Category: World

Solving the Euro crisis means a stronger ECB

I do not regret paying my access fee to the FT website.  This morning there are two excellent articles on the Euro crisis from the two regular Wednesday morning columnists: Martin Wolf and John Kay.  It has helped clarify the way ahead for me.

Mr Kay comes in at high level to give an overview of the crisis.  It is not comfortable reading for supporters of the Euro project like me, but, as usual for this author, pretty much spot on.  The main problem is not that the currency area lacks appropriate institutions at the centre, but that local institutions in many member countries are not strong enough to cope with the pressures of being in the single currency.

The eurozone’s difficulties result not from the absence of strong central institutions but the absence of strong local institutions. A miscellany of domestic problems – rampant property speculation in Ireland and Spain, hopeless governance in Italy, lack of economic development in Portugal, Greece’s bloated public sector – have become problems for the EU as a whole. The solutions to these problems in every case can only be found locally.

So the answer will not come from strengthening the EU’s central institutions.  This goes back to the original design of the Euro: the whole idea was to put pressure on governments to reform themselves, by denying them the easy escape route of devaluation. Unfortunately the EU’s politicians forgot this in the first decade of the Euro, so no real pressure was brought to bear, making the crisis infinitely worse once it hit.

This article does not say much about how to go forward from here, beyond suggesting that grandstanding at summits like today’s may be part of the problem rather than the solution.  Mr Wolf’s looks at one aspect of how to manage the crisis itself.  This in turn in is based on a paper by Paul de Grauwe of Leuven university, who literally wrote the textbook on the Euro (I know, since I read it as part of my degree course).

Professor de Grauwe points out an interesting fact: the bond markets are much harder on the Euro zone fringe economies of Italy and Spain than they are on the UK, even though the underlying positions of the countries is not all that different.  The difference is that the UK markets are stabilised by having the Bank of England as a lender of last resort which is able to deal with liquidity crises (i.e. an inability to raise cash for temporary reasons rather than underlying insolvency).  The European Central Bank does not do this, or not enough, for the Eurozone economies.  Mr Wolf, who structures his article as an open letter to the new ECB president Mario Draghi, argues passionately that it should.  This would stop the contagion spreading from the insolvent economies of Greece and maybe Ireland to solvent but challenged economies like Italy, Spain and indeed France.

This must be right.  The Germans, who are the main sceptics, must be persuaded – and convinced that such interventions would only apply to liquidity crises and not solvency problems, and that the ECB has the integrity and independence to tell the difference, in the way that politicians never do.

Giving the ECB a wider and stronger remit will be a big help.  This should extend to supervision of the European financial system (preferably for the whole EU and not just the Eurozone).  This will help deal with one of the biggest problems for modern central banking – that of coping with spillover effects, as described in this thought-provoking paper from Claudio Bono of the BIS (warning: contains mild economic jargon, such as “partial-equilibrium”).

So a reconfigured ECB will help the Euro through the crisis and prevent self-fulfilling prophesies of doom in financial markets having to be solved in grandstand summits.  That still leaves the longer term problem of how the less competitive Southern European economies can have a long term future in the zone.  But then again, I think they would have just as challenging a future outside the zone – even if it were possible to devise an orderly exit mechanism for them.

 

The tricky politics of an EU referendum

Last night’s drama in the UK parliament over the call for an EU referendum is over.  Will it all blow over?  For now, maybe, but the issue will come back.  Wise politicians will be thinking ahead about what they should do when it does. For David Cameron, it looks like trouble.

The starting point is that there is mounting pressure for a referendum on the European Union in the UK.  Why should this be?  We operate a representative democracy, after all, and the issues are complex – not the sort of thing that referendums are supposed to be particularly good at sorting out.  But there is a substantial body of public opinion who believe the country’s membership of the Union is an outrage to our constitution.  This has always been so – but while in the 1970s these were overwhelmingly older people, scepticism is now more widespread.  The Tory Eurosceptics who entered Parliament last year are a younger breed, and to many a focus on Europe has reached obsessive proportions.

