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Is Europe Melting?

The bad news from Europe is coming on so many levels that it is hard to avoid the feeling that something fundamental has changed in what remains the largest economic bloc — and largest collection of democracies — in the world.

From France come the election results, bad news in three different ways. First, there is the upsurge in support for unclubbable parties: between the far right and the far right, almost a third of French voters chose to support radical parties. While many voters use the first round in France’s two-round electoral process to register protest votes, it’s clear that the French political landscape is fragmenting, and in the final electoral round the two candidates still standing will have to appeal to the extremes — reducing their flexibility in office.

Second, it is looking less and less likely that the next French president — whether Hollande or Sarkozy — will be able to continue to work closely with German Chancellor Merkel. French politics and German politics are pulling in increasingly different directions, and the likely outcome is a much greater difficulty in developing a common Franco-German position on the growing number of urgent policy issues filling Europe’s in-box.  Even if you think that Merkel and the Germans have put Europe on a one-way trip to failure, a Franco-German impasse is not good news. Europe needs to act, and when France and Germany disagree, it usually can’t. They seem headed for more, and deeper, disagreement these days.

Finally, the dynamics of the election moved both candidates away from “Europe.” Hollande wants to tear up the fiscal pact, and Sarkozy is ready, de facto, to scrap the agreement that dismantled border controls among a core group of EU countries. “Europe”, meaning chiefly a power-grasping group of Brussels-based technocrats and the ever-deepening pile of regulations and rules that keep them in power, does need its wings clipped. A less ambitious Europe would probably be a happier and more successful entity. But it is far more likely in the present atmosphere that it will be the good things that Europe does which are in danger — open borders and the single market are much more vulnerable than excessive regulations, crazy farm policies and bureaucratic pettifoggery.

The French election is the biggest story in Europe today, but it is far from the only sign that Europe has fallen down and it can’t get up. The Dutch and Czech governments are falling as the strains of the European crisis bite deeper into national politics. The outlook in Spain and Portugal shows no sign of improving; Portugal may soon need a second bailout and the upward drift of the yields on bonds from recessionary Spain has traders biting their nails all over the world. Both GDP and real estate prices are widely expected to continue falling in Spain through 2012, putting more pressure on government finances and the banking sector. Economic output across the Eurozone declined in April as debt levels rose.

Trees do not grow to the sky, and holes do not often go all the way to China — even when Brussels is digging them. All over Europe there are companies who want to make a profit, young people who want to launch careers, entrepreneurs who want to try something new. The infrastructure is good, the borders are (still) open and the barriers to intra-European trade remain low. Germany has overcome the costs of integrating the former East Germany and reformed its labor markets and welfare system. The core of the European political class is still viscerally committed to integration, and both France and Germany remain committed to deep cooperation.

But it is hard to avoid the impression that, despite the considerable assets the continent still has, this European generation is living off — and spending down — the capital that its forerunners accumulated. And at some point one begins to wonder just how much is left in in the family trust.

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  • Eurydice

    Another interesting thing that’s happened recently is that the European Investment Bank has added a “drachma clause” to its loans to Greek companies, so that the loans may be paid if Greece exits the Euro. Also, they’ve placed the loans under British law in case of “irregularities.” The EIB says that all new loans to any country will have this currency clause (not sure about the British law part) and that just because a country can pay off its loans in another currency doesn’t undermine the Euro any – hmmmm, we’ll see.

  • Mrs. Davis

    The Euro was a mistake. Trying to make capital flow through a common currency without labor being able to flow equally freely is a chimera. The longer it takes to recognize this, the greater the price.

    As to the debts of sovereigns, we’re likely to discover how things can fly apart shortly after the markets are finished with the European states and begin to turn their attention to Illinois, Caliphornia, and .

  • vanderleun

    “between the far right and the far right, almost a third of French voters chose to support radical parties.”

    Some choice!

  • Kenny

    “this European generation is living off — and spending down — the capital that its forerunners accumulated.”

    Or said another way, today’s European socialists are running out of other people’s money to spend, and in this case, the money is the wealth accumulated by their parents and grandparents.

  • dr kill

    But it is hard to avoid the impression that, despite the considerable assets the continent still has, this European generation is living off — and spending down — the capital that its forerunners accumulated. And at some point one begins to wonder just how much is left in in the family trust.

    This. It is my impression (without statistical proof) that the capital being spent by the cohort of Americans born from 1925 to 1940 is a serious problem for younger Americans.
    I see them as devouring the capital accumulated by all previous generations of Americans who worked until they were unable to work further and lived in a time when lives were much shorter. I also feel that what they aren’t spending they are sitting on, and that’s not helping the economy either.
    One generation blowing all of American wealth acquired since the 16th Century can’t be a good thing.
    I wish Meade or Vanderleun would do a better job of thinking this through for me.

