Europe’s Arabian Reflection

Amidst the commentary on the incredible protests breaking across the capitals of the Middle East, one of the most common reactions is that of suprise; European commentators seem genuinely startled to discover, that on their southern frontier there are peoples, equal in number to themselves, ready to stand, and be counted.

In many ways, however, our surprise is not surprising. For most of Europe’s modern history, the Arab world did not ‘exist’ – at least, not in the same way as India or China. By 1700, the ratio of Europeans to Arabs in the world stood at 6 to 1. By 1920, at the time when the British and French Empires had divided much of the region among themselves, the ratio had reached 13 to 1: that is to say, for every Arab in the world, there were 13 Europeans. The Middle East ‘existed’, therefore; but much in the same way as Canada, or Australasia: a large and empty land, beautiful, bountiful, and ripe for conquest. It is in this light that one can comprehend why the French thought it feasible in 1830 to annexe and colonise Algeria, or why, a century later, European Jews could attempt much the same in British Palestine.

The scale of the change since that time has been staggering. In 1920, the population of the Arab world was some 42 million, the same as the France of that era; today, it counts some 350 millions, equal to the entirety of western Europe. By 2030, the Arab world will be equal in size to the total of both western and eastern Europe combined (see figure above). While from one perspective, the Arab world may be considered an ancient civilisation, from another, therefore, it is brand new; as new, perhaps, as the United States or Australia.

The west has never come to terms with this new reality, this teeming mass on its southern flank. Despite much that has been written, by Edward Said and others, about the ‘Orientalism’ of the nineteenth century European imagination, the truth is that the Arab world has never been much of a feature in our intellectual landscape. We have never really had to think about the Middle East as anything more than a vast land rich with natural resources for the taking, and for much of the twentieth century we could manage it as such, first under colonial officials, and then under the makeshift monarchs and generals we have installed or supported in their place.

Today, the old structures are broken; and an Arabian society is being born. It is there: a mirror image of ourselves, a mass of 350 millions taking shape like our reflection in the Mediterranean ocean. How will Europe deal with this new creature, the multitude of once invisible peoples who have filled out the unfinished concrete slums of Cairo, huddle in the packed streets of Gaza, and mass at the mosques of Mecca and Medina?

While there are some worthy initiatives, such as the Alliance of Civilizations, I suspect events will outpace our attempts to manage them. The fate of the one genuinely European project, the now stalled Union for the Mediterranean, already offers a bad portent for future attempts to deal with migration, integration, and the stability of the Levant.

Predictions for 2010 (Revisited)

Around this time last year, I did something that commentators are frequently advised not to do: I made predictions of how events in Europe would unfold in 2010. As a year has now passed, it is time to take a look back and briefly take stock of how those fared.

• Prediction 1) For the first year since 2005, the EU will not face a legitimacy crisis. There will be no constitutions to discuss, and no referenda results to be picked over by the press. The day to day business of Brussels will turn to unedifying ‘guns and butter’ topics. Well, I don’t know about guns. But butter, certainly. And thanks to the Icelandics, maybe fish too.

Whoops. At this point, I think I will simply give up predicting crisis-free periods for the EU. 2010 will of course be remembered as another crisis year – the ‘eurozone crisis’ – which we can add to the 2009 Lisbon crisis, the 2008 ‘Irish referendum’ crisis, the 2005 French and Dutch referenda crisis and so on. Was it a ‘legitimacy crisis’?  That’s an academic point. EU crises occur with such a regularity these days we will probably have to start grading them on a Richter scale, so as to distinguish the earth-shattering from the merely wibbly-wobbly.

• There will not be a eurozone member debt default, but driven by sovereign debt concerns, the rising run of the euro, which has lasted from 2002 to date, will finally come to an end. During the coming year the single currency will break below 1.40 against the dollar, perhaps even plumbing towards its 1.20 purchasing-power-parity value.

But on the euro, at least, I can feel pretty vindicated. There wasn’t a default, but the euro did indeed plummet, and my target of 1.20 to the dollar (reached during the May crisis) almost exactly marked the bottom. What I did not forecast was that the euro would subsequently recover all the way back to 1.40, though I did highlight the long-term value of the euro in the midst of the panic, and acted accordingly. Whether the long-run positive trend against the dollar has really turned: now that is another question, to which I’ll have to return.