This scepticism has been fanned by the press.  Why?  Clearly newspaper proprietors don’t like the EU for their own reasons – but surely it goes deeper than this.  The EU is an easy target for our frustrations, in much the same way as ethnic or religious minorities used to be.  They don’t answer back.  Exploiting this is one way to sell newspapers.  Add to this the growing frustration with the Union right across Europe, and the steady fading of European idealism, and you have a ready explanation for rising scepticism.

It all looks very different, of course, once you are responsible for running the government.  Here the thought of operating outside the EU, or even taking a detached stand within it, looks plain silly.  And so you have a tension between the governing elite and a substantial body of public opinion.  A referendum campaign seems to be one of the best ways of bringing this to a head.  A campaign in the right circumstances has the support of many Europhiles too.  They are sick of their steady retreat in face of the Eurosceptic onslaught, and long to turn and fight, even at seemingly hopeless odds – like the British soldiers retreating to the Marne in 1914.

So far so good.  Now it gets complicated.  Europhiles want a straight in-out referendum.  This would force pragmatic sceptics, including large parts of the Tory hierarchy, into the “in” camp.  To them, this is the basic question of principle anyway.  Trying to have referendums on carefully negotiated treaty changes is a misuse of this method of democracy.  Extreme Eurosceptics would be happy enough to go along with this, convinced as they are that the country would be much better off out, and that the public would rally to their cause.

But pragmatic Eurosceptics don’t want this, for exactly the reason that the Europhiles want it.  What they aim for is a changed relationship between the UK and the EU – and that a pre-emptive referendum on an in-out question would weaken their negotiating position.  For them the main job of a referendum is to put a spanner in the works of the EU itself, by blocking any changes they dislike to the treaties.  Pretty much everybody accepts that a UK referendum would have rejected any of the previous treaties (Maastricht or Lisbon in particular – though the former might have been quite close, in my view).  The idea of a three way referendum, with a renegotiation option, in yesterday’s motion was an attempt to win over these pragmatic sceptics.  But it didn’t really stand up to close examination – one of the bigger reasons why the motion fell so heavily.

But it is possible to see a the outlines of a deal coming out of this.  First negotiate a new deal with the EU, then have an in/out referendum on its outcome.  Sounds simple enough, but the renegotiation idea is fraught.  Is it a new deal for Britain, or a more general rebalancing of Europe?  I think the government has in mind the latter, drawing in allies from across northern and eastern Europe.  The idea would be to use the Eurozone crisis as leverage.  If the Union’s constitution needs to be changed to make the Euro work, then this can be made conditional on other changes.

The trouble is that it is difficult to understand what the shape of this deal might look like.  To the the EU core members (Germany, France, Italy and so on) the EU constitution is carefully balanced, with a free trade area on the one hand, and regulation to prevent a disorderly race to the bottom on the other.  Besides a treaty change will have to go through referendums right across the Union – a nightmare as European politicians learn that a rejection of a treaty can earn them extra goodies.

And so the risk is that the government returns from the “renegotiation” without very much to show for it, and then be forced to hold a referendum on it.  The prospects for a Britain-only renegotiation are even bleaker, as our bargaining position is so weak.  This will place the pragmatic sceptics, like David Cameron and William Hague, in an impossible position.  Yesterday’s debate has reduced their room for manoeuvre, as the Economist’s Bagehot column points out.  They will have to produce something relatively soon.

One of Mr Cameron’s main achievements has been to de-toxify the issue of Europe for the Tories.  But the issue could yet return to destroy him, his government and his party.  It will be the greatest test of his leadership.

