Sunday, June 19, 2016

Between the borders - more complicated than thought - Economist

Of all the glories contained in the French foreign ministry, the most glorious is the Salon de l’Horloge. Sumptuous in gold and marble, graced by chandeliers and silks, washed with light slanting up from the River Seine, this is where old men thrashed out the Treaty of Versailles after the first world war. The Kellogg-Briand pact was signed here in 1928, pledging to outlaw the aggressive resort to arms for ever. And, on April 18th 1951, exalted by the trappings of empire, ministers from West Germany, Italy, France and the three Benelux countries put their names to the Treaty of Paris, the founding document of what, four decades later, was to become the European Union.
Fitted out in the trappings of a scheme to manage the production of coal and steel, the treaty was at its heart a Franco-German peace accord. In keeping with its surroundings, its physical instantiation was sumptuous and symbolic. In his memoirs Jean Monnet, its progenitor, describes a document printed in France on Dutch paper with German ink, gathered in a binding from Belgium and Luxembourg and decorated with a bookmark woven from Italian silk. What Monnet does not say is that, because the negotiations had been so frantic, the sheet of paper the ministers actually signed had been left blank.
Were they alive today, those ministers would be amazed by how their successors have crammed that empty page full to bursting with institutions and countries. The community started out with six members, four languages, 177m people and (in 2014 money) $1.6 trillion in annual output. Today’s EU has 28 members, 24 languages, 505m people and a GDP of $19 trillion.
More generous than Versailles and more practical than Kellogg-Briand, the Treaty of Paris has blossomed into a unique supranational form of government. The EU has a court, a parliament, an executive and a president (several presidents, in fact), an apparatus much of which can be traced back to that spring day in 1951. And it has been fundamental to a great historical shift. In a continent whose history is written in blood, the idea of France, Germany or any of the large European states taking up arms against each other has become unthinkable.
And yet those ministers would also be dismayed by how much today’s Europeans have to complain about. A common currency they never envisaged has done great damage and provoked roiling discord. Unemployment in the euro zone has been 10% or more since September 2009 (excepting a blessed few months in 2011 when it dipped as low as 9.8%); among the young it hovers at around 20% across the EU. A flow of migrants comparable only to the post-war Exodus still fresh in the minds of those men in the Salon de l’Horloge is closing borders and deepening divisions. Eurosceptic parties are rising across the continent, including in Germany. Last month in Austria a far-right, anti-migrant, Eurosceptic candidate only just missed being elected head of state. If Britain votes to leave the EU on June 23rd, it will break a European taboo; there will be growing pressure for similar referendums elsewhere.,,

Only a few years ago pundits were writing books with titles like “The European Dream” and “Why Europe will run the 21st Century”. Yet today Jan Zielonka, professor of European politics at Oxford, reports that when he talks to European policymakers he is “stunned by their scepticism”. In May the president of the commission, Jean-Claude Juncker, lamented that: “in former times we were working together…we were in charge of a big piece of history. This has totally gone.” Donald Tusk, president of the European Council, is even bleaker, saying that: “the idea of one EU state, one vision…was an illusion.”
It always was. The myth around which the EU has grown is that ministers and their officials always planned gradually, but inexorably, to subordinate the nation state to a higher European order. In the words of Vaclav Klaus, a former prime minister of the Czech Republic, countries would “dissolve in Europe like a lump of sugar in a cup of coffee”. But although Monnet and some of those around him did indeed dream of a European superstate, the politicians who made use of their ideas did not. The pooling of sovereignty found in the treaties first of Paris and then of Rome—which created the European Economic Community in 1957—was designed to save the nation state, not bury it. Europe’s governments have jealously guarded their powers ever since.

If one key aspect of Europe has stayed constant, another has come full circle. Monnet’s scheme was an answer to the problem of Germany: too large to co-exist as a first among equals, too small to dominate its neighbours without resort to force. It was, for a long time, a good answer. For 65 years Germany has been prepared to subsume itself in Europe and, in exchange, has been allowed to act as a full member of the Western alliance. Today, by dint of unification and EU enlargement as well as its mighty economy, Germany runs Europe.
Nobody thinks Europe’s great power is about to take up arms. But what sort of union does it want? What sort of union will its partners—especially France—be prepared to accept? And what sort of reform could bring such a new Europe about? The Treaty of Paris was made possible by an unrepeatable, galvanising set of circumstances born of two world wars and the new Soviet threat. No comparable external forces are at play today; nor is there any obvious internal dynamic that can replace them.

