The Dirty War for Europe's Integrity and Soul

25/10/2013 by

Inaugural ‘Europe Public Lecture’, UWS, State Library of New South Wales, Sydney

On 23rd October 2013, I was honoured by the Department of History of the University of Western Sydney with an invitation to deliver their inaugural Europe Public Lecture. The event took place in the State Library of New South Wales, in Sydney. The talk was transmitted by ABC Radio National’ ‘Big Ideas’ program on 30th October (click here). You can also hear this interview, on the theme of my talk, with Philip Adams on Late Night Live. Read on for the full transcript of the talk…


The University of Western Sydney Inaugural Europe Lecture

State Library of New South Wales, 23rd October 2013

Europe has been a beacon on humanity’s proverbial hill since the end of the Second World War. Unifying hitherto warring nations on the basis of popular mandates founded on the promise of shared prosperity, the erection of common institutions, the tearing down of ludicrous borders that previously scarred the land – this was always both a tall order and an enchanting dream.

The EU could even pose as a blueprint that the Rest of World might draw courage and inspiration from so as to move closer together.

  • To create a common land without an authoritarian Empire.
  • To forge bonds that rely not on kin, language, ethnicity, a common enemy – but on common values and humanist principles.
  • A commonwealth were Reason, Democracy, respect for human rights, and a decent social safety net provide its multi-national, multi-lingual, multi-cultured citizens a canvass on which to become the men and women that their talents allow them to grow into.

When I was growing up in Greece’s neofascist dictatorship the thought of one day joining this emergent Europe of free nations had a magnetic effect. We all saw the prospect of becoming part of an inclusive Europe as an escape from irrationality and from barbarism. Similarly for the peoples on the wrong side of the iron curtain who, two decades later entertained similar thoughts.

Over the past decades, a European Union mirroring this vision seemed to be coming into being. Step-by-step. Crisis-by-crisis.

Alas, since the Crash of 2008, Europe has entered a phase that poses a clear and present danger to its legitimacy. To the very notion of shared prosperity that underpinned it. It is not inconceivable that the European Union could collapse like a house of cards, just like the Soviet Union once did.

Tonight I wish to ring an alarm bell based on a revisionist take on European integration. The very title of my talk, The Dirty War for Europe’s Integrity and Soul, foreshadows a line of argument which will not caress ears – but which (I hope) will conclude with a whiff of optimism about Europe.

In brief my argument will be that:

  • The European Union is fragmenting
  • That this multi-layered disintegration was triggered by the inane handling of the inevitable Euro Crisis
  • That, contrary to conventional wisdom, the Euro Crisis was not due to the fact that our European political economies are too different, too diverse. Rather, it was due to the faulty architecture of the particular form of Monetary Union we chose
  • That this particular form of Monetary Union was chosen because of the manner in which the EU was initially designed in the 1950s by Washington’s New Dealers and the way Europe’s leaders responded, in 1971, to the end of the first post-war phase (the Bretton Woods era) – once, that is, the US had stopped actively to ‘manage’ European integration
  • I shall then claim that, against the official narrative, the Eurozone is not on the mend and that, unless we change course, it will bring the whole of the EU down with it.
  • But what fresh course should Europe take? First, I shall claim, Europeans need to confront some toxic myths the illogical policies behind our Great European Deconstruction. Secondly, we must dissolve and escape from a false trilemma between:Finally, I shall be teasing out that which I think history and logic dictate as the rational way forward; the policy agenda with which to replace the three unappetizing alternatives just mentioned. I shall call it: Decentralised Europeanisation
    • the idea that Europe is, more or less, on the right path – it is not!
    • The notion that the solution lies in federating,– it does not!
    • And the desperate conclusion that the Eurozone was a bad idea, so let’s dismantle it – we should not!

But before any of this comes to pass, allow me to begin with several ‘true stories’ that will, hopefully, transport you into the Europe that I inhabit.


