Gibbon, Sartre, and the Eurozone

Tuesday

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Mario Monti said of the Euro that, “the will to make it indissoluble and irrevocable is there.” Today, perhaps yes, but what will the will be tomorrow?

Each time the Eurozone puts together another bailout package the markets follow with a brief (sometimes very brief) rally, which collapses pretty much as soon as reality reasserts itself and it becomes obvious that most of the measures constitute creative ways of kicking the can down the road, while those more ambitious measures that are more than kicking the can down the road are probably overly ambitious and not likely to be practical policies in the midst of a financial crisis.

Simply from a practical point of view, it is difficult to imagine how anyone can believe that a more comprehensive fiscal and political union can be brought about in the midst of the crisis, although formulated with the best intentions of saving the Eurozone, since the original (and much more limited) Eurozone was negotiated, planned, and implemented over a period of many years, not over a period of few days as inter-bank loan rates are climbing by the hour. Apart from this practical problem, there are several issues of principle at stake in the Eurozone crisis and the attempts to rescue the European Monetary Union.

Mario Monti was quoted in a Reuter’s article, Monti says EU hinges on summit talks outcome: report, in defense of strengthening financial and political ties within the Eurozone as a way to save that Euro that:

“Europeans know where they’re going… the markets are convinced that having given birth to the euro, the will to make it indissoluble and irrevocable is there and will be strengthened by other steps towards integration.”

Can the Euro be made “indissoluble and irrevocable”? Can anything be made indissoluble and irrevocable? I think not, and this is a matter of principle to which I attach great importance.

I have several times quoted Edward Gibbon on the impossibility of present legislators binding the acts of future legislators:

“In earthly affairs, it is not easy to conceive how an assembly equal of legislators can bind their successors invested with powers equal to their own.”

Edward Gibbon, History of the Decline and Fall of the Roman Empire, Vol. VI, Chapter LXVI, “Union Of The Greek And Latin Churches.–Part III.

Since I have quoted this several times (in The Imperative of Regime Survival, The Institution of Language, and The Chilean Model, e.g.), implicitly maintaining that it states an important principle, I am now going give this principle a name: Gibbon’s Principle of Inalienable Autonomy for Political Entities, or, more briefly, Gibbon’s Principle.

As I have tried to make explicit, Gibbon’s Principle holds for political entities, but I have also quoted a passage from Sartre that presents essentially the same idea for individuals rather than for political entities:

“I cannot count upon men whom I do not know, I cannot base my confidence upon human goodness or upon man’s interest in the good of society, seeing that man is free and that there is no human nature which I can take as foundational. I do not know where the Russian revolution will lead. I can admire it and take it as an example in so far as it is evident, today, that the proletariat plays a part in Russia which it has attained in no other nation. But I cannot affirm that this will necessarily lead to the triumph of the proletariat: I must confine myself to what I can see. Nor can I be sure that comrades-in-arms will take up my work after my death and carry it to the maximum perfection, seeing that those men are free agents and will freely decide, tomorrow, what man is then to be. Tomorrow, after my death, some men may decide to establish Fascism, and the others may be so cowardly or so slack as to let them do so. If so, Fascism will then be the truth of man, and so much the worse for us. In reality, things will be such as men have decided they shall be. Does that mean that I should abandon myself to quietism? No. First I ought to commit myself and then act my commitment, according to the time-honoured formula that “one need not hope in order to undertake one’s work.” Nor does this mean that I should not belong to a party, but only that I should be without illusion and that I should do what I can. For instance, if I ask myself ‘Will the social ideal as such, ever become a reality?’ I cannot tell, I only know that whatever may be in my power to make it so, I shall do; beyond that, I can count upon nothing.”

Jean-Paul Sartre, “Existentialism is a Humanism” (lecture from 1946, translated by Philip Mairet)

This I will now also name with a principle: Sartre’s Principle of Inalienable Autonomy for Individuals, or, more briefly, Sartre’s Principle.

If that weren’t already enough principles for today, I going to formulate another principle, and although this is my own I’m not going to name it after myself after the fashion of the names I’ve given to Gibbon’s Principle or Sartre’s Principle. This additional principle is The Principle of the Political Primacy of the Individual (admittedly awkward — I will try to think of a better name for this): political autonomy is predicated upon individual autonomy. In other words, Gibbon’s Principle carries the force that it does because of Sartre’s Principle, and this makes Sartre’s Principle the more fundamental.

At present I am not going to argue for The Principle of the Political Primacy of the Individual, but I will simply assume that Gibbon’s Principle supervenes upon Sartre’s Principle, but I wanted to make clear that I understand that there are those who would reject this principle, and that there are arguments on both sides of the question. There is no establish literature on this principle so far as I know, as I am not aware that anyone has previously formulated it in an explicit form, but I can easily imagine arguments taken from classic sources that bear on both sides of the principle (i.e., its affirmation or its denial).

Because, as Sartre said, “men are free agents and will freely decide,” the Euro cannot be made “indissoluble and irrevocable” and the attempt to try to make it seem so is pure folly. For in order to maintain this appearance, we must be dishonest with ourselves; we must make claims and assertions that we know to be false. This cannot be a robust foundation for any political effort. If, tomorrow, a deeper economic and political union of the Eurozone becomes of the truth of Europe, this does not mean that the day after tomorrow that this will remain the truth of Europe.

And this brings us to yet another principle, and this principle is a negative formulation of a principle that I have formulated in the past, the principle of historical viability. According to the principle of historical viability, an existent must change as the world changes or it will be eliminated from history. This means that entities that remain in existence must be so malleable that they can change in their essence, for if they fail to change, they experience adverse selection.

A negative formulation of the principle of historical viability might be called the principle of historical calamity: any existent so constituted that it cannot change is doomed to extinction, and sooner rather than later. In other words, any effort that is made to make the Euro “indissoluble and irrevocable” not only will fail to make the Euro indissoluble and irrevocable, but will in fact make the Euro all the more vulnerable to historical forces that would destroy it.

When I previously discussed Gibbon’s Principle and Sartre’s Principle (before I had named these principles as such) in The Imperative of Regime Survival, I cited an effort in Cuba to incorporate Castro’s vision of Cuba’s socio-economic system into the constitution as a permanent feature of the government of Cuba that would presumably hold until the end of time. This would be laughable were it not the source of so much human suffering and misery.

Well, the Europeans aren’t imposing any misery on themselves on the level of that which has been imposed upon the Cuban people by their elites, but the folly in each class of elites is essentially the same: the belief that those in power today, at the present moment, are in a privileged position to dictate the only correct institutional model for all time and eternity. In other words, the End of History has arrived.

Why not make the Euro an open, flexible, and malleable institution that can respond to political, social, economic, and demographic changes? Sir Karl Popper famously wrote about The Open Society and its Enemies — ought not an open society to have open institutions? And would not open institutions be those that are formulated with an eye toward the continuous evolution in the light of further and future experience?

To deny Gibbon’s Principle and Sartre’s Principle is to count oneself among the enemies of open societies and open institutions.

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An Alternative to the Euro

Thursday

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It continues to be a fascinating exercise to read the Financial Times each day to see the ongoing machinations and maneuvering around the fate and future of the Eurozone currency union. Some say it will be held together; others say Greece and a few others will leave the currency union and things will be fine; there are a few who insist that a Greek exit means that the currency union will collapse altogether. I have myself added to this lengthy debate with several posts, such as What would a rump Eurozone look like? and The Economic Future of Europe.

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	Euro area Member States
	Non-euro area Member States
	Member States with an opt-out

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I have suggested that with the departure of marginal economies (nation-states that never were peer-competitors to the core Eurozone economies) will leave the Euro stronger than before, and with prospects for a distant futurity. The proof of this is that, while the Euro is down on international currency markets, it has not been aggressively bid down in a scenario such as would be the case if currency traders expected the Euro to be circling the drain. In comparison to other major world currencies, the Euro remains today in a stronger position than when it was first issued.