WHAT is Europe?” asked Winston Churchill in May 1947. “A rubble-heap, a charnel house, a breeding ground for pestilence and hate.”
The war in Europe had killed 36.5m people. In many countries more civilians had died than soldiers. In his epic account of the aftermath, “Postwar”, the historian Tony Judt records that, in Yugoslavia, war destroyed 25% of vineyards, 50% of livestock, 60% of the roads, 75% of railway bridges, 30% of industry and 20% of homes.
Liberation and defeat had been hard. Allied victories over Germany’s occupying forces did not save the 16,000 people who starved in the Dutch “hunger winter” of 1944/45. In the three weeks after Soviet troops took Vienna 87,000 women were reported to have been raped. The daily ration in the American zone of occupied Germany in June 1945 was 860 calories, a third of what is recommended today. The intergovernmental arrangements that grew up in the 1950s would have been impossible without these enormities.
The post-war desolation was unlike anything since the Thirty Years War of the 17th century, a religious paroxysm which killed a similar share of the continent’s population. The Treaty of Westphalia, signed at that war’s end in 1648, shaped how Europe thought about conflict for the next three centuries: states should not interfere in each other’s domestic affairs; the way to contain countries’ ambitions was by maintaining a balance of power.

As the modern state evolved, that balance became harder to manage. In the 18th century Britain forged its constituent countries into a United Kingdom with imperial reach. Revolutionary France became the first nation to harness all the state’s resources to the waging of war; Napoleon’s Grande Armée conquered the continent. As the 19th century wore on, governments exploited Blut und Boden—blood and soil—as a tool to create national identities that increased their power. Compilations of folklore, tales of illustrious forebears, genealogies of language and theories of race were all put to work bolstering these identities. “The educated, multilingual cosmopolitan elite of Europe grew weaker,” writes the historian Norman Davies, “the half-educated national masses, who thought of themselves only as Frenchmen, Germans, English or Russians, grew stronger.”
After 1814 Germany invaded France five times. After 1914 the antagonisms and ambitions of European nation-states with colonies on almost every continent twice dragged the whole world into war. Far-fetched as it seems today, the dread in 1945 was that Germany would rise up yet again, as a Fourth Reich. Fear of Germany was compounded by fear of Russia, especially after the Soviet Union backed a Communist coup in Prague in 1948.
This, then, was the context for the Treaty of Paris. All across Europe states had failed their people. Some European countries had embraced Fascism. Others had crumbled. War had become total. The very idea of Europe had failed.
Beset by hunger, exhaustion and fear, governments desperate to ensure peace sought to extend their care of ordinary people.As a British historian, Alan Milward, has argued, to be legitimate in this fractured world the state had to strive to bring prosperity, employment and welfare to new voters—factory workers if they were not to be tempted by Bolshevism, and farm workers if they were not to be tempted by Fascism, as they had been when agricultural wages collapsed in the 1930s.
It was from this need to prevent war and safeguard the state that the European communities arose. The link was clearest in France. Prosperity required West German raw materials; France had depended on German coal since the 1890s, and by the 1930s had become the world’s largest coal importer. At the same time Germany had to be kept from renewed aggression. In 1945 Charles de Gaulle felt the best way to meet these goals would be to put the coal and steel industries in the Ruhr and Rhineland permanently under French control. France would guarantee its own safety by keeping West Germany as an agrarian state.

“A leap in the dark” –Robert Schuman on the Treaty of Paris
This was vetoed by the Americans and the British, partly because they worried that a poor, suppressed West Germany would either rebel or fall under Soviet influence. As a fallback, in 1946 and 1947, France flirted with the Soviet Union about an alliance in the East, an old strategy based on the balance-of-power logic of the Treaty of Westphalia. Stalin was not interested.
So it was that in 1949 France’s foreign minister, Robert Schuman, resorted to what European mythmaking casts as a bold new vision and history records as a third choice close to a last resort: Monnet’s plan for a Coal and Steel Community. The scheme, which Schuman presented in a “declaration” in the Salon de l’Horloge, was a trade treaty with a novel twist. It created a High Authority, which stood above the six governments, to administer its provisions. All the participants were equal and the pact was open to new members.
Schuman told the press the plan was “a leap in the dark”. Yet what is striking is not how far-reaching it was, but how tentative. The idea of European union had a long history—Victor Hugo had talked of a United States of Europe as early as 1849. Perry Anderson, a historian, has counted at least 600 publications between the wars proposing a united Europe. Next to almost all such schemes, the Treaty of Paris, with its focus on schedules of heavy-industrial output, was as dry as coal dust.
Why was it so modest? In part for the simple reason that the states wished to give up as little as possible. But in part, too, it was the tenor of the times. Grand schemes to remake society were tainted by Nazism and Bolshevism. In the second world war Albert Speer, Hitler’s chief architect, had drawn up plans for a pan-European political order. Pierre Pucheu, executed for his role as a senior administrator in Vichy France, had called for a single currency. There was a general suspicion of politics and passion. Raymond Aron, a French philosopher, thought that modern society was “to be observed without transports of enthusiasm or indignation”. “Where the first world war had a politicising, radicalising effect,” Judt writes, “its successor produced the opposite outcome: a deep longing for normality.”

