Europe and the Next Shoe to Drop
Everyone is wondering about the next shoe to drop in Europe. Italy is one focus; Spain is also a possibility. But theses are not the next shoes to drop. They have already dropped. The next shoe to drop is political, not in the sense of what conventional politician is going to become Prime Minister, but in the deeper sense of whether the political elite of Europe can retain power, or whether new political forces are going to emerge in Europe that will completely reshape the political landscape. If this happens, it will be far the most important consequence of the European financial crisis.
Thus far we have seen some changes in personalities in those countries that have been at the center of the crisis. In Greece, Papandreou has stepped aside. In Italy, next on the list, Prime Minister Berlusconi has now resigned. These resignations have represented a formal change of government, but not a formal change of policy. The coalitions that replace them remain dominated by Europeanists. They come from the generation and class that are deeply intellectually and emotionally committed to the idea of Europe. For them, the European Union is not merely a useful tool for achieving national goals. Rather, it is an alternative to nationalism and the horrors that nationalism has bought to Europe. It is a vision of a single continent drawn together in a common project—prosperity—that abolishes the dangers of a European war, creates a cooperative economic project and, least discussed but not trivial—returns Europe to its rightful place at the heart of the international political system.
For the leadership born just after the war, who came to political maturity in the last twenty years, the European project was an ideological given and an institutional reality. These leaders formed an international web of European leaders who for the most part all shared this vision. This leadership was not merely the political leadership. The Europeanist vision and ideology obviously dominated the thinking of the financial, corporate, media and intellectual elites. Europe ironically is filled with former Marxist radicals converted to the European vision. The European elite as a whole was committed to Europe—not universally obviously. There were exceptions; but on the whole.
What is going on now is a struggle by this elite to preserve their vision. When Papandreou called for a referendum on austerity, the European elite put tremendous pressure on him to abandon it. Given the importance of the agreements to the future of Greece, the idea of a referendum made perfect sense. With the referendum the Greek government could properly claim that their actions had the concurrence of the majority of the Greek people. But Papandreou came under tremendous pressure from Europe’s politicians not to hold the election. Rather than seek to accommodate a validating referendum, the European political elite, led by Germany’s Merkel, did everything they could to make a referendum impossible, including blocking the next tranche of bailout money. Papandreou was forced out and was replaced by a former Vice President of the European Central Bank, and the idea of a referendum already abandoned by Papandreou, disappeared.
The outrage at the idea of a Greek referendum makes perfect sense. It is not clear that the Greeks would have approved the agreement. There are two dimensions to this, the first national. The German version of what Greece did was that it irresponsibly borrowed money to support extravagant social programs, and then was unable to pay the loans back. The Greek version is that the European Union, under financial pressure, was revealed to be a means for the Germans to use its free trade system to surge exports into developing countries, using the regulations of Brussels and managing the Euro in such a way that Greece was backed into an impossible situation, and then called on to impose austerity on its people to save irresponsible financiers who new perfectly well what Greece’s economic position was, but not only were willing, but eager to lend money to them. Each version has some truth to it, but in the end the debate was between the European and Greek elites. It was a family dispute and whether for Greece’s benefit or for the European financial systems benefit; both sides were committed to finding a solution.
The second dimension had to do with the Greek public and the Greek and European elites. The Greek elite clearly benefitted financially and intellectually from the EU. The Greek public had a mixed experience. Certainly, the twenty years of prosperity between the 1990s and today benefitted many—but not all. The reshaping of the Greek economy left wide open to other Europeans entering and using Greece economically, left segments of Greece at a terrific disadvantage. This was particularly true for small business owners and for workers in industries overwhelmed by European competitors. Therefore there were always a segment in Greece that opposed the EU.
But the current situation was more radical than that. The question was who would bear the burden of the dysfunction of the European system in Greece. Assuming that the EU was to be saved, who would absorb the cost. The bailouts promised by Germany on behalf of Europe would allow the Greeks to stabilize their financial system and repay at least some of their loans to Europe. It would leave the Greek elite generally intact. The price that Greece would pay would be austerity, and that price would not be paid by the Greek elite, but from the broader public, who would lose jobs, salaries and careers.
So there were two dimensions. The first was whether Greece as a nation would deliberately default on its debts—as many corporations do—and force a restructuring on its terms regardless of what the European financial system needed, or whether it would seek to accommodate the European system. The second was whether it would structure an accommodation in Europe in such a way that the burden would not full on the public but on the Greek elite.
