Niall Ferguson peers into Europe's future and sees Greek gardeners, German sunbathers—and a new fiscal union. Welcome to the other United States.
Welcome to Europe, 2021. Ten years have elapsed since
the great crisis of 2010-11, which claimed the scalps of no fewer than 10
governments, including Spain and France. Some things have stayed the same, but
a lot has changed.
The euro is still circulating, though banknotes are
now seldom seen. (Indeed, the ease of electronic payments now makes some people
wonder why creating a single European currency ever seemed worth the effort.)
But Brussels has been abandoned as Europe's political headquarters. Vienna has
been a great success.
"There is something about the Habsburg
legacy," explains the dynamic new Austrian Chancellor Marsha Radetzky.
"It just seems to make multinational politics so much more fun."
The Germans also like the new arrangements. "For
some reason, we never felt very welcome in Belgium," recalls German
Chancellor Reinhold Siegfried von Gotha-Dämmerung.
Life is still far from easy in the peripheral states
of the United States of Europe (as the euro zone is now known). Unemployment in
Greece, Italy, Portugal and Spain has soared to 20%. But the creation of a new
system of fiscal federalism in 2012 has ensured a steady stream of funds from
the north European core.
Like East Germans before them, South Europeans have
grown accustomed to this trade-off. With a fifth of their region's population
over 65 and a fifth unemployed, people have time to enjoy the good things in
life. And there are plenty of euros to be made in this gray economy, working as
maids or gardeners for the Germans, all of whom now have their second homes in
the sunny south.
The U.S.E. has actually gained some members. Lithuania
and Latvia stuck to their plan of joining the euro, following the example of
their neighbor Estonia. Poland, under the dynamic leadership of former Foreign
Minister Radek Sikorski, did the same. These new countries are the poster
children of the new Europe, attracting German investment with their flat taxes
and relatively low wages.
But other countries have left.
David Cameron—now beginning his fourth term as British
prime minister—thanks his lucky stars that, reluctantly yielding to pressure
from the Euroskeptics in his own party, he decided to risk a referendum on EU
membership. His Liberal Democrat coalition partners committed political suicide
by joining Labour's disastrous "Yeah to Europe" campaign.
Egged on by the pugnacious London tabloids, the public
voted to leave by a margin of 59% to 41%, and then handed the Tories an
absolute majority in the House of Commons. Freed from the red tape of Brussels,
England is now the favored destination of Chinese foreign direct investment in
Europe. And rich Chinese love their Chelsea apartments, not to mention their
splendid Scottish shooting estates.
In some ways this federal Europe would gladden the
hearts of the founding fathers of European integration. At its heart is the
Franco-German partnership launched by Jean Monnet and Robert Schuman in the
1950s. But the U.S.E. of 2021 is a very different thing from the European Union
that fell apart in 2011.
* * *
It was fitting that the disintegration of the EU should
be centered on the two great cradles of Western civilization, Athens and Rome.
But George Papandreou and Silvio Berlusconi were by no means the first European
leaders to fall victim to what might be called the curse of the euro.
Since financial fear had started to spread through the
euro zone in June 2010, no fewer than seven other governments had fallen: in
the Netherlands, Slovakia, Belgium, Ireland, Finland, Portugal and Slovenia.
The fact that nine governments fell in less than 18 months—with another soon to
follow—was in itself remarkable.
But not only had the euro become a government-killing
machine. It was also fostering a new generation of populist movements, like the
Dutch Party for Freedom and the True Finns. Belgium was on the verge of splitting
in two. The very structures of European politics were breaking down.
Who would be next? The answer was obvious. After the
election of Nov. 20, 2011, the Spanish prime minister, José Luis Rodríguez
Zapatero, stepped down. His defeat was such a foregone conclusion that he had
decided the previous April not to bother seeking re-election.
And after him? The next leader in the crosshairs was
the French president, Nicolas Sarkozy, who was up for re-election the following
April.