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Which countries have adopted the euro – and when?

1999	Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland
2001	Greece
2002	Introduction of euro banknotes and coins
2007	Slovenia
2008	Cyprus, Malta
2009	Slovakia
2011	Estonia

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However, some of the recent arguments I have read suggesting that the Eurozone cannot continue to exist in its current form post-Greek departure have in them a hard kernel of truth. Some of this is semantics: if we say that the Euro cannot continue in its current form, all we are saying is that it could continue in an altered form. Read a little deeper in the context, though, and it becomes apparent that there rather more pessimism about the Euro than is captured by a mere semantic shift from the Euro based in the current Eurozone and a Euro based in a Eurozone minus Greece, Portugal, Spain, Italy, and Ireland.

One of the reasons that the Euro is not being aggressively bid down on international currency markets is that the core Eurozone economies have strong fundamentals, and these fundamentals are not going to disappear in a puff of smoke even if the Euro evaporates. Germany and France will continue to do business in some currency or other, and while their economies would take a major hit from the demise of the currency union, their fundamentals will ensure that they will recover and eventually resume economic expansion.

What I would like to suggest is that the Eurozone adopt a policy of economic shock therapy and take the bad news all at once, on the principle that a ratcheting downward of the Eurozone would create economic chaos and uncertainly each time a nation-state departed the currency union (a consequence of European leaders’ failure to see far enough down the road to make institutional provisions for both entry into and exit from the Eurozone). Europe could conceivably perpetuate the crisis of the Eurozone for a decade if marginal member nation-states fell away once every year or two. This would be a worst-case scenario that would set back the whole of the European economy for more than a decade as ongoing adjustments are made in the wake of further departures.

However, such a radical shock therapy need not mean the abandonment of some kind of currency union in Europe. I have suggested previously that the nation-states of Northern Europe that are on a more-or-less equal economic footing, and with more-or-less comparable social institutions and expectations, can work together well within a currency union in which tough economic standards are expected, enforced, and adhered to. Such a currency union of Northern Europe would roughly correspond to the extent of the Hanseatic League, which was a medieval trading group that flourish in the later middle ages and the early modern period — an international trading corporation before there was any such legal entity as a corporation or any such political entity as a nation-state (and therefore no sense of “internationalism” as we think of it today).

The Extent of the Hanseatic League in the late Middle Ages and Early Modern period.

A currency union in Northern Europe that roughly approximated the geographical region that once comprised the Hanseatic League would, I think, not only be sustainable, but would be a benefit to its members in the same way that being part of the Hanseatic League was a benefit to these late medieval and early modern merchants with their trading depots around the Baltic Sea. Rather than being dragged backward by non-compliant members, a union of economic peers would serve to pull each other forward. Strong provisions in any treaty governing such a union could ensure this not only by having a clearly defined legal process for departure from the union, but also, and as importantly, a clearly defined legal process to eject non-compliant members from the union.

In the map of Europe that I have colored below I have identified in a bright (Euro!) blue those nation-states that could probably cooperate in a strong Northern European currency union. This union could be “strong” in terms of its exclusivity and its willingness to exclude members that failed to maintain acceptable macro-economic targets. Membership would be a privilege, not a right; in the initial enthusiasm for the Euro, the sense of exclusivity was lost, which sentiment standing in for enforceable macro-economic standards. This Northern European currency union could be called, in deference to history, the Hansazone, and the currency could be called the “Hansa.” If the Swedes and the English could be persuaded to join too, all the better. This would work; the Eurozone as it is now constituted does not work.

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A “Hansazone” for a currency union in Northern Europe.

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The Economic Future of Europe

Monday

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The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

There is no question that it is unwise to engage in speculation at a time when events are poised at a moment of decision, but is there any moment that is truly free of historical consequence, when speculation might be a safer and more certain undertaking? I think not. Another time I will attempt to explain why not, which involves a careful consideration of several points in the philosophy of history, but I will leave that particular justification for another time and boldly press forward on the prospects of the Euro and the Eurozone, even as the Greeks continue to have difficulties forming a government after their recent elections, and even as the new president-elect of France, Francois Hollande, has not yet revealed the precise policies that will be implemented in the attempt to make good on his campaign promises assuring growth instead of austerity.

I have several times discussed the nature and difficulties of the Eurozone, first in a trio of posts about the crisis in Greece as it first become evident — The Dubious Benefits of the Eurozone and Will the Eurozone Enact a Greek tragedy? and Can punitive fiscal policy work? — and then in further posts about the Eurozone periphery more generally, beyond Greece — A Return to the Good Old Days, Can collective economic security work? and Poor Cousins. My most frequently read post on the Euro, Shorting the Euro, while still accurate is no longer timely. Since then I wrote What would a rump Eurozone look like?.

The Eurozone is a great economic experiment in the way that the US is a great political experience: both have represented a revolutionary new order while building on past experience. This, if nothing else, makes the Eurozone fascinating. In the categories of my own thought the Eurozone is not quite an intelligent institution since it was constituted with mechanisms for nation-states to enter the Eurozone but no mechanisms for a nation-state to exit the Eurozone. Most culpably of all, the Eurozone was designed without a mechanism for either 1) forcing compliance of member states with its standards, or 2) forcing member states to collectively come to the aid of a failing member state (or, I could also observe, some combination of the two).

If the Eurozone had had either of these two mechanisms — compulsory and enforceable standards, or compulsory wealth transfer from richer to poorer states — the acute problem in Greece at the moment, and the possibly chronic problems in Italy, Spain, Portugal, and Ireland, would present definite options. Without a formal mechanism for resolving the crisis, the financial crisis becomes a political crisis that it did not have to become.

The consensus in the financial press at the present time is that the Franco-German core of the Euro will remain intact, and that Francois Hollande will not set out to enact any radically socialist policies (cf. President Hollande and the IMF) that would doom either France or the Euro to the kind of perpetual economic twilight experienced by the nationalizing likes of Hugo Chavez, Evo Morales, or Cristina Fernandez de Kirchner. Hollande knows well enough on which side France’s bread is buttered, and his campaign rhetoric must be understood as something entirely parallel to the “red meat” speeches given in the US by both Republicans and Democrats during the primary season, only to be dialed back drastically when it comes to the general election.

But matters are altogether different outside the Franco-German core of the Eurozone, as what was once merely whispered is now on the front pages of the newspapers: the likelihood that Greece will leave the Eurozone. (cf. Greece, France and the future of the euro and EU central bankers ponder Greece euro exit) Indeed, today’s Financial Times had Greece on the front page (Fear grows of Greece leaving euro) and the inside pages (Greek exit from eurozone ‘possible’) as well as a new week-long series, “If Greece goes…”

What will the Greeks do if they leave the Eurozone? Will they take to the printing presses and start printing Drachmas until everyone has a satisfying pocketful of money and the economy is driven into hyperinflation and the Greeks impose on themselves the austerity that they were unwilling to accept from the Germans? Since it seems to be universally believed that a bloated public sector and no expectation of paying taxes is a good thing, maybe they will suspend taxes altogether in Greece, and add anyone who likes to the public payroll dole. Not surprisingly, such steps aren’t going to revitalize the Greek economy, promote prosperity, or stoke economic growth.

What Greece does have to offer is an enormous tourist industry, whose beaches and islands and quaint hotels with tavernas around the corner will suddenly become attractive to northern Europeans when they once again because an inexpensive playground, which will happen if Greece exits that Euro and allows a fully floating Drachma that can be bid down on the international currency markets. Of course, tourists hate riots, and they would prefer not to see news stories about pensioners committing suicide in the capital as a protest. A single negative newspaper story can ruin an entire tourist season, and the hotels and restaurants wait and hope that next year will be better.

