguided by the media or the church or some other institution that they simply do not know what is in their best interests anymore. ‘People getting their fundamental interests wrong is what American political life is all about’, asserted Thomas Frank in his influential US bestseller What’s the Matter with Kansas? How Conservatives Won the Heart of America. If this wasn’t the case, Frank says, then why on earth would they vote for the Republicans?

Contempt for the intellectual and moral capacities of the multitude invariably leads many self-proclaimed ‘enlightened’ commentators to distrust the public. Such anti-public sentiments are often expressed by environmentalists, who regard ordinary folk as far too selfish or too in thrall to consumerism to vote for policies that will require them to make the kind of sacrifices that might ‘save the planet’. So Australian academic Clive Hamilton has argued that the ‘practices of democracy at times do not sit comfortably with the best advice of those most qualified and knowledgeable’. As someone who considers himself to be among the ‘most qualified and knowledgeable’, Hamilton feels concerned ‘about the corpses of science, reason and expertise that democracy is leaving in its wake’.

Upholding the authority of the ‘most qualified and knowledgeable’ invariably leads to the downsizing of democratic authority. One advocate of soft coercion of the people, the green journalist Johann Hari, has argued that since ‘we’ll save the planet only if we’re forced to’, coercion is necessary in order to make us behave. He justifies the use of compulsion on the grounds that the issue of the environment is far too important to be decided through the unpredictable institutions of democracy. ‘[E]ven the most hardcore libertarians agree that your personal liberty ends where you actively harm the liberty of another person’, argued Hari in defence of compelling people to adopt a green lifestyle.

Disappointment with the intellectual and moral resources of ordinary people doesn’t mean that Thomas Frank or Clive Hamilton is an anti-democratic ideologue. But what their loss of faith in democracy expresses is a pragmatic and unprincipled attitude towards the ideal of political representation. Like bankers and EU policymakers, they have greater faith in technocrats and experts than in the electorate. The instinct to restrain the influence of popular will is even expressed by Anthony Barnett, editor of openDemocracy, who is uncomfortable with the idea of the UK parliament taking a decision on the death penalty. He feels reassured that Britain’s elected parliament ‘may debate but it cannot in fact introduce the death penalty’, because the European Court of Human Rights has ‘ruled that the death penalty does in fact contravene the European Convention [on Human Rights]’. The only difference between Barroso, Barnett and Hamilton is which expert institution they uphold as being preferable to the institutions of democratic accountability.

When it comes to making a decision about economic austerity, the environment or the death penalty, apparently the views of the electorate must now give way to the views of the ‘most qualified and knowledgeable’.

The democracy/efficiency trade off

Thinkers who argue against democratic political accountability often assert that representatives of the people are far less able to deal with complex issues, certainly in comparison with technocrats and experts. Of course, every modern political institution requires and depends upon the advice and input of scientists, engineers and experts. But what the advocates of the current technocratic turn demand is not simply that politicians consider such advice, but that they defer to it, that they bow before the wisdom of the expert. In its more caricatured form, this technocratic turn assumes the character of an expert-dominated polity. So Joschka Fischer, the former German foreign minister and grand old man of the Green Party, has talked about the need for an ‘avant garde of the United States of Europe’.