Tag Archives: Europe

Allegiance to the Flag

Nationalism is on the march, and not only in America.  Britain wants to leave the EU, and Scotland wants to leave Britain.  Across Europe, nation states are erecting barriers as they come to disagree with immigrations policy made in Brussels.

It’s nice to see the nationalists have their day, if only because the globalists have been on top since the Clinton administration.  To be honest, nationalism has a poor record.  It is associated with ugly tendencies like xenophobia and war.  On the other hand, globalism is the enemy of democracy.

The larger any government’s span of control, the less responsive it is … and the sums available for graft are larger.

You can see undemocratic processes at work today in Brussels and Washington.  Now imagine if the whole world were ruled out of Davos.  The policies go by different names, but globalism is a coherent movement with its own leaders and institutions.  The Council on Foreign Relations thinks that Canada, Mexico, and the U.S. should be a single administrative unit.  That’s no secret.  They published a white paper, and then we got NAFTA.

It is important to understand the tension between globalism and nationalism.  President Obama is on the record as a globalist.  This is why he recently visited London and advocated for Britain to stay in the European Union.  It is also why The Economist always, always labels nationalist parties in Europe as “racist,” “neo-Nazi,” or at least “far right extreme.”

Jeremiah, as you know, eschews labels and generalizations.  There is a balance to be achieved between national sovereignty and global institutions.  Free trade, for example, has lifted millions out of poverty.  Even as Americans have lost jobs and earning power, we have gained access to cheap foreign goods.  The right balance is one struck by negotiation among self-interested leaders of sovereign states.

Democracy works better at smaller scales.  British voters can be reasonably confident of influencing policy in London.  In Brussels, not so much.  Not only immigrations policy, but monetary policy, environmental and trade regulation, and foreign policy are made there, “one size fits all,” for Europe.

The larger any government’s span of control, the less responsive it is.  Leaders are physically more distant, and the sums available for graft are larger.  The right solution is smaller units of government, delegating strictly limited responsibilities to a federal system – kind of like our Constitution.  Does anybody still read that?

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Syrian Hypocrisy Roundup

Hungary is getting a lot of flak for closing its borders to Syrian refugees. Never mind that Austria closed its own border, creating the backup in Hungary. Never mind that Greece, which has a treaty obligation to control the European border, waves them through.

Although you [The Economist] clearly understand the difference between refugees and economic migrants, you continually elide that distinction – Simon Diggins

People have noticed that the migrants are mostly able-bodied young men. From a humanitarian perspective, this means that the women and children, the old and the weak – the people most in need of help – are abandoned in Syria.

Best practice is to settle refugees near home and temporarily, with the goal of resolving the crisis and keeping families together. Transplanting a nation’s labor force is a different project entirely, and of dubious humanitarian value.

For the effort, however, Angela Merkel was tipped for the Nobel Prize. Never mind that Turkey is already hosting 2.5 million refugees, and never mind that Europe has no common immigrations policy.  This prize offer, like the one inflicted on President Obama, is intended to be a bribe.

BlakanRoute

Finally, we note that our own inept policy in Syria (as in Libya) is what changed a harsh but stable dictatorship into an anarchic hellhole, causing the refugee crisis. It also ended decades of American dominance in region.

Speaking of Russia, has anyone noticed that the “axis of common sense” led by Hungary is all the old Warsaw Pact nations? Hmmm.

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Greek Debt Dilemma

We heard that Greece’s new finance minister, Yanis Varoufakis, is an expert on game theory, and we thought it would be fun to analyze the Greek debt crisis from that perspective. Patrick Young says the EU is in a lose-lose predicament, and that certainly sounds like applied game theory.

On one horn of the dilemma (a Greek invention) the EU may accede to Varoufakis’ demands for restructuring. Some of these demands are quite extreme, like growth linked bonds, perpetuities, a bridge loan, and more haircuts. If the EU blinks or, more accurately, if the troika blinks – then the other bailout countries will want the same concessions. Also, as Patrick Young says, it would be unfair to countries like Ireland, which took the medicine.