This may sound cynical, but it is realistic, and as close to true as I cam capable of getting. In actual fact, the reintroduction of the Drachma will necessarily be partial. The very wealthy already hold their assets in financial instruments not directly linked to Greece. Those not truly wealthy, but who have enough assets that they know to protect themselves, will already have their assets (other than real estate) moved out of Greece to the extent that this is possible. For the lower income bracket, the lower prices that will likely come (barring hyperinflation) from Greece re-adjusting its internal price mechanisms will make life slightly more affordable, but any assets held in Greece will essentially be ruined.

In practice, Greece will use both the Drachma and the Euro, because the Euro isn’t going away; the Euro will continue to be used in the rest of Europe, and will continue to be used as a secondary reserve currency around the world. The Euro will continued to be used in Greece, but Greece will no longer have any rights in determining administration of the Euro. I suggested once that the adoption of the Euro in peripheral European countries could be understood as a pre-emptive Euroization of the European periphery, with “Euroization” understood analogously to “Dollarization.” Greece will be related to the Euro as Ecuador is related to the US dollar. In fact, Greece will come close to approximating what I have called currency pluralism.

Under these conditions, the Greek economy will slowly and gradually improve its position, but no one will mistake the Greek economy as a peer competitor to the core states of the Eurozone. The Greeks will learn that if they riot, they will damage the one source of revenue that they can count on — tourism — and those who can accept this deal will reconcile themselves to life in the slow lane. The ambitious will leave for other parts of Europe or to America.

What will the rest of Europe do upon the exit of Greece from the Eurozone?

The Eurozone is a paradigmatically technocratic institution that presumes to organize and administrate the ordinary business of life without imposing any kind of ideological constraints on member states. Critics of the free market model of western capitalism linked to liberal democracy never tire of pointing out the ideological presuppositions of trans-national institutions like the Eurozone, the World Bank, and the IMF. I imagine that many of the Greek leftists now aspiring to form a government probably buy into much of this critique. But as they rail against the center and consciously enact policies intended to prove that they were right all along, they will only be guaranteeing the economic marginalization of Greece.

The implicit ideology of the Eurozone, however, is not that of the “Washington Consensus” with its deregulation and privatization, low tax rates and minimal government (otherwise known as Yanqui imperialism). Rather, the ideology of the Eurozone is that of the post-modern welfare state, with its cradle-to-grave social support system and a social consensus in which (in the words of the oft-disparaged Malthus), “each man’s share of labour would be light, and his portion of leisure ample.” You can call this the “Brussels Consensus” if you like.

In very small nation-states with ethnically homogeneous populations and a strong Protestant work ethic, the Brussels consensus works marvelously — in fact, it works better in such places than it works in Brussels itself. And that is why the Scandinavian nation-states regularly top all lists of the world’s stable democracies with the highest standards of living. But the rest of Europe, much less the rest of the world, cannot make itself over as Sweden or Norway, Denmark or Finland. However, those regions of Europe and the Eurozone that already approximate this social milieu, will continue to thrive in the economic context of the Eurozone.

As the Eurozone moves northward and begins to add stable and growing economies from the former Soviet periphery — chiefly Poland, but also the Baltic states — the geographical area of the Eurozone will come more and more to resemble that of the Hanseatic League, the great medieval trading network of Northern Europe (a trans-national corporation from before the age of nations and corporations). If you are unfamiliar with the Hanseatic Leagues, I urge you to watch Jonathan Meades’ wonderful documentary, Magnetic North, which offers a sketch of the trading bloc that is both erudite and amusing.

The Glory that was Greece and the Grandeur that was Rome may soon be severed from the industry and commerce that is Northern Europe, and Europe will continual to evolve regionally in ways that are consistent with regional economic cultures. Balkan Greece will have its own Orthodox tradition in the Balkans. Catholic Southern Europe (Italy, Spain, Portugal, and the Mediterranean islands) will eventually realize its own slower track version of the Eurozone, closer to the Eurozone than Greece, but not quite the same as the Franco-German core. Protestant Northern Europe will continue to optimize the currency union for those nation-states that are capable of maintaining the economic standards of the Eurozone.

If the Eurozone treaty can grow and evolve and change with the times, the Eurozone that will result will be more efficient and effective than the Eurozone as it is known today. If only those nation-states that are peer competitors can enter the currency union on terms of being true economic equals, this bond will grow and strengthen over time. The “Euroized” periphery will benefit from the trickle-down from a vibrantly economically competitive Northern European economic zone, but life will be different for them. It is silly to pretend otherwise.

There will be both opportunities and dangers in this changed and changing Europe. As has been the case from time out of mind, the clever and the ambitious will exploit the opportunities and will live well; the slow and the timid will will accept their lot.

Thus Europe will come to exemplify the maxim that Thucydides attributed to Athens at the height of Athenian hubris, though displaced from the political into the economic realm: the strong will do as they will, while the weak will suffer what they must.

Is this kind of economic hubris unsustainable? Not in the least. It was the model for Europe in antiquity, as we have seen in the case of Athens, and which was no less true of Rome, and it was the model for Europe again throughout the Middle Ages. This is the European way, however much they seek to deny it.

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What would a rump Eurozone look like?

Saturday

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What was once in the recent past spoken only in a hushed whisper is now openly discussed and debated: the break up of the Eurozone. But what exactly does “break up” mean in this context? The term implies a catastrophic failure that is not likely to come about, however painful a Greek exit from the Euro would prove to all the Eurozone economies. The Economist Intelligence Unit is calling the Eurozone crisis “€urogeddon,” which seems a bit dramatic for the financial press. With dire news following day upon day it would be easy to be very pessimistic about the Eurozone at the present time, but I am not pessimistic, although the short term outlook is not good. Being able to distinguish the short term prospects of an institution from its long term prospects is crucial in this context.

What exactly would a “break up” of the Eurozone look like? Here is what the Economist Intelligence Unit says in their report, “After €urogeddon? Frequently asked questions about the break-up of the euro zone”:

Firm predictions are tricky, but broadly a fracture between a strong northern “core” and the weaker “periphery” looks most likely. The process would, in our view, probably entail periphery countries breaking off individually to leave a “rump” of northern countries still within a currency union. Once one peripheral country (say, Greece) left, all the other vulnerable countries would probably follow. This means that Portugal, Ireland, Italy and Spain would leave the euro, although not necessarily immediately. Malta would probably leave, and Cyprus would have little choice but to exit as its banking system would be nearly wiped out by a Greek collapse. Up to ten countries could remain members of the euro: Germany, France, Austria, Belgium, Finland, Luxembourg, the Netherlands, Slovakia, Slovenia and Estonia (the last three all being small, open economies like Malta and Cyprus, but with healthier fundamentals).

It is interesting to me to see how this analysis — which I believe to be entirely reasonable and defensible — follows the principle of distinguishing center and periphery, which is something that I have been thinking about recently, and which I wrote about in The Farther Reaches of Civilization and The Second Law of Geopolitical Thought.

Thus a “break up” of the Eurozone would likely involve recession, riots, civil unrest, and bank failures (all these are also discussed in the Economist Intelligence Unit paper quoted above), but it would not be a catastrophic failure. We are not likely to see the dissolution of the Eurozone. The Euro currency will not only survive, but will eventually strengthen as the weaker and underperforming economies of the Eurozone leave the currency union and pursue a different — and marginal — economic path. The underperforming economies will devalue their labor, eventually attracting a little investment on the basis of this devaluation, and will more or less be relegated to a permanent twilight of an economy based almost entirely on tourism. (This is the obvious fate of Greece, and is likely the fate of Greece even if it remains within the Eurozone.)

A rump Eurozone would in fact be a healthier and more sustainable Eurozone than the current Eurozone, which attempts to treat underperforming economies the same as nearly optimal economies. The current Eurozone, with its peripheral members included, is like a cart pulled by two horses — a plough horse and a race horse yoked together. The financial markets are already anticipating this longer-term strengthening of the Euro. If the markets were expecting a catastrophic failure in which the Euro entirely disappeared and all the Eurozone member nation-states reverted to a national currency, we would see the Euro driven down dramatically. The Euro has fallen, but it still remains well within a ten year horizon of trading values. Nothing truly dramatic has happened to its value. If a catastrophic failure was expected, the Euro wouldn’t be trading ten or twenty percent down from its highest value, it would be trading at ten percent of its highest value.