In those early years the states guarded their privileges jealously—to the fury of Monnet and his band of federalists. Take, for instance, a proposal in 1950 to create a European army as an alternative to West German rearmament under NATO (which had been created the previous year). During the Korean war, seen as a sign of menacing Soviet ambition, the idea made progress. But the six governments found it hard to agree on how a European army should be run; French Gaullists hated the loss of sovereignty. America threatened an “agonising reappraisal” of relations if France voted against the defence treaty. Nevertheless in August 1954, after the Korean war was over, the French National Assembly rejected the European Defence Community by 319 votes to 264. The victors celebrated with a rousing chorus of the “Marseillaise”.
The same fate almost befell negotiations to broaden the Coal and Steel Community into the European Economic Community, a free-trade area known as the “common market”. At a conference in Messina in 1955 the French agreed to study the plan only after a desperate late-night session between the enthusiastic Belgian delegate and his reluctant French colleague. A year later, the French prime minister, Guy Mollet, was still wavering. True to France’s perennial concerns about where its energy would come from he wanted an agreement on nuclear power (known as Euratom), but he was unsure whether the common market was a price worth paying.

On November 6th 1956 Konrad Adenauer, West Germany’s first post-war chancellor, visited Paris in an attempt to persuade the French to embrace the deal. He might have failed had it not been for the fact Anthony Eden, the British prime minister, telephoned Mollet during their meeting to say that Britain, under pressure from the Americans, had called off its military operation with the French and Israelis in Suez. Mollet was incensed; Adenauer seized the moment: “Europe will be your revenge.”
Other American encouragements for European institution-building were more deliberate. Writing in 1948 the diplomat George Kennan summed up the view in Washington: if Germany was restored without European integration, there would be a German attempt to dominate. If Germany was not restored, there would be domination by Russia. America required a strong, prosperous Europe that settled the German question, and worked to that end. Without its support the enterprise might have failed.
So, too, might it have done without Monnet. He was a remarkable man. Born in the department of Charente in western France, he left school at 16 and went to work in the family cognac business in London. Later he became deputy secretary-general of the League of Nations, served a stint in Shanghai and, during the second world war, acted for the British in Washington (John Maynard Keynes thought his success at procuring arms and equipment shortened the fighting by a year). Time and again, Monnet was able to call on his formidable American diplomatic and political connections to help clear away obstacles to his plan.
But he was not able to turn the politicians who were gingerly using his ideas into true believers. De Gaulle, whom Monnet suspected of bugging his phone, was an early and enduring sceptic. He dismissed Europe as “ce machin”—this thingummy—and put a break on anything that diluted national governments’ power that was to last long after the general retired to rural seclusion in Colombey-les-Deux-Eglises in 1969. In the early 1970s, the French foreign minister, Michel Jobert, asked Edouard Balladur, later to be finance minister and prime minister, what the term European Union actually meant. “Nothing,” Mr Balladur replied, “but then that is the beauty of it.”
Today the European project is seen through the haze of the 1980s, at a stage when the original common market had attracted new members in the north—Britain, Ireland and Denmark—and in the newly democratic south—Spain, Portugal and Greece. Jacques Delors, another French finance minister, oversaw a burst of integration during his tenure as president of the European communities. It brought the single market, the European Union, limits on the scope of governmental vetoes, extra powers for the European Parliament and, eventually, the single currency. The collapse of the Warsaw Pact and, later, EU membership for the former Communist countries only cemented the impression that Europe’s advance was part of the order of things.
It suits the EU’s devotees and its critics alike to treat the strengthening and deepening of the Delors years as a default condition. The period conforms to the founding myth of an ever-closer union run out of Brussels by a powerful bureaucracy, something devotees treat as inevitable and critics as conspiracy. In fact, though, Mr Delors was the exception. His achievements were possible chiefly because the member states wanted to use the EU machinery as a way of catching up with the economic liberalisation that was bearing fruit in America and Britain under Ronald Reagan and Margaret Thatcher. For her part, Thatcher went along; she saw the single market as the sort of Europe that Britain wanted.
The EU was not predestined, but makeshift. In the frantic politics of the post-war world other Europes were possible. But the one that actually came into being has been oddly durable. The fretful union of today, dominated by governments that scrap and bicker and backslide, is not an aberration. It is how things began. That blank piece of paper in the Salon de l’Horloge was not so much a symbol of Europe’s unwritten potential as of how integration would be hard-fought and uncertain. Even if some countries are ready to give up certain powers from time to time, others are not, and nothing happens without a consensus. Leaders rarely act without a crisis to spur them on, and as a result their remedies are often inadequate.
Pro-Europeans look back to a golden age when statesmen were fired up by a common purpose. But such elite enthusiasm was never universal, and prevailed only briefly. Things might have been different had the idea of Europe won over Europe’s people.

