Ghost of Chamberlin: Munich Revisited

A rift is growing between Washington and Berlin over how to handle Vladimir Putin and his stoking of pro-Moscow separatism in the Donbas region of east Ukraine. Despite the denials of Secretary of State John Kerry, the split is becoming more obvious with each passing conference — or gathering for peace talks.The Munich security conference has exposed the divergence.

While Obama officials are playing it all down, senior US lawmakers aren’t so reticent. “History shows us that dictators will always take more if you let them,” says Sen. John McCain, comparing Angela Merkel and François Hollande’s talks with Vladimir Putin to Neville Chamberlain’s appeasement of Hitler.

A useful take on the conference can be found here at the Daily Telegraph.

The split dramatizes the recent remark by Germany’s President, Joachim Gauck: “Germans and Americans appear to live on different planets.”

Franco-German First Date

At least she didn’t slap him. The “first date” between new French President and German Chancellor didn’t go that well. Angela Merkel just wanted a gentle encounter, a get-to-know-each-other meeting: she said as much at the opening of their joint press conference in Berlin.

Francois Hollande, on the other hand, was full of ardor — after all he had rushed from the great city of romance, Paris, to see her.  And he lay siege immediately, seeking to conquer Frau Merkel with a passionate outline of the kind of Europe he wants to share with her.

She took it well, but with a slightly sour look on her face, maintaining, in short, that they would have lots to discuss. Indeed.

No Squaring The Circle

The following three things do not cohere – they are unworkable.

1. German Chancellor Angela Merkel’s insistence that there can be no going back on the pledges Greece made to get the second tranche of bailout money earlier this year.

2. The wish of 70 percent of Greeks to stay within the eurozone while at the same time failing to provide a working majority for a coalition government pledged to abide by the commitments made to secure the second tranche of bailout money.

3. Abiding by the pledges made to Greece’s European partners and the International Monetary Fund and being able to grow and cut the public debt.

In short, something has to give and the myth that Greece can possibly repay all that it owes,  ever – currently 161 percent of GDP – has to be dispelled. If it isn’t, then contagion will spread and the export market Germany needs to remain prosperous is going to disappear. And no amount of media commentary about disciplined, hardworking Germans and work-shy, lazy Greeks is going to square the circle.

Infantile Expansionary Contraction?

Democracy is about elections and we might not always like how people cast their votes but to dismiss their choices as “infantile” strikes me as high-handed — and in the case of the elections recently in Europe mistaken.

In the wake of the elections in four European countries – the UK, France, Italy and Greece — many Conservative commentators have been on their high horse. Of course, on the left their counterparts have been on braying form when some humility may have been in order, after all traditional left parties also bear a fair share of responsibility for the debt disaster that’s struck Europe.

As far as many Conservative commentators are concerned the narrative is this: Europeans displayed an astonishing lack of adult seriousness by either voting for fringe parties as in Italy or Greece or for the traditional left in France and the UK. By voting the way they did they displayed “wishful thinking” and ignored economic realities. Only by backing parties that are supportive of German-dictated austerity would they have shown they were serious.

And the fringe leaders are all lumped together regardless.

Anne Applebaum writing in Slate Magazine, for instance, argues that the fringe parties are “anti-European, anti-globalization, and anti-immigration. Their leaders, in the words of a French friend, want to ‘withdraw from the world.’”

And she added: “Above all, they are anti-austerity: They hate the budget cuts that they believe were imposed on their national governments by outsiders in the international bond market and by their own membership in the euro currency zone. Never mind that those same national governments had created the need for austerity by overspending and over-borrowing, or in some cases—most notably Greece—by funding vast, unaffordable and corrupt state bureaucracies over many decades.”

Well, the budget cuts were in a sense imposed by outsiders and in Italy and Greece the parties most responsible for over-spending and over-borrowing were the hardest hit in the elections – in Greece the two mainstream parties that have dominated politics there for the last 35 years, and in Italy the center-right parties that were in the coalition governments of Silvio Berlusconi.

In the UK, the local elections success of Labor, the party responsible for the country’s economic mess, can partly be put down to a series of poor decisions and cock-ups by the coalition government and to a general feeling in the country that “we aren’t all it together”.

