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Letting the Dust Settle in Europe

The dramatic events of the last 36 hours in Europe may represent a historic turning point — or they may not.  A couple of things seem clear: the latest agreement has neither saved the euro nor resolved the standoff between Germany and France, and British diplomacy seriously miscalculated the political mood among its partners.

As for the euro question, we must give the markets a few days to sift through the agreements, and wait to see what the European Central Bank does to stave off what could still be a very dangerous financial panic in one or more of the weak economies.  The downgrade of four leading French banks — despite the assurances from yet another suspect “stress test” that there was nothing to see here, folks, please move along quietly — suggests that the financial fireworks are not over yet.

The debate between Germany and France will now move into a period of trench warfare as bureaucrats produce dueling drafts of the intergovernmental treaties that will, if all goes well, lay out the new financial governance of the EU minus Britain.  It is much too soon to tell how this comes out; both sides still seem determined to build a European monetary system in their own image.  Germany has the money; France has the political support and the possibility of an unstoppable financial meltdown could give Germany the alternatives of accepting a mass bailout or watching the eurozone collapse.  We shall see.

The commentariat will no doubt be gravely weighing in this weekend to explain what has happened.  At VM, we are going to wait a few more days to let the dust settle.  The new European system works the way the US health care law does: there’s really no way of knowing what is in this deal or what it means until the various levers and wheels get into motion and we can see how they interact.  If the euro meltdown resumes and the ECB does not step in as the buyer of last resort for indebted countries, the entire agreement could fall apart and the new treaties might never be ratified or even written.

That seems unlikely, but so many unlikely things have happened in Europe during the last two years that it is hard to predict just how its institutions and leaders will behave.

Another possibility that will likely play out over a longer time: we need to remember that the austerity programs for the southern rim are unlikely to work very well in some or perhaps even all countries.  It is not at all clear how long the consensus to stick with austerity can last — and not just in Greece.  Opposition to the new order could manifest either in a refusal to ratify the new treaties or, even more likely, a passive refusal to enforce them when ratified. Many countries don’t observe European laws very zealously as it is; accounting is a marvelous and complex science and between national, provincial and local capital and expenditure budgets on the one hand, and national companies and autonomous quasi-statal enterprises on the other, there will likely be a lot of wiggle room in any treaty drafts that leave Brussels.  Will Europe adopt (and enforce) standards for measuring unfunded pension liabilities and off the books state loans and contingent liabilities?  Forcing Italy and Greece into Teutonic budgetary discipline will be a little bit like nailing jello to the wall.  Via Meadia awaits the results with interest.

As more details emerge, markets weigh their responses, and Europe’s leaders unveil their strategies for the next stage of negotiations, VM will do its best to figure out just what the Europeans have agreed to do, how likely they are to get it done, and how effective their efforts are likely to be.

We will also be watching the fallout in Britain.  Viewed from one angle, this is the biggest debacle in British foreign policy since Suez.  The new Europe seems likely, if in fact it consolidates, to build a financial system that consigns London to the outer darkness, meaning that Cameron’s veto will have failed to protect the interests for whose sake he wielded it.  But it is still a little too soon to pronounce on what all this means, and there may be additional points in the tortuous negotiations ahead where Britain can retrieve its position.  But it is hard for now to avoid the impression that Britain has yet again failed diplomatically in Europe; a country that was once the master of European balance of power politics seems to have lost its touch.

Over the next few days the picture will begin to clear, and as that happens, Via Meadia will share whatever light comes to us with our readers.  For good and for ill, the fate of the American economy is closely tied to what happens across the Atlantic.

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  • Rand Millar

    A century ago Edward Grey failed to have Britain weigh in at the critical moment in the balance of European power politics, and his countrymen soon paid a catastrophic price. Three times in the next three generations they would find their effective salvation across the Atlantic. In 1066 Britain’s greatest component, England, rejected the Nordic world at Stamford Bridge and surrendered to the Latin world at Hastings. Might she be headed for a similar existential moment now?

  • Tom Richards

    For my money, Cameron wanted to go home with a meaningless exercise of the veto to his credit in order to stave off civil war within his party, Sarkozy wanted an opportunity to mouth off about British obstreperousness for his electorate, the fonctionnaires wanted another empty “solution” to buy a few days’ grace from the markets, and everyone got what they wanted.

    Unless and until we have an announcement that the ECB will print on a monumental scale, we should continue to take Eurozone financial implosion as the likely outcome – an event which will change the landscape so completely that prior diplomatic positioning may be moot.

  • Kenny

    The PIIGS will not want their standard of living diminished …. but that must happen.

    The real question is how much is Germany willing to subsidize those countries so the standard of living of in the PIIGs does not fall to the actual level those economics deserve.

    After all, the EU is a quasi-socialistic construct, and one of the axioms of socialism is that the producers pay for and subsidize the non-producers.

    Of course, that is easier to do when the socialism is confined to one’s own country men than it is when it includes lazy foreigners.

  • J R Yankovic

    If London does get consigned to the European outer darkness (some of us would maintain the darkness actually thickens as you approach the center, NOT the peripheries – anyhow, great metaphor), then perhaps the Brits should interpret it as a Divine sign of a greater and purer light elsewhere (only half-kidding here). Among other things, say, a splendid opportunity to repair and recultivate Commonwealth, US, South American – perhaps even Scandinavian and (gasp!) RUSSIAN ties? No doubt I’m dreaming about that last refocus, but heck, I’ll consider practically ANYTHING to keep Moscow from getting further entangled with those slowly resurging, holding-out-till-I-get-my-best-offer Berlin Germans. Must say, though, I can’t quite figure out this seemingly perennial Russian softheadedness towards the Reich. Could it be the way they stood arm-linked and even-toed against the hated Anglo-Yank capitalist enemy 70 years ago? Funny, rather reminds me of a similar US softness of head towards the economic gods of Beijing, whom thankfully at least we’ve stopped worshiping . . .

