The Genoa Bridge collapse, neoliberalism, and the Italian left-right coalition government

The deadly collapse of the Morandi Bridge in Genoa, Italy, on August 14 has focused the attention of numerous journalists and commentators on the economic situation of Italy.

• Hilary Clarke and Gianluca Mezzofiore, Genoa bridge collapse came after years of warnings CNN 08/16/2018
• Italy bridge collapse: Genoa death toll rises to 43 BBC News 08/19/2018
• Franz Kössler, Genua: Der Einsturz der Brücke und der Politik Falter 34:2018 22.08.2018 (momentan hinter Abo)
• Walter Mayr, "Schakale und Lügner" Der Spiegel 34:2018 (18.08.2018)
• Thomas Migge et al, "Ein Sommernachtsalptraum" Profil 34:2018 20.08/.2018
• Paola Subacchi, Hard Lessons from Genoa Project Syndicate 08/21/2018
• Christian Wüst in "Tod im Tragwerk" Der Spiegel 34:2018 (18.08.2018) goes into some of the technical issues around the collapse.

The political background

The EU establishment has been in a tizzy since the current Italian government took office in June. It is a coalition of the left-populist Five Star Movement (5Stars) and the right-populist Lega. The Prime Minister from the senior coalition party 5Stars is Giuseppe Conte and Matteo Salvini, the longtime head of the junior partner Lega, is the Deputy Prime Minister and Interior Minister, the latter being the country's chief law enforcement official. Conte is an attorney with very little experience in politics. So it's no surprise that Salvini seems to be the actual government leader on policy.

Salvini has been enthusiastically pressing forward an anti-immigrant policy, which has included banning ships carrying passengers rescued at sea from the high risk immigrant route from Northern Africa. (Alexander Stille, How Matteo Salvini pulled Italy to the far right The Guardian 08/09/2018) Such a ban is a serious rejection of international law. Stefan Schmidt, a sea captain with experience in Mediterranean rescues who is current commisioner for asylum and refugee issues in the German state of Schleswig-Holstein, in this interview talks about the broader issue of sea rescues in the Mediterranean, not simply in relation to Malvinini, in this German-language interview, Stefan Schmidt: "Menschenleben stehen bei mir an erster Stelle" Deutsche Welle 19.08.2018:

Salvini's actions on the chronic refugee crisis are anti-EU and narrowly nationalistic.

And defenders of democracy and the EU see good reason to worry about the direction he's going, as Stille reports:

Salvini’s rise to power has heightened concerns in Italy about the escalation of racist and xenophobic violence in the country. Dozens of attacks on black people and Roma have been recorded in the last year, all over Italy, from Treviso in the north to Gioia Tauro in the south, including Florence and Rome. The attacks range from drive-by shootings with air guns, in which the attackers were reported to shout “Salvini!” to the assassination of a Malian trade unionist campaigning for fair pay for migrant workers. An Italian athlete of Nigerian descent, Daisy Osakue, the Italian under-23 champion discus thrower, was hit in the eye by an egg thrown from a car. Police have been pursuing attackers and making arrests, but the government has been more reticent. After a torrent of criticism for his anti-migrant policies – culminating with the headline “Get behind me, Salvini” on the cover of Italy’s largest Catholic magazine – Salvini responded with a favorite phrase of Mussolini: “many enemies, much honor.” He also insisted that the idea of widespread Italian racism was “an invention of the left”.

He's also making a show of forming common fronts with other nationalist (and pro-Putin) groups, even though the whole notion in a Nationalist International is inherently bizarre. Even though that's exactly what far-right parties in Europe are trying to have. Salvini's stunt this week is to advertise his fondness for Viktor Orbán, the Prime Minister of Hungary, which joins Poland as one of two countries in the EU who seem to have become authoritarian enough to no longer meet basic EU requirements for democracy and rule of law.

Lorenzo Tondo reports in Matteo Salvini and Viktor Orbán to form anti-migration front Guardian 08/28/2018. "The Italian interior minister, Matteo Salvini, and the Hungarian prime minister, Viktor Orbán, have said they are “walking down the same path” after discussing the formation of a common anti-migration front they said would oppose the policies of the French president."

Diplomatically, it also strengthens the impression that Malvini and the Lega are in reality the dominant party in the Italian coalition.

But it's not only the anti-EU refugee policies that causes the EU establishment to worry. The new government is also committed, for the moment, to defying Angela Merkel's austerity politics, which is treated like religious truth in EU economic policy.

The obsession with austerity politics of the Herbert Hoover/Heinrich Brüning cast has meant, among other things, delays in upgrades, repair, and expansion of infrastructure. That's been true even in Germany, where Merkel's governments have been restrained on infrastructure projects.

This is a familiar story. When faced with budget shortages, deferred maintenance is one of the first budget-cutting methods governments resort to. Paola Subacchi describes the larger problem this way:

In Western Europe and the United States, bridges, roads, and railways built in the 1950s and 1960s during the post-war reconstruction and economic boom are now old, obsolete, and overused. Does any developed economy have a long-term strategy to manage its essential infrastructure? Are risks being correctly assessed and mitigated? What are the trade-offs between maintaining and replacing infrastructure approaching the end of its life? And how can citizens influence the public debate about who should pay for infrastructure and where it should be built?

It's not just in Italy this problem is occurring. It's a chronic feature of the neoliberal era ushered in by Ronald Reagan in the US and Maggie Thatcher in Britain.

This attitude toward public infrastructure is seriously different from the time before "when demand-management policies went out of fashion," as Subacchi puts it:

The Morandi Bridge was inaugurated in 1967 with great pomp by Italy’s president. Back then, political capital was built around such projects – and not only because of patronage and corruption. Nowadays, modern democracies seem stuck around the trade-off between collective benefits from infrastructure and individual rights, and large projects are often the kiss of death for a politician’s career. ...

With the can continuing to be kicked down the road while existing infrastructure approaches its expiration date, we can expect many more such headlines in the not-too-distant future.

She also means that more broadly than just for Italy.

The bridge

I'm not going to claim to have any special insight into the technical problems involved. Christian Wüst's article talks at length about how the collapse was supposed totally unpredictable. Wüst explains that the bridge was made from a steel-and-concrete combination whose flaws from rust are very difficult to evaluate.

Only very near the end do we read this:

Nur zwei weitere Brucken dieser Art (Patent Morandi M5) wurden damals gebaut, eine in Venezuela, eine in Libyen. Das Konzept erwies sich als Irrweg. Der Beton schützt die Spannelemente nicht auf Dauer var Rost, wie anfangs gedacht, er kann den Verfall sogar beschleunigen, verhindert eine zuverlässige Prüfung und erhöht unnötig die Masse der Konstruktion.

[Only two other bridges of this type (patent Morandi M5) were then built, one in Venezuela, one in Libya. The concept proved to be wrong. The concrete does not protect the elements of the span from rust over a long time, as was originally thought. It can even accelerate the decline, hinders an adequate examination, and increase the mass of the construction unnecessarily.]

In other words, it sounds like there was good reason for the company responsible for the bridge to be very concerned that the bridge posed serious risks. And that measures needed to be taken to mitigate the risks: repairs, restrictions on traffic and vehicle weights, even replacements of the bridge or parts of it.

The neoliberal bridge and Italian populism

What's that you say? The company that was responsible for it? Why, yes, the bridge was being managed by a private, for-profit company, the holding company Atlantia. According to Franz Kössler, Atlantia (he uses the older name Autostrade per l'Italia) "controls about half of the Italian highways." (my translation)

The Morandi Bridge was originally built a state-owned company, IRI, and opened in 1967. But it long since came under the neoliberal gospel, of which privatization is one of the cardinal dogmas. IRI itself, which as Franz Kössler observes, was once "Italy's largest employer and a center of economic miracle of the postwar era," now has "long since fallen victim to the privatization policy."

When a major bridge collapse like this happens, the citizens obviously should demand accountability for the problem and, at a minimum, a serious and honest answer as to what happened in the disaster. And democracies should expect that their government will take the necessary steps to make sure the country's public infrastructure is safe and adequate.

And the Italian government parties are pointing fingers. Prime Minister Conte and 5Stars are blaming Atlantia and calling attention to the large ownership role of the Benetton family of Italian oligarchs. And, as Walter Mayr reports, Atlantia's operational earnings in 2017 was €2.6 billion ($3 billion at current rates).

But Mayr's Spiegel article treat the idea that there could have been any neglect on the part of Atlantia with contempt. And takes the idea that Italy should reduce it's budget deficit to zero without any reference to actual economic conditions as self-evidently sensible.

Which comes to the left side of Italian populism. Both 5Stars and the Lega want to get out of the current fiscal constraints imposed by the EU. Malvini has blamed the EU for the bridge callapse, which conveniently fits with the Lega's narrow-nationalist, anti-EU outlook..

But the Hoover/Brüning economic policies dominant in the EU are bad. And while I've seen no reason to think the EU specifically directed neglect of the Morandi Bridge, it's also not just demagoguery to link the event to EU austerity policies. And Italy's economy does need a boost, even apart from rickety bridges.