 

Five Eurosceptic fallacies

I caught a bit of last night’s Radio 4 Analysis programme driving home from a meeting, on Euroscepticism in  Britain.  One speaker (I didn’t catch who) suggested that the case for Britain being in the EU was mainly economic – that we could put up with a bit of lost sovereignty because we were being hitched to an economic powerhouse that would do our economy good.  This he said, was now clearly nonsense.  In evidence he said that the EU used to be 26% on the world economy and now it is 18% (I may have misremembered the numbers).  “We are being chained to a corpse.”  I was apoplectic.  But it is typical of the drivel that is being spread across our media.  It’s worrying that so few people bother to argue back.

Let’s clear the decks with some points of general agreement.  The Euro is in crisis, and this crisis could lead to an economic disaster.  This in some measure results from severe mismanagement of the currency by the EU’s leaders, aided by the European Central Bank (ECB).  The stock of European institutions is low in public eyes, not just in Britain, but across most of the continent.  This has something to do with a democratic deficit – with the institutions wielding power with little apparent democratic consent.

But it is possible to accept all this, and to think that the EU, and even the Euro, is fundamentally a good idea, and that Britain would be mad to consider leaving it.  The country may even be forced to join the Euro – though that event is surely a long way off.

Let me try to help the feeble defenders of British membership by elaborating four critical fallacies behind the Eurosceptics’ arguments, and fifth that is a bit more arguable.

First fallacy: there is such a thing as “just” a free trade area.  It often said the the country joined something that was just a free trade area, but this has morphed into something else.  But free trade across borders is a complicated business – and not just a matter of border controls and tariffs.  Its implications quickly reach into vast swathes of ordinary life.  Most of the US Federal government’s powers rest on its right to regulate interstate trade.  And the unhappy experience of the North American Free Trade Area (NAFTA) shows how politics gradually undermines transnational free trade projects that do not involve a significant pooling of sovereignty.

Fallacy no 2.  Britain is being ripped off by the rest of Europe because we have a trade deficit with them. This leads to the idea that outside Europe we would get a sweetheart deal (like Norway of Switzerland, or at least in popular myth) because they need us more than we need them.  But the British trade deficit arises from the chronic mismanagement of the British economy, which led to a prolonged period (since the late 1990s) where the Pound was too high for many of our export businesses to be competitive.  This uncompetitive exchange rate has now been reversed, and so our trade balance with the EU will correct.  And as for bargaining power, there is a fatal flaw to this line of reasoning: the relative size of the UK against the rest of the EU.  EU trade is a major part of our economy; UK trade is not a major part of the EU economy.

Fallacy no. 3.  Being outside the EU means that we don’t have to comply with EU regulations.  This is largely true of the labour market, it has to be said.  But far from true of product markets – since we need to sell our products in the EU.  Also, if foreign manufacturers are forced to comply with separate British product standards before they can export here, they will either charge us extra or not bother.  If you are in any doubt about this ask a Norwegian or Swiss about how much better life is without the burden of EU regulations.  You will get a lecture about how they have to comply anyway, without any input into how they are made.  This is of particular relevance to one of the areas where Britain has a competitive edge: financial services.  Our representatives in Europe are forever batting back ideas for new rules that would disadvantage the City; I wonder what would happen if they weren’t there any more?

Fallacy no 4.  We would save money by leaving the EU, because we are a net contributor to the EU budget.  This is an illusion.  We may pay less in net contributions, but we would pay more in tariffs  And if we charge more tariffs in return?  Any economist will tell you that this is a road to nowhere.  Our net contribution is a small price to pay for access, and, besides, some of it helps to develop new markets in the Union’s less developed countries.

Fallacy no 5.  Britain would have been worse off by joining the Euro at the start.  This contention is unprovable, as is the opposite: that we would have been better off in it.  The Euro, of course was badly managed.  But so was the Pound.  While the Euro was going on, the pound shot up in value, destroying many of our exporters and creating a big trade deficit.  Borrowing ran amok, as did, to a lesser degree, government expenditure.  When it all blew up, it left the British economy in a terrible state, one that it will take many years to recover from.  Won’t the devaluation of the pound help our recovery?  Yes, but it should never have got that high in the first place.  What would have happened if we were inside the Euro?  Almost certainly no better – except that our problems would have been more transparent, so we might have started to fix them a more quickly.  My point: an ugly mess either way.  Look at our Eurozone colleagues and the British economic performance does not look stellar.  A floating currency is no free lunch.