Each of my tales will come with a short title. My first one is called: Pilgrimage


On a dull autumnal afternoon, two suited men exuding authority entered the chapel in which the remains of Charles the First, or Charles the Great, or Charlemagne had been resting for 11 centuries. The year was 1978. The two men had just completed an agreement that set up the European Monetary System, the Eurozone’s precursor. They were both resolute about their decision but also highly worried. One of them, the French President Valery Giscard D’ Estaing, was haunted by the memory of France’s late exit from a previous experiment with a monetary union – from the midwar Gold Standard. Unlike Britain, that had taken its leave in 1931, France had held on till 1936, the result being that its economy was crushed by recession and thus ‘prepared’ for his nation’s ignominious defeat of 1939. Would France do better in the fresh monetary union, this time with Germany, that he had just agreed to? The second pilgrim, Helmut Schmidt, the German Chancellor, was also worried. For he knew that the mighty Bundesbank was about to pounce on him, fearing that its authority over German money might be offered to Paris as a form of dowry in an impending Franco-German marriage. To drown their trepidation, Giscard and Schmidt sought solace and legitimacy in the legacy of the Christian King who is synonymous amongst European traditionalists with the longing for Central European Unity. Shortly after their Pilgrimage, the French President told friendly newsmen: “Perhaps while we were discussing monetary affairs, the spirit of Charlemagne brooded over us.”

In the mid-1990s the ‘offspring’ of Giscard’s and Schmidt’s European Monetary System was being established: It was the European Central Bank. Interestingly, a number of officials likened its Establishment to the Coronation of Charlemagne; to the beginning of a new Christian Sovereignty that would traverse borders the way Charlemagne’s Empire first did after the Fall of Rome. I hope it is not too indelicate at this point to add a footnote: That it took the hideous murder of thousands of Muslim men in Srebrenica a year later, in 1995, and the spectacular failure of Dutch United Nations’ peacekeepers to protect them, before Europe discovered that there was such a thing as home-grown Muslim European citizens for whom a revival of Charlemagne’s legacy offered no solace.

My next tale is entitled: Error


It is November 1990. Mrs Thatcher has just resigned from the leadership of the Conservative Party but has one more appearance in the House of Common as PM. Relieved from power, she found the strength for one more bravado performance at PM’s Question Time. Responding to questions on Europe’s monetary union, she famously said: “It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.” She was, of course, spot on. A year later, Wilhelm Noling (Member of the BB’s Council) said the same thing: “We should be under no illusion”, he said, “that the present controversy over the new European Monetary Order is about power, influence and the pursuit of national interests.”

Mrs Thatcher was also right when she predicted that: “This single currency, like all fixed exchange rate regimes, will crack in the end… It will not result in harmonious developments.” However, Mrs Thatcher’s next sentence was in serious error. She said: “Monetary Union is an attempt to usher in Federation through the back door.” We now have evidence that this was, and is, not so. Just look at the so-called Banking Union that the EU has proclaimed. The unification of banking sectors across the Eurozone which is absolutely essential is now being proclaimed in theory to be denied in practice. To be confirmed in the breach rather than in the observance!

The next story is called: Frenzy


Franz, not his real name, worked for a major German bank for twenty-five years. In 2011 he confided to me that the Euro’s ‘good’ years, before 2008, had been the worst of his life. From 1999 to 2008 the pressure from his bank’s Frankfurt HQ on executives like him was relentless. Before the Euro, his job entailed flying around European capitals, assessing the credit worthiness of governments, local authorities, utilities, developers, local banks, large businesses; playing hard to get with them, and eventually signing off on loans that made sense to him. However, once the Euro was established the Frenzy began in earnest. HQ was pressurizing him incessantly to lend, lend, lend. When he warned them that increased lending would mean subprime loans to iffy customers, they couldn’t care less. It was all about securing a higher share of the Euro market than other banks – French banks in particular – who were also on a lending spree. And since total lending effected was linked to his and his bosses’ bonuses, Franz and his colleagues were sent to Dublin, to Madrid, to Athens, to every nook and cranny with a hitherto low level of indebtedness. Their mission? To increase it. “I lived the life of a predator lender”, he added.