Walter Mayr and and Franz Kössler make a point the some 5Stars figures had opposed a proposed road project that could have reduced traffic on the Morandi Bridge. And Profil that 5Stars "rejects big infrastructure programs on principle for ideological reasons." (my translation) Whether that is more a real ideological commitment of 5Stars or more of a "gotcha" point, I don't know. What does seem obvious is that some serious infrastruction

Italy's banks have been wobbly for a while and their economy is still slow in recovering from the Great Recession that began a decade ago. The Conte-Salvini (or Salvini-Conte?) government is pushing for a more expansive fiscal policy than Merkel and the EU want to allow.

But the combination of shaky banks and a government pushing back against Herbert Hooverish fiscal constraints imposed by the EU could bring a re-run of the Greek debt crisis and the eurozone confrontation of 2015. The Profil article cited above observes:

Die Populisten hatten Zeit genug, um erkennen zu konnen: Budgetdisziplin macht unpopular. Das, in Kombination mit ideologischer EU-Feindseligkeit, konnte Italien zum Sprengsatz der Eurozone machen.

[The {Italian} populists had enough time {since the 2008 economic crisis} to recognize: budget discipline makes you unpopular. That, in combination with ideological hostility to the EU, could make Italy into an explosive charge.]

Daniel Gros takes a wonkish look at the current risks in Italian risk spreads: Fiscal versus redenomination risk VoxEU 08/29/2018.

Former Greek Finance Minister Yanis Varoufakis notes in With his choice of prime minister, Italy’s president has gifted the far right Guardian 05/28/2018:

While it is true that Italy is in serious need of reforms, those who blame the stagnation on domestic inefficiencies and corruption must explain why Italy grew so fast throughout the postwar period until it entered the eurozone. Was its government and polity more efficient and virtuous in the 1970s and 1980s? Hardly.

The singular reason for Italy’s woes is its membership of a terribly designed monetary union, the eurozone, in which the Italian economy cannot breathe and which consecutive German governments refuse to reform.

The Genoa bridge collapse is another reminder that chronic austerity has longterm costs. The metaphorical collapse of the banks may be far more damaging to the economy and become the immediate cause of a new euozone crisis. But literal collapses are happening, too. And costing people who have the misfortune of being on the wrong bridge at the wrong time their lives.

Varoufakis on extend-and-pretend solution to euro and refugee problems

Yanis Varoufakis in an 11-minute interview with Bloomberg News on the two mega-problems that endanger the future of the European Union: the flaws of the eurozone currency construction, and the long-term refugee crisis:

https://youtu.be/PJB-iP9EmV4

He talks about how the current extend-and-pretend pseudo-solutions to both are are a deceptive mess. (The more I hear about Angela Merkel's recent deal on refugees with her Interior Minister Horst Seehofer, the more I'm impressed with what vapid political theater it is, a non-solution to a non-problem.) Phony solutions are a staple of normal politics, of course. But the EU program for Greece and the Merkel-Seehofer deal are both classic examples of the genre. The first is far more significant, the second more dramatic in its obvious phoniness.

He deals with the extend-and-pretend "solution" to the Greek debt crisis in Profiles in European Denial Project Syndicate 07/29/2018:

When bankers try to cover up bad loans on their books, they extend new loans to enable their insolvent borrowers to pretend to be servicing the original loan. When the new loan is exhausted, the client is allowed to suspend repayment for a few years, with interest accumulating. This keeps the net present value of their asset (the loan) constant while postponing the day of reckoning (when they have to confess to their regulator that the loan is unrecoverable).

Since 2010, Greece’s creditors have been practicing this extend-and-pretend strategy as though they were training for an Olympic event. Instead of a courageous and therapeutic haircut, or the moderate GDP-indexing solution, the Eurogroup’s recent decision, proclaimed as the “end of the Greek debt crisis” boiled down to the apotheosis of this cynical practice.

Italy and the ghost of 2015

Frances Coppola in a piece from last Thursday, The Eurocrisis Is Back And It Could Be Uglier Than The Last One Forbes 05/31/2018, comments on the looming clash between the Italian government coalition of Five Stars and the League, on the one hand, and the EU establishment, on the other.

She judges that the coalition's political program amounts to "a toxic mix of right-wing and left-wing handouts, with a hefty dose of xenophobia and Euroscepticism" that represents "a major attack on the Eurozone’s governance model."

The coalition is demanding that the fiscal and monetary rules that hold the euro together be reformed to suit its own agenda. This is not going to go down well in Brussels. Even more importantly, it is not going to go down well in Germany. The new finance minister, Olaf Scholz, is every bit as committed to fiscal discipline and austerity as his formidable predecessor, Wolfgang Schaueble.

They are right to demand an end to Herbert Hoover/Heinrich Brüning austerity policies. But the somewhat vague left policies of Five Star and the nationalist/xenophobia orientation of the League are likely to be an unstable mix. And maybe downright toxic.

And they are likely headed sooner rather than later to a conflict with the EU and Angela Merkel in the lead that will be a lot like the one in Greece in 2015. Like Greece, it has a debt load that it cannot indefinitely support under the current eurozone arrangements. And austerity policies imposed by the Troika have left Italy with a stagnant growth rate for years:

Since 2001, Italy’s GDP growth rate has averaged less than 1% per annum, and it has several times dropped below zero. When GDP growth is very low, debt/GDP does not fall even if the country runs primary surpluses. This is what is happening to Italy. It has a huge historic debt burden that it is unable to reduce, and the Eurozone’s fiscal rules actually make matters worse, since persistent austerity tends to depress GDP growth.

It's going to be a bumpy ride.

Italy's new government

After being stymied by the Italian President in their first attempt to form a government, the two coalition parties, the Five Stars Movement (Cinque Stelle) and the League, are making another attempt. (Jason Horowitz, Italy’s Populist Parties Win Approval to Form Government New York Times 05/31/2018) Giuseppe Conte is still their candidate for Prime Minister. Sergio Mattarella accepted the new government and cabinet Thursday evening. (Dominik Straub, Machtwechsel in Italien: Mattarella akzeptiert populistische Regierung Standard 01.06.2018)

Italy's new Prime Minister Giuseppe Conte

Unfortunately, the reporting on this one strikes me as a bit lazy (from the Times article):

... the newly constituted government, of the anti-establishment Five Star Movement and the anti-immigrant League, still left open the question of whether the reaction of financial markets to Italy’s political chaos this week had chastened them, or whether it simply had led them to disguise their hostility as the price of admission into power.

Populist leaders in Europe and across the Atlantic looked on with delight as they gained a powerful ally in the heart of Western Europe. European leaders in Brussels, already worried about Poland and Hungary, now fear a threat to European unity from within its core. [my emphasis]

For good measure, or to conform to superficial reporting conventions, he adds that the coalition parties "also want to lift sanctions against Russia and for Italy to move closer to its president, Vladimir V. Putin, who once said he didn’t need to meddle in the Italian elections because it was all going his way."

That treatment carelessly conflates the Italian coalition with the authoritarian regimes in Poland and Hungary and makes them sound like stooges of Vladimir Putin. It's a sloppy presentation.

And does the "paper of record" now just assume that it's the role of "financial markets" to "chasten democratically elected governments? Any lazy formulation.

EU Commission President Jean-Claude Juncker made it clear to Italians what the attitude of the EU leadership is, speaking like an English colonial viceroy (Stephanie Kirchgaessner Daniel Boffey, Juncker: Italians need to work harder and be less corrupt Guardian 05/31/2018):

Days after the Italian president, Sergio Mattarella, defended Italy’s place in the eurozone against the country’s populist leaders, the president of the European commission said he was in “deep love” with “bella Italia”, but could not accept that all the country’s problems should be blamed on the EU or the commission.

“Italians have to take care of the poor regions of Italy. That means more work; less corruption; seriousness,” Juncker said. “We will help them as we always did. But don’t play this game of loading with responsibility the EU. A country is a country, a nation is a nation. Countries first, Europe second.”

Believe it or not, that actually is diplomatic wording! Translated from EU-speak, it basically means: "Italy will do what the EU Commission, Angela Merkel, and the financial markets order them to do. Everybody knows that Italians (and Greeks and Spaniards and Portuguese and Irish people) are lazy and corrupt. More importantly, if you try to depart one iota from Herbert Hoover/Heinrich Brüning economic policies in good times or bad, we will crush your miserable, inferior little country."

Although Italy's not so little.

The new Italian government faces the same basic dilemma that the Syriza government faced in Greece in 2015. To provide Angela Merkel and the EU to release them from stone-conservative neoliberal economic policies, they have to be willing to credibly threaten to leave the eurozone. Which means that if Merkel and the EU refuse to make reasonable concessions, the Italian government really would have to be willing to take Italy out of the eurozone.

But there's definitely a dark side to the new Italian government. They are taking a xenophobic line, like the governments in Hungary and Austria, among others.