Of course there is a lot wrong with Europe and the Eurozone.  That does not mean that this country is better off outside.  The best case for a referendum in this country is that it would force supporters of the Union to make the case more forcefully, and expose the fraud behind the anti-EU case.  But on their performance to date, who can be confident of that?

Understanding the Euro Crisis

My favourite contemporary economist is UCL’s Professor Wendy Carlin.  She was my tutor at UCL, and led my second year macroeconomics course, and a third year course on European institutions.  Her patient, dispassionate analysis is worth so much more than all that shoot-from-the-hip banging on by celebrity economists, Nobel Laureates and all.  It was her analysis, well before the current crisis broke, that demonstrated to me that the last government’s economic “miracle” was unsustainable (the combination of an appreciating real exchange rate and a trade deficit being the giveaways).  She also helped me understand the Eurozone, and pointed out the trouble ahead, again well before it happened, arising from diverging real exchange rates within the currency bloc – in other words Germany was becoming more competitive while Italy, Spain and others were becoming less so.

So I was delighted to read her summary of the Eurozone crisis – 10 questions about the Eurozone crisis and whether it can be solved.  The is a wonderfully clear summary of the whole situation, written in early September.  Her central point is that the zone’s banking system is at the heart of the crisis, and tackling the banks will the heart of any solution.  European politicians have been trying to avoid this, no doubt because it shows that Northern European countries have played an important role in creating the crisis.  However, not least thanks to the new IMF chief Christine Lagarde, this is changing.

Of course Professor Carlin cannot point to an easy escape.  She points to two alternatives paths, other than the breakup of the zone:

Scenario #1 – a more decisive approach based on current policy (bailouts)
Policy-makers need

  • the existing bailout schemes to be successful and to be seen to be working in the next year
  • to keep Italy out of the bailout regime
  • to develop a replacement for the high moral hazard regime for banks and for governments but to do this in a way that does not undermine the bailout regime in the meantime.

Scenario #2 – large-scale restructuring of bank and government debts (defaults)
Policy-makers need

  • to move decisively now to end the high moral hazard regime by accepting that default on bank and government bonds on a much larger scale than envisaged in Scenario #1 is necessary
  • to engage in restructuring sovereign debt and bank debt by, for example, forcing bond-holders to swap existing short-term bonds for long-term
European politicians are attempting the first path, but the problem is contained in Professor Carlin’s third bullet: devising a financial scheme that avoids moral hazard by banks and sovereign states – this reckless behaviour in the belief that it will be underwritten by everybody else.  The favoured answer of many is a “Eurobond” – i.e. government borrowing underwritten collectively, combined with a toothier version of the failed Stability & Growth pact.  But this decisive step towards a more federal Europe runs well beyond any democratic mandate.  The German Chancellor, Angela Merkel, is rightly suspicious.
Which leaves the second scenario, which is favoured by American commentators, based on their experiences of Latin American debt crises.  This is surely much more convincing, and I hope that the IMF will use its influence to push down this path.  Bank regulation clearly needs to change, but beyond that it doesn’t need a more federal Europe.  We can use bond spreads to act as a break on government profligacy – which is how the Eurozone should have been run from the start.
A final point worth making from Professor Carlin’s analysis is that dropping out of the Eurozone wouldn’t really help Greece or any other country that much.  They would still have to run a government surplus, and so still have to go through a very painful reform programme sucking demand out of their economies.  Of course the hope is that a rapid devaluation would kick start exports – but it does not stop the need for painful supply-side reforms if these countries are to recover anything like their former standards of living.

