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Die Lüge (The Lie)

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Recent news out of Europe has been surprisingly mild: higher than expected growth in European economies; falling risk premiums across Southern European sovereign bonds; progress on the single bank resolution authority; release of pent up demand. Finance Ministers and business leaders make the proper cautious noises, but the tone is one of suppressed triumphalism: Europe seems to have weathered the worst.

Economics for Elites

If the economic data is looked upon as positive, it is only in contrast to what came before and to what is happening in emerging markets. Still, good news is what people want right now and Euro Area growth has increased enough for markets to react positively. Not only is the recession left behind, but the trend in the growth rate looks encouraging.

eu27gdp

If you look below the surface, however, the situation in Europe remains dire enough. While GDP growth has returned to most markets, in many it can only be described as anemic. The margin between growth and recession is narrow enough in these markets to be attributable to additional government deficit spending, as is the case in Spain, or one off corrections, as is the case in Greece. Most countries in Europe have not yet recovered their pre-crisis (2008) GDP levels; and some are still below their 2005 GDP levels!![1]

 gdp

There is a core of Northern European states centered on Germany that have never really suffered from the crisis, or else recovered very quickly. These countries are either part of the German production chain (Austria, Poland, Czech Republic, Hungary, Slovakia, Romania) or else depend heavily on the German market as a destination for their exports (Netherlands, Switzerland) or both. These markets are characterized by having Germany as the overwhelmingly dominant trading partner, to the extent that it is not too much a stretch to call this region “Mitteleuropa”.

% of Exports to Germany

% of Imports from Germany

Mitteleuropa

Czech Republic1

31.80%

29.50%

Austria1

31.40%

42.10%

Netherlands

26.30%

13.90%

Poland1

26.00%

27.30%

Hungary1

25.60%

25.10%

Slovakia

22.40%

18.50%

Switzerland

19.80%

29.70%

Romania

18.90%

17.50%

Large and Diversified

Belgium

18.00%

14.2%2

France

16.70%

19.50%

Denmark

15.90%

20.80%

Italy

12.80%

15.70%

Outside German Orbit

Norway

12.6%2

12.4%2

Portugal

11.8%2

11.2%2

United Kingdom

11.50%

12.50%

Spain

10.8%2

11.80%

Sweden

10.3%2

17.40%

Finland

9.4%3

13.9%3

Greece

6.2%3

9.2%2

1 German trade volume is 2x or more next largest trade partner
2 Germany is second largest trade partner
3 Germany is third largest trade partner

Other markets have also done well: Norway is a major oil and gas exporter; Sweden remains a competitive exporter of machinery, chemicals, metals, and military hardware; and France is a large, diversified economy with world-class companies. France is a special case, however: the French dirigiste economic model ensures that the dips in the business cycle are never too profound, but that the peaks are not particularly high either. The United Kingdom is also a special case, but for different reasons from France.

Outside the “German orbit”, things have gone less well. The Mediterranean and Balkans countries have suffered the most, and continue to suffer. Growth there remains fragile and disproportionately tied to large fiscal budget deficits.

Looking at GDP, even when disaggregated to the individual country level, nevertheless paints a rosier picture than what actually exists on the street. Gross Domestic Product is not a particularly good measure of what is going on in an economy; as Americans have discovered, you can have growth without jobs. Growth of corporate profits, that is. In Europe, this is very much what we are seeing. Other than the German middle class (and that of a few other small economies) most of the growth in Europe has yet to benefit workers and unemployment levels remain intolerably high[2]:

unemployment

“Mitteleuropa” stands out even more starkly as the only region that has managed, as a bloc, to reduce unemployment rates below pre-crisis levels (2005 to 2008). Slovakia, Hungary and Romania are not yet there, but their unemployment is trending downwards. The Nordic markets and UK have also responded relatively well, but unemployment remains stubbornly high in some countries. And then there is “everyone else” – places like France, Italy, Portugal and Ireland where job creation is barely occurring; or Spain and Greece, where “catastrophe” is not too strong a description and unemployment levels are falling only because people are leaving the job market faster than jobs are being destroyed.

