A prolific economist and journalist reveals how the nexus of international economics and national politics pushed the monetary union to the brink of extinction, how that disastrous development was avoided and why the long-term viability of a common currency challenges politics as we know it.
"Chacun Sa Merde"
It did not either knock on the door, or crash the gate. In September 2008, the global financial crisis entered in Europe in silence and brought it to the brink of collapse in a surreal obscurity.
While all the lights were focused on Wall Street's bankruptcies shaking the world, Chancellor Angela Merkel entrenched herself behind a wall of silence as she saw Germany, hidden from public awareness, head toward the same financial meltdown, as one bank after the other risked crumbling before her eyes.
On October 4, 2008, on the stairway of the Elysée Palais in the heart of Paris, she did not even want to pay heed to Nicolas Sarkozy, the French president, who was asking for an immediate, coordinated European reaction. Turning away from her and from the microphones, the French president confessed to his advisers: "If we cannot cobble together a European solution then it will be a debacle. But it will not be my debacle; it will be Angela's. You know what she said to me? 'Chacun sa merde!' (To each his own merde)."
Actually, according to an aide of hers, Merkel had quoted a proverb taken from a work written by a monumental figure of German culture, Johann Wolfgang Goethe: "Ein jeder kehr' vor seiner Tür, und rein ist jedes Stadtquartier" (Everyone should sweep in front of his door and every city quarter will be clean). To make the disagreement between the two leaders more ironic, Sarkozy turned back to the press and uttered: "It is absolutely obvious that there are differences between our cultures...."
The reason why Merkel was so opposed to putting on the table "some money," as Sarkozy called it, and backing up the dramatically endangered European banking system, was indeed also a matter of cultural differences in the heart of Europe. Merkel was shocked by the amount of incalculable risks that she was discovering in her own country and who knows what was hidden in the other countries: homework had to come first. Sarkozy, in that moment of need, had the intuition instead that he could solve the French banks' problems by leveraging a European common response.
It was also a typical Sarkozy-Merkel confrontation: the former's politics by instinct versus the latter's politics by program. "You do not have a real plan," Merkel said to Sarkozy at the Elysée. She did not consider Sarkozy's proposal a credible course of action. Setting up a common fund, mainly financed by Germany, that could become a self-service stash for any country trying to rescue its own banks was a non-starter in her eyes. In a government meeting in Berlin, Merkel had just reckoned that the European bank—umbrella plan that Sarkozy was demanding would make Germany contribute €75 billion, without knowing precisely for what use. Although the French president was urging the move as matter of survival for Europe, Merkel maintained that putting together a common fund would require months of preparations and preliminary negotiations. It was impossible in a few days to arrange a proper legal framework, even only at the national levels. And Merkel did need to make each step legally watertight and she needed also to know how to involve the German Parliament: "They would not understand." She was not le Président, she was die Kanzlerin in a federal, democratic system. Moreover, a common teller open to each and every bank would confuse the responsibilities. Any bank, from any country, could help itself, tap the common resources, and maybe even remain unknown. Finally, and most important, she had learned that it was not a matter of just "some money." It was hundreds and hundreds of billions of euros.
That first disagreement at the Elysée was a milestone in a long story of national interests, political hesitations, and half-hearted reciprocal trust that would make Merkel, Sarkozy, and the other leaders of the euro area accompany the euro to the brink of collapse several times in the following years. It was indeed a crucial moment for the destiny of the euro. National leaders—driven foremost by local economic and political interests—denied that Europe was on the brink. They succeeded in keeping the reality temporarily hidden from the public, but from that very moment they undermined the possibility of a common European response to the crisis. Ever since, the financial threat hitting some banks—particularly in Germany, France, the Netherlands, and Ireland—willingly neglected, mystified, or downplayed, grew larger month by month. In the following years, it became almost impossible to recover the road to unity. Eventually, the seams of the euro area were torn by the consequences of that initial division.
In fact, before coming back at the end of the next chapter to this eventful meeting at the ElysÃ(c)e at the beginning of October, it is necessary to look in some depth at the dramatic events of the weeks and even of the years beforehand and to see at work the powerful factors that made a European response impossible when it was most needed: the fact that the original responsibility for the crisis was primarily American; the hidden problems of the European banks; the national political interests behind the banks; and the conflict between the governments' interests and the action of the European institutions, first among them the European central bank. This is a combination that will be determinant for the rest of the crisis.