Time the British woke up to the crisis in Europe

It is a commonplace for Britain’s politicos to sadly shake their heads and complain that the Euro crisis demonstrates a woeful lack of political leadership.  Regardless of the fairness of this charge in respect of Angela Merkel, say, it clearly has resonance for Britain’s own leaders.  There seem to be two camps: ravingly impractical Eurosceptics, and sheer paralysis from everybody else.  The mood amongst Europhiles (as I witnessed at fringe meeting at the Lib Dem conference) is akin to deep depression.  It is time for this to change.

To be fair some key players have been showing something less than paralysis – George Osborne and Nick Clegg have both been conspicuous in raising the seriousness of the situation with their international colleagues – but their pronouncements are hardly more helpful than anybody else’s.  They aren’t bringing anything to the party and they aren’t trying bring our own public alongside.

The first point is that the Euro crisis has serious implications for Britain, much though most people seem to think it is happening to somebody else.  This is for two main reasons.  First is that this country would be caught up in any financial disaster.  Our oversized banks are deep in the mess; Euro zone countries are vital trading partners for a country very dependent on trade – especially given that international financial services are so important to us.  Our fragile attempts at recovery risk being completely blown off course.  Forget Plan B if this lot breaks.

The second reason it matters to Britain is that resolution of the crisis could take the European Union in a direction that is against our interests.  Britain leads the single market wing of the union: the chief Euro zone countries are more protectionist in their instincts.  We risk being shut out of the design of critical architecture – much as the Common Agriculture Policy was put together in our absence.

How to proceed?  We need to tackle the dark spectre head on: the best resolution of the crisis involves changes to the European treaties.  To change the treaties will require a referendum here (let’s not weasel out of it this time).  If we face up to that challenge now, it will show real courage, and help get things moving.

But, of course, we would need to see something in return.  Changes to the treaties that would further our interests.  These need to be to promote the single market, to protect London (and Edinburgh) as centres for financial infrastructure, and to reduce unsightly bureaucracy and/or operating costs of the Union (the siting of the European Parliamnet at Strasbourg needs to go on the table, at least).  Given our understanding of finance, we might well have useful things to say on the Eurozone architecture too – even though we clearly can’t be part of it.

To do this our leaders (the Prime Minister and the Deputy Prime Minister in the lead) need to build two sets of alliances.  The first is within the British body politic, so that the referendum can be won.  This needs to cover Tory pragmatists (David Cameron, George Osborne and William Hague), the Labour leadership and, preferably, the SNP.  The Lib Dems have an important role in making this hold together since, by and large, they understand the Union the best.  Mr Clegg’s experience of deal-making in the European parliament counts for a lot.  The next set of alliances is within the Union itself, to create a Single Market bloc.  The obvious candidates are the Nordic countries, Ireland and the Netherlands, together with many of the newer members in central and eastern Europe.

This will be very difficult.  That’s the point, almost.  The reward is a stabler EU, constructed more to our taste, even if we must concede some powers to an inner core of Euro area countries.  Everybody wins.  And by taking on the wilder Eurosceptic fringe, including their newspaper backers, it will cheer all right-thinking people up.  It’s time we stopped being paralysed by fear and came out fighting.

Tony Blair is both right and wrong, but mostly yesterday’s man

Well I was going to turn the radio off this morning when John Humphreys was interviewing Tony Blair to mark the 10th anniversary of 9/11.  But I couldn’t go that far, and I caught about half of it.  I’m glad I did because it has helped clarify my views on confronting terrorism.

Mr Blair’s main argument is a lot more subtle than it is often made out to be.  He dismisses his critics as believing that the Islamic extremists (and I think that term is a fair one) are not a lunatic fringe who can be contained using normal security methods.  They are in fact the extreme end of a much larger spectrum of people who agree with their virulent anti-western narrative.  Since they have such a large hinterland of people who will support them and from whom they can recruit, they will simply grow stronger if they are not vigorously confronted.   He completely rejects the idea that the West’s interventions in Iraq and Afghanistan have made things worse, since he says the terrorists would have gathered strength anyway.  What provoked 9/11? he asks.  The Al-Qaeda threat is of much longer standing than than these Western interventions.