So they are supposedly prepared to take a run at forcing a realistic adjustment of one of the EU's two chronic problems, the poor construction of the eurozone, which falls seriously short of being an "optimal currency area." Given the stubborn resistance of Germany and other northern European governments, that's not likely to happen, sad to say.

Bill Mitchell explains why the Financial Markets as such are not the cause of the euro's problems in (The assault on democracy in Italy Billy Blog 05/30/2018). He explains that the EU has a mechanism to save bondholders from taking a bad on their bond holdings, he writes:

The ECB clearly signalled a willingness to buy unlimited quantities of government bonds if there was the risk of insolvency.

But this intervention required that the countries succumb to a fiscal austerity package that ensured their growth prospects were minimal.

And the combination just meant that the next crisis was just around the corner.

The SMP gave way to the more recent asset-buying programs, which have seen huge volumes of government debt (other than Greece) accumulate on the ECB’s balance sheet, which have funded fiscal deficits and kept the Eurozone intact.

The interesting point is that while the ECB eventually dealt the private bond dealers out of the game they waited a time (in each episode) for those dealers to express their market preferences.

Why? It is obvious. They wanted to create a sense of public debt crisis – let the spreads of the Member State bonds rise against the German bund – to make it clear that Germany’s position was sound and the example and the rest were out of control rabble with excessive deficits.

Then they could have it both ways.

But the other chronic EU crisis, mass immigration of refugees, which also had an acute moment in 2015, is still there. The immigration wave isn't stopping. The EU countries badly, badly need an EU-wide plan for processing, housing, and integrating refugees, a plan based on some kind of reasonable burden-sharing among the member states. They also need to have adequate emergency services for refugee waves like the one that came in 2015. Xenophobic governments aren't going to get there.

Italy, the euro, and the democracy deficit

Former German Finance Minister Wolfgang Schäauble during the 2015 Greek crisis delivered a succinct statement of the conflict between neoliberal Herbert Hoover/Heinrich Brüning economic policy: "Elections cannot be allowed to change economic policy."

His then Greek counterpart Yanis Varoufakis rightly called that attitude "a great gift to those who don't believe in democracy."

"Our #democracy was crushed because the Wolfgang #Schauble line was seen through and completely & utterly adopted, that 'elections cannot be allowed to change economic policy', which is a great gift to those who don't believe in democracy" @yanisvaroufakis https://t.co/DwIFIEdkBD pic.twitter.com/vhJZKjk7aR

— DiEM25 (@DiEM_25) April 5, 2018

Unfortunately, the European establishment is still singing from the same hymnbook:

European Budget Commissioner Günther Oettinger apologized on Tuesday after facing criticism for suggesting that financial markets would show Italians how to vote.

Oettinger told broadcaster Deutsche Welle in an interview conducted in German that the reaction of financial markets would give Italian voters a signal not to vote for populists.

“My concern and expectation is that the coming weeks will show that the development of the markets, government bonds and the economy of Italy will be so far-reaching that this will be a possible signal to voters not to vote for populists on the right or left,” Oettinger said.

“Already the developments of the government bonds, the market value of banks, the general course of the Italian economy is clearly overcast, is negative. This has to do with the possible government formation.” (Emma Anderson, Oettinger apologizes after Italy remarks spark storm Politico EU 05/29/2018; my emphasis)

EU Commission President felt compelled to distance himself (publicly) from that comment, saying, "President Jean-Claude Juncker, saying that “Italy’s fate does not lie in the hands of the financial markets."

But in substance, Italian voters have every reason to believe that it's no more than lip service. The article quoted doesn't mention any criticism of the Italian President's decision that effectively blocked the seating of the duly elected national government and instead proposed to install as President a former IMF official who is (of course!) devoted to austerity economics. Anderson also reports:

Juncker’s own comments before the Italian election seemed to impact financial markets in February when he said that the EU should “brace ourselves for the worst scenario and the worst scenario could be no operational government.”

The Commission president later tried to smooth things over, by saying “whatever the outcome, I am confident that we will have a government that makes sure that Italy remains a central player in Europe and in shaping its future.”

But in case there is any doubt that the Schäuble Principle of Eurozone Government remains in effect, Vítor Constâncio, vice president of the European Central Bank (ECB) explained how things are in an interview with Spiegel Online ('Italy Knows the Rules' 05/29/2018):

SPIEGEL ONLINE: These achievements are now hanging in the balance because one country may no longer want to do its part. Even if their attempt to form a government has failed for now, Italy's two dominant parties are both skeptical of the common currency. They want to push through massive tax cuts and increase spending dramatically, despite that fact that, at 132 percent of gross domestic product, Italy has one of the highest levels of sovereign debt in the world.

Constâncio: It is certainly a challenge, first and foremost for Italy itself. When financial markets attacked Italy in 2012, it demonstrated that perceptions on the financial markets can be volatile and the risk assessment of a given debtor can change abruptly, sometimes with severe consequences - and this even though Italy already had a primary surplus at the time. We will have to see what happens now.

SPIEGEL ONLINE: Risk premiums for Italian government bonds have risen sharply again recently. At what point would the ECB intervene again, as it did in 2012?

Constâncio: I would like to stress that every intervention has to contribute to the fulfilment of our mandate and is also subject to conditionality. The Outright Monetary Transactions program for intervening in national sovereign bond markets of vulnerable countries can only be used if the country in question also agrees to an adjustment program. The rules are very clear on this. Everyone should remember that.

SPIEGEL ONLINE: So if Italy wants to circumvent the EU's fiscal rules, it can't necessarily count on the ECB's help?

Constâncio: I will only say that Italy knows the rules. They should perhaps take another close look at them. [my emphasis in italics]

I guess the latter is a sort of Italian version of the stereotypical American-movie German who says, "Ve haf vays of making zis happen."

This is how the EU's Very Serious People see things.

Wolfgang Münchau in his May 29 Eurointelligence public site writes:

But what we found most remarkable about the quality of the [German press'] discussion [about Italy's increasing resistance to austerity economics] is the opening paragraph of this story by Frankfurter Allgemeine. Apparently, the reason why Emmanuel Macron has been pressing for a deal on a European deposit insurance scheme by June this year is so that Germany rescues French banks from their Italian exposure. With such a framing in the paper of record of the largest member state, abandon all hope ye who enter the eurozone debate.

Recycled prescriptions for the EU

An intriguing headline hinting at an important insight: It’s time for the EU to get real, an article by Jen Spahn, German Health Minister and a leading figure at the moment in Angela Merkel's Christian Democratic Union (CDU) party, in Politico EU 03/22/2018.

His fresh and innovative solution? Double-down on the most misguided macroeconomic policies on which Angela Merkel has insisted in her years as Chancellor, at great cost to millions of people in the eurozone:

The future of our shared currency, the euro, is also central to Europe’s future. Reducing the debt levels of member countries is vital, as is reinforcing the European Economic and Monetary Union and ensuring that actions and liability go hand in hand. Credibly enforcing the EU’s stability and growth pact is the key task. In this way, we can enhance member countries’ financial resilience and our ability to withstand the next crisis.

In order to make the euro-architecture more robust, the European Stability Mechanism should be further developed into a European Monetary Fund, as already proposed by former Finance Minister Wolfgang Schäuble. Such a monetary fund would have to include better early-warning and prevention mechanisms for crises and credible procedures for debt restructuring in order to protect taxpayers.

Some sort of neutral internal governance — committed to compliance with the treaties, rather than political opportunism — will be vital. That would also enhance the attractiveness of the eurozone for those countries who have not yet introduced the euro. [my emphasis]

He also has this suggestion, "A recent proposal to provide a four-week Interrail pass for all school-leavers in the EU is intriguing, as it would help foster a connection to other Europeans. These are costly projects, yes, but they would allow us to make a positive — and distinctly European — mark on the world."

Easier than creating a common eurozone fiscal policy and budget, I guess. Not to mention creating shared eurozone debt instruments.

Spahn also has the not-exactly-bold suggestion of increasing the staffing of the EU Frontex border-patrol agency. He declares, "The issue that clearly causes the most anxiety with voters is migration. As long as human traffickers, rather than border officers, decide who sets foot on European soil, we put at risk one of the greatest achievements in European integration: the freedom of movement." This is a CDU-ish nod to anti-immigrant rhetoric, i.e., "human traffickers, rather than border officers, decide who sets foot on European soil."

The European immigration problem - a continuing crisis, actually - is not due to enterprising people smugglers, uh, "human traffickers." It's due to wars in the Greater Middle East including Afghanistan, and in North Africa. Along with the increasing and long term effects of climate change. It's a European problem. One whose actual solution will involve, yes, European countries agreeing of accepting a certain number of refugees. And preparation of adequate emergency services for spikes like those of 2015. All of which will require a practical attitude of solidarity, or cooperation, if you prefer. The nationalism and national resentments generated by Merkel's handling of the euro crisis have made that much more difficult.

If vague pronouncements like, "The creeping power grab by the European institutions must end," is all the EU leadership can come up with, that doesn't promise a happy future for the EU. Particularly since the eurozone's Fiscal Pact forces most eurozone countries to adopt procyclical austerity policies during recessions.