On September 15, 2008, three weeks before the Elysée meeting, the U.S. secretary of the Treasury had decided to let the investment bank Lehman Brothers go bankrupt, creating the biggest financial crisis in recent memory anywhere in the world. European leaders were growing aware that the Wall Street crisis, "the American mess" as they called it, was about to haunt them with equal vehemence. The initial, underlying feeling of relief that the difficulties of the "Anglo-Saxons" (as some Europeans sometimes referred to the Americans and the British) were not being visited upon the Europeans and that the speculators in the United States had gotten their just desserts was rapidly fading. The sense of immunity was unraveling, and with good reason: American toxic securities, including the infamous subprime mortgage assets, had been massively absorbed by European banks, and contagion was spreading fast, all the more so because financial interconnections among the twenty-seven European Union countries had grown inextricable in the previous years. Although practically no one was aware of it at the time, Germany had in fact been less than one step away from launching itself and the rest of Europe into a catastrophic crisis triggered by the near-collapse of a German bank. "A few days before, we had just defused the nuclear meltdown," a central banker remembered. "Nobody had understood how close we were."
This is what Merkel knew, and she was particularly worried about the political consequences of what was happening around the world and in her country. A financial crisis was almost inexplicable to European citizens who, all of a sudden, had to be told that they were losing their jobs because some highly paid bankers somewhere in the universe had taken too many risks using their money. The chancellor had seen that people in her country were growing disgruntled with the symbols of power, notably bankers and politicians. She was not going to throw the money of German taxpayers at irresponsible and wretched bankers in her own country, let alone in others. Eventually this whole story was a matter of democracy, not of instinct.
In fact, uncertain over the extent of the crisis, and certain of popular discontent, most European leaders remained hesitant and wary of each other. Just a few days before the October meeting at the Elysée, the Irish government had broken ranks with the rest of Europe. In sheer panic, Dublin announced that it would guarantee all deposits in its six biggest financial institutions for the next two years. If any of the national banks got into difficulties, Irish savers would be sure to get their money back. What would happen to the foreign depositors at the same banks? Or to the foreign banks in Ireland? "Chacun sa merde!" Not one word had been offered to coordinate or even prepare other governments. The decision was aimed at avoiding bank runs and was thus rational from a purely Irish political perspective. However, if other EU countries had attempted to do the same, savers would naturally have withdrawn their savings from banks in countries where these were not guaranteed by the state and channelled them to banks in countries where they were.
Had this spiral of "beggar-thy-neighbor" measures escalated, the integrated financial market would have been shattered and renationalized into domestic markets. The rights of foreigners would be denied and, step by step, legal and political conflicts would have erupted among the EU countries for the first time since 1957 and the Treaty of Rome establishing the predecessor body to the EU. Chancellor Merkel was on a flight to St. Petersburg when she was informed from the news wires of Dublin's decisions. Her reaction was blunt: If requested, the Germans would not bail out any ailing Irish banks, even though she knew that German banks, the public-owned Landesbanken in particular, were among the biggest creditors of Irish financial institutions. It would have been the perfect moment for the European Commission to take the initiative. This supranational institution in Brussels is the executive arm of the EU and is expected to put the interests of the citizens above those of single states. The commission could impose the priority of the common European interest over any uncoordinated initiative. But instead there was no protest against Dublin from Brussels. Not incidentally, the member of the EU Commission responsible for financial services was an Irishman. That was a fateful and telling sign: since the beginning, the European story of the crisis was being told as much by silences as by shouts.
Good-Bye to American Capitalism: Europe's Turn to Lead
The financial crisis had severely damaged American credibility. From a European perspective, Wall Street was the epicenter of greedy speculations that had triggered an unprecedented global shock. But while the United States was the largest net debtor in the world—reflecting its large current account deficits during the previous decade—the euro area was the world's largest holder of external assets and liabilities. The rapid spread of the crisis globally had highlighted the exorbitant role of finance that, superficially, seemed to distinguish the American from the continental economic models, but actually linked the two worlds. The shock originating in the U.S. financial system had led to disruption in the banking systems in Europe and around the world. In turn, the financial collapse gradually transmitted to the "real" economy (that is, the non-financial sector), as was more and more evident in the United States. Even the impressive growth of the past decade in America—on average 1 point of GDP each year greater than in the euro area—proved misleading once one took into account that the American growth had been inflated by extensive debt creation in the private sector.
But financial integration, promoted by the new, adventurous capitalism imported from Wall Street, had created also a strong interdependence around the world. The American problem was not a problem for America alone. The wealth of European citizens, and their capacity to consume and invest, were influenced by rapid swings in the prices of foreign assets. In part, this was because banks had put a great deal of foreign bonds and stocks into the portfolios of European households and firms. The volatility of foreign asset prices also had large consequences across borders. For all of its suspicion about international finance, Europe had a 50 percent larger amount of foreign assets than the United States relative to the GDP—even without taking into account the intra-EU allocations. Finally, when risk aversion or outright panic emerged in the United States, it rapidly spread throughout the world, changing the investment climate everywhere. Europe discovered it was by no means isolated from the U.S. financial excesses. Its banks had willingly participated in the go-go years of easy finance, maintaining later that it was an Anglo-Saxon manipulation of the European virtues of saving and restraint. Criticism of the influence of Wall Street and of the City of London in spreading toxic financial assets in Europe was not unfounded: for instance, two-thirds of the European holdings of U.S. toxic assets par excellence—long-term corporate mortgage-backed securities, the infamous subprimes—were traded through the Cayman Islands, the City of London, and Ireland. American insurance giant AIG alone sold from its London subsidiary $500 billion of credit default swaps to European counterparts, making them the final victims of the securitization "global food chain." Entire real estate markets, like the Spanish, had been transformed into speculative "bubbles" through the supply of cheap mortgages by the British banks that pushed the debts of households sky-high.
