Margaret Thatcher: European.

The French Socialists’ internal policy machinery has been activated to express increasing frustration and anger at the constraints of the Eurozone, in the context of rising unemployment and basically no sign of anything improving. Specifically, they’re trying to start a row with the Germans, and somewhat less obviously, Britain. The key quote is here:

“Le projet communautaire est aujourd’hui meurtri par une alliance de circonstance entre les accents thatchériens de l’actuel premier ministre britannique – qui ne conçoit l’Europe qu’à la carte et au rabais – et l’intransigeance égoïste de la chancelière Merkel – qui ne songe à rien d’autre qu’à l’épargne des déposants outre-Rhin, à la balance commerciale enregistrée par Berlin et à son avenir électoral”, écrivent également les dirigeants socialistes pour qui “la France possède aujourd’hui le seul gouvernement sincèrement européen parmi les grands pays de l’Union”.

So, they accuse Angela Merkel of thinking of nothing but German creditors, the German trade surplus, and her party’s prospects, and describe this as intransigent egoism. Well, perhaps they have a point. They blame all this on David Cameron for having a “Thatcherite tone” and only thinking of “Europe a la carte and with a rebate”. And apparently, the French government is the only sincerely European one.

Now I had no idea Merkel was such a poor weak insignificant figure that her policy was dictated by Britain. You may be surprised to learn that this diplomatic triumph is insufficiently publicised in the UK. Further, I clearly remember that the reason for austerity in the UK was meant to be that things were bad in the eurozone and we were going to be like Greece. Don’t just ask the prime minister, ask Sir Mervyn King. It’s as if British politicians tend to blame everything on the EU and French politicians tend to blame everything on the Brits, or something.

However, not only are they right on the actual issues, they have a point about Thatcherite Europe.

Margaret Thatcher was underrated as a European politician. As prime minister, she was very much in favour and deeply engaged in the creation of the Single European Act and therefore of the single market. It is a cliche to say that the Brits only think of the European Union as a single market, but this is ahistorical – in the mid-80s, single market completion was the absolute top priority on the European agenda. If Europe is a project under construction, the single market was the phase that was completed in the 80s. The notion of catching up with Europe, competing with Europe, trading across Europe – all of this was ingrained in Thatcherite style, tone, and rhetoric.

British macro-economic policy in the Thatcher years was also driven by European integration. After giving up on monetarism, the UK government decided to establish a fixed exchange rate with the D-Mark, and later formalised this by joining the Exchange Rate Mechanism. In fact, the UK spent as much time under Thatcher tracking the D-Mark as it did targeting the money supply. The notions of “importing credibility” that were used to promote the Euro in the 90s and 00s had an earlier run-out in the UK in the 1980s.

With an open capital account and a currency pegged to the D-Mark at a dramatically high parity, the UK in the late 1980s looks rather like a peripheral European economy of the mid-2000s, with inflows of capital chasing yield, a growing financial sector, a trade deficit, a housing bubble, and a political elite frantically clapping themselves on the back, before the crash.

The UK’s broader foreign and defence policy could have been reduced to the word “NATO”, which is another way of saying that it was focused on Europe. In the early 1980s, UK defence plans were all about the BAOR operational area in Germany and the NATO Northern Flank. In fact, if it hadn’t been for the accident of the Falklands, they would have been much more so, sharply reducing the Navy at the expense of the Army and RAF and the nuclear world. Similarly, Thatcher really didn’t care about the Commonwealth or anything much outside, yes, Europe or the North Atlantic.

I can hear a storm of whataboutery building by now. What about the rebate? What about “give me my money back”?

Well, what about it? A lot of European politicians spent the 1980s ripping into each other over narrowly national interests. (They did in the 70s and 90s and 00s, too.) Were any of the various ferocious defenders of the CAP as it applied to them un-Europeans? Was Helmut Kohl un-European for insisting on reunification, to head right for the reductio ad absurdum? Germany was obviously pretty keen on exporting cars – was Hans-Dietrich Genscher a Eurosceptic, then? This is simply hypocrisy, with a dash of sexism chucked in. (Do we have to quote Mitterrand fancying her again?)