Next, a tale about: Denial


Picture the following scene: It is September 2008. Lehmans’ CEO meets with Hank Paulson, the US Treasury Secretary and asks, as he did, for a gigantic credit line to keep Lehman’s’ afloat. Imagine the following answer from Paulson: NO to a bailout, NO to subsidised interest rates and NO, you are not allowed to file for bankruptcy! Of course Secretary Paulson would never issue such a non-sensical triple-NO. However, this was precisely the answer that the Greek PM received from his European partners when Greece became insolvent in January 2010. A majestic triple-Nein: No to a bailout, No to lower interest rates, peculiar No to defaulting on the Greek government debts.

Naturally, this remarkable Triple-Nein was a knee-jerk expression of Europe’s Gross Denial that it was facing an architectural, a structural, crisis; that we had created a monetary union featuring states (without a central bank to back them at a time of some global crisis) and a European Central Bank without a state to have its back. The Triple-Nein, or Europe’s Gross Denial, was upheld from January to May of 2010, when it became clear to Berlin and to Frankfurt (with helpful prodding from Washington) that the Eurozone was about to expire as Greece would default on its debts to German and French banks at a time that Portugal, Ireland and Spain were about to do the same.

The problem was that, when reality hit, in May 2010, Europe’s Gross Denial, instead of dissolving, simply mutated into another form: onto Greece’s so-called Bailout. The pertinence of Greece’s Bailout went well beyond the borders of Greece. For it was immediately to become the blueprint that visited Dublin, Lisbon, Madrid and which left its imprint in Rome, even in The Netherlands and France, pushing the whole continent into a new recessionary phase. Unnecessarily! A recession that Europe did not have to have.

The gist of the Deal offered to the Greek government was simple: “As you are now insolvent, we shall grant you the largest loan in history on condition that you shrink your national income by an amount never seen since the Grapes of Wrath.”

This was not a bailout. Greece was never bailed out. And nor were the rest of Europe’s swine – or PIGS as we are now called collectively. Our bailout was a cynical ploy for transferring large losses from the books of the French and German banks to Europe’s taxpayers, and in particular to Germany’s taxpayers. All in the name of… European solidarity! And as if this sinister subterfuge, this attempt to mislead seventeen Parliaments all at once, were not enough, the ‘transfer’ that they called a ‘bailout’ came attached with some very vicious strings. Effectively the loan’s condition was a dismantling of basic social welfare systems to be supervised by a so-called Troika of officials representing the ECB, the European Commission and the IMF.

This troika acquired a symbolic and real presence that Europe will find hard to live down. Comprising a small group of trans-national bailiffs, the troika soon acquired powers that governments could never dream of. With every troika visitation, the dream of shared European prosperity was dealt another blow. It marked a new episode of what I refer to as a nation’s ‘fiscal waterboarding’ that left it weaker, more indebted, demoralised. In this manner, the Ponzi Growth that my friend Franz and his banker colleagues were forced to fuel before the crisis, metamorphosised into what I call Ponzi Austerity. Let me explain what I mean by Ponzi Austerity with yet another true story:

It is Spring 2012. The Greek government had collapsed under popular anger at the nation’s sad state and a new election is due in May. A left-wing party that advocates rescinding the bailout agreement was rising fast in the polls and the troika suspended the disbursement of loan tranches to Greece in response. Unnoticed by almost everyone, this episode represented a sinister moment when the EU asserted the right of its executive to intervene directly in the democratic process of a member-state. Unelected officials in Brussels concocted a ‘right’ to suspend unilaterally an international and intra-European loan agreement, on the basis of their assessment of which political party was and which was not ‘acceptable’ to form government in a member-state.