• As governments set about implementing austerity measures, eurozone economic governance will become more contentious. There are still no agreed upon rules to replace the defunct Stability and Growth Pact. I suspect this will lead to a smouldering conflict between the ECB (backed by Germany and the Netherlands), who wish to maintain a strong currency so as to keep building its long-term credibility as a global reserve currency, and a motley group of politicians (possibly a coalition of southern European states spearheaded by Nicolas Sarkozy) who wish to have a weaker currency and weaker fiscal rules so as to promote domestic demand and export-led growth.

Once again, I think I can say that I called this right. Conflict in the European Council over the eurozone’s economic governance has surely been the issue of 2010. What I did not perhaps entirely get right was an assessment of how the alliances would form, as instead of standing up for a more reflationary policy, France has begun to sidestep the debate, allowing Germany and the Netherlands to impose a more austere set of rules, and leave Spain and Italy without any voice to propose an alternative. Nonetheless, during the May crisis it was France which forced Germany to accept the creation of a Eurozone Financial Stability Facility, and the Financial Stability Mechanism that allow for the purchase of peripheral eurozone bonds, as Sarkozy famously slammed his fists and huffed about pulling France ‘out of the euro’ unless Merkel signed the Greek package.

• The economic tendency of the euro’s first decade, where ‘peripheral’ members (Ireland, Greece, Spain, Finland) grew rapidly and ‘core Europe’ (France, Italy, Germany) stagnated, will likewise come to an end. Consumer and corporate deleveraging, not to mention government austerity, will lead to painful year-on-year adjustment in the peripheral countries while core Europe surprises to the upside.

Again, I feel vindicated here, as it certainly wasn’t obvious in December of 2009 that Germany and France were on the verge of an economic mini-boom, with German GDP having rocketed upwards by 3.7 per cent this year. Perhaps it was more obvious that the eurozone periphery had a difficult period of adjustment ahead, though I’m not sure how many people foresaw that Greece and Ireland would still remain mired in recession. Though it isn’t much of a surprise prediction at this point, I still believe this is the beginning of a very long trend, possibly lasting a decade, in which the core eurozone continues to outperform the deflating periphery.

• When the first Council meetings are chaired by Van Rompuy next year and when Ashton starts shuttling off for mediations in Moscow or Tehran, their roles will actually be taken seriously. Currently they are written off as irrelevant. But they have not actually begun. So I suspect that by the end of 2010, journalists will at least have learnt how to pronounce ‘Van Rompuy’ correctly (and perhaps decided whether to call the new High Representative ‘Baroness’, ‘Lady’, or simply ‘Cathy’).

Alas, I may have to retract my words here, as 2010 did not allow either of the new EU roles to clearly define their purpose or function: instead, post-Lisbon Europe has clearly emerged as a Europe of nation-states, and the key personalities remain the heads of state and government, not least of all Angela Merkel and Nicolas Sarkozy. The High Representative role has remained tied down with bureaucratic legwork, like getting the approval of the European Parliament, finding offices, and making appointments, while Van Rompuy has not been as prominent a figure in the eurozone’s economic governance agenda as the Heads of State and Government, or, for that matter, Jean-Claude Trichet.

• The looming prospect of budgetary cuts across all EU member states will lead countries to take defence cooperation more seriously — if only as a means of ‘doing more’ (or rather, the same) ‘with less’.

Defence cooperation, however, has indeed been a breakthrough trend of 2010. Its most prominent instance has been the decision of the British and French governments to share their nuclear capacity, aircraft carriers, and start a joint expeditionary force. The deal agreed between Mr. Cameron and M. Sarkozy last month surprised many: but not myself, driven as it was less by a commitment to the European ideal than a desire to cut public spending. A separate proposal, reached between Germany and Sweden a month later, may lead to a similar deal next year, and be the first of several such treaties between EU member countries. The only question now is whether such bilateral negotiations will be superseded by any EU-wide collaborative ventures, which seems unlikely as long as they remain blocked by the British.

• EU integration in the western Balkans may make a surprise breakthrough after years of stasis. Macedonia, Serbia and Croatia will all be on track for eventual EU entry, leading to hopes the whole region may eventually follow suit.