Euro exchange rate with the US dollar in the second half of 2011.

The Eurozone still remains one of the great socioeconomic experiments of human history — an experiment on a grand scale, like the Constitution of the US, which attempted to put Enlightenment-era values into actual practice as a political institution. We recall that the US, in the course of working through its experiment, has encountered some major obstacles, such as the Civil War. As it happened, the US did not break up, or even shed its underperforming regions; however, it maintained its unity only through force of arms. This is significant.

One of the radical and novel aspects of the Eurozone is that it has been voluntary; no military power was been employed either to establish the currency or to further the expansion of the Euro or to secure its ongoing unity. We cannot place too much importance upon this unique historical fact. The very existence of the Eurozone is a living and vital rejection of the Stalin Doctrine. This is not only historically unusual in global terms, it is remarkably at variance with European history itself, which has been unparalleled in its violence and bloodshed.

Because the Eurozone is voluntary, it can afford to be flexible over the long term. It may not have been initially conceived as a flexible institution that could grow or shrink as political and economic conditions change over time, but I think that it could become something like this. Even while the peripheral economies may fall away, several nation-states continue with their accession process to join the Euro. From the experience of the Euro so far, we can more or less predict which economies will be able to successfully join the Euro, deriving a benefit thereby, and those economies which cannot successfully function as a part of the Eurozone.

The voluntary and egalitarian nature of the Eurozone will not vanish with a Greek default and exit from the currency union, even if the exit of Greece takes another member states out of the currency union at the same time. In fact, it could be argued that the experience will make the Eurozone more voluntary and more egalitarian. If the Eurozone comes to include formal protocols both for entering and for exiting the Eurozone, the voluntary nature of the association will have taken a step toward rationalization, and the Europeans will have accomplished something that the US was not able to accomplish: peaceful succession.

I am optimistic that the Eurozone (under the security umbrella provided by overwhelming US military force) may become one of human history’s first truly intelligent institutions. In some earlier posts I made a distinction between the grades of flexibility in institutions, and suggested that humanity might someday be capable of living under intelligent institutions which can take account of their own need to change over time, and the effect this change intelligently and peacefully, rather than being dragged kicking and screaming into the future. The Europeans have proved that they can learn from history, and have demonstrated this by peacefully creating and living within the Eurozone. If they can learn to live without solving problems through force of arms, there is hope that they can also learn to live with truly egalitarian, flexible, and intelligent institutions that can learn from past mistakes and incorporate change into the very structure of that institution. Time will tell.

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Note Added 04 July 2015: While the above was written years ago, the analysis is still more-or-less accurate, and I can stand by most of the claims I have made. I have further elaborated on the past difficulties and future economic possibilities for Europe in the following posts:

● Poor Cousins

● The Economic Future of Europe

● An Alternative to the Euro

● The Dubious Benefits of the Eurozone

● Shorting the Euro

● Will the Eurozone enact a Greek tragedy?

● A Return to the Good Old Days

● Can collective economic security work?

● What would a rump Eurozone look like?

● The Old World in Turmoil

● Gibbon, Sartre, and the Eurozone

● Europe and its Radicals

● Default in the Eurozone

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Incommensurable Defaults

Thursday

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Just a few days ago in Axioms and Postulates of Strategy I wrote the following:

“Emphatically, facts do not speak for themselves. Perhaps it would be better for formulate it like this: facts cannot be counted upon to consistently and univocally speak for themselves. In some contexts and situations, facts sometimes speak for themselves, but this is a function of the conditions under which the facts are manifested. All other things being equal — i.e., when the conditions under which a fact is manifested cannot be controlled or limited — facts do no speak for themselves. This is what Nietzsche meant when he wrote that there are no facts, only interpretations. The modern quest to attain insight through accumulation of and immersion in a mass of detail is more likely to overwhelm than to enlighten.”

It follows from the fact that facts do not speak for themselves, and many (or at least several) different constructions can be erected on the same set of facts. This is the source of incommensurability. Two incommensurable bodies of knowledge — two incommensurable sciences, or even two incommensurable economies — can be raised on a single set of facts.

In the complex world of the social sciences, which involve not only the ambiguities of the world and its facts, but also the ambivalence of human agents whose motivations and purposes are present throughout every claim and counter-claim, the possibilities of incommensurability are raised to a higher order of magnitude. And so it is with economics, which is perhaps the most mathematized of the social sciences, or I could say that it is the most social of the “hard” sciences. Incommensurable economic doctrines flourish, and so the intellectual world is awash with economic claims and counter-claims, both of which seem to be supported by “hard data” (as the contemporary idiom has it), but which also seem to be mutually inconsistent, if not to describe entirely different worlds.

This incommunsurability, the ability to raise plausible but mutually incompatible constructions upon what would appear to be a single state of affairs, was on display in a page-long article by Jude Webber on Argentina’s debt default in the Financial Times for Tuesday 19 July 2011. The article was billed on the front page as “Wise or Lucky: Argentina’s model default,” while on the inside page it was called “Argentina: A high-risk recovery.”

The subject of default is uppermost in the minds of those in the financial community because of the looming default of Greece, a member of the Eurozone, and the shaky condition of Ireland and Portugal. The financial contagion is spreading through the Eurozone and now is affecting Italy and Spain also, whose borrowing costs have risen dramatically just in the past few days. Comparing Argentina in 2001 to Greece in 2011 is of course a lot like comparing apples and oranges. Nevertheless, comparisons are made, and this FT article made a number of comparisons of this order, both implicit and explicit.

I was surprised at the extent to which the author went easy on the Argentine default, and although the article hedged on any kind of outright declaration that Argentina was a “model” for other insolvent nation-state, given its current economic growth some ten years on after the default, this was clearly the picture that emerged. Part of this is to be put to the fact that a Greek default is now considered inevitable, and no one expects the debt to be paid off in full (investors are said to received a “haircut”), the Europeans are looking to a silver lining to the clouds, trying to convince themselves that default is not disaster and that there is a future after default within the Eurozone.

There was, in the article, no explicit recognition of the fact that, since Argentina’s default, that country has been cut off from international credit markets, and as a result of this has had to budget within its means for the past ten years. At least part of the present performance of Argentina’s economy is due to this forced budgetary discipline. This is not, of course, the only reason for Argentina’s superficially good economic statistics. The article chooses to focus on the ways in which international market conditions have, for the past ten years, converged to Argentina’s benefit, which the explicit proviso made that conditions could change at any time and, which them, the relative fortunes of the country. I do not disagree with this, but it is far short of an adequate picture.

I wrote above of Argentina’s “superficially good” economic statistics, and it is important to look beyond the surface in order to get the fuller picture. It is also important to consider the history of Argentina’s economy. History is always relevant to the interpretation of the present, but in the case of Argentina it is more than relevant, it is poignant, because Argentina was once a wealthy country. While Argentina has recently been admitted to the G20, and seems on the path to recovery, and perhaps even eventual wealth, it seems questionable whether the combination of sovereign debt default and a political balancing act within the Argentinian economy can produce lasting results, or whether the country will slip into a prolonged economic twilight of the sort that most pundits now predict for Greece.

Argentina is a large country, geographically extensive with a temperate climate that favors agricultural production. During the nineteenth century Argentina was among the wealthiest countries in the world due to its agricultural exports. That is to say, Argentina relatively early in its history moved to industrial-scale agricultural and an export-based economy. We all know, from recent financial reportage from east Asia, and especially from China, of the vulnerabilities of an export-driven economy, and the need to build an internal market in order to increase resiliency and decrease vulnerability.