Over lunch in an Alsatian restaurant, André Klein declares that nationalism is the disease and Europe the cure. A kindly man dressed in a round-collared Alsatian tweed jacket, Mr Klein is a native of the town of Colmar, where the cobbled streets are lined with half-timbered houses.
When he was born, in 1938, his home town was in France, as it is today; but for almost half the previous century it had been in Germany, and it soon was again. His first memory is of being dug choking from the rubble after an Allied bomb fell on his house. He was educated at the Ecole Nationale d’Adminstration—ENA—alma mater of many of the republic’s top civil servants and politicians. Though he is too self-effacing to say so, he is a model citizen of the EU. “I am European more than French,” he says. “People here feel deeply that they are European. It is necessary for peace. They and their ancestors have seen too much conflict.”
For much of history his part of the world was a contested borderland. The Rhine, 20km east of Colmar, was the Roman frontier. The town has been part of the Holy Roman Empire and of a league of city states; in the Thirty Years War it was briefly conquered by the Swedes before the Treaty of Westphalia gave it to France. The subsequent centuries of turn and turnabout between Germany and France strengthened people’s regional identity; their links to whichever capital city claimed them at the time never grew that strong.

“People here feel deeply that they are European” –André Klein
Now that this borderland finds itself in the heart of Europe, the frontiers barely exist. Not far down the A35 is EuroAirport, serving France, Switzerland and Germany. On a recent Sunday French and German protesters met on the banks of the Rhine to demonstrate in two languages against the nearby nuclear power station at Fessenheim. “Radioaktivität kennt keine Grenzen”, one banner read: radioactivity knows no borders.
One border that is pointedly ignored by subatomic particles lies between France and Switzerland at Meyrin, 300km from Colmar. The mighty accelerators of CERN, a joint European physics laboratory, straddle the frontier there, their beams of protons whirling between the two countries at almost the speed of light. For several years Mr Klein worked as an administrator at CERN. He reminisces about an international meeting at the lab during the cold war. The atmosphere was frosty, but when the chairman took off his jacket and the rest followed, Chinese, Russians, Americans and Europeans were suddenly just physicists. Mr Klein sees no conflict in multiple identities. He is simultaneously a native of Colmar, an Alsatian, a Frenchman and a European.
Marco Zanni often drives past Colmar on his way from Milan to the European Parliament in Strasbourg where, at the age of just 29, he is an MEP for Italy’s Five Star Movement. He, too, sees himself as a European. He studied business in Barcelona alongside people from across Europe. He was an investment banker in Italy. He is polyglot.
But Mr Zanni thinks that the EU—and especially the euro—is driving Europe apart. His father, an engineer who worked for Italcementi, a building-materials multinational, had to delay retirement because of Italy’s pension cuts during the euro crisis. He remembers a Greek student mocking a German classmate in the university in Barcelona, thanking him sarcastically for paying his taxes. The euro zone’s one-size-fits-all regime, he says, means debtors cannot decide their mix of policies. An obsession with austerity is preventing countries from restoring economic growth. The European Central Bank (ECB) is out of anyone’s control. “This is the time to say the euro failed,” Mr Zanni believes. The project is turning “Italians and Germans one against each other.” There is “no community”, he says. “We don’t have a European people.”
Somewhere between the 78-year-old from Alsace and the 29-year-old from Milan, Europe has lost its way. Plenty of people still support the EU, some with passion: young Balts who see it as a path to prosperity and a source of security; Belgians who hope for a way to cope with their divisions; Italians and Romanians who seek a bulwark against their own crooked politicians. But a European identity remains elusive.
When, in 1861, Massimo d’Azeglio, an Italian statesman, said “We have made Italy. Now we must make Italians,” he was outlining what seemed like a reasonable project. Germany was doing much the same with Germans; Britain had done something similar with Britons. But the tools which forged nations in the 19th century—forebears, symbols, cultural achievements—look unacceptably clumsy when used by Brussels today.
The EU created a pantheon of European heroes. Erasmus and Galileo made it, but for some reason Grundtvig and Comenius never caught on. It has something that looks like a flag but which, according to Luuk van Middelaar, a Dutch historian, is officially a “logo”, because the member states balked at flag-hood. It has borrowed an anthem, “The Ode to Joy”, from Beethoven, but it remains a creature of the concert hall rather than the heart.
In 1977 the commission proposed “European Rooms” in museums, but was beaten back by member states. In 1990 “Europe—A History of its Peoples” was published simultaneously in eight languages, laughably depicting Homo erectus as “the first Europeans” and lamenting Europe’s being “outstripped by the Neolithic revolution” in the Middle East in 8000BC. An accompanying textbook caused rancour: the British were upset that Sir Francis Drake, whom they see as a hero for sinking the Spanish Armada, was dismissed as “a pirate”; Germans found accounts of Gaul being raided by “barbarians” from across the Rhine degrading, and had the term replaced by “Germanic tribes”.
For many years such silliness did not matter. After France rejected plans for a European army in 1954, Europe focused on what Mr Van Middelaar calls the “low politics” of tariffs and trade, rather than the high politics of grand strategy. Such an arrangement never needed much support from voters, and those voters did not care that the European project was technical and remote.