I also think it’s important to distinguish Thatcher, prime minister, from Thatcher, post-prime-ministerial pontificator. Her swing to Euroscepticism was post-1990, post-power, rather like her swing towards the climate-change deniers. It’s worth noting that the Eurosceptics were not passive, either – they deliberately sought to claim the Thatcher myth as a source of legitimacy for their efforts to topple John Major. She also, I think, adopted Euroscepticism as a way of projecting influence in the Tory Party after leaving office. That said, we should surely consider action before 1990 as weightier than words after 1990. And her foundation was very much involved in the Central European transition to a certain idea of democracy – in the EU, in NATO, in the stability pact, eventually in the Euro.

So why isn’t this more obvious? I think the answer is that the European Union has not turned out to be the nice alternative to Thatcherism it was sold as in the 1990s. Ask a Spaniard. No, go ahead.

The policies it delivers – open trade, austeritarian macro-economics, open capital flows, no real redistributive budget, and a permanent war on inflation – are basically nothing Margaret Thatcher would not have welcomed. Even the way she thought tact was something sailing-ships did would fit right in with German newspapers claiming Cyprus is a richer country than Germany. And the EU’s generally sane approach to things like environmental regulation would work for the post-1987, Montreal Protocol and IPCC-championing, “first scientist prime minister” version of Thatcher. It did at the time.

I wonder, in conclusion, if Thatcher can be understood from a European point of view as an ordoliberal politician, rather than a libertarian or just a conservative? Britain has always been more like Germany than it lets on. Thatcher was a European; it’s Europe that’s the problem.

Of fish, flowers, AKs, offshore banking, and now horsemeat

The horsemeat scandal has taken an unexpected, and possibly very significant, turn. So the Cyprus company controlled by Dutch meat merchant Jan Fasen, who was caught last year passing off South American horsemeat, and which is accused of doing the same with horses from Romania and the British Isles, turns out to have a single director, which is itself a company. (Fasen’s firm, if you haven’t heard, is named Draap, or the Dutch word for “horse” spelled backwards.)

This second company, Guardstand, also controls something called Ilex Ventures, which was used by…ahem…the international arms dealer Viktor Bout to buy some aeroplanes. Oh. Guardstand, for its part, is controlled by something called Trident Trust, which is a company-formation agent in Cyprus, which mostly serves Russian customers.

Now, it would probably be wrong to assume that Bout was behind the horsemeat racket or that some huger interest controlled both. It is probably more useful to look at this from a horizontal, functional perspective. Both Bout and the horsemeat guy made use of Cyprus’s role as a Russian-speaking offshore financial services centre with access to the eurozone.

There’s quite a lot more information at Reporting Project, which speaks to this point. The corporate structure is more complicated than the Guardian piece suggests. Draap’s sole shareholder is Hermes Guardian Ltd. in the British Virgin Islands, its sole director is Guardstand, and the company secretary is Trident Trust. Hermes Guardian is a shareholder in numerous other Cypriot companies, and one of its directors is the head of the Cypriot Fiduciary Association. And both Guardstand and Trident were also used during a half billion dollar acquisition of a steel mill in Donetsk.

All this originated because of the existence of a tax treaty between the Soviet Union and Cyprus. Russians and Russian money have been very obvious in Cyprus in the euro era.

It is often suggested that this treaty, like the similar one with Iceland, was intended by the Soviet side to help finance their intelligence agents in the West. If true, it’s possible that Bout would have been aware of it, having worked for the GRU (Soviet/Russian Military Intelligence) in Africa in the 1980s. As he used the Sharjah Airport free-trade zone as the trading and aviation centre of his business, he may have used Cyprus as the financial centre. These are the places where the rubber meets the road of globalisation, and they tend to build up a layer of secrets over time.