In Italy and Greece, voters turned to fringe parties to express their distrust of the center. The traditional left did well in Italy but not as well as it should have given the circumstances. It didn’t do so because of the scandals that have hit some prominent leftwing politicians.

And it isn’t clear to me that Italian voters who backed the movement of Beppe Grillo, the comic-turned-blogger activist, were expressing anti-European, anti-globalization or anti-immigration positions.

True, Grillo wants Italy to drop the euro and re-introduce the lira, but is that what was uppermost in the mind of voters when they backed the comedian’s Cinque Stella movement? Of the more the more than 20 people who voted for Cinque Stella who I have spoken with in the last few days not one of them mentioned dropping the euro as Italy’s currency. Nor are any of them anti-immigrant and none of them were anti-European.

They say they voted for Cinque Stella to record a protest against many things – from the corruption of the mainstream parties of both the center left and center right to Silvio Berlusconi’s disastrous stewardship of the country and to the fat-cat Italian parliamentarians, the highest paid lawmakers in Europe.

And none of them were that critical of caretaker premier Mario Monti or his efforts to reduce the public debt or implement structural reform, including changes that would open up the country’s rigid labor market.

Monti’s government is a technocratic one and he and his government were not standing in the local elections. Interestingly, despite the pain Monti is causing people with cuts, reductions in pensions, etc, he has high popularity ratings in the opinion polls of more than 50 percent.

While all of my Cinque Stella voters had questions about austerity and the cuts – from the timing of them to where the cuts are being applied – they all accepted that Italy has to reduce its public debt, improve competitiveness and cutback on the country’s bloated public sector.

And why in the world would they vote for Berlusconi’s party or the Northern League, his onetime coalition partners, when they accept change has to take place?

After all Berlusconi implemented scant reform when he had the opportunity to do so and under his rule, Italy grew at an anemic annual rate of one third of 1 per cent and dropped further down league tables for economic freedom and competitiveness and media freedom. Under Berlusconi, there was a resurgence of the Mafia and increased public corruption. During his tenure his coalition partners approved 18 pieces of legislation that sought to protect his own personal business interests and to provide him with legal immunity for wrongdoing. Is that center-right record one that deserved to be rewarded? Would the voters in Italy have shown more adult seriousness by voting for the center-right?

Brendan O’Neill writing in Spiked in an article headlined “Posturing against austerity: an infantile disorder” strikes the same kind of notes as Applebaum, first misunderstanding that the Grillo vote was a protest one and not one aimed at the Monti government and then arguing that elsewhere the leftwing groups that made electoral gains are driven by a desire to avoid reality.

He wrote: “The alarming thing about Hollande and Alexis Tsipras, the comparatively youthful leader of Greece’s Coalition of the Radical Left, is that they are being treated seriously despite the fact that they, too, are a bit of a joke, a comedic interlude in mainstream politics who offer little, if anything, in the way of an alternative.”

Pairing Hollande with Tsipras seems a tad odd. The latter is far to the left of Hollande and has declared the recovery blueprint approved by the European Union and the International Monetary Fund (IMF) as “null and void” while the new French President has talked only of renegotiating the EU fiscal compact his predecessor, Nicolas Sarkozy, signed.

Hollande is an experienced and mainstream politician and arguably his vagueness during the election campaign on the details of what he would do in office is a reflection of political wisdom – he has avoided over-selling presumably in order to try to lower the expectations of his supporters. He has given himself room for maneuver. He has committed to balancing government spending and borrowing by 2017, avoided making commitments to increase public sector employment beyond education and even with his pledge to hire 60,000 additional teachers he has stressed that this will not be done overnight.

In short, it strikes me that voters on the whole in Italy, Greece and France turned to what they had on hand to punish the mainstream parties responsible for the economic mess while at the same time registering as best they could their opinion that the current approach to dealing with the crisis isn’t working. Is that infantile posturing?