The caretaker Greek government was left with no alternative than to suspend its own payments to Greek institutions and individuals. Hospitals, schools, wages, pensions all diminished fast. But the concern of the great and the good was about Greece’s debt to our… ECB. You see, a year before, in an ill-fated attempt to shore up Greek government bonds, the ECB had purchased a bunch of them, at low, low prices. The ploy failed, as did Greece. Regardless, the ECB held these bonds and they started maturing. Had they not been purchased by the ECB in 2010, they would have been haircut together with the rest of the bonds in private hands a few months earlier, in early 2012. But no, the ECB cannot accept write-downs from member-states because it is against its charter which prohibits it from financing member-states. So, the caretaker Greek government, while putting Greece’s social economy through the wringer, had to find €5 billion in a few days to repay the ECB for one of these maturing bonds. But remember: the troika was not lending it any more and nor was anyone else.

The obvious thing to do, under the circumstances, would be for Athens to default on the bonds that the ECB owned. But this was something that Frankfurt and Berlin considered unacceptable. The Greek state could default against Greek and non-Greek citizens, pension funds, banks even but its debts to the ECB were sacrosanct. They had to be paid come what may. But how? This is what they came up with in lieu of a ‘solution’: The ECB allowed the Greek government to issue worthless IOUs (or, more precisely, short-term treasury bills), that no private investor would touch, and pass them on to the insolvent Greek banks. The insolvent Greek banks then handed over these IOUs to the European System of Central Banks (through the so called ELA program of the ECB) as collateral in exchange for loans that the banks then gave back to the Greek government so that Athens could repay… the ECB. If this sounds like a ponzi scheme it is because it is the mother of all ponzi schemes. A merry go around of Ponzi Austerity which, interestingly, left both the insolvent banks and the insolvent Greek state a little more… insolvent while, all along, the population was sinking into deeper and deeper despair. And all that so that the EU could pretend that its idiotic rules had been respected.

Screen Shot 2013-10-25 at 2.26.12 PMThis is but one example of the vicious cycle of Ponzi Austerity that is being replicated incessantly throughout the Eurozone. Its stated purpose is to reduce debts. But debt is rising everywhere. Is this a failure? Yes and no. It is a failure in terms of the EU’s stated objectives but not in terms of the underlying ones. For, in reality, the true purpose of the ‘bailout’ loans was to effect a cynical transfer of the Periphery’s bad debts from the books (mainly) of the Northern European banks to the shoulders (mainly) of Northern Europe’s taxpayers. Sadly, this cynical transfer, effected in the name of European ‘solidarity’, led to a death dance of insolvent banks and bankrupt states – sad couples that were sequentially marched off the cliff of competitive austerity – with the awful result that large sections of proud European nations were dragged into the contemporary equivalent of the Victorian Poorhouse.

Perhaps you now begin to recognise why I think it imperative that we do not mince our words; why it is apt to speak calmly but firmly of a Dirty War for Europe’s Integrity. And for its Soul.

But time for my next story: Impotence


It is 2011. Gulio Tremonti, Italy’s Minister of Finance, is keen for ideas of how to stop the domino effect taking his country down. He agrees to see a friend of a political adversary who has an idea about how the Eurozone debt juggernaut could be stopped in its tracks. The Minister hears the idea and likes it a lot. Immediately he asks his aides to organise meetings between his visitor and Members of European Parliament, Brussels officials etc. with a view to helping his visitor lobby these important European policy makers in favour of this interesting proposal. At that point his visitor turns around and says: “Minister, what is the point? Why should I try to convince all these officials if I have convinced you? You are the Finance Minister of a major European nation. You sit on the council of finance ministers. If you like my proposal, why don’t you table it as your own at that lofty forum?” The Minister smiled. He sat back in his plush armchair and responded in a manner that, tragically, made perfect sense: “Do you know what will happen if I table your proposal? SMS’s will stream out of the room while I am talking. The press will shortly be reporting that the Italian Minister of Finance is tabling a proposal for a central management of a part of the debt of every Eurozone member-state. Seconds later the money markets will push Italian bond yields through the roof as the rumour spreads that for the Italian Finance Minister to be proposing such ideas, Italy clearly cannot refinance its debt. My dear friend, I shall cease to be Minister the next day. How exactly will that help promote your proposal?”