We didn’t see either a starting date for accession negotiations for Macedonia, or an entry treaty for Croatia, as I had expected – though on the plus side Montenegro was last week granted candidate status. Also, visa-free travel was finally granted to residents of the entire western Balkan region (with the exception of Kosovo) as from this month Albanians and Bosnians can travel freely throughout the Schengen zone – a development that may be of little note to existing EU citizens, but that will transform the lives of those stuck in Europe’s “forgotten” southeast.

• Europe will be ‘on track’ for a transcontinental high-speed rail network. With the completion of the Italian and the Spanish high-speed networks, only two remaining links (Turin-Lyon and Barcelona-Montpellier, both expected sometime in the next decade, though construction at least may begin 2010) stand in the way of a full north-south network running from Madrid to London, and back down again from Amsterdam to Naples.

This wasn’t much of a prediction for 2010, as much as a general outlook for the future, as none of the lines I mentioned were meant to be complete by now. Some new developments include the start of high speed trains direct from London to Germany, a faster connection to Amsterdam, and the completion of the first ‘arcs’ of the Eastern network, including  Helsinki-St-Petersburg, opened this month. Ground has also been broken on the Lisbon-Madrid line, which will eventually connect through to Paris, London and Brussels.

• Finally, Brussels had better enjoy the ‘business-as-usual’ atmosphere while it lasts. The most likely origin of the next institutional crisis, which I predict not for 2010 but shortly thereafter: the UK, where an incoming Conservative government this May will be torn between moderates who wish to remain members of the EU and sceptics who are firmly set on the exit door. These divisions will remain hidden as long as the new government’s honeymoon lasts, but break out not long afterwards – in particular when it becomes clear that à la carte membership is not on the menu. Those who doubt this need only recall the cantankerous atmosphere of the mid-1990s — and this time British public opinion is far more hostile than then.

Well, here I think I was utterly wrong. The surprise of a coalition government in the UK, with the ‘Tory Wet’ (sorry, Liberal Democrat) Mr. Clegg joining the rather dry Mr Cameron in government has taken the edge away from traditional British euroscepticism, and instead produced a government that prefers to kick the Europe issue as far as possible down the line. Still, my original prediction was ‘not for 2010 but shortly thereafter’, and I suspect that it may still be right, as some of the coalition fissures continue to fizzle under the surface.

I am currently considering whether to revisit this foolish enterprise again for the coming year. In the meantime, what predictions would you have for 2011? Feel free to post your ideas below.

Is Germany Acting Like a Hedge Fund?

In recent years, the German government has been very keen on attacking hedge funds. It all started in 2005 with Müntefering’s “locusts” diatribe, and the current Finance Minister Wolfgang Schaeuble has kept up the act, most recently by demanding that funds be placed “under surveillance” by intelligence agencies. Yet, observing German government behaviour over the last year, I cannot help but wonder whether, in their hedge fund obsession, maybe they have learnt some tricks of the trade.

Where to start? First, among the activities of hedge funds that attract them so much public ire is accelerating a bond panic, say by short-selling sovereign debt, and then surreptitiously buying it back at vastly reduced prices, once the panic has run its course. As data from the Chicago Mercantile Exchange shows, speculators went massively short the euro in January, and Greek debt in particular: yet by the end of summer, just as ordinary investors had sold out their positions in terror of an impending eurozone ‘collapse’, institutional investors had piled quietly back in.

Whether by accident or design, Berlin has got a similar deal with its own eurozone crisis lending. In late 2009, as it became clear that Greece had falsified its accounts and would be in need of a bailout, the new government announced emergency cuts and canvassed support from potential lenders. After a slow-motion crash which saw bond yields spike 7 months later at 12 per cent, EU member states finally agreed a lending package that would allow Greece to borrow from other members at a reduced rate of 5 per cent.

Yet many forget that in late 2009 , the yield on Greek 2-year bonds was still 4 per cent, and that the real loss of confidence only occurred in February when Germany blocked other eurozone states from finalising an EU ‘bailout’ mechanism and France blocked Greece from turning to the IMF. Had Greece been allowed to go straight to the Fund, the country could have borrowed at a 3 per cent SDR rate. EU member states, led by Germany and France, precipitated a crisis that has allowed them to force out of Greece a rate of return a good margin greater than what the country might have received elsewhere. This is the kind of trickery that would earn any hedge fund manager a very healthy end-of-year bonus.

