Europe drifts towards the brink of a cataclysm

Summary:  Previous chapters in this series discussed the objective factors — and the timing of events.  Here we look at subjective but potentially decisive factors.

From the previous post — At some point Europe will decisively choose to either unify or break the European Monetary Union.  Both options can work if done with determination and skill.  Both have large costs.  Neither Europe’s leaders or peoples yet know which path they will choose, so neither do we. Although most US experts believe they will choose to break the EMU in some fashion, the recent Berlin State elections showed surprising strength for the parties supporting unification.  That should not surprise, as unification would give Europe powerful competitive advantages in the 21st century.  Continued dithering guarantees disaster.

Other chapters in this series:
(1)  Can the European Monetary Union survive the next recession?, July 2008
(2)  The Fate of Europe, nearing the point of decision
(4)  Delusions about easy fixes for Europe, dreaming during the calm before the storm

Contents of this chapter

1. Background
2. Today’s Situation
3. Have people lost confidence in their leaders?
4. For more information

(1) Background

Norman Angell wrote The Great Illusion (1909) to show that a major war in Europe would benefit neither victors nor losers.  Angell said that Europe’s nations were economically integrated to the point that war would prove too disruptive, so as to deter wars or end them quickly. Therefore, despite the arms race then underway, militarism was no longer useful for nations.

The book became a best-seller.  But in 1914 Europe acted illogically (the result proved that they should have listened to Angell).  Europe may do so again soon.

The cost of a disruptive crisis would be severe to every nation in today’s highly integrated Europe — no matter if the result is unification or divorce.  This ominous near-certainty should force a highly coordinated, tightly planned response by both individual nations and Europe’s multilateral institutions (and the IMF, as the world will also suffer).   Divorce or unify.  Both work if done with determination and skill; both have large costs.

But there are a host of factors preventing a rational response.  Fear of costs and potential disaster.  Hatred between nations.  Leaders’ delusional optimism (we can manage events, so there is not need to plan).  And others.

(2)  Today’s situation

“They have six weeks to resolve this crisis.”

— British finance minister George Osborne on 23 February 2011, referring to the G-20 meeting in Cannes on November 3 (source: Reuters)

Can Europe’s governments, on their own or through multinational institutions, act rapidly on sufficient scale? This, of course, was the problem in 1929. Even if they had seen the necessity, they probably could not have acted with the necessary speed and scale.

There are tools at hand, earnestly discussed today, to prevent a crisis.

1. A large fund  (perhaps 3 trillion Euro) to stabilise the banks if Greece defaults
2. Using the European Financial Stability Facility (EFSF,  now proposed to be 440 B euro) to leverage resources of the ECB
3. Using the EFSF to provide guarantees to buyers of sovereign or bank bonds
4. Implement the European Stability Mechanism (ESM) faster than planned, perhaps in early 2012
5. Force the ECB to cut rates and make massive purchases of sovereign and bank bonds

Even if fully implemented, these probably do little but buy time (See Krugman’s analysis).  The time expensively bought by previous programs has been squandered.  None address the rot at the core of the European Union:  lack of popular support for the project.

(3) Have people lost confidence in their leaders?

Since 2008 we have seen dozens of press conferences with well-dressed bureaucrats confidently unveiling new programs. Each with a long and obscure acronyms.  Each consisting of complex financial mechanisms. None addressing the fundamental problems. Will next round be greeted with scepticism — or even mockery?

Why have the many previous programs produced such large but brief bursts of confidence?  We see our leaders, especially central banks, as like the Wizard of Oz.  No matter how we mock them, accuse them of corruption and stupidity — like the Kings of olden days we feel awe at the might of the State machinery we labored so long and hard to build.

The Wizard of Oz relies on his awesome reputation. He hands out trinkets, which change the lives of those who believe in his power (see the script!). To the lion he gives courage.  To the scarecrow he gives intelligence.  To the tin man he gives a heart.

But the Great and Powerful Oz is just an old man behind the curtain.  As are our leaders.  The secret we have yet to learn:  the machinery of State has power only to the extent that the people support it.  The people of Europe lack faith in the unification project, while their leaders remain committed to it (for good reasons, as explained in the previous post).

This disunity cripples their governments’ ability to handle the crisis.  If not resolved soon by controlled unification or divorce, it will result in a cataclysm for Europe.

Internal political conflicts (eg, slavery in 19th C America and unification in today’s Europe) can turn even the most skilled political engineers into clowns or monsters in the people’s eyes.  Either happening in Europe would initiate the next phase of the crisis.   {paragraph expanded for great clarity in response to comments}

(4)  more information

(a)  Experts discuss the fate of Europe:

1. “Does the Euro have a Future?“, George Soros, New York Review of Books, 13 October 2011
2. “Greece Should Default and Abandon the Euro“, Nouriel Roubini, Roubini Global Economics, 22 September 2011

(b)  Other posts about Europe on the FM website:

1. Can the European Monetary Union survive the next recession?, 11 July 2008
2. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
3. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
4. Governments cannot go bankrupt, 2 April 2010
5. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
6. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
7. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
8. The Fate of Europe, nearing the point of decision, 13 September 2011

For other posts about the events taking place today see the FM Reference Page about the End of the post-WWII geopolitical regime.