A year later, that Minister was gone anyway. A new ‘technocrat’ prime mininster was sworn in, Mr Mario Monti. His mission? To stabilise Italy’s public finances so as to render its €2 trillion debt sustainable. His anointment coincided with increasing yields on Italian government bonds and with a serious scare that Europe’s banks were on the verge of collapse. Under its new leadership, of another Mario (Mr Mario Draghi) the ECB suddenly allowed banks to borrow at ultra low interest rates as much money as they wanted from the ECB with a view to killing two birds with one stone. The ECB’s hope was that the banks would lend on these monies to the states in which they were domiciled at an interest rate that would be positive but much lower than the one genuine private investors were demanding. Banks and states would be thus reprieved.

One morning in February 2012, the new Italian prime minister received a visit from the CEO of one of Italy’s largest banks. The CEO tells Mr Monti that the bank has a couple of days left before it pulls down the shutters unless it found an extra €40 billion. He added that, on that very morning, his bank was issuing private bonds with a face value of €40 billion. This is what he proposed: To be allowed to use these useless private bonds as collateral in order to tap into the ECB’s new loose loan facility (known as LTRO), he would need the prime minister to authorize a government guarantee of these bonds. Monti despaired. If he turned down the audacious banker’s request, a major bank would go under with untold repercussions in an economy already on the edge. If, on the other hand, he agreed, Italian public debt would immediately, in a jiffy, rise by €40 billion. Fearing that his hands would be covered with the blood of this huge bank, and of all the victims of the chain reaction its demise would create, a dejected Mario Monti agreed. Soon after, as debt rose, he was forced by Brussels to tighten the screws of austerity further pushing Italy into a recession even though the country was managing to deliver a trade surplus. It is no wonder that Mr Monti is now history, having been sent packing by an angry electorate at the first available opportunity.

It takes only a moment’s reflection to realise that this is what Ponzi Austerity accomplishes in today’s Europe: It rotates politicians around putting them condemning them eventually to discover the hard way that they were allowed to be in government but certainly not in power.

Which brings me to my sixth story: Despotism


Mr Klaus Masuch is the ECB’s representative in the troika delegation that spreads panic everywhere it goes. It is early 2012 and the troika passes through Dublin. In the press conference after his meeting with Irish officials, Mr Masuch felt comfortable enough amongst mostly sycophantic journalists to relate a conversation he claimed to have had with a Dublin taxi driver. At which point Vincent Browne, the seasoned Irish journalist, asked his question: “Did you have a chance to ask your taxi driver what he makes of the fact that the ECB forced our government to guarantee private bankers’ debt that our public finances could ill-afford? Debts that the Irish people never consented to through their elected representatives? Did you ask him how he feels that he now has to struggle because your Central Bank forced our government to bailout private bankers so that non-Irish banks to which the money was ultimately owed would not need to be bailed out by Frankfurt, Berlin or Paris?” Clearly discomfited Mr Masuch began to whisper that he admired the Irish people for their resilience and for their grasp of the economic situation. “You have not answered the question Sir”, wailed Vincent Browne. “But I have.” “No you have not. Please answer the question. Why did Europe’s central bank, our central bank, force a small nation to take on private debts without their consent?” At which point Mr Masuch gathered his papers and left the room. If you want a visual depiction of Europe’s democratic deficit; if you want to see why a majority of Europeans are increasingly reporting to pollsters that they have no confidence in European institutions, google “Vincent Browne versus ECB official”, watch the clip, and weep! You may, I submit, be reminded of Berthold Brecht’s comment that: “Brute force is out of date. Why send out murderers when you can employ bailiffs.”

My seventh tale will be entitled: Ignorance


Europe’s finance ministers are gathering in the Fall of 2011 in Poland. Tim Geithner, the American Secretary of the Treasury, is in attendance with some solid advice on how Europe might sever the death embrace between insolvent banks and bankrupt states. He was not just ignored. He was attacked. As the meeting ended, Ms Maria Fekter, the Austrian finance minister, who was apparently speaking on behalf of the other ministers, opined that the Americans had no business telling Europeans how to deal with the debt crisis when America’s debt was higher than the Eurozone’s. “We need no lectures from the United States” she said defiantly. When I saw her on television speaking those words I must admit I despaired. I despaired because it revealed the deep ignorance of our European leadership. For she seemed to believe that Europe’s problem was debt. Not the architectural design the Eurozone. But debt. Debt was never Europe’s problem. It was a mere symptom of a terrible institutional design. Our finance ministers resemble doctors who misdiagnose a cancer patient in severe pain as afflicted with a pain-crisis.