Likewise, there is also a strange parallel to be found in the financing of major investment banks, and Germany’s involvement in the new European Financial Stability Facility (EFSF). Perhaps one of the most subtle and odious practices since the financial crisis has been the way that banks have recapitalised by borrowing unlimited amounts from the ECB and the Federal Reserve, at interest rates you or I cannot access, and built back their balance sheets (as well as maintain their salary structure) by lending out at higher rates to companies and to governments (though in the eurozone, primarily to distressed governments). Strangely, via the EFSF Germany, along with its other contributors, looks set to profit from a similar kind of debt arbitrage. In order to pay for its contribution, the ESFS is expected to issue bonds at 3.5 per cent, and then lend the money to countries like Ireland at a final rate of 6 per cent; if Germany receives compensation equivalent to its €120bn guaranty, debt arbitrage will pocket Berlin an additional €4.4bn a year – a cumulative 400 euro windfall for every man, woman and child in Germany over the next ten years! And this the policy for which German voters are apparently outraged. Many of course remain under the sad delusion that Germany has actually given money to Ireland, rather than simply written insurance on a loan.

I know the German government response would be that these loans will be very risky, and in the event that Ireland or Greece has to default, the German taxpayer that will foot this cost (though I calculate a huge haircut of around 25 per cent would be required for this ‘Bund-EFSF arbitrage’ to turn a loss). They also might say that issuing guarantees to Greece, Ireland and so on forces up the cost of their own debt refinancing, though the evidence is mixed so far. And I know that finally they might reply that if Germany and other eurozone governments did not step in, these countries would not find institutional investors for their loans, and could face a paralysing default. Even here I am not so certain, as in addition to the IMF, China’s two main sovereign wealth funds have about $700bn in total assets under management, the Russians have at least $150bn, the Abu Dhabi Investment Authority about $600bn, Saudi’s AMA has $431bn, and Libya has another $70bn lying spare. Some assortment of these countries might be prepared to bail out Europe’s little sovereign defaulters, if they agreed to rent out their foreign policy for a few years.

So in exacerbating crises from which they subsequently profit, are Germany and France behaving like ‘hedge funds’? I, myself, am not cynical enough to believe that they would collude to extract a tough deal simply for their own benefit. But I am realist enough to know that, unless concessions are offered further down the line, many voters in Dublin and Athens will start to see it that way.

On Leadership

I was recently sent an article written by Vaira Vike-Freiberga, former candidate for President of the European Council, which includes a couple of interesting comments on the vexed topic of Europe’s leadership – or lack thereof. Among these are the views that, first, the current crop of European leaders are little if at all worse than those of preceding generations, and second, that the purpose of the European Union ought to be to make the need for such ‘transformative leaders’ redundant, by replacing the rule of whim with the rule of law.

Such remarks are a breath of fresh air for those who have been inhaling (or in my case, exhaling) daily invectives against Europe’s supposed ‘leadership deficit’. For what, let us consider, would correcting such a deficit really require? Leadership requires that some degree of decision-making capacity be concentrated in the hands of a single individual, which is obviously not true of the European Union at present, with its two ‘presidents’ and all-powerful Council. Yet such a derogation would only be justified if we believed that there were certain individuals endowed with sufficient insight and knowledge to know better than a group of their peers; and that political institutions might exist which reliably place such individuals in power.  Presidential democracies are based precisely on such a faith. That faith is routinely betrayed, as incumbents inevitably reveal their human flaws and weaknesses.

In a well-ordered polity, it is not individuals, but rules, and organisations, which must govern. Rules, because in the absence of a beneficent leader whose informed whims prove consistently correct, it is upon tested principles that we must rely; and organisations, because a collective of individuals, serving in committee, is more consistently just than any single individual proves likely to be.

Yet this is oddly close to post-Lisbon Europe as it stands. Like the Swiss Federal Council, the European Council functions as an executive committee, to which the most important decisions must be referred, while the European Union’s routine decisional powers are intentionally split across specialised agencies, such as the European Central Bank or the European Court of Justice, whose judgements concerning human rights or monetary policy will not be improved by political interference. We have created strong institutions, so individuals need not be.

I know that some are finding this form of governance frustrating, and I share their frustration. It is slow moving, not particularly transparent, and the heroes and villains are impossible to identify; in short, it does not make for good news copy. But, in this regard the European Union is hardly alone in the world. Who, for example, can say much about the ‘leadership’ of China, Japan, or Singapore? They are no less opaque, consensual, or gradualist in style. Yet in these polities, it is fair to say that ruling committees, civil servants, and special agencies are perhaps able to develop more intelligent policies than a single ‘leader’, elected or otherwise, would have been likely to accomplish. Indeed, within living memory the Chinese and Japanese have learnt that lesson well.