The fate of the euro and the fate of the EU

The euro is plagued by the basic problem that the eurozone does not meet the basic requirements of an "optimal currency area".

Paul Krugman wrote in 2012 (Revenge of the Optimum Currency Area NBER Macroeconomics Annual 2012 Vol. 27) that "right from the beginning" of the euro, economists working with the "theory of optimum currency areas" warned that it "suggested serious concerns about the euro project." He explains:

The disadvantages of a single currency come from loss of flexibility. It’s not just that a currency area is limited to a one-size-fits-all monetary policy; even more important is the loss of a mechanism for adjustment. For it seemed to the creators of optimum currency area (OCA), and continues to seem now, that changes in relative prices and wages are much more easily made via currency depreciation than by renegotiating individual contracts. Iceland achieved a 25 percent fall in wages relative to the European core in one fell swoop, via a fall in the krona. Spain probably needs a comparable adjustment, but that adjustment, if it can happen at all, will require years of grinding wage deflation in the face of high unemployment. [my emphasis]

Recessionary effects hit different regions of a currency zone with disproportionate effects, i.e., "asymmetric shocks." If the currency zone has a common budget, countercyclical measures can be designed that transfer money from the less heavily stricken regions to the ones hardest hit during a recessions. The concept isn't all exotic, though it sometimes sounds so in the economic jargon:

Let’s once again take a not at all hypothetical example: Florida, after the recent housing bust. America may have a small welfare state by European standards, but it is still pretty big, with large spending in particular on Social Security and Medicare — obviously both are a big deal in Florida. These programs are, however, paid for at a national level. What this means is that if Florida suffers an asymmetric adverse shock, it will receive an automatic compensating transfer from the rest of the country: it pays less into the national budget, but this has no impact on the benefits it receives, and may even increase its benefits if they come from programs like unemployment benefits, food stamps, and Medicaid, which expand in the face of economic distress.

This provides not only relief in a humanitarian sense. It also gives harder hit areas additional purchasing power that stimulates the economy in those areas, especially if there is effectively labor mobility. That transfer function makes the dollar currency zone (the US) a "transfer union." The EU is not.

In addition to a transfer union and labor mobility, the ability of the currency zone to borrow money secured by the union as a whole in order to benefit some sections of the currency zone more than others is an important feature to make it workable. In other words, the currency zone needs a lender of last resort. The lack of it in the eurozone was a major factor in the post-2008 euro crisis.

But the EU doesn't have a transfer union, a banking union, a common borrowing capacity (though the ECB has been to partially mitigate that lack), or a common budget. And labor market mobility among EU countries is significantly limited by language as well as different educational systems. Although Krugman notes "lack of labor mobility has not played a major role in euro’s difficulties, at least so far."

(It's worth noting here that a drive through rural states or cities hard hit by de-industrialization will dramatically show that the dollar "transfer union" doesn't entirely eliminate major regional disparities in prosperity.)

Wolfgang Münchau warns in the Financial Times that the unresolved problems of the euro currency zone are more a threat to the survival of the EU than Brexit (Lack of eurozone reform outranks Brexit as the EU’s biggest threat 12/17/2017):

There is a theoretical argument that a fully functioning banking union constitutes a sufficient set of conditions for eurozone stability. It would be a wonderful proposal for a monetary union in a parallel universe. Back on earth, fiscal union is needed precisely because the banking union will always be imperfect.

Therefore, the fundamental problems of the eurozone will remain unaddressed: large and nondecreasing financial imbalances between member states; weak banking systems that are overdependent on EU members; an inbuilt tendency towards pro-cyclical fiscal policies that exacerbate boom and bust; a lack of instruments to deal with asymmetric shocks; and, most important of all, a fundamental lack of trust. The cyclical economic recovery has deflected attention away from these issues, but has not resolved any of them. [my emphasis]

I would add the refugee crisis. It's currently in a less acute phase. But it is both a symptom and the cause of the lack of trust between EU members.

Brexit Updates

The Real News has the following video reports on the aftermath of Brexit.

Brexit sends Europe into Political and Economic Crises (1/2) 06/28/2016:

Brexit sends Europe into Political and Economic Crises (2/2):

The Corbyn No-Confidence Vote and the Bleeding of the Labor Party 06/28/2016:

Neoliberalism and Brexit

I'm trying to be cautious about making assumptions on the relationship between economic conditions and the rising xenophobia and nationalism we're seeing in European politics. And US politics, unfortunately.

This is why studies like the classic studies organized by Frankfurt School exiles in the US, The Authoritarian Peronality (1950), are so valuable in reminding us of the complexity of the interaction between social conditions, family structure and other dynamics.

The economic and political theories have been dominant in the North Atlantic world and beyond for decades. It first became dominant during the Reagan Administration in the US and the Thatcher government in Britain. The Maastricht Treaty on European Union of 1993 represents a key turning point for the ascendance of neoliberalism in Europe. A key aspect of neoliberal hegemony in both the US and Europe has been the adoption of that outlook by the dominant center-left parties, social-democratic in Europe and the Democrats in the United States.

The neoliberalism of the 1990s up until today didn't create nationalism, xenophobia or racism, obviously. But in politics, quantity and intensity matter. A lot. And there are distinct social changes that have affected economies from Germany to Britain to the United States as a result of the dominance of such policies and theories of government.

Servaas Storm takes a shot at framing the problem in How the Brexit Tragedy Challenges Economics New Economic Thinking 06/26/2016:

It would be a tragic mistake to read this resentment against the E.U. as only anti-migrant, racist or bigoted, because the racism and bigotry have grown in conditions of economic austerity, artificial job scarcity and crisis, rising unemployment, rising job insecurity, and exploding inequalities as social protection for workers, pensioners and families have been scaled down in favour of an expanded social safety net for TBTF [too big to fail] banks and corporations. Almost everywhere in the E.U. — as in Britain — there is a polarization of the income distribution into a large number of low-income households and a much smaller number of very rich, while the middle classes have shrunk. There is a segmentation of employment into low-wage, unprotected and precarious jobs, mostly in low-tech services, and high-wage and protected jobs in high-tech manufacturing, finance, legal services and government.

Labour market reforms are turning European countries into “dual economies” — a trend fuelled by robotization and technological progress. The real message therefore is one of utter macroeconomic mismanagement in response to the global crisis and on-going rapid technological change, which – unfortunately not for the first time in recent history – has created the conditions for political instability, upheaval and social chaos. The massive social protests in France against the modernization of labour laws — newspeak for a reduction in the strength of French job-protection laws and social security in general — by the “socialist” Hollande government illustrate the point: The systemic dismantling of worker protection in the name of cutting wage costs and improving unit-labour cost competitiveness will certainly increase job insecurity, employment precariousness, and inequality without any further macroeconomic benefits. Despite uncountable attempts to do so, no robust relationship has been found between job-protection, on the one hand, and unemployment, economic performance and productivity growth on the other hand. [my emphasis]

Negotiating over negotiating Brexit

Anything can happen with Brexit. But it sounds unlikely to me that it's going to be a smooth process.

European Parliament President Martin Schulz is from the German SPD. But he's a shameless Angiebot, not that this makes him any different than most other SPD leaders, a related but different story. He demanded that Britain make their Article 50 application by this Tuesday! Probably not going to happen. In theory, the SPD (Angie's junior coalition partner) is pressing for a rapid British exit while Angie and her CDU/CSU are being more cautious.

But there's no way Schulz made that kind of statement without Merkel's approval. If Merkel is going to preserve her current EU, she has to punish the defiant, like she punished Greece. I'm convinced that Merkel sees the EU as a neoliberal version of the Warsaw Pact; that's a big reason I call her East Germany's Last Revenge on the West. Since Britain is not a part of the euro, she has more flexibility to make concessions to Britain and did make some prior to the Brexit vote. But punishment and intimidation is how she rolls in these things, with the full support of the SPD.

I'm very sure Angie doesn't give a flying flip that a majority of British voters elected to leave. At his first meeting with Yanis Varoufakis as Finance Minister of Greece when the Syriza government took power in 2015 with a clear electoral mandate to end the Herbert Hoover austerity programs, Angie's Finance Minister and fellow CDU leader Wolfgang Schäuble told Varoufakis, “Elections cannot be allowed to change an economic programme of a member state!” (Why we must save the EU Guardian 04/05/2016)

Angie's close ally and Defense Minister Ursula von der Leyen is saying, "No one will have to chance to play for time. The economy will demand quick clarity. Investors will hold back until they know what's going on now: in or out." ("Es wird niemand die Chance haben, auf Zeit zu spielen. Die Wirtschaft wird schnelle Klarheit einfordern. Investoren werden sich zurückhalten, bis sie wissen, was jetzt gilt: drinnen oder draußen."; Schulz fordert Austrittsantrag der Briten bis Dienstag Spiegel Online 25.06.2016)

The negotiating over negotiating is already well underway (Jon Henley et al, European leaders rule out informal Brexit talks before article 50 is triggered Guardian 06/27/2016):

On the eve of a crunch summit in Brussels, the German chancellor, Angela Merkel, said she, president François Hollande of France and Italy’s prime minister, Matteo Renzi, had agreed at their meeting in Berlin that “there will be no formal or informal talks about Britain’s exit” until the UK has triggered article 50, the untested procedure that governs a member state leaving.