Agriculture has continued to be a mainstay of the Argentine economy throughout the twentieth century up to the present, and it is still synonymous with the production of beef. But the agricultural economy is not the whole story. Set in the midst of Argentina’s vast spaces are many surprisingly large cities. I have previously wrote about how Sarmiento urged the urbanization of Argentina because he considered cities to be a civilizing force. This is one of Sarmiento’s intellectual legacies, and comes across clearly in his Facundo.

In a recent BBC piece, Rise of the Asian megacity, the focus of the article is Asian cities, but I was interested to note that for the statistics in 1990, when only ten megacities were named, while half were in Asia, the other interesting fact, not expressed in the BBC story, was that the other half of the ten cities were all in the western hemisphere, and Buenos Aires was one of these ten largest cities in the world. According to current statistics, Buenos Aires is now larger than Los Angeles, and the only larger cities in the western hemisphere are Sao Paulo, Mexico City, and New York.

When I visited Argentina last year I didn’t travel to Buenos Aires, but I did fly in and out of Cordoba, which is Argentina’s second city, with just over a million in population. I was quite surprised by the size of the cities in the Argentina. On every map a city just looks like a small dot, and the unfamiliar traveler often doesn’t know what to expect. Thus when I arrived in Santiago del Estero, San Miguel de Tucuman, and San Salvador de Jujuy, I was taken aback by the shear size of these cities of which I had no previous knowledge. All were big, bustling urban centers.

To get to these cities, however, one had to pass through mile after mile of open country, and as one passes through the small towns along the highway one sees the legacy of Argentina’s agriculturally-based economy: almost every small town had a John Deere dealership, and the greater part of the heavy truck traffic on the highway consisted of agricultural shipping.

Like many places in the world, Argentina has a divided soul: it is both rural and urban, and both rural and urban traditions have contributed substantially to its cultural heritage. I suggest that Argentina is as profoundly affected by The Rural-Urban Divide as is the US, if not more so. Apart from Sarmiento, the literature of the southern cone is rich in stories of inter-generational alienation between the gaucho tradition and the emergent urbanism the transformed the gaucho from a vital part of the landscape to a romantic literary motif. (This is especially the theme of Uruguayan playwright Florencio Sánchez.)

Argentina’s divided soul (no less than that of the US) has led to divided policies, but whereas the divided souls and policies of the US has resulted in less that optimal economic polices, the increasing marginalization of agricultural as an economic force has limited the impact of these policies. In Argentina, where agriculture is still a major force in the economy, policies that have sought to placate urban populations through the politics of subsidy have been devastating for agriculture, and therefore devastating to the economy on the whole.

The Kirchner-Fernández administration has been actively interventionist in the economy, and has been interventionist in the Peronist populist tradition. But this has been an urban populism that treated the agricultural sector as a producer of wealth that can be expropriated and redistributed. The result has been a series of policy interventions that have penalized the traditional agricultural export model, and has even forced agricultural producers to sell at a loss to the domestic market.

Not surprisingly, some major Argentinian agri-businesses have been moving assets to neighboring Uruguay, and indeed the Financial Times article mentions in passing the problem of capital flight. There can be perhaps no more dramatic illustration of this than the fact that Uruguay has now bypassed Argentina as an exporter of beef. I urge the reader to look at a map and compare the relative geographic sizes of Argentina and Uruguay. Even the reader who is unfamiliar with Argentina’s tradition of producing beef for export will immediately see that something is a little strange when diminutive Uruguay can export more beef than Argentina. (Take a look at Uruguay forecasts beef exports will total 1.4 billion USD in 2011.)

In other sectors of agriculture, Uruguay’s exports of fruit have increased sharply. For example, blueberry exports have doubled (mostly going to the European Union), while overall fruit exports have exceeded US$100 million for the first time in its history. Uruguay’s fruit exports are still dwarfed by those of Argentina, but we see a broadly based increase in Uruguay’s agricultural production and export. Thus while Argentina’s economy has been growing at 6 percent per year since the initial contraction following the default, its agricultural industry has been lagging while neighbors pick up the slack. The traditional engine of industrial development and national wealth in Argentina has been marginalized by political intervention, and this puts the sustainability of Argentina’s present financial model in question.

While it is easy to say that policies can be changed and the agricultural industry can resume its role, there will be an inevitable loss of market share and perhaps lost decades of national wealth. Unlike, for example, the mineral wealth of the DPRK or the petroleum reserves of the US held in ANWR, which are essentially resources banked in the ground, and which can be extracted more efficiently and more profitably in the future with improved industrial technologies, the loss from missed agricultural opportunities is a loss that cannot be made up at a later date. If you don’t sell fruit or beef this year, someone else will sell it, and the purchaser will likely consume it this year. You may sell to them next year, but you missed your chance to profit from this year.

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Poor Cousins

Saturday

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The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

A Parable

Once upon a time there was a large family, which either because of or in spite of their long intimacy and shared history, was a fractious and disputatious bunch, with old fights and old grudges that were never forgotten, even though the principals to these disputes were long dead. Over time the fortunes of the family had diverged, and some that had been rich in the remote past had become quite poor, while others who had started with nearly nothing had done very well for themselves.

The wealthy members of the family, who owned many industries, employed many people, and had large, modern, comfortable houses for themselves and their immediate family, were fully aware of their improved status in their world, while those members of the family who had fallen on hard times were equally well aware of their fallen status.

The poor cousins nurse a sense of resentment over the lower living standards and their perceived lower social status, while the well-to-do cousins nurse a sense of resentment over contributing to the support of their ne’erdowell cousins. The former never lose sight of the fact that every penny given has been given begrudgingly; the latter never lose sight of the fact that every penny spent on the poor cousins is a penny they are not spending on themselves or their children.

The wealthy cousins were constantly faced with the question of what to do with the poor cousins. Say you put the poor cousins on the dole. They become lazy, drink too much, pick fights, and cultivate a sense of entitlement. Do you help the poor cousins find work? Do you make work for them in your own industries? The same problems reappear: the poor cousins show up drunk and do shoddy work.

Say that the wealthy cousins attempt to observe the old maxim that if you give someone a fish they eat for a day, but if you teach them how to fish, they can feed themselves in perpetuity. In this spirit, the wealthy cousins help the poor cousins to start businesses. But the business doesn’t go well. Do the wealthy cousins continue to support the failing business, just so the poor cousins have something constructive to do? And, if they do, for how long?

In the fullness of time, the wealthy cousins decide to pool their resources and create a bigger business enterprise than ever before. The poor cousins want to be part of this, so the wealthy cousins tell them that if they maintain certain standards, stop drinking, and promise to work very hard, that they can be part of the new business enterprise and share in the wealth that will be produced.

Alas! the present plan works no better than previous plans. The poor cousins join in the new business, but they can’t quite make it work, and worse, they threaten to pull the whole industry down with them. What’s a wealthy cousin to do? Cut the poor cousins loose? Keep giving them money so they can continue with their end of the business, even though it is obvious that they can never turn it around?

The Lesson

Europe has not an essence, but a history. Like the individuals who jointly constitute Europe, there is no metaphysical center to the continent any more than there is a metaphysical center of the individual person. It is the shared history that constitutes Europe that makes Europe what it is. But in addition to being a shared history, it is also a disputed history. Every part of Europe has its own perspective on European history, and therefore its own sense of its place within Europe.

The shared history of the European nation-states makes the Eurozone seem like an obvious idea, so much so that it would only seem to be a matter of financial engineering in order to get things right. It would seem to be a mere matter of details to be cleaned up and the whole scheme put into practice, but, as is often said, the devil is in the details. The disputed history makes the obviousness of the Eurozone not quite so obvious in practice.

The crafting of the Eurozone turned out to be more political than financial engineering. As a political creation, the Eurozone was more diplomatic than a strictly business deal would ever be. Businesses deal with hard and unpleasant facts; if they fail to do so, they will go bankrupt. Diplomacy, however, avoids hard facts because hard facts are the rocks upon which ships of state come to grief. In diplomacy, nothing that can be stated indirectly is stated in direct and unforgiving terms.