If it is bad to be a worker in Europe, it is even worse to be young. Unemployment rates for youths under 25 years old are so bad in some countries that university graduates are lining up around the block at foreign embassies to get out. This is great for those countries that need skilled workers and can absorb the immigrants: Germany is a major destination for Spaniards, Italians and Greeks, as well as the United Kingdom, the US and former colonies. But it is a disaster for the local economies: not only are they losing their best and brightest, they are doing so at a time when the demographic clock is ticking down as their working age populations retire in every greater numbers.

youthunemployment

Contrast this with the United States, a federal union that actually works:

usacontrast

Every state of the Union has exceeded its pre-crisis GDP with the exception of Wyoming (99%)[3]. The unemployment picture is more similar to that of Europe, in that most states have still not reached the level of employment enjoyed in the period 2005 to 2008. On the other hand, the absolute level couldn’t be more different: The US national average unemployment rate was 6.7% for December 2013, and not a single US state had an unemployment level that exceed the average unemployment for the EU as a whole (10.7%). The closest was Rhode Island at 9.1%[4].

A Deficit of Europeans

Much has already been made of a “two-track” Europe, i.e. Mitteleuropa vs. the PIIGs, and the lack of convergence between the two regions. But what has developed in fact is not just a “two-track” Europe, but a “two-tiered” Europe: a Europe where ‘recovery’ is restricted to elites, corporations, and banking houses, while the mass of workers and the middle classes are increasing squeezed between the Scylla and Charybdis of unemployment and taxation[5].

pew4

This is not to denigrate the important work that European leaders are doing: a single resolution mechanism is an important piece of institutional machinery; keeping the European financial system from collapsing is also critical; and improving balancing government budgets is also important, at least in the long-term. It remains evident that a vast gap exists between the perception European leaders have of their performance and the one held by the people of their nations.

pew2

Even the term “European leaders” is becoming a misnomer. Increasingly, it is only the elites that are self-identifying as Europeans at all. Nationalism and populism are on the rise across the continent, as the mass of citizens find that their interests are no longer aligned with Brussels; and that they are increasingly resentful of bureaucratization and opacity of European institutions. This is not a recent trend – as early as 2005, voters in France and the Netherlands resoundingly defeated the proposed EU Constitution in referendums held in these countries. The gulf between elites and masses was only widened by the subsequent Treaty of Lisbon, which had many of the same clauses of the rejected constitution, only it was never subjected to plebiscite anywhere.

It was not always thus. During the 1990’s, the popularity of the European Union soared, and citizens were proud to say that they were Europeans first, and Germans, French or Spanish second. That is no longer the case. EU officials point out that there are still states eager to join the EU – and this is true; but they are mostly keen on joining a single common market and currency union where, it is hoped, their economic prospects will improve. That is a very different proposition than one of ceding ever large portions of sovereignty to some unaccountable body in Belgium. Today, support for Europe itself continues to crumble as ordinary citizens lose faith in an institution that seems unable to understand or resolve their problems[6].

pew1

The European Union is not going to collapse simply because citizens are somewhat disenchanted with it. Union officials would be quick to point out that popular support will rebound once the crisis is over and economic conditions improve. That may very well be true: but in how many years or decades will that be? Even in cornerstone nation France, where economic conditions are nowhere near as cataclysmic as in Greece or Spain, the perception of mediocre, distant, detached leadership failing to address real issues is gaining ground. Nationalist, populist and EU-sceptic parties continue to make inroads and gain electoral strength in many European countries.

pew3

It may not be true that an improved economy will make for improved attitudes towards the Union. It may be that EU institutions have failed in the one task that was most critical: they have failed to create Europeans. Ordinary folks have awoken to the fact that they still feel more German, French and Spanish than anything else. Nowhere is this more evident than in the two political crises that now threaten to tear Europe apart: immigration and nationalism.