“We don't have a European people” –Marco Zanni
But the EU has since entered people’s lives. Mr Delors’s burst of integration began in 1986 with the Single European Act, the first ambitious reworking of the Treaty of Rome. This created a single market, with consumer protection and product regulation. Six years later, the Maastricht treaty, a flawed attempt to deepen the union as a response to the perceived crisis of German unification, provided for an end to the franc, the lira and the escudo. When the eastern countries joined the EU, the rules on freedom of movement brought Polish plumbers and Romanian roofers into everyday contact with Parisians and Londoners.
The EU therefore needed popular legitimacy. One approach to providing it has been to create new political power structures in the hope that political identity would follow. Thus in 2009 the directly elected European Parliament was given the role of adopting EU legislation alongside governments. It also now helps choose the president of the commission.
But a parliament does not produce a people. A survey in 2014, before the most recent elections, found that one in ten Britons could name their MEP in Strasbourg, compared with half who could name their MP in Westminster. Many voters treat elections to the European Parliament as national polls that offer a chance to register a protest against incumbent governments at home. As a result about a third of the institution meant to embody the spirit of European union turns out to be Eurosceptic. At the same time, the parliament knows that most of the clout still lies with the member states. It therefore obsesses about EU process and, as if it were a lobby group rather than a legislature, spends its time campaigning for more powers and bigger budgets. That only makes it more remote.
In 2001 the EU tried to put this right with a constitution to establish the union as a covenant directly between Europeans, rather than a deal stitched up between their governments. The spirit of Philadelphia was never far from the mind of the convention—especially that of its president and would-be Madison, the former president of France, Valéry Giscard d’Estaing.
However the constitution’s 446 articles and 36 supplementary protocols spread over more than 500 pages. In Mr Anderson’s damning judgment, it was “an impenetrable scheme for the redistribution of oligarchic power”. In 2005 voters in the Netherlands and—to the great surprise of their rulers—France roundly rejected it. It was then converted into the Lisbon treaty. Voters in Ireland gave that the thumbs down, too, before being bullied into ratifying it.
The changes that sprung from Maastricht and the creation of the euro could not be justified on the basis that a single European electorate had voted for them: such an electorate didn’t exist. Instead, the EU has had to fall back on what is known as “output legitimacy”—the idea that Europe is justified by results. And it does indeed bring many benefits. Not only peace and markets, but weight in negotiations over such things as trade and climate change and influence in disputes with Iran and Russia, not to mention the automatic right to travel and work abroad.
But output legitimacy fades. Long-standing benefits like peace are soon taken for granted. Governments erode trust in “Brussels” by blaming the EU for decent but unpopular deals that they have signed up to. And output legitimacy is also by its nature weakest when most needed. The time when a system requires propping up is when it is resented—which is when any faith that it is doing good will be at a low ebb.

Writing about world order, Henry Kissinger, a former American secretary of state, observes that a geopolitical system must balance power and possess legitimacy if it is to be stable. The system faces challenges when power shifts or the sources of legitimacy alter. The Soviet Union collapsed when Russian power declined; imperial China was overthrown when the Qing dynasty could no longer command loyalty.
As Europe developed, champions of Monnet’s dream thought the source of its legitimacy should shift from governments to the citizens. But the citizens have resisted. At the same time power has shifted. After the fall of the Soviet Union first reunification and, later, the accession of the countries of central and eastern Europe increasingly put Germany in charge. The euro has strengthened Germany further. When the euro system has required someone to write a cheque, the pen has been brandished by Angela Merkel.