In an atmosphere that seemed to represent the twilight of global capitalism surrounding the crisis, "leading the world" became more than just a slogan for European politicians. Europe had long preserved a certain skepticism toward the primacy of the economy and the rightfulness of markets. A culture of political morality had produced both devastating wars and their antidotes: democracy and the separation of powers. The welfare state embodied in European social programs had become the only way to reconstruct a collective sense of positive patriotism after the annihilating experiences of the totalitarian regimes of the first half of the twentieth century. The same historical motivation had led peoples and states to choose the way of the integration of nations and had generated the project of European-wide institutions after World War II. The EU itself was also an attempt to rise to the global challenge. Taken together, the EU's twenty-seven countries are the largest economic block of the world, and their combined population of around 500 million is the third-largest after China and India. The euro area alone has a larger population than the United States. The EU countries accounted in 2008 for just more than 28 percent of global GDP, greater than the United States (25 percent) and the single largest block in the world.
Their unique form of both supranational and intergovernmental cooperation relies on a new and untested form of power, where leadership derives from consent, and diversity leads to dialogue. In principle, national sovereignty gives way to the will of the majority among European citizens. This was intended to be a pattern that, in the spirit of the founders, could be extended to peaceful cooperation in the world, offering a model for the new emerging powers and, finally, giving a sense of destiny and goodness to Europe's history and thus solving the Schuldfrage, the guilt question, of a continent tarnished by wars and atrocity during the twentieth century. But beneath the grandeur of the European dream remain national interests, personal ambitions, and politics. If "leading" is still a nontranslatable word for Germans, it persists as an oneiric temptation that leaders of these ancient and aging countries, trapped between symbols and traditions of their nineteenth-century sovereignties, cannot resist. Most of them are still governing from within ancient palaces among baroque mirrors that deform the present. They breed fictions of sovereignty and fight deadly domestic political battles while actually yielding power month by month to the global markets or to supranational institutions. Eventually, if they could not find a way to govern globalization, their national powers would be based on denying reality.
In fact, above European citizens hovers a sense of incipient decline, as China, India, Russia, and Brazil appear to be on the rise. Hegel's prophecy—whereby the spirit of the world moves from east to west ("following the movement of the sun")—seems relevant now, and the circle is closing as it approaches Asia. Europeans seem intimidated by the growing social complexity of a globalized world, between changing local conditions and irresistible external pressures. Individuals grope for orientation in increasingly overheated political competitions at national levels, where it is difficult for them to distinguish between action and empty communication. The sense of becoming negligible manifests itself in the spasms of populist politics or in a last nationalistic gasp of its leaders. In a debate at the British Parliament in December 2008, Gordon Brown argued that he had "saved the world," provoking such an outburst of derision from the ranks of the opposition that he strived to regain control, groped awkwardly, and repeated the phrase several times—that he actually had "saved the world ... banks." At the IMF meetings in Washington, just five days after the fateful summit of October 4, German finance minister Peer Steinbrück attacked the hegemony of the Americans and the British who "through financial domination had brought the world on the brink of collapse" instead of accepting the wisdom of the German Sozialmarktwirtschaft (social market economy), a sentiment that was widely shared in Berlin. During the previous months, Steinbrück had a number of frontal clashes with the Bush administration. He was still furious remembering how his American counterpart had once received him for just eleven minutes, while standing in a hall. Things had changed now. One official in Washington remembers the climate in those days: "Suddenly we were like pariahs; we were not in the condition to even put forward a suggestion. People were yelling at us and we ourselves knew we bore the responsibility."
Excerpted from Saving Europe by CARLO BASTASIN Copyright © 2012 by Carlo Bastasin. Excerpted by permission of BROOKINGS INSTITUTION PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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|You Save:||$2.67 (8%)|
|Full Title:||Saving Europe: How National Politics Nearly Destroyed the Euro|
|Publisher:||Brookings Inst Pr|
|Date Published:||March 08, 2012|
|Feature:||Text to Speech Enabled|
|ISBN:||0815721978 / 9780815721970|
|Categories:||Business & Money / International Business|
|Business & Money / International Business|