The choice that the Greek government made was to see accommodation with European needs, and to allow the major impact of austerity to fall on the public. Given elite interests in Europe—now deep and abiding—and the ideology of Europeanism, the Greeks chose accommodation. And given the nature of austerity, it would, by definition fall on the public. And given all of this, it was vital not to hold a referendum. Now, the fact is that the Greeks would seek ways to evade the harshest dimensions of austerity by breaking the deal. That is the social contract in Greece—the Greeks would promise the Europeans what they wanted but they would protect the public with duplicity. But while that might work in Greece it cannot work in a country like Italy, whose exposure is to large to hide in a duplicity and duplicity cannot be the ultimate solution to the European crisis in general.
And here we come to the real European crisis. Given the nature of the crisis, which we have seen play out in Greece, the European elite can only save the European concept and their own interests by transferring the cost of the broader public. This isn’t simply among the debtors. Creditors, like Germany, must also absorb the cost and distribute it to the public. The German banking system cannot simply manage to absorb the losses. They, like the French, will have to be recapitalized, and the cost will fall to the public.
This was not supposed to be the way Europe worked. Like Emmanuel Kant’s notion of an eternal peace, the European Union promised eternal prosperity. That and the avoidance of war were the great promises of Europe, and there was no moral project beyond these. If either of these things are not delivered, the legitimacy of the European project is undermined. If the price of retaining Europe is a massive decline in the standard of living of Europeans, then the argument for retaining Europe is weakened.
As important, if the perception is that Europe failed because the European elite failed, and that the European elite is defending the European idea as a means of preserving their own interests and position, then the commitment of the public to the European idea, never as robust as the elite’s commitment, becomes questionable. There has been a general belief in Europe that the crisis can be managed within the current structure of Europe. The Germans, however, have floated a proposal that would give creditors in Europe—the Germans—the power to oversea the economic decisions of creditors. This would undermine sovereignty dramatically. Losing sovereignty for greater prosperity would work in Europe. Losing it in order to pay back Europe’s banks is a much harder sell.
Couple this with anti-immigrant, particularly anti-Muslim feeling among the European public. This massive cultural shift in some countries is associated both with the EU and its borders policies, and with their national and international elites, who have used immigration to fuel the economy, while creating both economic and cultural tensions in the native public. This issue is linked to the general issue of the EU as it places elite and public in fundamental economic and cultural division.
When race and ethnicity meet economic austerity and a sense of betrayal in the elite, this becomes an explosive mixture. Europe already has experience with this in the interwar period, but it is not exclusively European. The disappointment in ones personal life, a feeling of cultural disenfranchisement by outsiders and the sense that the elite is neither competent, honest or committed to the well being of their own public tends to generate major political reactions.
Europe has avoided this thus far. The anti-European and anti-immigrant factions are there, and they have been there during the period when the EU was working. That is the warning sign—they were always there, polling 20 percent for right wing parties in France. It is not clear that this faction as strengthened in this crisis, but it is not yet been made clear how much this crisis will cost the European public, nor the fact that there really aren’t going to be any miraculous solutions. As Italy confronts its crisis, the cost and the inevitably of the cost will become clearer.
A large number of elections are scheduled or expected in Europe in 2012 and 2013. At the moment, these appear to be ones to be held between the conventional parties that have dominated Europe since World War II and since 1989 in the East. These are the parties of the elite, in general, all more or less buying into Europe. But within some of these parties there are anti-European factions, and as sentiment builds, new parties and new factions within the parties will emerge. You cannot have a crisis of this magnitude and not have Tea Parties and Occupation factions emerge, save that in Europe where the crisis is not only about economics, but also about race, sovereignty, national self determination and the moral foundations of the EU, these elements will be broader and more intense.
Populist sentiment coupled with racial and cultural concern is the classic foundation for right wing parties that are nationalist. The European left in general is part of the pro-European elite. Apart from small fragments, there is not much of the left that hasn’t bought into Europe. It is the right that has been warning about Europe and has had meaningful following in the past 20 years. It would seem reasonable to expect, as the price and who bears it becomes clear in Europe, that these factions should become much stronger.
The real question, therefore, is not how the financial crisis works out. That is becoming clear. It is rather whether the European project will survive and that depends on whether the European elite can retain its legitimacy. That legitimacy is not gone yet by any means, but it is in the process of being tested like never before and it is difficult to see how the elite retains its legitimacy. The polls don’t show it yet, because the magnitude of the impact on individual lives has not manifested itself in most of Europe. When it does show itself, there will be a massive recalculation of the European elite—its worth and standing. There will be calls for revenge, and vows of never allowing it to happen again.
It follows that by mid-decade, Europe’s political landscape will have shifted dramatically, with new parties, personalities and values emerging. The United States shares much of this but its institutions are not newly invented. Old and not working creates problems. New and not working is dangerous. Why the United States will take a different path is a subject for another time. Suffice it to say here that the magnitude of Europe’s problems go well beyond finance.
This is a crisis of sovereignty, cultural identity and the legitimacy of elites. The financial crisis has several outcomes all bad. Regardless of which is chosen, the impact on the political system will be dramatic.