Hollande urged Britain to “not waste time” in launching the leaving process. “Being responsible means not wasting time in engaging with the question of Britain’s departure and setting this new impulse we want to lend the new European Union,” he said, adding that “nothing is worse than uncertainty – and Britain has already had painful experience of this”.

France and Italy, not surprisingly, are on board with Merkel's approach. The German SPD, which still passes for a center-left party and serves as Merkel's junior coalition partner, is playing its part by publicly insisting on a hard line with Britain:

The president of the European parliament, Martin Schulz, warned this weekend that a period of limbo would “lead to even more insecurity” and said the Brussels summit was the right time to begin formal exit proceedings.

There was pressure, too, from within Merkel’s own government: the head of her Social Democrat coalition partners, Sigmar Gabriel, called for “decisive action instead of indecision”.

Brexit and the European left

Jamie Galbraith gives his verdict on Brexit in The Day After DiEM25 06/25/2016:

Leave won by turning the British referendum into an ugly expression of English nativism, feeding on the frustrations of a deeply unequal nation, ironically divided by the very forces of reaction and austerity that will now come fully to power. The political effect has sent a harsh message to Europeans living in Britain, and to the many who would have liked to come. The economic effect will leave Britain in the hands of simpletons who believe that deregulation is the universal source of growth.

That such a campaign could prevail – leading soon to a hard right government in Britain – testifies to the high-handed incompetence of the political, financial, British and European elites. Remain ran a campaign of fear, condescension and bean-counting, as though Britons cared only about the growth rate and the pound. And the Remain leaders seemed to believe that such figures as Barack Obama, George Soros, Christine Lagarde, a list of ten Nobel-prize-winning economists or the research department of the IMF carried weight with the British working class.

He identifies the 2015 treatment of Greece as a key turning point for the Brexit trend: "The groundwork for the Brexit debacle was laid last July when Europe crushed the last progressive pro-European government the EU is likely to see – the SYRIZA government elected in Greece in January 2015."

Galbraith thinks it's likely that the political contagion will spread:

And the crisis now erupts everywhere in Europe: in Holland and France, but also in Spain and Italy, as well as in Germany, Finland and the East. If the hard right can rise in Britain, it can rise anywhere. If Britain can exit, so can anyone; neither the EU nor the Euro is irrevocable. And most likely, since the apocalyptic predictions of economic collapse and “Lehman on steroids” that preceded the Brexit referendum will not come true, such warnings will be even less credible when heard the next time.

Former Greek Finance Minister Yanis Varoufakis does his own postmortem in The Right Left for Europe Project Syndicate 06/24/2016. Varoufakis believes that European politicians should be able to walk and talk at the same time. As Greek Finance Minister, he supported Greece staying in the EU and the eurozone. But he also knew that to be able to negotiate a minimally acceptable deal with Germany, Greece's government had to be prepared to leave the eurozone if they didn't get it. Prime Minister Alexis Tsipras wasn't prepared to do that.

That's part of the background of his commment here, "it is one thing to oppose entering the EU; it is quite another to favor exiting it once inside. Exiting is unlikely to get you to where you would have been, economically and politically, had you not entered. So opposing both entry and exit is a coherent position."

Speaking of his own pro-EU group DiEM25 (Democracy in Europe Movement). he writes:

... we will not be forced by the prospect of the EU’s disintegration to acquiesce to an EU of the establishment’s choosing. In fact, we believe it is important to prepare for the collapse of EU under the weight of its leaders’ hubris. But that is not the same as making the EU’s disintegration our objective and inviting European progressives to join neo-fascists in campaigning for it.

Varoufakis refers to left opponents of EU membership for their individual countries as "Lexiteers." He addresses the arguments of three Lexiteers, whose opinions he obviously takes seriously: Richard Tuck, Thomas Fazi and Heiner Flassbeck. In respnse to Flassbeck, he writes:

Perhaps Flassbeck’s harshest criticism of DiEM25’s radical pan-Europeanism is the charge that we are peddling left-wing TINA: “there is no alternative” to operating at the level of the EU. While DiEM25 advocates a democratic union, we certainly reject both the inevitability and the desirability of “ever closer union.” Today, the European establishment is working toward a political union that, we regard as an austerian iron cage. We have declared war on this conception of Europe.

More Brexit

Brexit will get a lot of attention in the American press, at least for a few days. It affected the stock market, so the news will pay attention.

This is probably a nonviolent instance of the famous cynical comment commonly attributed to Ambrose Beirce, " "War is God's way of teaching Americans geography, "War is God's way of teaching Americans geography."

Australian economist Bill Mitchell gives some historical perspective of the internal British politics of European unity in Britain should exit the European Union Billy Blog 06/22/2016.

Paul Krugman isn't too worried over the economic consequences (Brexit: The Morning After 06/24/2016):

Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others’ exports) are low and other traditional restraints on trade relatively mild. But everything we’ve seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less productive as a result.

But right now all the talk is about financial repercussions – plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it.

But he rightly focuses on the significance of political decisions to follow:

It seems clear that the European project – the whole effort to promote peace and growing political union through economic integration – is in deep, deep trouble. Brexit is probably just the beginning, as populist/separatist/xenophobic movements gain influence across the continent. Add to this the underlying weakness of the European economy, which is a prime candidate for “secular stagnation” – persistent low-grade depression driven by things like demographic decline that deters investment. Lots of people are now very pessimistic about Europe’s future, and I share their worries.

But those worries wouldn’t have gone away even if Remain had won. The big mistakes were the adoption of the euro without careful thought about how a single currency would work without a unified government; the disastrous framing of the euro crisis as a morality play brought on by irresponsible southerners; the establishment of free labor mobility among culturally diverse countries with very different income levels, without careful thought about how that would work. Brexit is mainly a symptom of those problems, and the loss of official credibility that came with them. (That credibility loss is why the euro disaster played a role in Brexit even though Britain itself had the good sense to stay out.)

At the European level, in other words, I would argue that Brexit just brings to a head an abscess that would have burst fairly soon in any case. [my emphasis]

This is a good discussion featuring Ivo Daalder, Richard Haass and Margaret Warner of what Brexit implies for US foreign policy, Foreign policy experts anticipate Brexit’s global impact PBS Newshour 06/24/2016:

Britain is still a NATO member. And for ties to the US, that one that binds stronger than the EU. But ever since the Clinton 1 Administration - when the European Community had just become the European Union, Britain has been the US voice within the EU. The US policy has been to push to have the EU expand its membership as a way to incorporate eastern European nations into the West. But it also kept the EU weaker because the more countries they had, the harder it was in practice to achieve the famous "ever closer union." Because it's still American policy that the US should keep overwhelming dominance in all parts of the world and therefore forestall the rise of any potential "peer competitor," which the EU could have been before the 2008 crisis and Angela Merkel went to work on it. So from the current US policy viewpoint, it's a positive that the EU is now weakened and the "ever closer union" looks like it will be postponed indefinitely. But we also lost Britain the main advocate for American foreign policy in the EU.

Clinton I and Obama weren't quite as crass in the way they expressed it as Shrub Bush was. Actually, to the extent that Europeans have an interest in not having unending chaos in the Middle East that encourages terrorist attacks inside Europe and generates massive numbers of refugees that the EU is obviously failing to handle well, a more coherent EU foreign policy would be in practice a beneficial restraint on American Presidents doing dumb stuff in foreign policy. But with neoliberal economics the dominant economic policy approach in the EU, it's hard to see how they are ever going to achieve enough unity to actually solve the snowballing problems they have. But in Britain, their political leadership of both Labour and the Tories pretty much decided after the Suez Crisis of 1956 that they would never be on the opposite sides of the US on a major foreign policy issue. The pitiful Tony Blair was following that approach in facilitating Dick Cheney's invasion of Iraq. If the EU could ever develop a genuinely independent foreign policy in the foreseeable future, it would have to be without Britain. Or, as I guess we'll be calling it when Scotland and Wales declare independence, Little Britain.

Need for fiscal stimulus in the eurozone

Ari Andricopoulos gives a macroeconomic commentary on Angela Merkel's austerity policies in A plan to turn the Euro from zero to hero Coppola Comment 03/31/2016:

As I've explained elsewhere, reasonably large government deficits are very important for sustainable economic growth. However, in the Eurozone this is prohibited both by the Stability and Growth Pact (SGP) and by the fear of losing market confidence in the national debt. At the same time credit growth for productive investment is constrained by weak banks and Basel regulation. And the Eurozone as a whole is already running a large current account surplus; the rest of the world will not allow much more export-led growth. Helicopter money would be a solution, but politically this is a long way away. Summing up, if economic growth cannot be funded by government deficits, private sector debt, export growth or helicopter money it is very difficult to see where nominal GDP growth can come from.