And he is partly right.  There is a big hinterland for the terrorist groups, and an even bigger group of people who think that there are two sides to what is going on, rather than it being a simple battle between good and evil.  But from the same facts I draw a different conclusion.  This is not just a battle between just goodies and baddies; there is a huge neutral middle ground whose support is decisive.  These are mainly Muslims, and they live all over the world.  If these people come to the conclusion that the terrorists are a bad thing, who will make their aspirations more difficult to achieve, then Al-Qaeda and its like will be isolated and disappear.  If, on the other hand, they accept the clash of civilizations narrative, their support, even if mostly tacit, will keep the terrorist threat going forever.

There is a security campaign against the terrorists; but there is also a hearts and minds campaign for the Muslim public.  Unfortunately, if we are too uncompromising on the first campaign we will not win the second.  It is important to occupy the moral high ground.  The tragedy is that Tony Blair, and the American neocons, think they are occupying this higher ground.  In fact they have been systematically provoking the Muslim public.

And the important thing to understand about the hearts and minds campaign is that the ground shifts.  What gave Al-Qaeda real strength in its early days was the US intervention in the first Gulf War in the 1990s, which led to the stationing of US troops on Saudi soil; this seemed an insult.  It probably didn’t mean a great deal to the wider Muslim public, but it was enough for a determined group of Middle East activists to get started, mainly from Saudi Arabia and Yemen.  Israel, Iraq and Iran didn’t really come into things.  This was enough to lead to 9/11.

But the American response to 9/11 changed the game.  The outrage initially gave them the precious high ground, but they made cynical use of it.  Two problems stand out: the campaign in Iraq and taking sides with Israel.  These may not have been all that relevant to the Al-Qaeda threat in 2001, but they became so because the the strength of the American intervention.  The Muslim public became angry with America and its allies, and the extremists were able to pump up the clash of civilisations narrative.  They started to draw in many more recruits from right  across the world, including Britain.

But the hearts and minds battle has not been one-sided.  The terrorists’ very success has exposed the weakness of their case.  They now spend more energy killing other Muslims and creating civil disorder in Muslim countries than they do on attacking the west.  They have no real answers to the problems that trouble so many Muslims: dis-empowerment and poverty.  The west is retreating from Iraq and, ever so slowly, Afghanistan.  The British coming together after 7/7 has not played to the extremist narrative.  The western response to the Arab Spring has shown it to be a bit less cynical than people thought – comparing favourably with China and Russia, say.  In Libya Al-Qaeda and the west turned out to be on the same side.  Israel remains a running sore, of course.

Of course we need a robust security response to the terrorist threat.  But it can do more harm that good.  Assassinations and suspending the rule of law should not be part of it.  The terrorists may not be moved by this – but they will increasingly lose the support of their hinterland.

We have to move on.  Mr Bush’s and Mr Blair’s response to 9/11 was a huge mistake, and we can’t expect them to acknowledge this.  But they are yesterday’s men.  We’ve learnt a lot.  A new generation of leaders is showing more subtlety.  Slowly, we are learning how to manage the terrorist threat.

 

The Euro: Thatcherism by other means

It’s a grim time for supporters of the Euro project like me.  Hardly a day goes by without hearing some highly patronizing person going on about how a country fixing its exchange rate is a terrible idea  because it can’t then devalue when it hits trouble, and how the austerity policies in the Euro zone are doomed to fail.  One irony is that many of these people are from the the political right; the sort of people who think that the Thatcher revolution of the 1980s was not just a good thing, but a turning point for the British economy.  In fact the Euro advocates are proposing very similar medicine for southern Europe.

The UK economy inherited by Mrs Thatcher in 1979 was a mess.  Both unemployment and inflation were persistent, and the country was referred to to as “the sick man of Europe”.  Mrs Thatcher’s solution was to focus on the long or medium term drivers of success, with utter contempt for short-term palliatives.  She progressively liberalised the economy, and in particular the labour market, then dominated by trade union power, and taxation, which had reached punitive levels on the rich (and not so rich, come to that).  In macroeconomic policy she believed in squeezing down inflation through tough monetary and fiscal policies.  Interest rates soared.  Amongst other things, the pound rapidly appreciated.  This was all part of the medicine.