More generally, we must be careful not to fetishise ‘leadership’, for the degree to which individual initiative is replaced by specialisation and the separation of functions is often a mark of the maturity of a polity. In well-functioning parliamentary systems, such as Sweden or the Netherlands, leadership is largely aesthetic, epiphenomenal, an after-effect. Prime ministers do not decide policy proposals, but receive these from think-tanks and advisers; they do not draft their own speeches, but have writers for this; they do not formulate policy implementation or the negotiating position of their country at international meetings, for these civil servants are tasked. Prime ministers act more as a chief spokesperson or press officer than a ‘leader’ as such, just as the monarch forms a symbolic figurehead for the nation as a whole. Such is the mark of a high quality of government, upon which the inhabitants of a France or Italy, for example, might regard with envy.

Meanwhile, where institutions give the possibility for real leadership, they typically lead to systemic policy failures. I do not wish to dwell excessively upon the problems of the United States, not least of all as in many respects the political system there does exhibit many positive attributes of specialisation and delegation – for example in the way the Federal Reserve is granted relative autonomy from executive or Congressional influence in order to execute its mandate. And yet, many areas, and notably foreign policy, remain the prerogative of the executive and his clique, and thus are subject to repeated diversion and error. This is not a coincidence, but an outcome of any political system where the objective of political participation is to elect a king, rather than assist in forming a government.

Why should Europe ever have sought to emulate the imperial presidency, for example by having a ‘presidential’ leader of the Council, when there are better models to be found in other parts of the world, not least within our own continent? And yet the charge is repeated, and repeated again, that Europe lacks leadership, and needs a stronger hand to guide it through. It is time to leave such delusions by the wayside. Politics, as Max Weber famously wrote, is a ‘slow boring of hard boards’. This may not be to the aesthetic taste of many, and it may not sell newspapers or inspire the imagination. Yet in the long run, it is, sadly, the only system we know that really works.

The Rise and Rise of Nationalism

Something of a controversy was stirred two weeks ago, when Charles Kupchan declared in a Washington Post editorial that Europe was ‘dying’ of nationalism. His argument earned a surprise rebuke from Italian President Giorgio Napolitano, who was speaking at the Ambrosetti Forum, but his evidence is not so easy to dismiss. From German reluctance to a eurozone ‘bail-out’ to French demands to renationalise migration policy, national governments seem more and more willing to challenge Brussels.  And if the exit polls are anything to go by, this weekend tolerant Sweden is about to join the list of EU member states with at least one radical right party in parliament.

But has nationalism actually been rising across the EU? The survey data would suggest that it has. Since the early 1980s, the World Values Survey has been asking respondents across Europe and the world how proud they are to be from their country. Since then, the proportion of respondents offering the maximum response, ‘very proud’, has been rising in most countries and sometimes rising quite sharply.

National Pride in Europe, 1981-2007

Given that the question is pride, rather than nationalism, perhaps the implications for European integration are fairly benign – after all, one can be a patriotic Swede and still believe in European solidarity. Yet a glance at the country ranking suggests a different conclusion. The countries at the core of the European project – France, Germany, Italy and the Benelux – are the least patriotic, and the ‘problem cases’ – such as Poland, Britain or Iceland – are where pride is strongest.

If there is a trend of rising nationalism, there is also a paradox. All the data show that Europeans travel more, work across borders, study abroad, and have more social contacts from other countries than was the case a generation ago. And yet, for all that, the borders in our minds are more firmly sealed than ever.

Democratic Deficit or Surfeit?

Does Europe need more democracy or less? In the late-18th to mid-19th century, the grand intellectuals of the era, such as Voltaire and Georg Wilhelm Friedrich Hegel, also felt that Europe needed to overhaul its creaking system of governance. However, they were afraid of strengthening the role of parliament, fearful that this might further entrench the noble and clerical elites who most opposed liberal reform.

Instead, their favoured solution was despotisme éclairé: enlightened despots whose absolute power could push through progressive changes by decree. Napoleon Bonaparte may be the most famous such figure, but other examples included Prussia’s Frederick the Great, who eliminated use of torture and capital punishment, Joseph II of Austria, who eased the oppression of the Jews, and Catherine the Great of Russia, who reduced many of the taxes and tariffs preventing free trade and enterprise.