This immediately reminds me that his alleged financial manager, Richard Chichakli, has recently surrendered to Australian police after eight years on the run. He’s been extradited to the United States, where Bout is serving his sentence, still protesting to Russia Today that he only ever dealt in fish and flowers.

Now, for the other significant bit. Cyprus has a lot of the same economic problems as, say, Greece. Notably, its banks are in trouble and the sovereign may have to bail them out and the sovereign itself will end up bust, so on and so forth, we all know the story by now. One of the reasons the Cypriot sovereign is on the hook for quite so much money is that Cyprus has surprisingly big banks. Of course, they’re linked up to the rest of Europe via TARGET 2, so if the big depositors spook*, it’s an instant run on the bank.

Big depositors, you say? And who might they be? I think it is fair to say that nobody is particularly keen to bail out Viktor Bout or Horsemeat Guy. As a result, it’s politically very possible that the whole idea of a bail-in might get tested. And whether it does, and the exact terms, are increasingly linked to things like “how far into the maze the journalists get” and “whether Richard Chichakli starts singing in jail”.

And we may be going to see what happens when an offshore financial centre goes bust.

*surely the right word here…

Central European Links

Here’s a depressing but interesting story. More and more Jews are moving to Vienna, which sounds rather hopeful…except that they’re coming from Hungary, to get away from anti-Semitism and people like piece o’work Zsolt Bayer.

Jonathan Freedland, meanwhile, asks his American friends to stop worrying about pogroms in London and to worry more about Hungarian and Polish politicians they find politically congenial.

You’d be surprised how often my fellow British Jews are required to disabuse U.S. friends of such delusions. One leading communal professional recalls a London meeting with an American counterpart, the latter first insisting on a tearful embrace: “You’re going through what my grandmother went through in Russia, with the pogroms,” he sniffed.

Nobody in the UK appears to have noticed that our aerospace/defence national champion is involved in a massive corruption scandal in Austria. A neat use of the radial graph visualisation explains exactly how BAE’s money was distributed around the Austrian political class to help sell Eurofighters.

Remember when the accession states were the happy hunting grounds of the libertarian blogger? Only too well. Slovakia’s prime minister thinks the privatisations were a terrible mistake and the flat tax was a sacred cow that had to die. Further, being a small and highly open economy/a branch of VW-Audi is less fun than it used to be.

And a Bulgarian politician is the target of a fake assassination attempt.

Europe’s capital strike, Central European edition

Even if Monti seems to have succeeded in dragging the spreads closer together, there are plenty of problems around the European economy. Bloomberg reports on central and eastern Europe’s economies in search of a growth model. So far, some of them chose export-led growth and integration into (basically) German automotive supply chains, and others had a credit and property boom.

Well, it’s pretty easy to work out which was the better idea, but the problem is that with demand (especially for cars) across Europe in the toilet, the export plan isn’t looking too great either. Worse, some of the exporters are seeing their exchange rates rising fast. Poland, which is the paradigm case of an EU accession state that specialised in exporting into the German automotive supply chain, saw its currency rise 9.4% in 2012.

Diversifying trading partners away from the euro region should also “help at the margins,” Ulgen [HSBC chief economist for the region] wrote, adding that Poland and the Czech Republic have already managed to increase trade with countries from the former Soviet Union. Polish exports to the Commonwealth of Independent States rose 21 percent in the first nine months of last year and Czech exports increased 42 percent, according to HSBC.

While fiscal stimulus is not an option, there’s also further room for monetary easing in Poland and Hungary, while the Czech Republic, with the policy rate near zero, may need to resort to currency intervention, Ulgen wrote.

The problem here is that the plan is now, apparently, “export to countries that are poorer than we are”. This being Bloomberg we get a ritual reminder that “labor and pension rules” must change. But the Czechs’ GDP per capita at purchasing power parity is 123% of Russia’s.

The Austrian central bank governor, Ewald Nowotny, is apparently a leader in this effort and if anyone ought to be batting for Central Europe it’s the Austrians. However, out of the three banks who have cut their lending in the region the most, two of them are Erste and Raffeisen.