This diplomatic behavior is fine for cautious nation-states who always keep an eye on neighbors, even when they have signed a peace treaty with them, but when it comes to unifying economies, it is no longer an acceptable practice. To make the Eurozone work for all members of the Eurozone would have required internal mechanisms that would, quite without sentiment, transfer wealth from where it was abundant to where it was needed. But rich cousins don’t want to support poor cousins, and poor cousins have no incentive to go to work if rich cousins are there to foot the bill.

It was widely reported not long after Greece joined the Eurozone that it had cooked the books to show itself as having met the Eurozone standards for entry into the monetary union. This was no secret once it came out. Greece was not summarily dismissed. Once made part of the family firm, how do you fire your poor cousin? Now the Eurozone is paying the price both for its diplomacy and its family sentiment.

Every large extended family has at least one drunk, one lunatic, one pervert, one criminal, one womanizer, one ne’erdowell, and one layabout — at least one, and more likely several of each. Europe is a family, it has its share of misfits, and some of these misfits are the most successful among the European nation-states. Family sentiment can paper over the strained relations withing families in the limited and controlled context of a family reunion, but when it comes to sharing the family purse, family sentiment is not enough.

It has been a fascination and an education for me to open up the Financial Times over the past few weeks, since every day has brought a new round of stories and opinion pieces on the looming Greek debt problem, possibly leading to default. Every possible opinion has been presented and argued for and against. I suspect that what is happening in the pages of the Financial Times is often more important than what is happening in government bureaucracies and boardrooms around the continent, since everyone in the bureaucracies and boardrooms reads the FT before they attend their meetings, and they probably all take their arguments from those already presented in the press.

I have the luxury of being intellectually fascinated by the process; those in the Eurozone must be experiencing that sinking feeling and so cannot really fully engage in the question as an intellectual exercise. For the Europeans, this is about family. And so the question remains: what is to be done with the poor cousins?

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Can collective economic security work?

Wednesday

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The European Union (EU) is a political and economic community of twenty-seven countries, established in 1993 by the Maastricht Treaty. The European Union presently consists of 27 countries and has a total population of nearly 500 million citizens (497,198,740).

The idea of collective security can be traced back at least to Kant, whose short and widely influential work Perpetual Peace is as clear and as easy to understand as the Critique of Pure Reason is opaque and difficult to understand. There are many visionary ideas in Kant’s essay, all of which were ahead of his time, and most of which still remain ahead of our time. Here is Kant’s formulation of collective security:

“Peoples, as states, like individuals, may be judged to injure one another merely by their coexistence in the state of nature (i.e., while independent of external laws). Each of then, may and should for the sake of its own security demand that the others enter with it into a constitution similar to the civil constitution, for under such a constitution each can be secure in his right. This would be a league of nations, but it would not have to be a state consisting of nations. That would be contradictory, since a state implies the relation of a superior (legislating) to an inferior (obeying), i.e., the people, and many nations in one state would then constitute only one nation. This contradicts the presupposition, for here we have to weigh the rights of nations against each other so far as they are distinct states and not amalgamated into one.”

Immanuel Kant, Perpetual Peace, Section II, “SECOND DEFINITIVE ARTICLE FOR A PERPETUAL PEACE”

After considering the vicissitudes of “lawless freedom” and the perversity of war, Kant continues:

“…there must be a league of a particular kind, which can be called a league of peace (foedus pacificum), and which would be distinguished from a treaty of peace (pactum pacis) by the fact that the latter terminates only one war, while the former seeks to make an end of all wars forever. This league does not tend to any dominion over the power of the state but only to the maintenance and security of the freedom of the state itself and of other states in league with it, without there being any need for them to submit to civil laws and their compulsion, as men in a state of nature must submit.”

While Kant is known as an “idealist” philosopher in the technical sense of idealism, which is to say that Kant sees the world as ultimately constructed out of ideas, this essay of Kant reveals Kant as an idealist as the term is commonly used in conversation. In fact, Kant deserves to be called an idealist in both senses. It is hard to believe that Kant believed in the practicality of his proposals in his Perpetual Peace essay, but I don’t think that there is any question that he did so believe. Kant also wrote a wonderful little essay, which I have quoted on several occasions, in which he argues quite explicitly against those who maintain the impracticality of theoretical ideals.

Surprisingly, perhaps even shockingly, the world has tried to put some of Kant’s ideas into practice. While the League of Nations didn’t work out so well, we still have the United Nations, and though it can’t accomplish much, it is at least a nod in the direction that Kant visualized. The idea of collective security, then, in familiar to all, and can be intuitively summarized in phrases such as there being strength in numbers, all for one and one for all, and the like.

I would like to suggest that beyond collective security in the familiar sense that there is also the possibility of collective economic security, and I would argue that the European Union constitutes an attempt to realize collective economic security. I can easily imagine how others might disagree with me on this. I recall some time ago I was reading a Stratfor analysis in which the writer (probably George Friedman) argued that the rationale behind the European Union was ultimately security, and that the unification of the European economy was only a means to the end of getting Europe to work together abandon its militaristic ways so there wouldn’t be any more blood-lettings like the world wars of the twentieth century.

That Europe is and has been a deeply fractured place was recently reiterated on Stratfor by Marko Papic in The Divided States of Europe:

“Europe has the largest concentration of independent nation-states per square foot than any other continent. While Africa is larger and has more countries, no continent has as many rich and relatively powerful countries as Europe does. This is because, geographically, the Continent is riddled with features that prevent the formation of a single political entity. Mountain ranges, peninsulas and islands limit the ability of large powers to dominate or conquer the smaller ones. No single river forms a unifying river valley that can dominate the rest of the Continent. The Danube comes close, but it drains into the practically landlocked Black Sea, the only exit from which is another practically landlocked sea, the Mediterranean. This limits Europe’s ability to produce an independent entity capable of global power projection.”

Nevertheless, I think that there is a certain segment of people who see strength in numbers economically, in way that that is not tied to security. Sometimes bigger is better, and especially so when one is attempting to deal with the consequences of mass society engendered by industrialization. It could be argued — in fact, I would argue — that the economic success of the US was due in no small part to is large (ultimately continental) contiguous land area under a single political regime. If North America had been political divided like South America, it is unlikely that its economic development would have taken the particular path that it did take.

I have mentioned in some previous posts that Gaddafi has argued on many occasions for a “United States of Africa,” and while this is perhaps impossibly visionary, if it could be made to work it would have great economic benefits for the continent. Similarly, the European Union is sometimes characterized as a “United States of Europe,” and with hope and the aspiration that its collective economic and technological clout might rival that of the US. So even though the term “collective economic security” is not used, the idea is out there, and has been the basis of practical policy objectives.

The Wikipedia article on collective security quotes A.F.K. Organski on five (5) basic assumptions of collective security:

● In an armed conflict, member nation-states will be able to agree on which nation is the aggressor.
● All member nation-states are equally committed to contain and constrain the aggression, irrespective of its source or origin.
● All member nation-states have identical freedom of action and ability to join in proceedings against the aggressor.
● The cumulative power of the cooperating members of the alliance for collective security will be adequate and sufficient to overpower the might of the aggressor.
● In the light of the threat posed by the collective might of the nations of a collective security coalition, the aggressor nation will modify its policies, or if unwilling to do so, will be defeated.

This is formulated in terms of security from military attack, but it could be reformulated, mutatis mutandis, to address collective security from an economic standpoint. Economically, the threat to economic security comes not primarily from a military assault but from an economic crisis. This should seem pretty intuitive to most people these days, since the global economy is only now pulling out of what is being called the “Great Recession,” which was triggered by the subprime mortgage crisis — a genuine financial crisis if there ever way one — and even more recently the Eurozone was been faced with major crises as Portugal, Ireland, and Greece have come close to defaulting on their debt payments. (Most of the today’s Financial Times was about the Greek debt crisis.)