In a way, this can be seen as a Prisoner’s Dilemma. Every country knows (or should know) that if all states provided fiscal stimulus, the Eurozone would benefit from more economic growth. However, for any individual state, a unilateral fiscal boost would increase their own government debt whilst giving a fair amount of the GDP growth to other states (because some of the stimulus would go to increasing imports from the other nations). And if all others provide stimulus, then it is in an individual state’s interest to take the benefit of the other states’ stimulus, and become more competitive versus the rest. [my emphasis]

And he addresses the current debt problem of southern European countries who have sovereign debt denominated in euros, not in separate national currencies:

The debt owed to the creditor nations therefore gets larger in real terms. In the end, the debts owed by the South to the North are unpayable without the Northern countries running a current account deficit and using the savings built up during the amassing of the surplus to buy goods from the South. But the Northern surpluses are only getting bigger.

On top of this, all countries in the Eurozone are committing the "original sin" of borrowing in a foreign currency. This can only be a time bomb, waiting to devastate Europe.

By all appearances, though, the eurozone will continue their current march toward a collapse of the eurozone.

Do central banks need to be "independent"?

Simon Wren-Lewis has a wonkish post, The strong case against independent central banks Mainly Macro 03/05/2016 raising points I'm glad to see being discussed. He gives some background on the development of thinking about central banks and economic management. Here he describes the post-Bretton Woods state of affairs, which Yanis Varoufakis would call the birth of the Global Minotaur. But "delegation" here, he means "giving central banks the power to decide when to change interest rates (independent central banks, or ICBs)":

A story some people tell is that this all fell apart in the 1970s with stagflation. In the sense I have defined it, that is wrong. The Keynesian framework had to be modified to deal with those events for sure, but it was modified successfully. Attempts by New Classical economists to supplant Keynesian thinking in policy circles failed, as I note here.

The more important change was the end of Bretton Woods and the move to floating exchange rates. That was critical in allowing the focus of demand management to shift away from fiscal policy to monetary policy. The moment that happened, it allowed the case for delegation to be made. Academics talked about time inconsistency and inflation bias, but the more persuasive arguments were also simpler. Anyone who had worked in finance ministries knew that politicians were often tempted and sometime succumbed to using monetary policy for political rather than economic ends, and the crude evidence that delegation reduced inflation seemed strong.

And he notes that the conservative-leaning consensus before the 2008 crisis revealed its huge problems to a wider public:

However the consensus assignment had an Achilles Heel. It was not the global financial crisis (which was a failure of financial regulation) but the Zero Lower Bound (ZLB) for nominal interest rates. Although many macroeconomists were concerned about this, their concern was muted because fiscal action always remained as a backup. To most of them, the idea that governments would not use that backup was inconceivable: after all, Keynesian economics was familiar to anyone who had done Econ 101.

That turned out to be naive. What governments and the media remembered was that they had delegated the job of looking after the economy to the central bank, and that instead the focus of governments should be on the deficit. Macroeconomists should have seen the warning signs in 2000 with the creation of the Euro. There monetary policy was taken away from individual union governments, but still the Stability and Growth Pact was all about reducing deficits with no hint at any countercyclical role. When economists told politicians in 2009 that they needed to undertake fiscal stimulus to counteract the recession, to many it just felt wrong. To others growing deficits presented an opportunity to win elections and cut public spending.

Macroeconomists were also naive about central banks. They might have assumed that once interest rates hit the ZLB, these institutions would immediately and very publicly turn to governments and say we have done all we can and now it is your turn. But for various reasons they did not. Central banks had helped create the consensus assignment, and had become too attached to it to admit it had an Achilles Heel. In addition some economists had become so entranced by the power of Achilles that they tried to deny his vulnerability.

And that vulnerability is essentially the conservative obsessions that are part of Hoover Hoover/Heinrich Brüning economics that wound up having a pro-cyclical bias in a depression economy.

The EU's concessionary deal with Britain

The Latin American Herald Tribune reports on the EU capitulation to British nationalism in the agreement just made (EU Leaders Reach Deal Aimed at Averting British Exit 02/19/82016):

The draft [agreement] includes a provision allowing Britain to apply an “emergency brake” on benefit payments to immigrants from other EU countries.

While Cameron originally sought a “brake” lasting 13 years, resistance from Eastern European countries – a major source of inexpensive migrant labor for Britain – forced him to settle for seven years.

On the question of sovereignty, the text recognizes that Britain, which stands outside the eurozone, “is not committed to further political integration in the European Union ... References to ever-closer union do not apply to the United Kingdom.”

Cameron also won assurances that the EU would not seek to impose eurozone financial regulation on the City of London, Britain’s Wall Street.

“This deal has delivered on the commitments I made at the start of this process. Britain will be permanently out of ever-closer union, never part of a European super-state, there will be tough new restrictions to our welfare system for EU migrants – no more something for nothing – Britain will never join the euro and we’ve secure vital protections for our economy,” Cameron said. [my emphasis]

Greek Prime Minister Alexis Tsipras tweeted (02/19): "EU at a critical crossroads: without solidarity, without sharing burdens and responsibility, it faces the risk of reaching a dead-end. #EUCO"

Another sad step toward failure for the EU (Updated)

British Prime Minister David Cameron won concessions from the other EU members that loosens Britain's ties and commitment to the Union, concessions that make him willing to campaign for Britain staying in the Union in the referendum coming up in possibly in June. (Daniel Brössler und Alexander Mühlauer, Cameron setzt sich bei Brexit-Verhandlungen durch Süddeutsche Zeitung 20.02.2016)

I don't want to be so pessimistic as to say it's another nail in the coffin of the EU. The EU may well continue to exist for many years. But its one-time promise is dying. Or rather it was killed by failure of leadership by people like Cameron, Angela Merkel and François Hollande on major issues like the euro crisis and the years-long refugee crisis.

This week I've been reading a paper by Jürgen Habermas that he delivered in November 2007, "Europapolitik in der Sackgasse" ("Europe at an Impasse"), published in Philosophie und Politik/Philosophy Meets Politics 9:2008. He was pleading for continuing the process of increasing European integration, emphasizing how the EU could become a major force offsetting US cowboy foreign policy, and how it could serve as a model worldwide for regional cooperation.

It reads now like nostalgia, a fond remembrance of a hopeful path not taken, and now the chance is gone.

Today we have the grandees of the EU congratulating themselves that they have encouraged nationalism within the EU by caving to Britain's demands for special treatment and less integration with its partner nations.

The refugee crisis grinds on, with no decent solution in sight.

And there's this, from Wolfgang Münchau, Four signs another eurozone financial crisis is looming Financial Times 02/15/2016:

The rout in European financial markets last week was a wat­ershed event. What we witnessed was not necessarily the beginnings of a bear market in equities or an uncertain harbinger of a future recession. What we saw — at least here in Europe — is the return of the financial crisis.

Version 2.0 of the eurozone crisis may look less frightening than the original in some respects but it is worse in others. The bond yields are not quite as high as they were then. The eurozone now has a rescue umbrella in place. The banks have lower levels of leverage.

But the banking system has not been cleaned up, there are plenty of zombie lenders around and in contrast to 2010 we are in a deflationary environment. The European Central Bank has missed its inflation target for four years and is very likely to miss it for years to come.

He also observes:

Looking back, the cardinal error committed by the European authorities was the failure in 2008 to clean up their banking system after the collapse of Lehman Brothers. This was the original sin. Many other mistakes subsequently compounded the problem: pro-cyclical fiscal austerity, the ECB’s multiple policy failures and the failure to create a proper banking union. It is interesting that every single one of these decisions was ultimately the result of pressure brought by German policymakers.

You're doing a heckuva job, Angela Merkel, a heckuva job!

Italy and the euro crisis

Wolfgang Münchau writes about his expectation for the future of the European Union in Athens and Rome expose Europe’s greatest faultlines Financial Times 01/31/2016:

Greece may be the starkest example, but it is not the only country facing overlapping crises. It is not even the most important one facing this dilemma. That would be Italy. While Rome’s problems are different from those of Greece, the country’s long-term sustainability in the eurozone is just as uncertain, unless you believe that its economic performance will miraculously improve when there is no reason why it should.

Italy was overwhelmed by the increase of refugees from north Africa last year. On top of that it faces unresolved economic problems — no productivity growth for 15 years; a large stock of public sector debt that leaves the government with virtually no fiscal room for manoeuvre; and a banking system with €200bn in non-performing loans, plus another €150bn of debt classified as troubled. Then consider that its three main opposition parties have, at one time or another, all questioned the country’s membership of the eurozone. Even if none of them look like coming to power in the near future, it is clear that Italy only has a limited amount of time to fix its multiple problems.