Monnet once said that Europe’s six founding countries had produced “a ferment of change”, starting “a process of continuous reform which can shape tomorrow’s world more lastingly than the principles of revolution so widespread outside the West.” It is an appealing vision; but the ferment has lost its fizz. A new settlement is needed. Unfortunately (in this respect) the forces at play today lack the nation-shaking urgency that brought the community together in the Salon de l’Horloge. And having failed to create enough Europeans like Mr Klein, the EU lacks the popular legitimacy it needs to bring about reform.
There is no lack of advice about how to make up for these deficiencies. One commentator thinks the missing ingredient is religious faith. Another reckons the EU went awry when it stopped being “boring”. Despite many countries’ chilly welcome to Syrian migrants, some still believe in the EU’s importance as a moral exemplar for a world trapped in the zero-sum calculus of the Westphalian state. There are those who call for a dramatic transfer of powers and politics to the centre. They are countered by fans of a radical decentralisation, down to the level of the region and city. Still others are drawing up blueprints for the EU’s dismantling.
Brexit is not the EU’s greatest problem. Whether Britain stays or goes, the union will have to grapple with migration and the euro, which are even more complex. Its progress will be hampered by economic stagnation. Unemployment will continue to feed populism and frustration with the elites. The fight will go on between debtors and creditors over austerity, debt relief and the ECB. To the extent that people feel economically hard-pressed, they will be even less inclined to accept immigrants. The Germans won’t accept freeriding, the easterners won’t accept a collective response, and the migrants will keep coming.
Those who look to solve this with a leap of integration are likely to be disappointed. The politics of pooling sovereignty has rarely been easy. Delay usually prevails. But Eurosceptics who see the EU as a house of cards are likely to be disappointed, too. When faced with an inescapable choice, leaders usually find a compromise to tide themselves over until the next crisis. They value the EU greatly and they rightly fear the consequences of its failure.
As ever, France and Germany will play an outsize part in deciding whether the deep problems of migration and the euro culminate in the development of a new stability or in collapse. France did not sign up to Europe as the junior partner, but Germany’s pre-eminence has turned it into one. Perhaps, with its growing population, it will recover its vitality. Or perhaps, weighed down by economic stagnation and the burden of the far-right, anti-EU National Front, it will become a disgruntled and disruptive force. If France rebels, muddling through will fail.
More important still is Germany. It no longer needs Europe as absolution for the second world war, and it has become too big to be just one power among many. At the same time, it is too small to carry the EU’s burdens alone. This is the German question today. German voters balk at a “transfer union” that sees their savings used to bail out countries in trouble. If transfers and debt relief are the price for holding Europe together, will Germany pay up? Or will it go its own way, with a coterie of close, like-minded followers? What are the borders of the possible?

If you take a train from Warsaw through the pine forests and the lakes to Poland’s frontier with Belarus, you come eventually to Krasnogruda. Once it was the family house of the poet Czeslaw Milosz. Today it is home to Fundacja Pogranicze, the Borderlands Institute, a place teetering on Europe’s rim.
Settled by Poles, Lithuanians, Russian Orthodox, Roma, Belorussians, Ukrainians and the odd Tartar, this soil has soaked up a lot of blood—as much as Alsace, maybe more. It is a long way from the statesmen and their aides wrangling over treaties and laying down history in the Salon de l’Horloge.

Krzysztof Czyzewski, the institute’s director, explains that nationalism here has separated families. People have had to decide whether they are, say, Polish or Lithuanian, when they are often a bit of both. When such borderlands are troubled, people are easily persuaded to retreat into their identities, seeing all others through narrow windows of hostility—as when Yugoslavia tore itself apart in the 1990s.
But in peaceful times, the borderlands are strong. Their people can navigate complex, nested identities that are ethnic, national—and European.
Mr Czyzewski calls himself a bridge-builder. His work is to bring people back together. Not for him the ossified culture of nation-states and the doomed, top-down schemes to create Europeans that fit the remit of Brussels. Other Europes are possible. He believes that people need an Agora, a common space where differences can coexist—a place of peaceful borders peacefully crossed, be it central, like Colmar, or liminal, like Krasnogruda.
Security and the slow accretion of confidence can help people move past nationalism to embrace a new European landscape of regions, cultures and cities. This is the Europe that is to be found in Colmar and CERN; in the student bars of universities—even, perhaps particularly, if the students from Germany and Greece mock and goad each other there; in old battlefields as well stocked with holiday homes as with past glory and in the football stadiums where Europe’s great clubs vie for the cup.
After more than 60 years of integration, nation-states persist, stubborn and seemingly immovable. They will not go away. But at its best, in its lasting peace, Europe reveals something between and beyond them. If the EU is to thrive, its supporters must have it take on something of the patchwork vision Mr Czyzewski lays out among the lakes and forests. Like him and Mr Klein, they must start to understand that the ethnic mosaic of the borderlands is the most European identity of all.