Immigrants? Who needs stinking immigrants?

On February 9th, Swiss voters went to the polls to decide whether the country should limit immigration, even from other European countries[7]. Backing the measure was the right-wing People’s Party, a euro-sceptic and anti-immigrant group that currently holds the largest number of seats in the National Council[8]. Swiss businesses opposed the measure, as detrimental to their needs for skilled workers as well as for potential impacts on trade with the EU, where 50% of Swiss exports go. Yet a slim majority of voters, 50.34%, carried the “Yes” vote to re-impose quotas after a 2000 referendum to remove them. Voter turnout was 55.8% of the electorate.

In so voting, the Swiss now oblige their government to pass laws curtailing immigration within three years, including that from European Union member states[9]. This would be in direct contravention of the Schengen Agreement, of which Switzerland is a signatory, which provides for the free movement of people within the zone. It also contravenes other agreements between Switzerland and the EU that places citizens of each entity on equal footing within one another’s labor markets.

Reaction to the vote was immediate. European Union officials denounced it as a treaty violation and warned of broader consequences for Switzerland. Already, Brussels has cut-off Swiss participation in EU research and education programs[10].  Luxembourg’s Foreign Minister, Jean Asselborn, warned the Swiss that EU benefits were not an a la carte menu: “You cannot on one hand have a privileged access to the EU internal market and on the other hand dilute free movement – the two are related, that’s clear.”[11]

The vote is damaging on a number of levels. For one thing, it is damaging to Switzerland’s international reputation as an open and welcoming society. The People’s Party’s argument that immigrants were stealing Swiss jobs and welching off public benefits is hardly credible in a nation with 3.5% unemployment – quite the opposite, Swiss businesses opposed the referendum precisely because they need skilled foreign workers to continue growing. Additionally, the “Yes” vote supporters employed some blatantly xenophobic and especially Islamophobic propaganda which is blatantly contradicted by the facts of Switzerland’s own Federal Statistics Bureau. One poster showed a veiled women and an upward trending chart saying “1 million Muslims? Stop mass immigration”. Yet the vast majority of yearly immigrants to Switzerland, more than 80%, are other Europeans, and the decade-on-decade increase in Muslims has been in steep decline since 2000. In light of the People’s Party’s support for the 2009 referendum on a prohibition of minarets, this attitude places them firmly in the camp of Europe’s other right-wing extremist parties.

swissvote

It is also damaging to the European Union; this vote must certainly reinforce Brussels’ distaste for and distrust of popular referendums. The EU suffers not only from a deficit in Europeans, but a deficit in democratic accountability. The results in Switzerland are unlikely to make EU officials more welcoming of citizen participation.

The Swiss referendum also poses a threat to the May elections for the European Parliament. The vote has energized and, to a certain extent, vindicated the far right parties across Europe. These parties were jubilant at the outcome of the referendum. “Fantastic,” exclaimed Geert Wilders of the Dutch Freedom Party, “What the Swiss can do, we can do too: cut immigration and leave the EU.”[12] These sentiments were echoed by France’s openly racist National Front, led by Marine Le Pen and Nigel Farage of the United Kingdom Independence Party: “Were the British people to be given their own referendum on this issue then the result would be the same, but by a landslide.”[13]

These would be the declarations of fringe groups and radicals, which have always inhabited the margins of European politics, except that the extreme right is forecast to capture up to 150 of the 751 seats in the EU Parliament. That is no longer a pesky outlier. The National Front stands to take in 23% of the vote, according to a January poll by Ifop. A recent poll by YouGov shows the UKIP contesting first place with Labour[14].