  • thibaud

    “this European generation is living off — and spending down — the capital that its forerunners accumulated”

    Not quite. There are multiple Europes, and each tells a different story. Ireland and Iceland suffered property bubbles and a high degree of bankster/insider politician corruption, but they’ve taken serious medicine and are coming back. Spain’s problems are at least as much the fault of foreign banks as of the Spanish, who at least at the central or federal level were fiscally responsible. They are not to be lumped in with the Greeks. Italy also is fiscally responsible.

    Most importantly, the northern protestant European nations esp Sweden, Germany, Norway, Holland, and Finland are thriving.

    It’s not been well-reported by our blinkered media (including US bloggers), but these nations did what the US has spectacularly failed to do: rein in their banking sectors, ensure clean politics and impose decent corporate governance while maintaining efficient and excellent health care and a reasonably generous safety net.

    You’d never believe it reading our blinkered, ignorant media – and this includes bloggers who, given their claim to superior accuracy, ought to know better – but in reality, the nordics’ and Germans’ unemployment and growth rates compare very favorably to ours. Ditto for Canada.

    We have much to learn from the Swedes’ and Canadians’ reforms of their banking sectors in the 1990s and from German corporate governance, which reins in piggish behavior by _both_ unions and CEOs. We could also look to Canada for an example of an intelligent health insurance system that lives comfortably alongside fiscal prudence.

    Another cultural trait that we seem to have lost: northern frugality. America’s binge economy still rests heavily on millions of consumers buying (mainly Asian-made) junk they don’t need with money they don’t have. Nothing against Apple, but even when the goods in question are vital and superbly designed, we still have the problem of lack of hiring stateside. Apple is propping up nearly every fund manager’s performance, sells wonderful Asian-made stuff, but Apple’s ecosystem has not made a meaningful dent in the high unemployment component of the US misery index.

    Ironically, Americans bash the nordics/Canadian/German model of pragmatic, flexible, high-performing capitalism while they salute corporate chiefs who don’t know how to add jobs in the US. For some strange reason I can’t fathom, we still uphold our bizarre linkage of health insurance to employment status and our still more bizarre tax code that punishes work and hiring while lavishly rewarding capital.

    This is a recipe for structurally high unemployment. The Canadians and north Europeans understand this, and have figured out how to have a lower unemployment rate than ours while maintaining flexible labor markets, competitive export-oriented multinationals and a humane and efficient health insurance system. Sweden spends a tiny fraction of what we do on healthcare administration, and their healthcare, hospitals, pharma/medical research are all world-class.

    Maybe WRM could spend a bit more time studying the northern Europeans and the north North Americans and a bit less time reflexively dismissing his straw blue man. They’re not at all the same.

  • dr kill

    Pardon the misspelled surname, Professor.

  • thibaud

    For the curious, here’s how our Northern cousins did a 180 after they were facing fiscal ruin during the 1990s.

    Note that this wasn’t a popular movement or even an elite political movement but really one man, Chretien, a Quebecois leader from the left, who steered the nation away from the brink and slashed the budget without destroying Canada’s healthcare system or safety net.

    Today Canada’s in fine shape. The Swedes and Danes offer similar turnarounds during the same era. They’re thriving now, too, and will escape the euro-collapse.

    If there’s a pattern here, it’s that those quiet, sober, hardworking nations are not in the grip of either unions or hedgefunders, and have been led for the most part in recent times by relatively honest public servants who neither promise their people the moon nor chase unicorns of one ideology or another.

    A pox on both US houses and their insular ideologies.

    Time for us to get out of our cocoon and start asking how it is that the Canadians, Swedes, Germans, and other northern European nations manage to avoid our binges and busts, our casually cruel Rube Goldberg health insurance kludge, and our increasingly Brazil-like socioeconomic structure in which the middle class is squeezed between an enormous and growing underclass and a small group of windfall recipients at the top.

    Some modest proposals for the US:

    Rein in the bankers as well as corrupt pols.

    Stop importing an underclass.

    Focus less on consumption and build up savings while giving people the backstop of universal health insurance that enables them to breathe easier and focus on their families, jobs and communities.

    This model isn’t “blue” or purple or any other color. It’s pragmatic capitalism that incorporates hard-won lessons from the collapses of the 1990s and from 2008.