The results were indeed dramatic.  Unemployment got much worse, with devastation sweeping through great swathes of industry – all of which makes our current troubles look like small beer, even though, according to GDP statistics, we are supposed to be in a worse mess now.  But in due course the economy prospered and reached undreamed of heights – though some parts of the country never recovered.

Back to the Euro zone.  The underlying problem with all of the currently struggling economies, except Ireland maybe, is not entirely dissimilar to that faced by Britain in 1979.  A host of product market, labour market and tax inefficiencies have conspired to make their economies relatively uncompetitive.  The political will to tackle these problems has been lacking.  Before the Euro they could simply let their currencies slide to offset this lack of competitiveness.  But all this did was to ensure that the living standards of citizens stayed below their potential.  And it was unsustainable in the long term; eventually you get to stagflation and even hyperinflation – a fate which Portugal in particular was reaching before the Euro project offered rescue.  Once in the Euro devaluation is not an option, and so politicians have to focus on medium and long term reforms.  This is what they are now doing, some with more enthusiasm (say Portugal) than others (say Italy).

Mrs Thatcher, of course, would never approve of a country joining the Euro – she treasured national sovereignty too much – but she would have approved of many of its consequences.  Mrs Thatcher did not believe in devaluation.

But this is hardly an advertisement for the Euro for many.  A lot of people still think that the Thatcher years were a period of gratuitous violence with adverse consequences that we are still suffering.  It was she that was responsible for the trashing of so much British manufacturing, with the appreciating pound very much part of this.  And the work she started was capably continued by Messrs Brown and Blair, since a high pound, together with aggressive exporting practices from China and India, had a similar effect in the 2000s – albeit compensated by unsustainable jobs in finance and building.

And there is no avoiding that the southern European economies need to go through a process of harsh economic reform, or else suffer a slow slide into poverty.  Euro advocates had always foreseen this; what they had not foreseen was that reduced government borrowing costs once in the Euro would allow these countries to put off the evil day, only to make it infinitely worse when it arrived.

Accounting for Libya

So now we are in a sort of endgame in the Libyan war.  It is not over, but Gaddafi’s government has been decisively beaten.  This outcome arises despite a constant stream of scepticism amongst experts and commentators, right from the start, and from a broad political spectrum.  I was not one of these sceptics, and I must admit to being annoyed by the patronising tone of much of it, assuming that politicians and supporters were muddled naifs who had failed to learn from history.  While these sceptics rapidly move on to point out the considerable difficulties that will arise in rebuilding the country, I feel that some accounting is called for.

As I said at the time, Libya’s situation was unique.  It’s geography is such as to make air power particularly effective.  Gaddafi’s rampant egotism had made him diplomatically isolated, tolerated by his allies and not liked.  In spite of claims by many that there was no clear strategy for the intervention, the strategy was clear all along.  Use air power to protect the existing rebel strongholds and then strangle the Gaddafi regime.  After this it would basically collapse from within.  This was mainly about momentum and morale.  Apart from a core of die-hard loyalists, who had much to lose from regime change, the regime’s power depended on two sources of support: loyal tribes and mercenary soldiers.  These would only be effective as long they thought the regime was going to win.

And so it has transpired.  The fall of Tripoli was remarkable.  Yes the core loyalists fought hard, and they are still there – but there were not enough of them, and they seemed to lack organisation.  The mercenaries had melted away into thin air.  The sympathetic tribes just looked on.  The turning point seems to have been the cutting off of the capital from succour coming in via the Tunisian and Algerian borders.