The problem is not trivial. McKinsey estimates that private investment in Europe has fallen by €354bn since 2007, while the corporate sector has about €450bn in cash on its balance sheet. Being who they are, it’s all about “regulatory barriers” and such. But look at this chart.

What on earth are European governments doing contributing to the problem here?

Science Fiction?

“What do I think about the legacy of Atatürk, General? Let it go. I don’t care. The age of Atatürk is over.”
Guests stiffen around the table, breath subtly indrawn; social gasps. This is heresy. People have been shot down in the streets of Istanbul for less. Adnan commands every eye.
“Atatürk was father of the nation, unquestionably. No Atatürk, no Turkey. But, at some point every child has to leave his father. You have to stand on your own two feet and find out if you’re a man. We’re like the kids that go on about how great their dads are; my dad’s the strongest, the best wrestler, the fastest driver, the biggest moustache. And when someone squares up to us, or calls us a name or even looks at us squinty, we run back shouting ‘I’ll get my dad, I’ll get my dad!’ At some point; we have to grow up. If you’ll pardon the expression, the balls have to drop. We talk the talk mighty fine; great nation, proud people, global union of the noble Turkic races, all that stuff. There’s no one like us for talking ourselves up. And then the EU says, All right, prove it. The door’s open, in you come; sit down, be one of us. Move out of the family home; move in with the other guys. Step out from the shadow of the Father of the Nation.
“And do you know what the European Union shows us about ourselves? We’re all those things we say we are. They weren’t lies, they weren’t boasts. We’re good. We’re big. We’re a powerhouse. We’ve got an economy that goes all the way to the South China Sea. We’ve got energy and ideas and talent – look at the stuff that’s coming out of those tin-shed business parks in the nano sector and the synthetic biology start-ups. Turkish. All Turkish. That’s the legacy of Atatürk. It doesn’t matter if the Kurds have their own Parliament or the French make everyone stand in Taksim Square and apologize to the Armenians. We’re the legacy of Atatürk. Turkey is the people. Atatürk’s done his job. He can crumble into dust now. The kid’s come right. The kid’s come very right. That’s why I believe the EU’s the best thing that’s ever happened to us because it’s finally taught us how to be Turks.”

The Dervish House by Ian McDonald, pp. 175-76

Enter transition, Exit conditions

Compare and contrast: IMF statement on Egypt —

“A number of fundamental structural reforms, including the transition to a VAT-like consumption tax and reform of the highly inequitable and costly system of subsidies, are needed to improve the efficiency of public spending and help reduce the fiscal deficit in the medium term. We share the government’s view that immediate implementation of such reforms is not feasible in the context of this arrangement as additional preparatory work is needed to ensure that an effective safety net is in place to protect the low income households. The government intends to prepare a road map to facilitate implementation of these reforms in the future.”

IMF statement on Belarus

“We have also initiated discussions on a possible IMF program. This has only been the beginning of our discussions and we still have a long way to go. We need to have further negotiations on macroeconomic policies. We will also need to agree on structural reforms to improve the efficiency of enterprises and the financial system so that in future growth will be strong and durable. Above all, the authorities have to be committed to macroeconomic stabilization and structural reforms. We will have to agree on strong stabilization and structural measures which would be implemented prior to the program and would demonstrate their commitment.”

To spell it out, Egypt and Belarus are both looking for around US$3 billion.  Egypt gets it with an explicit deferment of structural reforms as long as there is an “action plan.”  Belarus will have to do reforms before there’s a loan.  Does anyone else see a political version of moral hazard here?

How I was wrong about the euro

This Transitions Online piece is fascinating – as south-eastern Europe has changed, the location of “Europe” or “the West” has swung around all over the place. Once upon a time, Bulgarians and Romanians looked at Yugoslavia as the future, a better version of their own society, and both a reasonable substitute for Germany or Italy and a transit route on the way there. People watched Yugoslav TV illegally. Then, the earthquake, the nightmare. Nobody wanted to be anything like it. People in what had been Yugoslavia looked east, both because there was peace, because that was where the smuggled fuel came from, and also for political support.