yougov

These results are beyond worrying. There are also extremist parties in Austria, Belgium, Bulgaria, Cyprus, Denmark, Greece, Hungary, Italy, Latvia, Sweden, and Slovakia that stand to benefit. And they are beginning to organize themselves at a European level, joined by a common dislike of non-European foreigners (i.e. Muslims) and the EU itself. Historically, the each nation’s far-right has been focused on domestic politics and fragmented, but late last year Marine Le Pen’s National Front and Geert Wilders Freedom Party agreed to coordinate strategy at a European level.

 lepenandwilders

These results have European elites worried. Le Pen and Wilders practically declared war on them: “The time of patriotic movements being divided is over,” said Ms. Le Pen, calling it “an historic day”. “Today is the beginning of the liberation from the European elite, the monster in Brussels.”[15]  And they should be worried: the rise of the far right is attributable directly to the very failures of the “elites” to engage the citizens of the member states. Who else are they supposed to turn to in the face of monumental indifference and arrogance?[16]

My Nation, ‘tis of Thee….

Europe also has to deal with the resurgence of regional separatist movements. In September 2014, the Scots will go to the polls to determine whether they will remain a part of the United Kingdom or become a totally independent nation again after 300 years of union. The Catalans in Spain would like to have a referendum as well, but the Spanish government has flatly refused to contemplate any hint or suggestion of a secession vote. Those are the most vocal and proximate of the movements, but they are by no means the only ones. The Vlaams Belang of Belgium would like to set up an independent Republic of Flanders. The Italian Northern League would want to create a Repubblica Padana including all of Italy north of the Po River; Venice too would like to have a referendum on secession that would include only the territories of the old Venetian Republic. Corsica would like to gain its independence from France; and the Basques would also like to separate from Spain.

Those are just the serious independence movements. There are literally hundreds of others representing the aspiration to recreate every canton, länder or bailiwick of Old Europe.

salmondmas

The European Union is, in this regard, a victim of its own success. After all, the whole history of Europe since the Middle Ages has been that of big states forming at the expense of small ones, through a process of dynastic inheritance and conquest. Multi-cultural empires had their drawbacks, as the Habsburgs could tell you, but there was strength in numbers when the enemy was at the door that the small states simply couldn’t muster. By eliminating war from the continent and tearing down most of the international borders, the logic of big states made less sense. Just as London, Paris, Rome and Madrid found reasons to complain about the centralization of power in Brussels, so too did Barcelona, Bilbao, Edinburgh and Venice find reasons to complain about the centralization of power in their national capitals. Why not be independent? In the context of the new Europe, what difference would it make?

separatists

It was the success of Europe that turned the separatist movements into serious political forces; but it was the failure of Europe to create Europeans that has turned them into political crises. If the people living in Madrid really felt more European than Spanish, then it wouldn’t make much difference to them if Catalonia or the Basque Country remained part of Spain or not. They would still be part of the EU. No borders would go up; everyone would use the same currency; the free movement of labor, capital and goods would still exist. The only difference would be that the Spanish flag would be replaced by the Catalan senyera over the Castle of Montjuic. It would be no more dramatic than Maine separating from Massachusetts (1820) or the separation of New Mexico and Arizona (1866). Within the context of the American Union, these events only mattered in relation to the number of Representatives and Senators on Capitol Hill.[17]

Instead, what you have is the return of the ugly old nationalism of the XIXth and early XXth centuries. The Belgians are barely on speaking terms with each other; the Northern and Southern Italians detest each other; the Scots are viewed as ungrateful moochers by the English, who are in turn despised as Sassenachs; and in Spain, you have threats of legal action, arrests, even some extremists calling for police and military intervention against the separatists.

I don’t propose to voice and opinion on the rights or wrongs of each of these movements, or whether Spanish or British nationalism is somehow superior to Catalan or Scottish nationalism. My point is that none of this would matter if “Europe” was a going proposition. It is not; so the peoples of Europe continue to find reasons to hate one another.