Münchau notes that Italy's leadership is being open in its criticism of the EU under Angela Merkel's rule: "There are signs that Italy’s patience with the EU and Germany, in particular, is wearing thin . Matteo Renzi, prime minister, has been openly attacking the policies of the EU on energy, on Russia, on the fiscal deficits, as well as German dominance of the entire apparatus."

But I have to admit I'm puzzled by his concluding paragraph: "There is an element of bad luck in this. Europe’s policy of muddling through, of doing the minimum required, and hoping to mop up the rubble later, might even have worked if the refugees had stayed at home. The EU’s mistake was not to have chosen a path that would lead to invariable ruin, but to render itself defenceless against the next unforeseen shock."

I can't even figure out what he's trying to say with the last sentence. Does he mean it would have been okay "to have chosen a path that would lead to invariable ruin" if they had just left themselves a bit more flexibility for the next bump in the road that would require more muddling through? That "invariable ruin" wouldn't be quite so bad if it were delayed a bit?

The increasing pressure of the refugee problem no doubt made the EU's situation more complicated in 2015. But that acute phase was also a result of previous muddling through on the refugee crisis which had actually been going on for years. It's not unusual for politicians to overblow real crises or gin up phony ones for other purposes. But the refugee problem has been a visible crisis for years, while Merkel and the rest of the EU just didn't come up with good solutions. And still haven't.

I'm sorry to see that Münchau will no longer be providing a weekly column for Spiegel Online, as he notes in his final installment, Langsames Dahinsiechen 29.01.2016.

There he explains that he expects the EU will not collapse in a rapid and dramatic fashion. But rather that it will decay away, with "periphery" countries dropping off and a core of the wealthiest countries remaining:

Selbst beim besten Willen wäre eine Lösung unserer permanenten Krise schwierig, denn sie zu koordinieren, setzt eine Gemeinsamkeit von Interessen voraus. Wahrscheinlicher ist, dass die verschiedenen Krisen ihren Lauf nehmen und dass wir ihre negativen sozialen und wirtschaftlichen Konsequenzen mit dem Wischmop wirtschaftspolitischer Notmaßnahmen aufsaugen.

Im Verlauf dieser Entwicklungen drohen neben dem Ende von Schengen und der Verkleinerung des Euroraums ebenfalls eine Spreizung der Einkommen, eine Verarmung der Mittelklasse und eine damit einhergehende politische Radikalisierung. Damit ist nicht unbedingt die Demokratie an sich gefährdet, aber sicherlich die über die nationalen Grenzen hinausgehenden Vereinbarungen und Institutionen. Es ist kein gutes Umfeld für europäische Integration und die internationale Kooperation und Koordination. Die EU wird dabei nicht spektakulär zusammenbrechen, sondern an ihren Rändern zerfleddern und im Inneren.

[Even with the best will, a solution to our permanent crises would be difficult, because to coordinate them assumes a commonality of interests. It's more likely that the various crises will run their course and that we will absorb their negative social and economic consequences with the Whisk broom of political-economic emergency measures.

In the course of these developments, along with the end of Schengen and the shrinking of the euro area, {we are} threatened as well with a collapse of income, an impoverishment of the middle class and with a consequent political radicalization. That doesn't unquestionably threaten democracy as such, but it certainly does the agreements and institutions that cross national borders. It is not a good environment for European integration and international cooperation and coordination. The EU will thereby not collapse spectacularly, but rather tatter along the edges and hollow out in the center.]

I'm not at all confident that a crackup of the eurozone will be so minimally dramatic. But we will probably soon see.

EU:intersecting crises

Wolfgang Münchau continues to chronicle the tangle of crises in which the EU and the eurozone find themselves (Europe needs a sense of strategic direction to survive Financial Times 11/29/2015):

... there are too many crises occurring simultaneously for which the EU is unprepared: refugees, terrorism, Russia’s invasion of Ukraine, eurozone sovereign debt, Britain’s future in the EU, Greece’s future in the eurozone, the Portuguese constitutional crisis, Catalonian independence, Italian banks, Volkswagen. We will soon need a crisis database to keep track.

And he discusses how the refugee crisis has exposed the limits of Merkel's extend-and-pretend crisis management style in a much broader way than the euro crisis had previously:

Ms Merkel committed a significant error in the way she opened the doors to refugees. She did not consult other political leaders nor even her own party. She underestimated the impact and failed to make logistical preparations. Are we really surprised that some EU countries refuse to accept even the modest quotas proposed? ...

The EU is überfordert — overwhelmed — by global and regional military conflicts, the co-ordination of macroeconomic policy and humanitarian emergencies. ...

At present the EU response to all these crises is to fudge forward. As we saw in the euro crisis, this can work for a time. But, while you can play tricks of smoke and mirrors with debt, it is hard to make this work with refugees. If the external border is not sufficiently well controlled, countries will ultimately have no choice but to impose their own domestic controls. And so they should. [my emphasis in bold]

Snowballing crises for Merkel and the EU

The euro crisis began in 2009 and has become a chronic condition, with periodic acute phases.

The refugee crisis has also been going on for years, entering an acute phase in 2015.

The Paris terrorist attack of November 13 was understood in the EU as a new crisis, interpreted especially by the French government as a reason to escalate military operations against ISIS in the complicated situation in Syria. And this week the Syrian situation got even more complicated with Turkey shooting down a Russian fighter under circumstances that are disputed, as one would expect in such a case. (Robert Perry flags a notable discrepancy in Turkey's account in Turkey Provokes Russia with Shoot-down Consortium News 11/24/2015.)

Now the crises are converging in a way that highlights the serious flaws in the EU, the construction of the eurozone and especially in the leadership of Angela Merkel and her fondness for extend-and-pretend short-term fixes instead of substantive solutions.

Dan McLaughlin reports (Refugees in Balkan limbo as crisis deepens EU divisions Aljazeera America 11/27/2015):

The Nov. 13 attacks in Paris transformed a huge political, economic and humanitarian challenge into an acute security crisis and widened already major divisions between European Union states over how to handle an influx of refugees that the onset of winter has failed to halt.

The suspicion that one of the Paris attackers was a Syrian who came to Europe among refugees deepened distrust of the new arrivals and turned more EU states against German-led efforts to welcome people fleeing the world’s war zones.

In the week after the carnage in the French capital, which left 130 dead, several countries on the so-called Balkan route into Europe closed their borders to all refugees other than Syrians, Afghans and Iraqis, who have the best chance of receiving asylum in the EU.

McLaughlin also notes, "Not for the first time in this crisis, however, states took drastic action without warning or coordination with each other; they left thousands of people stranded on remote frontiers with inadequate facilities, no idea of what to do next and a rising sense of panic as the first snow of winter fell."

In that context, this story is as interesting as it is odd, Flüchtlingspolitik: SPD tadelt Juso-Chefin für Merkel-Lob Spiegel Online 27.11.2015. Johanna Uekermann, the head of the Young Socialists (Jusos) group of the SPD, made a public comment defending Angela Merkel on the refugee crisis, "In dieser Frage muss man echt sagen, dass sie zum allerersten Mal in ihrer zehnjährigen Kanzlerschaft so etwas wie Rückgrat zeigt" ("In this matter, one must really say that finally in her 10-year Chancellorship, she has shown something like a backbone.")

It's not unusual that an SPD leader would endorse Merkel's position on the refugees. That's part of the larger political Kabuki Merkel and her CDU/CSU have been playing on the refugee crisis: some party leaders bitch and moan about the scary foreigners, Merkel plays the Compassionate Pastor's Daughter, and the SPD presents itself as supporting their Chancellor on the refugee problem against the cold-hearted Christian Democrats. No one who has been following the course of the SPD over the last several years should be surprised that they are more eager to appear as Angie-bots than Angie's own party. Cartoonist Klaus Stuttman saw this development in full swing when the SPD fell all over themselves after the 2013 election to become junior partners yet again to Merkel's CDU/CSU in a Grand Coalition, aka, GroKo:

But to make it weirder, several prominent figures in the SPD blasted Uekermann instead! Hubertus Heil, the deputy leader of the SPD Bundestag parliamentary caucus (Fraktion) was pretty harsh: "Juso-Bundesvorsitzende geht CDU-Vorsitzender auf den Leim und fällt eigener Partei in den Rücken. Unlogisch, unsolidarisch, unklug." ("The national Juso chairperson is out of line with the CDU Chairperson {Merkel} and hurting her own party. Unlogical, unsolidarish, not clever.") The head of the SPD Fraktion joined in the criticism along the same lines.

But, wait, you may say, wasn't Uekermann praising the Compassionate Pastor's Daughter?

Spiegel Online quotes the SPD General Secretary, Yasmin Fahimi, from the Rheinische Zeitung, Viel Ärger für Juso-Chefin Johanna Uekermann 27.11.2015. It's a bit confusing. Spiegel is apparently quoting verbatim and indirect quote from the RZ, without clearly identifying it as such. Anyway, the indirect quote in question is:

Sie lobten damit die Frau, die die Transitzonen von CSU-Chef Horst Seehofer unterstützt habe, die den Familiennachzug für Syrer nicht wolle und die schwangeren, minderjährigen und behinderten Flüchtlingen keine angemessene medizinische Versorgung geben wolle.