Well, interpreting Organski’s basic assumptions in terms of collective economic security, we see that the idea turns into a disaster:

● In an economic crisis, member nation-states will be able to agree on the cause of the crisis.
● All member nation-states are equally committed to contain and constrain the crisis, irrespective of its source or origin.
● All member nation-states have identical freedom of action and ability to join in containment and de-escalation of the crisis.
● The cumulative power of the cooperating members of the alliance for collective economic security will be adequate and sufficient to contain the economic crisis.
● In the light of the economic power wielded by the collective might of the nations of a collective economic security coalition, the cause of the crisis will be intimidated into cooperation, or failing to do so, will be contained.

The amusing thing about this is that, while this remains a coherent set of principles when reformulated in terms of economic security, it is even more spectacularly impossible than when formulated (as in the original) in terms of politico-military security. This makes the disaster of these principles particularly interesting, because it shows us that a coherent body of thought can be utterly unworkable despite its coherency.

The reader may well respond to me by saying that I have no basis whatsoever for my claims about collective economic security, and this is not even a fair way to summarize the mission of the EU. I would agree that this is certainly not the be-all and end-all of the European Union, but on the other hand what I did explicitly say about was that the idea of collective economic security is out there.

The idea is out there, but it has not (perhaps, until now, unless I have been anticipated, which is more likely than not) been made fully explicit. What that means in practical terms is that the idea is present implicitly, and the implicit presence of an idea is an idea with deniability. People can and do think in terms of ideas that have not been made explicit, and when they do so they often think in a way that is sloppy, vague, imprecise, and riddled with fallacies.

One of the virtues of making an idea fully explicit is that weaknesses and faults become as obvious as strengths and virtues. When an idea is out in the open and is debated and discussed in explicit terms, its strengths and weaknesses can be compared in a rational and systematic fashion. When an idea remains in the shadows, by contrast, it has a subterranean influence without being critically assessed. This can be unfortunate, since a vaguely appealing implicit idea is not balanced by an explicit consideration of its limitations.

One of the reasons (though certainly not the only reason) that ideas are never made fully explicit is that they are “unthinkable” for some reason or another. It takes a visionary mind to think the unthinkable in explicit terms. Herman Kahn famously did this for nuclear war during the height of the Cold War. I am not suggesting that collective economic security has anything like the unthinkable character of nuclear war, but I am suggesting that we have not had an economist since Malthus who was willing to think through the economically unthinkable.

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A Return to the Good Old Days

Thursday

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Western Europe has brought itself to such a high pitch of development in recent decades following the combined devastating effects of the Great Depression, the Spanish Civil War, the Second World War, and the looming presence of Soviet communism, that we scarcely remember the time when Portugal was the Bolivia of Europe: perpetually poor, politically unstable, and subject to a seemingly endless series of coups d’état.

Portugal’s torpor was more or less the result of the one-two punch of an early modern “resource curse” followed by the 1755 earthquake and tsunami at Lisbon. What I mean by an “early modern ‘resource curse'” was that the Portuguese economy became dependent upon income from colonies in the New World, which in the case of Portugal meant Brazil. Industry declined precipitously in Portugal itself, and the people cultivated a sense of entitlement for generations until they were largely incapable of practical effort in ordinary pursuits. (A situation much like the Persian Gulf oil sheikdoms of today.)

As I noted above, Europe has done rather well for itself, bringing along with it not only the core continental economies of France and Germany, but also economies that had historically been quite marginal: to the west — the Iberian Peninsula — and to the east — the Balkans and Central Europe. The world became so quickly accustomed to this success that the idea of a European economic union, ultimately cemented by the currency union of the Euro, seemed to have about it a certain air of inevitability, as though its success were guaranteed.

Now it seems that Portugal is about to slip again into a kind of economic torpor, consigned to a marginal position, along with Greece, in the Balkans, which had its riots and crisis some months ago. In today’s Financial Times, Portugal and Greece were both described as peripheral Eurozone countries. In The Dubious Benebits of the Eurozone I suggested that it was remarkable that there was no built-in mechanism in the formulation of the currency union to address such crises. I still find this remarkable, and it is perhaps the most telling sign of the presumption of the inevitably success of the union that no plans, or insufficient plans, were made for troubled times.

However, I also argued in Shorting the Euro that the value of the Euro is quite high, and even if the currency takes a hit, the Europeans will still be quite well off, and their economies will ultimately be sound. Except, perhaps, for the “periphery.” Marginal Europe is likely to return to its historically marginal status, so that those countries not traditionally part of the core of successful European economies will find that they have not “hitched their wagon to a star” by joining the Eurozone. Those nation-state that have traditionally been part of the core of successful European economies have demonstrated that they will not intervene in a robust manner to keep these marginal and peripheral economies on an equal footing to their own.

At this point in the recovery of the world economy, following the housing crash and the consequent financial meltdown, world economists were no doubt optimistic that growth would be hitting its stride about now. Instead, we have the earthquake and tsunami in Japan, with is attendant nuclear crisis, and social unrest throughout the Arab world, and between these natural and social disturbances expectations of slow, steadily, predictable growth must fall by the wayside.

In Portugal, austerity measures were voted down in a move that may result in an international bailout package — imagine the IMF coming to the rescue of a Eurozone nation-state, while the rest of the Eurozone looks on in complacency. But Portugal is far from isolated in this respect. Attempted austerity measures for the long-term good of the economy are notoriously unpopular, and routinely are the cause of riots and social unrest. The telos of this development is a situation like that in Argentina, when a popularly elected government attempts to practice the politics of mass subsidy — disastrously.

Indeed, the social unrest in the Arab nation-states that has been dominating the news lately has often been triggered by economic grievances. These economies have been moribund not least due to the cronyism of entrenched autocracy, and the legitimate hope is that, with the end of such autocracy and its inevitable cronyism, that there will be a democratizing effect and a spreading of the wealth. Such hopes are justified in the long term, but in the short term — and this is the scale of time represented by triggers for social unrest and revolution — they are unrealistic in the extreme. Russia now, some twenty years after the dissolution of its command economy, is doing well, but it went through some rather difficult times in its transition. The same is to be expected, at least to some degree, in regard to North Africa and the Arabian Peninsula, though greatly complicated by the oil wealth in the region.

In terms of sheer weirdness, perhaps recent moves by Utah to make gold and silver alternative currencies represent a movement of ideologically driven economic policy that, if the idea spreads, could do significant mischief. There is dissatisfaction and unrest among the wealthiest in the world, who may choose to cut off their collective noses to spite their collective faces. There is also dissatisfaction and unrest among the poorest in the world, and with the efforts to remove Muhammad Yunus from the Grameen Bank in Bangladesh that he created, it seems that economic policy is becoming politicized and polarized in ways that may give immediate emotional satisfaction at the expense of long term growth and economic viability.

I am not projecting or predicting worldwide financial disaster — I find apocalyptic scenarios distasteful in the extreme, not least when expressed in the secular terms of economics — but it does seem at the moment that the world economy is teetering on a knife edge, at which point it could fall backward into retrograde and politicized policies of the sort that exacerbated the Great Depression, and from which it might regain its sanity and move forward again by placing rationality and pragmatism of the emotional satisfaction of economic revenge.

In the grumbling hive of Mandeville’s Fable of the Bees, “every Part was full of Vice, Yet the whole Mass a Paradice,” and, “Their Crimes conspired to make ’em Great.” Great economies comprise great crimes; and great wealth means wealth often in undeserving hands. But the alternative — making everyone poor, something Mao pioneered with the Great Leap Forward and the Cultural Revolution — would leave a mark on world history from which we would not soon recover if practiced on a global scale. And this is the danger: the global economy is global, and with potentially global problems. Global efforts are needed to prevent moralistic folly from ruining what hopes we may rationally entertain.