Fast forward to today, and I wonder whether anything has changed. Europe urgently needs to reform its economy, protect the rights of migrants, and open to foreign trade and investment, yet the scale of these tasks exceeds the petty provincialism of Europe’s peoples and their Lilliputian politicians. Popular parties in the Netherlands or Hungary call for the expulsion of hard-working newcomers, religious liberties are under threat, and even mainstream politicians in Britain and Germany indulge the tabloid taste for base economic populism.  Is this the ‘democracy’ of which Brussels apparently requires more?

I realise this will sound elitist. But then, the EU is an elitist project, and many of its achievements have been attained, not only in the absence of, but directly in confrontation with popular sentiment. The reconciliation between France and Germany would not have occurred had the choice been given to ordinary French men and women, many of whom in the 1940s still favoured the pursuit of war reparations. The abolition of the death penalty across the EU’s 27 member states flies in the face of opinion polls showing a majority in its favour across most new member states, and until recently even in Britain. And equal rights for ethnic and sexual minorities were made law in central and eastern Europe against the overwhelming tide of public opinion.

Is this a problem for a liberal-democratic approach to government? I do not think so. Liberty and democracy often come into conflict, and like the German or US Constitutional and Supreme Courts, the European Union has always been a liberal constraint mechanism, designed to prevent our peoples from descending into the tit-for-tat trade disputes, competitive devaluations, and human-rights violations that have characterised our not-too-distant past.

In the 18th century, Emperor Joseph II summarised his creed in the pithy statement: “everything for the people, nothing by the people” – which would also, it seems, prove a strangely apt slogan for the EU.

[Note: This entry was adapted from a recent commentary in E!Sharp. I had promised in my previous post to write an entry on prospects for a more open European foreign policy: I will postpone this to a future entry.]

“Why Do They Hate Us?”

Shortly after September 11th, a frequent refrain among the American commentariat was: “why do they hate us?” Americans had always seen themselves as a benevolent power, and found themselves confused by the sight of jubilant crowds in Gaza or Lebanon, celebrating the destruction of lower Manhattan. Juxtaposing these with dated images of protesters burning US flags in Seoul or Paris, the viewer could be left with an impression of rising ‘anti-Americanism’ in a world that veered between envy and ingratitude.

These days, however, it is Europeans as much as Americans who can ask themselves why they attract so little respect in the world. Whereas once a Chinese white paper declared Europe ‘the world’s rising superpower’,  in recent weeks a chorus of international commentators has begun to deride Europe’s pretensions to international leadership. Kishore Mahbubani, the Dean of Singapore’s Lee Kwan Yew School of International Affairs, charges that Europe no longer understands ‘how irrelevant it is becoming to the rest of the world’, while Richard Haass, the president of the US Council on Foreign Relations, has publicly declared  ‘goodbye to Europe as a high-ranking power‘. And these are hardly voices from the wilderness or the lunatic fringe. Mahbubani is Dean of one of Asia’s rising policy institutes, and Haass is a longstanding nonpartisan diplomat.

So why are European countries riding this wave of derision? After all, Europeans, moreso than Americans, have the right to see their continent as a fundamentally benign influence. Europe is a peaceful juggernaut, a bumbling assortment of nation-states whose foreign engagements seem limited to disbursing development aid and hosting long if slightly meandering conferences. We have our internal problems, but not such as to merit the contempt of elites in New Delhi, Beijing or Cairo. Yet long gone seems the time, just 6 months ago, when Al-Jazeera could run a documentary entitled ‘Europe: a fast-track superpower’.

So, why has the cheering so quickly turned to sneering? I do not think it can be dismissed as mere envy: outsiders are not simply jealous of European wages, holidays, and pensions. Nor do I think it is despair at Europe’s torturous process of internal decision-making, despite how often these make the headlines in a post-Lisbon Europe.

Instead, then, I would suggest a more inconvenient truth. Countries across the world have long resented western meddling and moralising, and have found the confidence to talk down a Europe whose global influence is no longer taken for granted.