Of course, the voters aren’t alone in being critical of the current austerity tactic. They have plenty of fellow-conspirators – to name a few, the International Monetary Fund; the Italian Premier; the President of the European Central Bank, Mario Draghi; the Financial Times economics columnist Martin Wolf; and The Economist magazine – hardly a bunch of leftwing or fringe loonies. They all argue for blending public debt reduction with growth measures.

Take what The Economist wrote in last week’s edition. “Germany will find itself isolated. It has pushed austerity too far and too fast. The myth of an expansionary fiscal contraction, the idea that deficit cutting would boost growth, has been largely dispelled. The latest evidence is that in a downturn the multiplier effect of fiscal tightening can lead to a deeper recession, making it even harder to cut the deficit.”

Or consider what Martin Wolf wrote in a column this week. “The fact that the policy for dealing with it (the crisis) has been such a disaster – sending unemployment figures through the roof and magically increasing budget deficits – only hastens the final act of this drama: the possibility that Greece will default, leave the euro and increase the contagion in Spain and Italy.”

Wolf argues that German Chancellor Angela Merkel will have little choice but to agree to some changes to the fiscal compact and to soften austerity in its current form. “Whether it is renegotiated, modified or supplemented with a growth pact is a matter of words.” And she has little choice not only because the economic realities demand it but the voters fired a warning shot.

 

 

 

 

 


Growth But What Kind Of Growth?

The election of François Hollande as the new French President will give a lift to other European leaders, such as Italy’s Mario Monti, who want to temper austerity with measures to stimulate growth.

Despite mutterings from Berlin this morning that Germany has no intention of renegotiating the European fiscal pact, German Chancellor Angela Merkel has signaled that she would be open to some growth-tilted measures to go along with the fiscal pact.

What seems likely to happen is that the pact will not be reopened. Merkel seems unlikely to shift on that — after all, she considers the agreement very much her baby. But she won’t oppose a side-agreement that contains several measures aimed at stimulating euro-zone growth.

But the negotiation over those measures is what is going to be tough and potentially highly divisive. Two different visions of what is need for growth are going to be in conflict.

Hollande’s is more public sector-based and involves government borrowing and spending on things like the development of infrastructure. He has suggested, for example, raising money for major road improvements with so-called European Project Bonds.

The competing vision can be seen in the approach of the classical liberal Monti and the new European Central Bank chief Mario Draghi, the Italian banker and economist who succeeded Jean-Claude Trichet at the ECB last autumn.

Both Monti and Draghi are pushing for major structural reform, arguing this would prompt sustainable growth. That involves reducing the public sector and reforming rigid labor markets making it easier for firms to hire and fire.

Both sides are likely to find considerable common ground – hence my argument yesterday that there will in effect be a Hollande-Monti dynamic driving much of EU politics in the coming months. Together the two have the clout to push Merkel. But it isn’t going to be easy to merge the two visions and settle on agreed measures.

There will be consequences for Hollande with his own supporters. Fifty-six percent of France’s GDP now goes on the public sector – that’s a higher proportion than Sweden’s. Any resulting growth agreement made by euro-zone leaders is still going to mean that Hollande having to cut back on the public sector, to disappointment those who celebrated his victory last night in Paris.

 

The Hollande-Monti Pact: Growth Over Austerity

Exit polls suggest at the time of writing that Nicolas Sarkozy has suffered the ignominy of being a one-term French president. His loss means that for the first time in nearly a quarter of a century the French have elected a Socialist as their leader.

The result looks like it will be closer than many thought it was going to be a couple of weeks ago. Sarkozy’s rather brutal anti-Muslim appeal to the far right seems to have been rewarded with a narrower defeat. It appears the Socialist François Hollande has secured 52 percent of the vote compared to 48 percent for incumbent Sarkozy – a solid victory. And as I write, Sarkozy has conceded.

Sarkozy is only the second president, after Valéry Giscard d’Estaing, in 1981, to fail to win re-election under the Fifth Republic.

His supporters are now suggesting that this was an “unwinnable election.” That he was unfortunate in his timing: he entered office as the financial crash hit. Does this mean that no  incumbent can expect to win in the current circumstances? He is, after all, the 11th government leader to be swept from office since the financial crash struck. Does this French election hold a warning for Barack Obama?