  • Tom Gates

    Kenny is right, but think of all of the implications for high-end US real estate if all of the European muckety mucks must flee Europe for here! Yeah right, I am a generation behind!

  • Cunctator

    To refer to the Front national as a radical right wing party is to employ rhetoric often used by the left to attack its opponents. The FN hold a wide variety of positions, many of which are no different than those espoused by Charles de Gaulle.

    More to the point, the FN is playing within the rulesz of the game in France, so it is hardly very radical. Is it extremist to challenge prevailing multiculturalist views, or to question the benefits of globalization, by means of the ballot box? Is democratic political discourse to be so constrained that it is no longer permitted to argue against the positions of those so long in power? I suspect that your readers would find the front-runner, M. Holland, and his views (to say nothing of President Obama and his policies) far more extreme than those of Mme. Le Pen.

  • vanderleun

    Sigh. I guess I’m being too subtle here. It is but a mild corrective I am issuing. Then again perhaps it is not an incorrect statement but exactly what the Purfesser wishes to say when he writes: ” between the far right and the far right” when it comes to discussing choices made between parties in France. Perhaps France has no far left parties. Only far right and far right that is father right. Right?

  • thibaud

    Actually, in the nordic countries and Canada, it’s the current generation that undid the grievous financial mistakes made by their parents in the 1980s and early 1990s.

    As to unemployment, Germany, Austria and Holland – together, more than a quarter of the entire eurozone – average about 5% unemployment – that is, they have full employment now.

    Here’s the latest unemployment data as of Feb 2012:

    Austria 4.2 % unemployment
    Netherlands 4.9 %
    Germany 5.7 %
    Sweden 7.5 %
    US 8.3%

    Sweden’s unemployment rate is below ours, solely because of a somewhat higher youth unemployment rate (23% vs 16% for the US). Re. youth unemployment, Austria Holland and Germany also have unemployment rates about half those in the US.

    It’s simply [scatological reference removed] to suggest that “socialism” is responsible for the crisis of the eurozone. Europe’s protestant core nations are not only not in crisis; they’re thriving.

    In fact, if you were to separate the arc of the Rhineland and the Alps and the Po River valley from the rest of Europe – that is, the Dutch-German-French-Swiss-Italian high tech, pharma and advanced manufacturing heart of Europe – you’d see an integrated region that has strong growth, exceptionally well-managed and powerful multinationals, low unemployment and superb research and educational facilities.

    This is the region where most of the world’s top pharmaceutical companies and all of its strongest auto manufacturers are located. No accident that the one remaining supercollider research institute for physics is located in this area as well.

    It’s foolish to talk about “Europe” as some kind of undifferentiated mass. There are many Europes. Were the eurozone to revert to the core six nations of the original EC, it would be quite healthy, strong and dynamic.

  • Jacksonian Libertarian

    “The core of the European political class is still viscerally committed to integration,”

    The Euro and the EU were always a top down artifically imposed regime, without the grassroots public support needed for a stable economic and political union. We know this because no European Constitution ever passed the public’s approval. One need only look at another top down imposed regime (The Soviet Union and Warsaw Pact) to see how this is all going to turn out. The EU and the Euro are going to fly apart just like the Soviet Union and Warsaw Pact did before them.

  • WigWag

    “The Dutch and Czech governments are falling as the strains of the European crisis bite deeper into national politics.” (Via Meadia)

    Interestingly the Dutch Government collapsed only after non-official coalition member Geert Wilders refused to accept a government sanctioned austerity program.

    Wilders is widely known as the increasingly popular Dutch politician who has made a career of lamenting and trying to limit Muslim immigration to the Netherlands. In the United States, most people would consider Wilders and his party to be “conservative;” in fact, they are anything but. Wilders is a “liberal” in the original sense of the word and he happens to have significant and justified disdain both for Brussels and for the idea that austerity is the path to prosperity.

    During the last Dutch elections, Wilders and his Party did far better than anyone expected. With new elections likely to take place in late June, it is a reasonable possibility that Wilders will be the top vote getter and perhaps the next Dutch Prime Minister; talk about sending shock waves throughout Europe.

    The policy prescriptions that Wilders advocates are likely to be quite popular with the Dutch electorate. He advocates dramatic limitations on immigration from Islamic nations, he disdains Brussels and he opposes mindless austerity plans like the ones crafted in Germany. His program is likely to be well received and he could win.

    A victory by Wilders would be far more consequential for Europe over the long run than whether Hollande or Sarkozy is victorious in France.