    Imagine it: the US, Britain and Russia on more or less the same page. Never was, never will be, right? But I can dream, can’t I?

  • Anthony

    “For good and for ill, the fate of the American economy is closely tied to what happens across the Atlantic.” Global commerce generally WRM has vital interest in European economic growth/stability. ECB and return to economic growth are linchpin to any sustainable Euro-zone agreement.

  • WigWag

    “It is not at all clear how long the consensus to stick with austerity can last….” (Walter Ryssell Mead)

    I am afraid that Professor Mead has missed the forest for the trees. The problem is that austerity will make Europe’s economic problems even more intractable.

    German economic success has been built on the fraud that it’s responsible fiscal policies are the basis for it’s success. Unfortunately this commonly held view is misconception; it’s pure nonsense.

    Germany, with an economy that is overreliant on exports, has benefited tremendously from the expansionary fiscal policy that the United States and to a lease extent it’s more profligate neighbors have followed. Had the United States followed the German fiscal approach, Germany would be in almost as bad shape as the Italians. The bottom line is that the Germans are little better than economic freeloaders which makes their lectures about fiscal responsibility little more than rhetoric spoon fed to a credulous press and public.

    If the rest of Europe follows Germany’s advise, Germany itself will suffer. If the United States ever decides to behave as “responsible” as Germany, the German economy would implode.

    One last thing; wasn’t it just a month or so ago when Professor Mead wrote a post telling us that David Cameron was the second coming of Winston Churchill and Margaret Thatcher? Now he tells us that Cameron has been outmaneurvered as if he is an amateur.

    Which is it, Prodessor Mead; is Cameron a genius or an idiot?

    Can’t you make up your mind?

  • dearieme

    One of Cameron’s terms was that the UK government be allowed to impose higher (I repeat HIGHER) capital requirements on UK-based banks than France and Germany proposed to impose on eurozone banks. It’s worth reflecting on the implications of that.

    It might also be worth wondering why Cameron felt it necessary to demand protection of the EU’s “single market” rules.

    Clegg, the Deputy PM and leader of the EU-enthusiast Liberal Democrats, apparently thought that the British terms were so mild that they were bound to be accepted.

    In short: what on earth was going on, and why? What are France and Germany up to?
    I suppose that the bank capital business implies that French and German banks are close to insolvency, but what on earth have they in mind for the Single Market?

  • rkka

    “remember that the austerity programs for the southern rim are unlikely to work very well in some or perhaps even all countries”

    The correct answer is it won’t work in any country. A debt/GDP problem isn’t helped by shrinking the GDP. I guess the advocates of “austerity” failed long division or something? Brit PM Cameron introduced ‘austerity’ when he took office, and the Brit economy predictably has tanked, so much so that revenue shortfalls are triggering another round of budget cuts.

    Which will tank the economy some more…

  • rkka

    “Must say, though, I can’t quite figure out this seemingly perennial Russian softheadedness towards the Reich.”

    Well, the last time this came up it was because Foreign Ministers Litvinov and Molotov failed to convince Neville Chamberlain that his notion of “…Germany and England as two pillars of European peace and buttresses against communism” was a really bad idea.

  • Mahon

    What I would like to see is an annual Conference of the following nations, meeting on (let’s say) Diego Garcia island: America, Britain, India, Australia and Japan, i.e. those committed to market capitalism, liberal democracy, the rule of law, peace through strength, and the free global flow of trade and ideas. Call it the Anglosphere if you want. It would not be an alliance against anyone or a substitute for current agreements, but an indication that serious people were intentional about the kind of world in which they wished to live.

    I’m sure Hillary will get right on it.

  • Andrew Allison

    With respect, I’d like to suggest that the commentariat (and, unhappily, Prof. Mead) have misread the tea leaves. The proposed treaty changes would have given a subset of the EU members the right to impose regulation on the whole, thereby subverting the fundamental EU protection that treaty changes must be approved by all. As people come to recognize this, Cameron’s action will be seen to have been far-sighted. The new group is based on the ludicrous thesis that, France and, with the exception of Ireland, the PIGS will actually implement the austerity measures required.

  • Mrs. Davis

    Ireland has voted for and is implementing austerity. While they are in financial straits, they should not otherwise be lumped in with the PIGS.

    A propos to compare the New European System to Obamacare. It should be to the Euro as Obamacare will be to the blue social model.

  • Jacksonian Libertarian

    I just don’t see the PIIGS putting their fiscal house in order, as long as there is even a remote possibility of a bailout. Kicking the can down the road is what Politicians do.

  • Kris

    I greatly enjoyed the following sentence in a straight news story: “Legal advice seen by The Daily Telegraph warns that the breakaway group of 26 countries cannot use the EU institutions or change European treaties without Britain’s consent.”

    Fog on the Channel…

  • Marlin

    Professor Mead, I love reading your columns, but I must say that I believe you’re being a little too assumptive to say ‘this is the biggest debacle in British foreign policy since Suez’. I believe it is equally possible that the Eurozone will eventually fail (or consolidate into a much smaller core), thus proving Cameron presecient.

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