Meanwhile, people in the rest of the Balkans looked north at Hungary or south at Greece. Of course, that was because the European Union came to them. Now, well, not so much. If there was ever a time to be eurosceptic, this is the moment. Greeks are quite possibly looking north and wishing they weren’t in the eurozone.

I remember that in the mid-1990s, I was quite sceptical about the single currency for the usual reasons from the left – basically, Keynesian concerns. Having grown up in a succession of recessions, the prospect of joining the Stability & Growth Pact and signing up to the monetarist second pillar of what wasn’t then the ECB didn’t seem great. However, I was (still am) very pro-European on all other issues and eventually I came round to it for not much of a better reason than that it offended the right people. Also, this was the early 2000s and economic policy based on rules seemed to be a pretty good idea. As it happened, of course, when a dose of stimulus was wanted this didn’t keep anyone’s hands out of the medicine chest. Neither did the austerity hold back anyone who was determined to have a monster property boom.

The other big concern was the optimal currency-area problem – could the interest rate be right for the whole eurozone? This is about the most conventional critique of the euro there is. In the UK, it used to be quite a commonplace that the country itself wasn’t an optimal currency area, with the corollary that it therefore didn’t matter so much about the euro. I never quite grasped the logic here, although I admit I may have used the argument. Perhaps the underlying thinking was that there is really no such thing as an optimal currency area – a currency system that was sufficiently decentralised to offer an optimal credit environment in its whole territory would have such high transactions costs it wouldn’t be worthwhile, and therefore we would always have to tolerate some inefficiency due to this effect.

So I was very pro-euro and pro-European while it was a live issue in the UK (about 2003, IIRC – I wonder what happened then?).

What I don’t remember anyone discussing much was the Eurosystem as opposed to the Euro or the ECB – the transactional, flow-of-funds financial workings between the member central banks and the ECB. Nor do I remember anyone talking very much about the fact that the ECB doesn’t have an explicit lender-of-last-resort function. And even discussing whether member states should do anything to manage their trade balances with one another – that was so far out of fashion, of course, that even I didn’t give it any thought.

Of course, this was the bit that bit us.

To put it another way, we argued enormously about the fiscal aspects of the Euro, which turned out to be absurdly easy to fudge when it became necessary to do so. We argued quite a bit about interest rate policy. We hardly even mentioned banking or the issue of money. This is quite a cock-up when you remember we were talking about setting up a new central bank. No wonder west is north and east south.

Is this just my fault? Was there serious discussion of how the Eurosystem might work or not in a financial crisis back in the 90s? Working on my own private black swan theory – apparently unlikely events are both predictable and usually predicted, but they tend to be ones it was unrespectable to predict – somebody must have been.

Also, has anyone else in Britain changed their mind, or is it only me?

Ron Asmus, RIP

Ron Asmus, a key person in the 1990s enlargement of NATO and a tireless advocate of better European and transatlantic relations, died on Saturday, April 30. He was 53.

The Economist’s Eastern Approaches blog writes:

He was a discreet, wise and sympathetic presence in the region, in Washington DC, and in West European capitals for two decades, explaining to jittery ex-communist politicians that volume and frequency of public utterances does not correlate with effectiveness, to American officials and politicians that the goal of “Europe whole and free” still required patient and detailed work, and to West European leaders that a security grey zone in the east would be as bad for them as it would be for those consigned to it.

Just so.

He will be much missed, even among people who barely knew him, and his efforts missed among people who knew him not at all.

Finalité Revisited

Shortly after the big round of EU enlargement in 2004, I took a look at future prospects for enlargement. At the time, I called prospective members, “largely a collection of the poor, ill-governed and recently-at-war.” Most of them are much less recently at war, many of them are better governed, and almost all of them are less poor, yet for all but a few prospects for EU accession seem to me more distant than in 2004.

What has happened?
Continue reading