As an example of our limited soft power, consider that when I ask people around the world, what ‘Europe’ means for them, I am always surprised how little they mention social democracy, or human rights, or even ‘the good life’. Overwhelmingly, the most common response is a memory of European colonial rule, and an abiding sense of our satisfied self-superiority. While Europeans mark history by 1918, 1945, and 1989, the rest of the world still remembers 1842, 1857, and 1884, and always will. Many opportunities have come and gone to draw a line under the past, yet many see Europe as a closed fortress offering few opportunities for integration or innovation.

Can Europe move on from this past? The answer is yes, but if Europe is to become the multilateralist leader that we desire it to be, urgent rebranding is required. The first step would be to project a more inclusive image, of a continent open to new people and new ideas: in America, the election of a Kenyan’s son to the presidency may have done little to erase the inequalities of the US inner city, but in a single stroke, it has allowed the country to reinvent and renew itself as a global nation. Europe has successful migrants, but it is a sad fact that there was more ethnic diversity in Stalin’s politburo than in today’s European Commission.

Second, we can try to tell a consistent story to the outside world. Our preferred narrative is a very Christian tale of fall and redemption, a story about a continent ravaged by centuries of war and conquest that, from the rubble of 1945, decided to make peace with itself and divest its colonial ambitions. If only we could tell this story credibly, the European Union might grow into the multilateral leader to which it aspires. But every time we must face the outside world, the mask just keeps on slipping; the old national rivalries and machinations are there to see, ugly and protruding around the edges. When the moment comes to reform the UN Security Council or voting rights in the Bretton Woods institutions, we dig in our heels and bury our heads in the sand: I honestly do not think the Germans realise how ridiculous they look demanding another European Security Council seat when there is not yet space for India. Likewise, much is made of Europe’s Common Foreign and Security Policy, but in the Africa missions – the only substantive engagement outside of the European neighbourhood – it is difficult to mistake the post-colonial machinations of French, Belgian and British interests.

Next, we would also do well to break with the belief that respect will be earned through doling out ever larger sums of foreign aid, especially when such sums are tied to an unending moralising discourse. What the wretched of the earth want is not our money, but our respect. We pay out aid unrelentingly, but barely consider whether the money is spent effectively, or the distortions we introduce into local politics, and this demonstrates an even greater contempt than to give nothing at all. We have yet to learn the lesson of China’s diplomatic success in Africa, which is that developing nations are less interested in process than achieving results.

Finally, Europe must stop hiding behind the United States, and begin taking responsibility for its own decisions. Yet this cannot happen as long as Europe is run by a centre-right gerontocracy that seems more comfortable clinging to the Atlantic past, than in adjusting to our multipolar present. Our leaders spend their days determined to preserve token participation in NATO, obsessing over President Obama’s will-he-won’t-he participation in the joint EU-US summit, and scrabbling over their de jure powers in the Bretton Woods institutions, when they need to realise that the rules of the game are changing, and the old networks are rapidly losing their influence. Ironically, the Americans seem to understand this better than ourselves these days.

So if these are the challenges facing the European Union, what are the prospects for achieving the change we need? That will be the topic of my next entry.

Britain Entering the Twilight Zone

In recent weeks, something odd has happened in British politics — something that has the potential to significantly transform the way the country relates to the European Union in the years to come. And yet, nobody seems to have noticed it: or if they have, to have not quite thought through the implications.

The ‘something’ in question is the prospect of electoral reform, now being considered by each of the two main parties as a condition for entering a coalition with the Liberal Democrats, who have recently surged ahead in the polls.

Why would this affect Britain’s role in Europe? I can see two possible outcomes, depending on whether the British adopt the alternative vote or shift to some form of proportional representation.

Switching to an alternative vote system, in which voters rank candidates from most to least favourite, could lead to a  Liberal Democrat ‘power broker’ scenario that will substantially moderate the likelihood of eurosceptic policies coming to pass. The reason is that alternative vote systems tend to favour centrist parties – such as the Liberal Democrats – as these are the ‘least repugnant’ (hence second-preference) option for most voters. With the Liberal Democrats as permanent kingmaker to either Conservative or Labour governments, both parties (in particular the Conservatives) would have to tread more carefully over Europe once in government, so as not to alienate the pro-European instincts of their new partner.