Germans at all walks of life are sick and tired of seeing their own municipal facilities closed down … bailing out the Greek economy to the tune of €700 per family. That’s a transfer payment the Germans didn’t sign up for.

Morally, this is where Jeremiah stands. Estonia lived through an internal devaluation and emerged stronger for it. Someday, some Greek government will have to make reforms – to cronyism, tax evasion, and unsustainable social spending. Germany seems to be the only fiscally responsible country over there – and they’re pilloried for it. Jeremiah’s moralizing is not the topic, however. We’re talking about game theory.

On the other horn, if the troika plays hardball – halting the ECB collateral waiver, suspending the next tranche of bailout cash – then Greece will be “forced” to exit the Eurozone, and maybe the Union. We put “forced” in quotes because, at this move in the game, Varoufakis would not accept the troika’s terms. Greece would exit, and play the victim. Of course, as Thomas Schelling will tell you, the key is to make sure the troika knows you’re not bluffing.

This is where the IMF comes in. Exiting the euro has always been the right answer for Greece (see this comparison with Argentina). They’re in primary balance, and they could easily implement the three D’s – drachma, default, and devaluation. There would be some pain, but Greece has already endured some seven years of pain. If they had exited right away, they’d be back in the bond market by now. However, like Argentina, they would need help from that lender of last resort, the IMF.

The government quickly collapsed and was replaced by one that devalued the currency and defaulted on the country’s debts … growth resumed a few months later

The IMF is blocking the exit, by cooperating with the EU and ECB. This is because a successful exit, like a successful renegotiation, would also set an undesirable precedent. Spain would be next, the Eurozone would dissolve, and the IMF would have to fund more emergencies than it can handle. It would be the capital equivalent of a refugee crisis. If Greece were to exit, the troika would prefer them to crash and burn, pour encourager les autres.

So, when Varoufakis threatens to borrow from China or Russia, this is not as petulant as it sounds. Whether a practical matter or a bluff, he needs a source of funding other than the IMF – and the IMF has done a lousy job of including emerging economies. Small wonder that China is willing to lend contrary to Western preferences. We wonder, by the way, if the IMF will be so hardnosed when the time comes for France.

So, while there is no guessing how Chancellor Merkel will play the troika’s hand, the likeliest outcome seems to be a continuing fudge while the EU grinds steadily toward mutualization.  They should arrive at that goal just in time for the whole Union to go bankrupt together. Pyrrhus, another Greek.

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Freeze-Frame Economics

Socialist policies have a way of freezing their object at a point in time, like taking a snapshot. Take, for example, laws intended to give workers a better income. European governments have been doing this for years, making their companies uncompetitive and raising barriers to new workers. That’s why youth unemployment is so high. Chart by Reuters.

unemployment-1024x1024They start with good intentions, of course. Everybody wants workers to have a better wage, time off, health care, and early retirement. There’s a moral hazard, though. Politicians can pass these laws all day long, because they don’t have to bear the costs. They will compete to befriend the working class and, whatever level of largesse might be appropriate, they will overshoot.

Wherever there is a good intention, there must be a tradeoff. Policy is all about balance. If you can’t see the tradeoff, then you haven’t understood the problem (or you have succumbed to a moral hazard).

We think France has the most absurd labor laws – see here, here, and here – though Italy may be worse. When companies can no longer support their “social charges,” they’re not allowed to reduce staff. Like a snapshot, socialist policies froze Europe’s workforce at a point in time. Those who are in, are locked into the good life ‘til retirement. Young workers are locked out.

If you’re a hardcore socialist, you may feel that companies should bear unlimited social costs. Any profit above zero means that workers are being exploited. If “the people” owned the means of production, then every penny could go to the workers. Wherever this has been tried, unfortunately, the result has been a freeze-frame economy.