None of this is hindsight – seem my post last March.  What annoys me about the many critics is their inability to look beyond the generalities to the specific facts of the case.  To them, it was this way in Iraq, so it will be this way in Libya.  I am afraid that this kind of unthinking generalisation is a general disease right across modern society, and especially amongst people counted as experts.  From medicine to economic policy.  People don’t bother to analyse the particulars of the case, simply spouting forth the general rules with confidence.

It is too much to hope this will change.  But we fight on.

Sometimes things just don’t make sense

It is one of the most enduring human characteristics to try and see patterns in the world around us.  We don’t like the idea of random events.  People even pore over lottery numbers.

After the awful events in Norway last week, it is only natural that people try to make sense of them.  The most common is that it is part of the rise in right-wing hate politics – for example Timothy Egan in the New York Times or Matthew Feldman in the Independent.  A more original alternative, from Joan Smith, also in the Independent, is that it is part of frustrated male pride, with parallels in the British 7/7 bombers.

But I don’t think any of this helps.  Of course people who think we should do more about the extreme right will use this event to bolster their case.  And the extremists themselves may also do so, on the grounds that this act shows just how desperate things are getting.  Frustrated macho pride was clearly part of the toxic mix, but this afflicts most of the male population.  The more I find out about Anders Behring Brehvik, the more I think his lawyer is closer to the mark by describing him as “mad”.

I am no psychologist, but I don’t think Brehvik fits the normal description of insanity.  But he does seem to have something that the professionals call a “personality disorder”.  He seems to have real difficulty in socialising.  He acted alone, almost certainly, when most terrorist acts are collaborations, like the 7/7 bombings, with people encouraging each other on.  He read widely, and took inspiration from a lot of different sources, but he doesn’t seem to have tried harden his ideas through proper discussion and argument with anybody else.  They are a very flaky agglomeration of fantasies.  The idea of a cultural war between the West and Islam has many followers, but allying with mumbo-jumbo of the Knights Templar?  Describing himself as Christian without any reference to what that actually means?

It is nonsense.  If he hadn’t picked up on these ideas, something else might have done.  Anarchism, perhaps.  The closest parallel is the US Unabomber, another unconnected loner.  We can try too hard to find patterns.  Sometimes the only way to understand something is to say that it is senseless.  The random act of a madman.

Europe’s financial crisis gets dangerous

While the British news media and politicos alike obsess with the unfolding of the News of the World hacking scandal, Europe’s financial crisis enters a dangerous stage.  In fact this crisis seems to unfolding just as quickly, and with much more important potential consequences.  Was I being too sanguine last Friday, when I blogged that it was a learning curve rather than a fundamental problem?  Well, probably.

I had hardly posted it than a flood of dire articles about the crisis came out.  One of the best is by  eminent US economist Larry Summers in this morning’s FT(£); alongside it an equally gloomy article from FT regular Wolfgang Munchau (£).  Mr Summers points to the critical issue of confidence that could be destroyed in a default, drawing a parallel with Lehman in 2008.  He then offers quite a plausible way out.  But the problem, as Mr Munchau points out, is:

I often hear that Ms Merkel in particular has moved a long way from her original position 18 months ago, when she ruled out any money for Greece. This is true. But the crisis now moves at a rate that exceeds her political speed limit.

There’s clearly a problem.  One issue is the expectation that European leaders will muddle through, as they always have.  This, unfortunately, is a self-destroying prophesy.  Because Europe’s leaders expect everything to come right in the end, they don’t have the incentive to make it actually happen.  Actually Europe’s greatest achievements have required some strong leadership, with Helmut Kohl, Germany’s Chancellor in the 1990s standing out.  Mr Kohl achieved German unification on his own terms, pushed through monetary union and the massive eastward expansion of NATO and the EU right into the former Soviet Empire.  Mrs Merkel does not fill his shoes.

Still, there are plenty of bright ideas for ways out, without the Eurozone collapsing, Mr Summers’s among them.  They will all require Mrs Merkel to shift her current stance.  Things could get worse before they get better.  At any rate it looks more soluble than the US budgetary stand-off.