The question on everyone's minds back in November 2011
was whether Europe's monetary union—so painstakingly created in the 1990s—was
about to collapse. Many pundits thought so. Indeed, New York University's
influential Nouriel Roubini argued that not only Greece but also Italy would
have to leave—or be kicked out of—the euro zone.
But if that had happened, it is hard to see how the
single currency could have survived. The speculators would immediately have
turned their attention to the banks in the next weakest link (probably Spain).
Meanwhile, the departing countries would have found themselves even worse off
than before. Overnight all of their banks and half of their nonfinancial
corporations would have been rendered insolvent, with euro-denominated
liabilities but drachma or lira assets.
Restoring the old currencies also would have been
ruinously expensive at a time of already chronic deficits. New borrowing would
have been impossible to finance other than by printing money. These countries
would quickly have found themselves in an inflationary tailspin that would have
negated any benefits of devaluation.
For all these reasons, I never seriously expected the
euro zone to break up. To my mind, it seemed much more likely that the currency
would survive—but that the European Union would disintegrate. After all, there
was no legal mechanism for a country like Greece to leave the monetary union.
But under the Lisbon Treaty's special article 50, a member state could leave
the EU. And that is precisely what the British did.
* * *
Britain got lucky. Accidentally, because of a personal
feud between Tony Blair and Gordon Brown, the United Kingdom didn't join the
euro zone after Labour came to power in 1997. As a result, the U.K. was spared
what would have been an economic calamity when the financial crisis struck.
With a fiscal position little better than most of the
Mediterranean countries' and a far larger banking system than in any other
European economy, Britain with the euro would have been Ireland to the power of
eight. Instead, the Bank of England was able to pursue an aggressively
expansionary policy. Zero rates, quantitative easing and devaluation greatly
mitigated the pain and allowed the "Iron Chancellor" George Osborne
to get ahead of the bond markets with pre-emptive austerity. A better
advertisement for the benefits of national autonomy would have been hard to
devise.
At the beginning of David Cameron's premiership in
2010, there had been fears that the United Kingdom might break up. But the
financial crisis put the Scots off independence; small countries had fared
abysmally. And in 2013, in a historical twist only a few die-hard Ulster
Unionists had dreamt possible, the Republic of Ireland's voters opted to
exchange the austerity of the U.S.E. for the prosperity of the U.K.
Postsectarian Irishmen celebrated their citizenship in a Reunited Kingdom of
Great Britain and Ireland with the slogan: "Better Brits Than
Brussels."
Another thing no one had anticipated in 2011 was
developments in Scandinavia. Inspired by the True Finns in Helsinki, the Swedes
and Danes—who had never joined the euro—refused to accept the German proposal
for a "transfer union" to bail out Southern Europe. When the
energy-rich Norwegians suggested a five-country Norse League, bringing in
Iceland, too, the proposal struck a chord.
The new arrangements are not especially popular in
Germany, admittedly. But unlike in other countries, from the Netherlands to
Hungary, any kind of populist politics continues to be verboten in Germany. The
attempt to launch a "True Germans" party (Die wahren Deutschen)
fizzled out amid the usual charges of neo-Nazism.
The defeat of Angela Merkel's coalition in 2013 came
as no surprise following the German banking crisis of the previous year.
Taxpayers were up in arms about Ms. Merkel's decision to bail out Deutsche
Bank, despite the fact that Deutsche's loans to the ill-fated European
Financial Stability Fund had been made at her government's behest. The German
public was simply fed up with bailing out bankers. "Occupy Frankfurt"
won.
Yet the opposition Social Democrats essentially
pursued the same policies as before, only with more pro-European conviction. It
was the SPD that pushed through the treaty revision that created the European
Finance Funding Office (fondly referred to in the British press as
"EffOff"), effectively a European Treasury Department to be based in
Vienna.