Four percent is not a heavy defeat. While Sarkozy faced an uphill battle and was associated for many of the French with four years of crisis, the seeds for his defeat also rest with the manner of his governing. The French tend to appreciate a discreet president and Sarkozy was anything but: he chose to celebrate his victory at one of Paris’ most expensive restaurants and for several days after relaxed on a friendly billionaire’s yacht – one sporting the British Red Ensign!

As the living standards of the French dropped during his time in office and unemployment rose, the brash Sarkozy continued to project himself as a contemporary JFK, surrounding himself with beautiful women – not just his wife – and was happy to appreciate being associated with the finer things in life.

Many, I suspect, did not forgive him for this and as they went to the polls they recorded their resentment.

This marks him out from Obama. Sarkozy seemed distant from the pain. Obama doesn’t — although he doesn’t have the Bill Clinton gift of actually appearing to feel the pain. That, though, may save him come November.

There will clearly be Europe-wide consequences from this election. As far as Europe is concerned it is likely to shift the focus from austerity to growth and sets up a possible confrontation between Hollande and German Chancellor Angela Merkel.

The Economist this weekend suggested that Hollande may be rather dangerous, suggesting that he will turn the clock back to the early disastrous days of his Socialist predecessor François Mitterrand. Certainly, Hollande will be less business friendly than Sarkozy and this could well impact the growth he says he wants. But he is a sophisticated and cautious political player and some of his campaign rhetoric should be taken as just that.

Merkel was already indicating on the eve of the French presidential election that she would be open to re-thinking on the austerity-tilted European fiscal pact. She has come under strong lobbying pressure from Italy’s Mario Monti to do so.

Now that Hollande has won that pressure will simply grow on her — and with both the French and Italian leaders arguing for the pact to reflect more of a mix of reform, austerity and growth, she is likely to have to concede and sell it to the Germans.

How the bond and financial markets react is another matter. We shall have more hints on that tomorrow when they open.

Whistling in the Dark

Bloomberg has a headline this morning that about says it all when it comes to the Eurozone’s political leadership – “Euro Leaders Aim to Buy Time to Save Currency.” More time?

For the past 18 months there has been dithering and inconclusive summits and failure at every turn to get out ahead of the crisis. Solutions promised and offered have failed to convince the markets and investors that a bottom has been put in to save the currency from collapse and the Eurozone from fracture.

With a new year we are where we were before: no viable political solution.

According to Bloomberg, European leaders are “seeking to buy time for the Spanish and Italian governments to wrest control over their debt.” But that isn’t something that is going to happen overnight or even in a few weeks or months. And getting control of their debt is linked to how the markets feel about the Eurozone generally and the level of confidence investors have in it and not just in Italy and Spain.

Neither country has a solvency crisis – or rather they didn’t. Their initial challenge was over liquidity – and that has been allowed to turn into pending insolvency.

In her end-of-the-year comments, German Chancellor Angela Merkel said her government will do “everything” to bring the euro out of the slump. The only way that can happen is if the Germans agree financial transfers to their poorer neighbors. That has to be done quickly now and speed means Berlin accepting Euro-wide debt consolidation and the issuing of Eurobonds backed by all.

The details of closer financial integration with stricter rules on individual government’s public expenditure can come later.

In the next three months some 157 billion euros ($203 billion) in debt will mature in the 17-member Euro area. And something solid needs to emerge from the scheduled Jan. 9 meeting between Merkel and French President Nicolas Sarkozy or those three months could be even more torrid that what we witnessed last year.

Shape Up

World Bank’s Robert Zoellick talks on a theme dear to this blogger’s heart – namely, that the political leaders on both sides of the Atlantic just are not performing and collectively are one of the main causes for the loss of confidence and market turmoil and economic malaise.

“What’s happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries,” he said.

So let’s see what happens at the summit between French president Nicolas Sarkozy and German chancellor Angela Merkel and whether they are able to lead and forge a way out of the Eurozone crisis. There is only one realistic alternative now: closer fiscal integration and a serious Eurobond system to bail out the weaker members. If that doesn’t happen, then the markets are going to starting testing with the targets again being Italy and Spain.