Were central banks partly responsible for 2008 Globsl Crisis - Financial Times

Before the crisis of 2007-08, the general public rarely considered central banks and that was the way central bankers liked it. The less they were in the headlines, the better: if the global economy was working well enough to be considered boring, they were doing their job.
Then the banking system collapsed and the central banks had to come out of the shadows. Never were the words of central bankers such as Ben Bernanke and Mervyn King more eagerly scanned. They became financial physicians, applying quantitative easing here, cash injections there and radical surgery for the parts that couldn’t be saved.
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Afterwards, reflection set in. The central banks had clearly played a major role in resolving the crisis — but had they also been responsible for causing it? Was their medicine effective or did it produce unforeseen side-effects? Are they really independent or have politicians and vested interests captured them? These are some of the questions addressed in three new books.
Their focus is the US Federal Reserve, the closest thing we have to a global central bank, and its older but smaller cousin, the Bank of England. President Woodrow Wilson signed the Fed into law in 1913, after the intervention of financier J Pierpont Morgan to restore confidence during the panic of 1907 highlighted the need for a more formal method of controlling the US banking system. The Bank of England was also formed out of adversity by a government in 1694 that needed urgently to raise funds to finance a war with France.
Their powers have waxed and waned but in the years since the crisis, sometimes in conjunction with other arms of government, they have had three core functions. They are the lenders of last resort to banks in trouble; they serve as banking regulators; and they act as their governments’ economic agents. The latter is achieved by controlling the money supply and setting interest rates, and the efficacy of this methodology is the common ground between the two trenchant critiques and one neutral account reviewed here.
The Fed’s global pre-eminence is based on the size of the US economy, which makes its presidential-appointed and congressional-vetted chair central banking’s global superstar. Excepting the incumbent Janet Yellen, the three dominant chairs of modern times are Paul Volcker (1979-87), Alan Greenspan (1987-2006) and Ben Bernanke (2006-2014).
Volcker took office at the time of “the Great Inflation”, after a period in which the Fed had unsuccessfully tried to tackle out-of-control price rises through interest rates. Influenced by the work of the monetarist economist Milton Friedman, Volcker switched tack by targeting the amount of money in the system and letting the market set interest rates in response. If money was scarce, the price that borrowers would have to pay would rise. It was brutal medicine, costing millions of jobs and causing interest rates to soar but it did bring inflation under control and perceptions of the Fed’s independence gave Ronald Reagan, president during many of these years, air cover from any collateral damage.

Volcker’s successor, Alan Greenspan, achieved iconic status as the central bank’s overlord. He was feted in the US and abroad, and in 2002 was given an honorary knighthood for his “contribution to global economic stability”. The basis for this was the low inflation and steady growth of the Greenspan years and the markets’ belief that, at times of disruption, the Fed would always come to the rescue with easy money or discrete pressure on private banks to help ailing institutions. This safety net became known as the “Greenspan Put”. Greenspan just had time to bring out a book explaining the secrets of his success before it all unravelled.
The task of resolving the crisis fell to his successor Ben Bernanke. The situation was desperate and Bernanke’s Fed used the authority granted it in Section 13(3) of the Federal Reserve Act to bail out banks “in unusual and exigent circumstances”. The subsequent exercise of economic power was virtually unprecedented in the US outside of wartime.
Peter Conti-Brown, an assistant professor of legal studies and business ethics at the Wharton School, writes the measured account from which the preceding historical analysis is partly drawn. The Power and Independence of the Federal Reservedescribes the Fed’s journey from its early 20th-century role “as a banker’s bank and lender of last resort, to the god of the boom-time economy” in Greenspan’s time “and back again” after the crisis of 2007-08 to the “functions [that] defined the Federal Reserve System at its inception”, including regulation and supervision. He explains clearly how complex relationships shape the Fed’s independence in a meticulous study of its political, economic and constitutional history.
There are no villains in his account. “Central bankers at the Fed aren’t throwing darts at a decision tree, nor is there any evidence of venality and corruption,” he writes. Instead, the Fed adjudicates impartially between conflicting views, seeking to reconcile imperfect data and always shaped by the shifting blend of personalities and ideologies on its governing board. While that particular conclusion might be hard for the conspiracy theorists to swallow, it is hard to disagree with the author’s overarching premise that reforming the Fed’s “complicated, confused and opaque” governance would improve transparency, restore accountability and reduce the risk of groupthink.