It was the SPD that positively welcomed the departure
of the awkward Brits and Scandinavians, persuading the remaining 21 countries
to join Germany in a new federal United States of Europe under the Treaty of
Potsdam in 2014. With the accession of the six remaining former Yugoslav
states—Bosnia, Croatia, Kosovo, Macedonia, Montenegro and Serbia—total
membership in the U.S.E. rose to 28, one more than in the precrisis EU. With
the separation of Flanders and Wallonia, the total rose to 29.
Crucially, too, it was the SPD that whitewashed the
actions of Mario Draghi, the Italian banker who had become president of the
European Central Bank in early November 2011. Mr. Draghi went far beyond his
mandate in the massive indirect buying of Italian and Spanish bonds that so
dramatically ended the bond-market crisis just weeks after he took office. In
effect, he turned the ECB into a lender of last resort for governments.
But Mr. Draghi's brand of quantitative easing had the
great merit of working. Expanding the ECB balance sheet put a floor under asset
prices and restored confidence in the entire European financial system, much as
had happened in the U.S. in 2009. As Mr. Draghi said in an interview in
December 2011, "The euro could only be saved by printing it."
So the European monetary union did not fall apart,
despite the dire predictions of the pundits in late 2011. On the contrary, in
2021 the euro is being used by more countries than before the crisis.
As accession talks begin with Ukraine, German
officials talk excitedly about a future Treaty of Yalta, dividing Eastern
Europe anew into Russian and European spheres of influence. One source close to
Chancellor Gotha-Dämmerung joked last week: "We don't mind the Russians
having the pipelines, so long as we get to keep the Black Sea beaches."
***
On reflection, it was perhaps just as well that the
euro was saved. A complete disintegration of the euro zone, with all the
monetary chaos that it would have entailed, might have had some nasty
unintended consequences. It was easy to forget, amid the febrile machinations
that ousted Messrs. Papandreou and Berlusconi, that even more dramatic events
were unfolding on the other side of the Mediterranean.
Back then, in 2011, there were still those who
believed that North Africa and the Middle East were entering a bright new era
of democracy. But from the vantage point of 2021, such optimism seems almost
incomprehensible.
The events of 2012 shook not just Europe but the whole
world. The Israeli attack on Iran's nuclear facilities threw a lit match into
the powder keg of the "Arab Spring." Iran counterattacked through its
allies in Gaza and Lebanon.
Having failed to veto the Israeli action, the U.S.
once again sat in the back seat, offering minimal assistance and trying vainly
to keep the Straits of Hormuz open without firing a shot in anger. (When the
entire crew of an American battleship was captured and held hostage by Iran's
Revolutionary Guards, President Obama's slim chance of re-election evaporated.)
Turkey seized the moment to take the Iranian side,
while at the same time repudiating Atatürk's separation of the Turkish state
from Islam. Emboldened by election victory, the Muslim Brotherhood seized the
reins of power in Egypt, repudiating its country's peace treaty with Israel.
The king of Jordan had little option but to follow suit. The Saudis seethed but
could hardly be seen to back Israel, devoutly though they wished to avoid a
nuclear Iran.
Israel was entirely isolated. The U.S. was otherwise
engaged as President Mitt Romney focused on his Bain Capital-style
"restructuring" of the federal government's balance sheet.
It was in the nick of time that the United States of
Europe intervened to prevent the scenario that Germans in particular dreaded: a
desperate Israeli resort to nuclear arms. Speaking from the U.S.E. Foreign
Ministry's handsome new headquarters in the Ringstrasse, the European President
Karl von Habsburg explained on Al Jazeera: "First, we were worried about
the effect of another oil price hike on our beloved euro. But above all we were
afraid of having radioactive fallout on our favorite resorts."
Looking back on the previous 10 years, Mr. von
Habsburg—still known to close associates by his royal title of Archduke Karl of
Austria—could justly feel proud. Not only had the euro survived. Somehow, just
a century after his grandfather's deposition, the Habsburg Empire had
reconstituted itself as the United States of Europe.
Small wonder the British and the Scandinavians
preferred to call it the Wholly German Empire.
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