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Note added 29 March 2011: Today on the BBC, in the story Portugal and Greece downgraded on debt worries, it was reported that Standard & Poor’s has downgraded Portuguese and Greek bonds: “The downgrades left Portugal one notch above junk rating and Greece’s creditworthiness below that of Egypt.” It seems we are well on the way to a two-tier Eurozone in which there will be a core of healthy, growing economies that more or less approximate the originally intended policy limits of Euro participation, as well as a periphery of poor cousins that use the Euro but which do not hew to Euro budgetary targets nor uphold Eurozone policies. One can see the participation of the Eurozone periphery as a kind of preemptive Euroization of marginal economies that might have needed rescue (and perhaps Euroization) by the core Eurozone nation-states at some point in time anyway. Why not put them on the Euro now instead of later? This makes northern European tourism to Greece and Portugal all that much easier by avoiding the inconvenience of currency conversion.

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Note added 05 April 2011: A new story today, Portugal downgraded by Moody’s on further debt concerns, notes that Portugal’s bonds have been downgraded again. The above-referenced story said that the previous downgrading, “left Portugal one notch above junk rating,” which means that the current downgrading puts Portuguese bonds firmly in junk bond territory. The Portuguese have receive so little in terms of support from the Eurozone that it invites the counter-factual speculation as to what would have been done in respect to Portugal had the Portuguese not been part of the Eurozone.

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Will the Eurozone enact a Greek tragedy?

Tuesday

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A few weeks ago in The Dubious Benefits of the Eurozone I discussed the dilemma of Greece, and, perhaps more importantly, the dilemma of the other Eurozone economies that are now mere bystanders to a Greek tragedy.

Problems continue to mount, and no solution is in sight. Day after day, the headlines fall like dominoes — last Friday: All for one… The eurozone countries are politically responsible for Greece’s problems, by Tommaso Padao-Schioppa, former ECB board member; Monday: Euro’s critical test: The eurozone needs to have powers to tax member states in a crisis, by George Soros (who needs to introduction), and today, Tuesday: What now for Europe? There is more than money at stake in the Greek crisis, by Gideon Rachman.

The truth of the matter is that the Eurozone has already failed, and it has failed because it has been starkly revealed, with all the blunt disambiguation of a messenger speech, that there is no mechanism in place that will either coerce other members of the currency union to come to the aid of Greece in a robust fashion, or that will coerce Greece to take the painful steps it must take to reform its economy in order to bring it in line with the best Eurozone economies. Either way, action is painful and expensive, but inaction is to condemn the population of a country in crisis to a long slide, at the bottom of which is poverty and economic irrelevance. Unfortunately, since the slide takes time and the consequences are not immediately apparent, it is almost certain that lack of political will means Greece will become a de facto second-class citizen of the Eurozone.

It is a hard saying, but some peoples condemn themselves to long term lower standards of living by unwillingness to work regularly, pay taxes dependably, regulate honestly, and govern transparently. Greece, of course, has a history of crippling strikes and Communist activism that have militated against productivity. In such a context, not paying one’s taxes can be spun as a heroic act of defiance in the face of corrupt governmental interference. And they are right. The government is corrupt. All governments are corrupt to some degree, but we pay our taxes anyway if we want to possess a national infrastructure that will make it possible to live reasonably comfortable lives in the context of contemporary industrialized society.

This impasse should not surprise us in the least. The general principle at stake is that a collective crisis demands cohesive collective action, the sooner the better, the more decisive the better. In most particular instances of the general principle, it does not surprise us when a collective entity that has become too large for its mandate fails to deliver cohesive collective action. When the Europeans announced that they would create a joint military force, no one took it seriously. A joint European military command would be at least as difficult as a joint European foreign policy, and probably more difficult. While divergent national interests appear much more rapidly when it comes to fighting and dying, they eventually appear in economics as well. Taxing and spending is not quite as immediate as fighting and dying, and it is perhaps the next thing on the list that will get people’s attention.

After the Second World War, and again, on a wider scale, after the Cold War, Europe proclaimed itself to be unified. Moreover, it Europe has acted on occasion as though it were in fact unified. An outside observer who knew nothing of European history except what could be documented from public news sources since 1945 might come to conclusions that, despite having better than fifty years of evidence to support them, are still nearly baseless. Such is potentially the fate of all inductive reasoning that does not rest on a foundation that comprehends a period of time sufficient to measure the patterns in the history of the observed entities. Since the patterns of political entities are played out over centuries, fifty years is an insufficient sample for an accurate result.

The need for collective action in the face of crisis, and the lack of a collective will to take action, is the tragic flaw, the Achilles heel, of all trans-national entities. That being said, I am not simply contrasting the supra-national entity of the Eurozone to the successful and robust nation-state, since this implies that the nation-state possesses some special quality in virtue which cohesive collective action is possible (which latter occult quality perhaps resides in the Volk). In fact, extant nation-states do possess this quality — essentially, the quality of being able to act upon raisons d’état — but not intrinsically. The nation-state can be defined ex post facto as that political entity for which raisons d’état are possible; the territorially defined nation-state is the effective limit of cohesive collective action. In other words, nation-states are nation-states because they have achieved national cohesion. To understand the causality to run in the other direction — that nation-states achieve cohesion because they are nation-states — is to get things seriously backward.

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Shorting the Euro

Tuesday

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If anyone thinks that the US debt position is particularly bad, they should take a look at Europe. There is a front page story on today’s Financial Times that positions of 7.6 billion dollars have been taken shorting the Euro. A “short” is a term in finance that essentially means betting that the shorted commodity (which in this case in the Euro) will decrease in value. In other words, major hedge funds and and traders are counting on a fall in the value of the Euro. This speculation is primarily due to an expected debt crisis within the Eurozone. (I previously wrote about the woes of the Euro in Greece in The Dubious Benefits of the Eurozone.) Also today, at the same time that the Financial Times was reporting the massive shorting of the Euro, the BBC ran a story, Euro bounces back against the dollar and pound, that begins, “The euro has strengthened against both the pound and the dollar as currency traders’ fears about European debt levels begin to recede.” The BBC story points out the the Euro has recovered from recent lows, but mentions nothing of the shorting on international currency markets.

Although a currency ought to be understood as one commodity among many, as I have characterized it above, because currencies are tied to political entities (mostly to nation-states, but in the case of the Euro to the EU, which is a quasi-state entity) currency speculation takes on a political edge. Aggressive currency speculation (especially the shorting of a currency) is often perceived as a hostile act taken against the nation-state that generates the currency in question.

Speculation against the Thai Baht was widely credited for triggering the Asian financial crisis of 1997. Currency speculators like George Soros are soft targets, especially given the popular anti-financial sentiment of the present, so it is all-too-easy to ascribe blame to them, but note that I identified currency speculation as the trigger of the crisis. The causes of the crisis are many and reach back further into contemporary history.

Should we expect a European financial crisis to emerge from this massive shorting of the Euro? There may be a “crisis”, but there will be no crisis on the scale of the 1997 Asian financial crisis. Why not? Europe’s fundamentals are strong, and its institutions are robust. Neither could be said of the east Asian “tiger” economies of the 1990s. Moreover, the Euro has been a highly valued currency that has been bid up appreciably in recent years.

The short memory of traders and newspaper columnists militates against their seeing commodity prices in an historical context large enough and long enough to make sense of market fluctuations. I have no doubt that if the Euro plunged in ten percent of its value, this would be received with much wailing and gnashing of teeth in the financial press. But let us put this in perspective. The Euro is currently trading around $1.38296. A ten percent decrease would value the Euro around $1.24466. But as recently as June 2001 the Euro was only worth about 85 cents. A Euro devalued by ten percent would still be about forty cents higher than its low point in June 2001.

After the initial release of the Euro, its value steadily declined against the dollar for a couple of years. Its present high valuation has been the result of nine years of accumulated appreciation. At that rate, the Euro could afford to lose some value. A decline in the value of the Euro would be a major boost to Eurozone economies as their products would suddenly be much more affordable in major consumer markets like the US.

. . . . .

● Poor Cousins

● What would a rump Eurozone look like?

● The Economic Future of Europe

● An Alternative to the Euro

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