He says that his “book is for those readers who are eager not for single sentences, but for the quieter and necessarily lengthier discussion” and that he is “comfortable losing the fringe conspiracists”. He has achieved both objectives, though perhaps at the expense of enticing the general reader. If you are a serious student of central banking or heading for an interview at the Bank of England or the Fed, this is the book for you; if you are interested in the subject but prefer something more accessible, try the other books on this list.
These include Fed Power: How Finance Wins, a welcome demonstration that grounded academic work can be entertaining as well as informative. Lawrence Jacobs and Desmond King, political scientists from the universities of Minnesota and Oxford respectively, live up to their claim to “jettison the all-too-common hermetic language of academia in favor of candor

Their interpretation of the Fed’s role goes beyond that of independent adjudicator into a more sinister form of regulatory capture, in which well-heeled lobbyists influence Fed officials for their own ends. Neither is the Fed a disinterested actor, for it has objectives of its own “to sustain its flow of resources to function and to reward the private banks in its system”. It achieved the latter by delivering “substantial advantages to one industry and a few privileged firms”.
Theirs is the more persuasive explanation but there is no smoking gun. The evidence of a deliberate attempt by the Fed to elevate the interests of big finance above the rest of the economy is circumstantial. Though the crisis was resolved in a way that favoured certain financial institutions, there are no revealing emails or memoranda that betray any kind of motive other than supporting the public interest as the Fed defined it.
The authors know the Fed inside out but they are on less sure ground when they contrast its performance with that of other central banks. The Bank of England is praised for requiring the banks it bailed out to support homeowners and small businesses, whereas the Fed rescued the US financial institutions unconditionally. But the US bounced out of recession more convincingly than the UK, raising questions about the effectiveness of the Bank of England’s intervention. Perhaps the Fed wasn’t so dumb after all.
The Bank of Canada’s tight grip on the Canadian banks ahead of the crisis is nicely contrasted with the Fed’s approach. It worked very well but a more detailed discussion of how that could have been applied to the larger US banking system would have been welcome. However, these peripheral criticisms should not detract from a book that is engaging throughout and generally persuasive in its principal thesis that the Fed is a politically loaded institution that drives rising inequality.
Finally, Anjum Hoda brings a practitioner’s insights and biases to the subject. She is a former portfolio manager, derivatives trader and strategist who is currently running a capital advisory business. She has an intricate knowledge of how money markets work and uses this to good effect in Bluff: The Game Central Banks Play and How It Leads to Crisis.


Her core belief is that the central banks’ use of interest rates to control the economy is ineffective and directly caused the crisis. The bluff is that by “lowering interest rates they can propel the public into economic activity that leads to greater prosperity characterized by more jobs and wages”. In fact, the updraught is felt primarily in capital asset prices: “Low interest rates, impending inflation and reasonable levels of current consumption stop people from realizing these apparent wealth gains and spending money proportionately on consumer goods and services.”
Thus the interest rate policy helped asset owners but did nothing for the have-nots and increased market volatility by mispricing risk. When, as occurred in the subprime mortgage crisis, interest payments were interrupted, the whole edifice cracked. This was the inevitable consequence of the misconceived Greenspan Put and, while she is not the first person to identify the flaw, it has rarely been more clearly explained. Even the most serious-minded readers will find the story enlivened by the likes of Mary Poppins, Kung Fu Panda and some amusing analogies.
Where the book falls down is in its overgenerous treatment of the industries with which the author is involved. According to Hoda it was the central banks, not the private banks, that bear primary responsibility for the crisis. She largely absolves commercial banks and investors, believing that they were mere infantrymen marching to the central banks’ low interest rate drumbeat. It is a very sympathetic interpretation. The front-line banks were volunteers rather than conscripts and could have exercised their own judgment to march out of time, as some indeed did.
Her analysis of the investment banks is benign to the point of absurdity. The long list of fines and restitutions they were later forced to pay show that they made their money in far more nefarious ways than she describes, and it is stretching credibility to regard them as innocent beneficiaries.
Nonetheless, if these particular judgments are suspect, understanding the central banks’ role in causing as well as resolving the crisis is still an important step in ensuring that in future they stay out of the headlines. For that we would all be grateful.