[Thereby she {Uekermann} is praising the woman {Merkel} who supported the transit zone of CSU head Horst Seehofer, who doen't want family unification for Syrians and don't want to provide pregnant, underage and disabled refugees proper medical treatment.]

Here it sounds like the leadership is criticizing Uekermann for not being critical enough of the Compassionate Pastor's Daughter!

Johanna Uekermann, Chairperson of the Young Socialists (SPD)

We have to allow for the fact that being in the mouth of the crocodile can lead to some confusion. Here's my best guess how to read this particular burst of criticism against the Juso Chair.

First, it's Uekermann has been a critic of the SPD Angie-bot course since late 2013, when he was first elected Juso chair. As I wrote at the time (The SPD and a possible new Grand Coalition government in Germany 12/08/2013):

The Jusos formally voted against the coalition agreement and elected as their new leader a Bavarian social democrat, Johanna Uekermann, who is vocally opposed to a new Grand Coalition. ...

The Jusos' opposition is scarcely decisive. But it's also significant. Opposing a key national national policy of the SPD leadership like this is no small thing for ambitious young SPD politicians. (Wolfgang Wittl has a biographical sketch of Uekermann, Adams Zankapfel Süddeutsche Zeitung 25.10.2013) And Christoph Hickmann writes, "Die Jusos sind der harte Kern des sozialdemokratischen Widerstands gegen die große Koalition." ("The Jusos are the hardcore of the Social Democratic resistance to the Grand Coalition.") (Im Herzen des Widerstands SZ 07.12.2013)

In a Juso Blog post, Andro Scholl warns, "Europe is going kaput and the Grand Coalition will do nothing about it!" (Stell Dir vor Europa geht kaputt und die Große Koalition ändert nichts dran! 25.11.2013)

So the Angie-bot leadership has never much liked Uekermann in her current role. I'm thinking the criticism from two sides - she criticized the Compassionate Pastor's Daughter! She didn't criticize the Compassionate Pastor's Daughter enough! - is also political Kabuki. The main irritation is that the SPD leadership is so subservient to Merkel that they wanted to take a whack at Uekermann and snivel to the Compassionate Pastor's Daughter in response to Uekermann's clearly backhanded comment. "In this matter, one must really say that finally in her 10-year Chancellorship, she has shown something like a backbone" clearly assumes that it's obvious that she hasn't shown any backbone before, which is really the core of Merkel's EU critics more generally. Her extend-and-pretend approach to critical problems has involved avoided describing them as they are and backing away from confronting the nationalist element in her own party over European unity. We've seen that clearly in the euro crisis, in the refugee crisis, and now in the latest military escalation in Syria.

I'll give Uekermann credit for some perceptive political theater of her own. Her comment the SPD honchos singled out for attack pinpoints the key flaw in Merkel's leadership that may already have doomed the EU to more weakness or even disintegration. But it's not as though Merkel has failed to show "backbone" against her enemies, as her ruthless position against the elected Greek government in the first half of the year showed dramatically.

Yasmin Fahimi's criticism of Uekermann's statement quoted above is actually correct. But the SPD has been more supportive of Angie than the CDU/CSU on the subject, so phrasing her comment that way may well have been designed to put the SPD leadership on the spot over their defense of Merkel. It looks to me like it had that effect, anyway.

Timo Lokoschat responds to the anti-Uekermann criticism in Blanke Nerven Abendzeitung 27.11.2015; Uekermann herself retweeted it. So the attribution in the Abendzeitung may be an error, although it speaks of Uekermann in the third person. He uses the term "Genossen," the SPD word for "comrade," which they use on official occasions:

Es gehört zu den Forderungen jeder ordentlichen Sonntagsrede, dass in Krisenzeiten „Parteipolitik“ außen vor gelassen werden solle. Wie weit hier Anspruch und Wirklichkeit auseinanderklaffen, zeigen gerade wieder die unverhältnismäßig harten Attacken auf die Juso-Vorsitzende, die es gewagt hat, der Kanzlerin „Rückgrat“ zu bescheinigen.

Rückgrat! Liest man die hysterischen Reaktionen von Fahimi, Oppermann und Co., könnte man glatt denken, sie habe gefordert, der deutschen Sozialdemokratie selbiges zu brechen.

Der bizarre Streit zeigt vor allem eines: wie blank die Nerven bei den Genossen liegen. Seit Monaten dümpeln sie abgeschlagen und ohne Machtperspektive hinter der Union – und das, obwohl durchaus Akzente in der Großen Koalition gesetzt wurden. Trotzdem können viele Wähler den „Markenkern“ der Partei nicht mehr erkennen, beklagen ein gefühltes Desinteresse an ihrer Lebenswirklichkeit.

Das kann man ändern – aber sicher nicht durch Desavouierung der eigenen, immer etwas rebellischen Jugend.

[One of the requirements for every proper Sunday speech that in times of crisis, "partisan politics" should be left out. How far the demand and reality differ has just been shown again in the disproportionally harsh attacks on the Juso Chairperson {Uekermann}, who has dared to acknowledge the "backbone" of the Chancellor.

Backbone! Reading the hysterical reactions of Fahimi, Opperman & Co., one could easily think that she had called for the breakup of the German Social Democracy itself.

The bizarre conflict show one thing above all: how raw the nerves of the comrades are. For months, they bob around as though beheaded and without a perspective for power behind the Union {CDU/CSU} - and doing it, even though it clearly establishes accents in the Grand Coalition {i.e, provides visibility for the SPD}. Nivertheless, many voters can no longer recognize the "core branding" of the Party, {and} complain about a perceived disinterest {by the SPD} in their real lives.

One can change that - but certainly not be disavowing their own, always somewhat rebellious youth.]

In other words, Uekermann's criticism and the confused backlash from the leadership it provoked has illustrated the fecklessness of the current party leadership. They are comfortable being in the mouth of the crocodile, so comfortable that they freak out at straightforward criticism of the crocodile's disastrous failures.

Martin Schultz is a German SPD leader, President of the EU Parliament, and a shameless Angie-bot. So when he sounds like he's criticizing the GroKo, it's worth looking at his words closely. (EU-Parlamentspräsident: Schulz gibt Schäuble Mitschuld an Spaltung Europas Spiegel Online 27.11.2015) Schultz has gone so far as to publicly acknowledge the obvious, that Germany's domineering, nationalist handling of the euro crisis has damaged trust among EU partner nations, which has massively contributed to the lack of cooperation in the 2015 phase of the refugee crisis. "Es mag zynisch sein, aber es ist gerade Payback-Time in Brüssel," he says. ("It may sound cynical, but it's finally payback time in Brussels.")

Yes, it's too good to be true. Because Angie-bot Schultz doesn't blame Merkel's disastrous Herbert Hoover/Heinrich Brüning austerity economics. Or her nationalist posturing over it. And certainly not the SPD's disgraceful backing of those policies to the hilt. No, it turns out that Angie's Finance Minister, Wolfgang Schäuble, is the problem! Despite his being the Finance Minister, Schäuble was one of Merkel's political mentors who she cheerfully stabbed in the back as soon as she got the chance. Lately, he's been a pain in the rear to Merkel over the refugee crisis, even though his positioning has fitted well into the CDU/CSU's political Kabuki play over it. So Schultz' criticism of Schultz is just a continuation of the SPD's subservience to Merkel.

Another word on the euro crisis. Wolfgang Münchau continues his Cassandra warning to Germany and its leaders Währungsunion: Deutschland zahlt - oder das System explodiert 27.11.2015 that unless they abandon the spectacularly failed Hoover/Brüning policies, the eurozone's problems will continue to worsen. And he again points to the stagnation of Italy since the beginning of the eurozone as as major possibility to bring the next acute phase of the crisis. He worries "that it won't take much longer until Italy has a tangible interest in leaving the euro area" ("dass es nicht mehr lange dauert, bis Italien ein handfestes ökonomisches Interesse daran hat, den Euroraum zu verlassen").

He also recites basic facts about the euro currency zone that most of the German leadership and mainstream press seemed to have been strenuously attempting to avoid since forever. Including:

Deutschland hatte enorme Vorteile von der Währungsunion. Ohne sie wäre der deutsche Wechselkurs deutlich höher und die Warenausfuhren geringer. Ohne eine Währungsunion hätte Deutschland nie nahezu Vollbeschäftigung erreicht. Die Hartz-Reform hätte es möglicherweise gar nicht gegeben, denn die gesteigerte Wettbewerbsfähigkeit wäre wahrscheinlich durch einen höheren Wechselkurs wieder ausgeglichen worden.

Germany had enormous advantages from the currency union. Without it, the German exchange rate would have been distinctly higher and export of goods smaller. Without the currency union, Germany would never have reached near-full employment. The {neoliberal, anti-labor} Hartz-IV reform would possibly never have been, because the rising competitiveness {of Germay} would probably have been balanced by a higher exchange rate.]

Heck of a job, Angie, heck of a job!