    For more on the political crisis in the Netherlands, go here,

  • Luke Lea

    thibaud sounds like he knows what he is talking about

  • Luke Lea

    A further reflection on thibaud’s comments:

    It sound like the U.S., having imported a new underclass, is in the situation of the E.U. .? We have capital and labor mobility between states, and each state cannot set its own monetary policy. Hope I’m wrong but I would like to get his reaction.

  • Jules

    Note that this wasn’t a popular movement or even an elite political movement but really one man, Chretien, a Quebecois leader from the left, who steered the nation away from the brink and slashed the budget without destroying Canada’s healthcare system or safety net.

    Today Canada’s in fine shape

    I wouldn’t say it was one man. It was a recognition across the political spectrum that things couldn’t go on the same way. The fact that the Liberals would have comfortable majority governments for the forseeable future certainly helped. But it’s important to note that ideology played little part in it. The kind of ideological fundamentalism that characterizes US political discourse is not the norm in Canada, or for that matter the rest of the English-speaking world.

  • Mick The Reactionary


    “Another cultural trait that we seem to have lost: northern frugality”

    Diversity is our strength, or so we are told. What is this nonsense about north European culture? Our new countrymen from Mexico, legal or not, reject frugality as Yankee imperialism creation.

  • Tom

    @Thibaud: Apples and oranges. All of the countries you listed are extremely homogenous in ways that the United States is not, with the exception of Canada–and even then, Canada is still more homogenous than the United States. I would also like to point out that the US has basically been providing most of these countries’ defenses since the ’90s.

  • thibaud

    @Tom: fair point about homogeneity, but even Americans of northern stock – and keep in mind, Germans are still the largest group in this country by ethnic origin – have lost the yankee ethos of savings and provision for each other that our parents and grandparents had.

    The point is that back in the early 1990s, the American political elite, in rejecting an expansive north European-style welfare state with universal health insurance, made a deliberate choice for a modern bread-and-circus consumer economy based on easy access to artificially cheap consumer credit and mortgages.

    This rejection of our traditional yankee ethos has had severe implications for our democracy. First, we’re now locked into a boom-and-bust economic model in which 70% of our GDP depends on US consumers buying stuff they largely don’t need with money they don’t have. This extreme imbalance away from savings toward consumption distorts all kinds of policies, from tax policy to retirement planning and pensions to energy conservation to state and municipal budgets.

    Second, US households’ extreme dependence on marketplaces – mainly the RE market and the stock market – means that US families and communities get periodically whipsawed by the inevitable downturn when the Fed shuts off the credit spigot, as it must every 5-10 years or so.

    Third, we have created in the last half century or so a culture of junk: throwaway Chinese-made garbage, a truly vile entertainment industry that produces celebrities who are celebrated for being famous, and houses and communities distinguished less by their beauty or utility than by the amount of cheap shiny Chinese-made stuff they contain.

    Contrary to the panglossian musings of our host, this is _not_ the best of all possible worlds. It sure as heck isn’t the free, proud and resilient yankee America that most of us cherish.

  • thibaud

    @Luke – not so. Europe has formal, or legal, labor mobility but in practice, Spaniards and Greeks don’t head en masse to Germany or Holland as the job market swells in one region and wanes in another the way, say, poor white and black southerners migrated to Chicago and Detroit in our fathers’ day (and back south in our own).

    That said, labor mobility WITHIN northern Europe ie from sector to sector is far higher than it is within France and the south European nations. The Dutch especially have encouraged flexible labor markets. This is a very large reason for the northern Europeans’ success, and it’s what they have in common with the US economy.

    The point is, those old Michelob ads were not wrong: yes, you _can_ have it all, or at least you can have both

    a) flexible labor markets and dynamic world-class private companies, and

    b) universal health insurance and a reasonable degree of security for working families.

    The Dutch, Germans and nordics have achieved this, as have the Canadians, and we could too if our politics weren’t so corrupt and degraded by extreme ideological nonsense.

    The north European way this is probably superior to ours overall; it is certainly more sustainable in every respect.

    The cost, I suppose, to us would be a more boring American culture, one that generates fewer outliers: fewer Steve Jobses and fewer Bernie Madoffs alike, no Googles but also no Enrons, no Lady Gagas and no Kardashians.

    But the tradeoff seems like a worthy one. Instead of a culture of garbage and a massively indebted economy of booms and busts, we could have one based on high savings, stable families and communities where the middle class is not shrinking and on the run and where people aren’t facing ruin should they lose a job or develop a (hateful phrase!) “pre-existing condition.”

    Again, this isn’t “blue” or purple. It’s simple pragmatism and a willingness to eat a bit of humble pie and learn from the recent experience of our northern cousins on both sides of the pond.

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