The Challenge

The mantra of the European Union has always been – and continues to be – “ever closer union.” So far, this has proven to be a lie. While the European elites continue to build transnational structures, the common European is turning away from Europe and back to their old allegiances in greater and greater numbers. The EU has managed to paint over some of the ugly old cracks on the Old Continent, but it hasn’t been able to turn the very diverse peoples into Europeans.

There are many in Europe – and the United States – who welcome these developments. They think the European Union has gone too far; that it has grown “monstrous,” a bloated bureaucracy. They are entirely wrong.

Europe does have some ugly warts and it does suffer from a democracy deficit. One of the main reasons “Europeanization” has failed is precisely because the people feel that they have been ignored: especially since 2005. And perhaps some EU organs have been tactless or overly-bureaucratic in their dealings with member states. Yet the accomplishments of the EU over the past 40 years are impressive: eliminating war, spreading democratic norms, promoting prosperity, expanding and securing human rights. The dream of a federal Europe should not be cast away, nor should extremists be allowed to tear it down. The challenge for Europe is to find a way to reengage with her citizens, to turn them into Europeans – even as “Yankee” and “Dixie” were eventually turned into just “American”. Failure in this endeavor means the failure of the European project.

That is something that the United States cannot allow. America has always been the European Union’s greatest supporter and ally, despite our little disagreements. North America and Europe remain the two pillars of the world system: a liberal, democratic, humanitarian system. The Transatlantic Alliance, while much maligned and seemingly without direction, remains a cornerstone of global security. So long as it is strong and successful, other nations will seek to emulate it or fear to challenge it. Americans and Canadians[18] have poured their blood and treasure in prodigious quantities for over 100 years to make Europe a haven of democracy and not totalitarianism: it would be folly to abandon that process now, and wholly damaging to the security and liberty of the world.

To those who would see Europe fail: can you imagine what would come in its place?

 transatlantic


Sources and Notes

[1] Eurostat

[2] Ibid

[3] Bureau of Economic Analysis

[4] Bureau of Labor Statistics

[5] “Decreasing Faith in the European Union,” Pew Research Center, 13 May 2013

[6] Ibid

[7] It should be noted that at the time of the referendum, foreigners constituted 25% of the Swiss populace and the rate of immigration per capita was 3x larger than that to Germany and 4x larger than to the US. Population Size and Composition and Components of Population Change, Swiss Federal Statistical Office

[8] 54 seats out of 200. It is nevertheless important to notes that the People’s Party lost 8 seats from the previous election.

[9] Switzerland is not a member of the Euro group, nor of the European Union, but it has adopted much EU legislation, benefits from access to the common market, and has signed the Schengen Agreement on the free movement of People.

[10] Andrea Thomas, “Germany’s Merkel Calls For Reasonable Response to Swiss Immigration Vote,” The Wall Street Journal, 18 February 2014

[12] James G. Neuger and Catherine Bosley, “Europe’s Anti-Immigrant Parties Cheer a Swiss Vote,” Bloomberg Businessweek, 13 February 2014

[13] Ibid

[14] Peter Kellner, “European Elections: UKIP Closes In On First Place,” YouGov, 16 January 2014

[15] Ian Traynor, “Le Pen and Wilders forge plan to ‘wreck’ EU from within,” The Guardian, 13 November 2013

[16] In all fairness to the “Eurocrats”, the same phenomenon is observable in the US with the rise of the populist Tea Party and the perception that entrenched Washington elites have lost touch with the common voter.

[17] It should be noted that the peculiar circumstances of ante-bellum American politics actually made the creation and admission of new states a terribly divisive issue, but that was due to the sensitivity of the slave states and their desire to ensure a numerical equality with the free states in the U.S. Senate, not from any nationalist sentiment.

[18] And Australians, New Zealanders, South Africans, Indians….many nations have fought to preserve the freedom of Europe and the world. I don’t mean to gloss over their sacrifice….

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