Moving to a proportional representation system, on the other hand, could send Britain deeper into the twilight zone than is commonly thought. Proportional systems favour fringe parties and extremists, who suddenly face no obstacle to parliamentary representation; groups such as the UK Independence Party, or even the British National Party, would almost certainly make inroads to Westminster – much as they have done in the European Parliament, where a proportional system is already used. While centrist coalitions might emerge at first, in the event of PR, could one forever rule out the possibility of some kind of purple-blue coalition (between the UK Independence Party and the Conservatives) that would seek to push through a fundamental renegotiation of Britain’s role in the European Union?

The Euro is Still a Better Reserve Currency

The euro has fallen 12 per cent against the dollar since December, leading some to question the euro’s value as a global reserve currency. Yet as the following chart from Clemens Kownatzki shows, such fears are overblown.

The data show the euro-dollar relationship all the way back to 1972, using a currency basket to derive values prior to 1999. As one can see, since the end of Bretton Woods, European currencies have gradually strengthened against the dollar and the long-term trend is up.

Even if the panic continues and the euro troughs at 1.1 or even at parity with the dollar, this would still imply an upwards historical trendline. Given Europe’s low inflation, lower budget deficits and more robust trade figures, this trend is likely to continue over the decade, even if the short-term trend is clearly down.

What the Eurozone Can Learn from Africa

Among the torrent of cliches about Greek dramas, tragedies and trojan horses that have filled the business pages in recent weeks, there has been no shortage of apokálypsis and huperballein. Neither apocalypse nor hyperbole are in short supply, for example, in Liam Halligan’s recent article in the Daily Telegraph, which argues that the euro may “collapse, just like every other currency union in the history of man”. However, even more nuanced commentators such as Samuel Brittan and George Soros, writing in the Financial Times, echo the refrain that the euro’s “unique” historical “experiment” may now “fail it’s first major test”.

Might a little economic history, I wonder, add some much-needed perspective? For as a single currency area, the euro is neither unique, nor experimental, nor a test. The Economic Community of West African States (ECOWAS) has since 1945 had a common currency among a variable group of 14-plus states in central and west Africa, despite widely varying economies, languages, and religions. The United States began expanding the ‘dollar zone’ back in the nineteenth century, with Puerto Rico joining in 1898, Panama in 1904, and Ecuador and El Salvador in the last decade. Nobody believes that the US would bail out these countries if they reneged on their sovereign debt obligations.

Perhaps a little reflection upon the experience of other currency zones, then, would deflate some of the present eurozone panic. While it is widely viewed as a potential ‘disaster’ for Greece to leave the single European currency, since the inception of the West African Economic and Monetary Union, 7 states have left the CFA franc, while others have joined. The departures were never disastrous, either for the countries that left, or those that remained. When Mali left the franc zone in 1962, they simply devalued and rejoined in 1967. There is no reason why Greece, the Mali of Europe, should refrain from doing likewise – as Harvard economist Martin Feldstein has recently suggested.

Similarly, the exit of a country from a currency union need not entail a ‘domino effect’, whereby somehow a Greek exit from the euro will lead Portugal, Spain, Ireland and Italy to be picked off one by one, until Germany is left alone carrying some new version of the Deutschmark. When Argentina finally broke its link to the dollar in 2002 this did not mean that Hong Kong, Saudi Arabia or even Lebanon had to do the same. It is true that a sovereign default would raise debt refinancing costs in other indebted states: yet the effect can usually be contained, for in the modern era indebted states use multilateral institutions such as the International Monetary Fund to keep others in line. Indeed it is precisely the eurozone’s unwillingness to contemplate calling in the Fund,  as Bruegel’s Pisani and Sapir have advocated, while failing to propose a credible European alternative, as Gros and Mayer suggest, that is sustaining the current panic.

Given this, why is the prospect of Greek departure from the euro seen in such a bleak light? Not, I think, because it represents an economic failure, but rather because it would expose the limits of political ambition, by revealing our unwillingness to make the relatively small loan guarantees needed to facilitate Greek adjustment. It would be an existential crisis for Greece, because it would mean drifting to the outer circle of a European project that has been central to its democratic and economic transition since 1981. It would be an saddening event for Brussels, because it would expose the limitations of the Zollverein model, according to which economic union will eventually force a closer political arrangement. So the Greeks risk proving the quip that Greeks are ‘Turks who think they are Italians’, while Europe risks losing faith in its ever-closer union.

The prospect that Europe faces is therefore not a breakup of the euro area. Rather it is that the countries of the eurozone drift along together, like the franc area of Africa, without ever leading to closer political ties.