At the time of the revolution, the Russian economy was all primary production and a little heavy industry. The new Soviet government took ownership of mines, farms, dams, steel mills and crude factories – all labor intensive, the best possible industries for socialism.

Fifty years later, it was the same grainy photograph. Outside the Soviet Union, steel production moved to electric mini mills, farmers enjoyed the “green revolution,” Shockley invented the transistor, and Sony gave us the Walkman. In the free world, competition drove innovation and human progress.

The causes and effects of the Soviet tragedy are well known, and we needn’t go into details. Our purpose is to show a general rule, which is that socialists invariably look at history synchronically. They seek to protect today’s workers in today’s economy – preserving them in aspic, as it were – and they end up condemning the workers of tomorrow.

See also: Second Class Workers

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Daring Daylight Bank Robbery

Banks in Cyprus are closed this week, while the government helps itself to depositors’ savings.  No kidding.  They plan to confiscate roughly 10% across the board.  The actual confiscation will be quick, but they are still deciding how much to take.  Cypriots are queuing up at the ATM.  Good luck!

Frances Coppola describes the process in technical terms.  Apart from the fact that the government is robbing its own citizens, the novelty is that they’re robbing the small, “insured,” depositors before wiping out the shareholders, bondholders, and large, uninsured depositors.  You know that FDIC sign in your bank branch?  It says that if the bank goes bust, your money is protected.

Robbing insured depositors seems like a surefire way to start a bank run right across Europe.  Anybody with money in a wobbly Greek or Spanish bank has to be stuffing it in a suitcase right now.

So, could it happen here?  The Boston Consulting Group recommended just that, in 2011.  Their report is here.  No dithering about for a week, either –  they have calculated exactly how much “haircut” the depositors will have to take (26%).

Jeremiah often calls inflation a hidden tax on people with money in the bank.  Maybe that wasn’t so bad.

See also:  Save the Savers

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Message from Keynes

Jeremiah complains that there is little difference between the red and blue parties, but this year we have a real choice.  President Obama has spent the last few years setting up a social welfare state on the European model.  He has nationalized health care, mortgage lending, and General Motors.  He has increased social assistance of all kinds, from unemployment to food stamps.

When the facts change, I change my mind.

It is hard to write about this objectively, given what has happened in Europe.  When the President took office, in February 2009, he could look across the ocean to a place where the rich took care of the poor, the government provided everything, and people didn’t worry too much about money.

Employment was propped up by short hours and long vacations, and people retired early.   In those days, Obama often spoke of emulating the European model – France, in particular.  His policies and his public remarks bear this out.

Now, unfortunately, that model is gone.  It was crushed by the weight of promises it couldn’t keep – as, too, were many American cities.  We invite the President to consider the words of his favorite economist, John Maynard Keynes – when the facts change, I change my mind.  Maybe capitalism wasn’t so bad after all.

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Iron Fist Dictator You Deserve

Two new plays about Joseph Stalin are opening in London.  Two!  Why so much interest in Uncle Joe?  The answer jumps out of The Economist’s review – craven people get the callous rulers they deserve.

American voters, and European voters for that matter, support politicians who tell them what they want to hear.  If someone tells the uncomfortable truth – whether it’s Bill Clinton, Paul Ryan, or Jens Weidmann – we don’t want to hear it.  The truth is that Western economies are getting crushed by foreign competition, and we can no longer afford the quality of life that we have come to expect.

From Amsterdam to Athens, voters angry at unemployment and austerity are turning to protest parties.

Will voters support longer working hours, later retirement, and reduced benefits?  Why should they?  There will always be some smooth talker with an easier solution.  Blame the “grand bourgeoisie,” as they say in Europe.  Blame the Jews.  Blame the kulaks.  Vote for Francois Hollande, with his 100% marginal tax plan.  Genius!

So, here is Jeremiah’s bleak forecast for Western democracy.  As one economy after another feels the pinch of austerity, voters will turn to socialists, and nationalists, and National Socialists.  Don’t think that it can’t happen here.

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