Time for a story of wickedness


Last year I was in Brussels, discussing the latest twists and turns of the crisis with one of the Commission’s high priests. I asked an almost impertinent question to which I was surprised to receive an honest answer: “Why was the Commission pushing Portugal to increase indirect taxes at a time of collapsing demand?” Will this not push sales and state revenues from this tax down? Similarly with the doubling of taxes on heating fuel in Greece. “Why are you pushing for this? Don’t you see that an already impoverished people will simply not heat up their homes and that government revenues from the fuel tax will fall?” His answer was: “Of course. But, we are only pushing for higher sales and fuel taxes as a deterrent. The point is to demonstrate to Rome what it has coming its way if they do not comply with our directions (sic).”Screen Shot 2013-10-25 at 2.26.25 PM

This is what the crisis is doing to our Europe: A clueless political personnel, in denial of the systemic nature of the crisis, is pursuing policies akin to carpet-bombing the economy of proud European nations in order to save them. Greece, Portugal, Ireland, Spain are beaten into a pulp to keep Italy and France in awe. When I hear European officials, who habitually present these policies in the name of community, solidarity, efficiency, responsibility, worry about the loss of legitimacy of European institutions, I ask: Really?

My last story is the least appetising. Its title: Serpent DNA


It is late 1944. A new French brigade of the SS is put together. Its name? Charlemagne. Its French members fought to the bitter end in Berlin defending the Nazi regime against the advancing Red Army. Just a reminder that our European symbols can fall prey to the Dark Side.

And it is not just Charlemagne. Other totemic notions have been usurped, even pioneered, by the continent’s Dark Side. In Europe we like to think of the European Economic Community, as an idea, an institutional blueprint, that was conjured up as a bulwark against totalitarianism. Not true. The first academic conference, with the full participation of government ministers and officials, to discuss, and I quote from the official program, “The formation of a European Economic Community”, took place in Berlin. In 1942! Under the auspices of Walther Funk, Hitler’s finance minister and president of the Reichbank. A year later, another official, had this to say: “In my view a nation’s conception of its own freedom must be harmonised with present-day facts and simple questions of efficiency and purpose… Our only requirement of European states is that they be sincere and enthusiastic members of Europe.” “In fifty years Europeans will not be thinking in terms of separate countries.” The official’s name? Joseph Goebbels!

None of this insinuates that our European Union has Nazi roots. My point is that Europeans should beware: A European Economic Union is not per se democratic or necessarily a bulwark against totalitarianism. The Dark Side can also find expression in its design if we allow the Serpent DNA that, despite de-Nazification, has not disappeared from Europe, to replicate. Our moral obligation is to keep at bay through constant reinvigoration of our democratic principles. The very principles that are now set aside by the logic of the various troikas.

Perhaps this is a goo moment to take stock: The global financial sector has imploded twice in history. Once in 1929, then in 2008. In 1929 two things happened soon after. The first was that the common currency of the era began to unravel. It was the Gold Standard. The second was that, soon after, in Europe we ended up with Nazis in power and with a reinforcement of fascists everywhere in Europe.

Screen Shot 2013-10-25 at 2.26.34 PMMy fear when our own generation’s 1929 hit in the Fall of 2008 was that history would repeat itself. And not as a farce. In 1929, just like in recent years in Europe, all the burden of adjustment was forced upon the debtors. Such a policy cannot succeed since deflation poisons debt dynamics, and mass unemployment poisons democracy. Europe today, under its postmodern version of the Gold Standard, also known as the Euro, is repeating that cardinal sin. As a result, Greece, a country which in the 1940s put up spectacular resistance to the Nazis, became so demoralised that it has allowed the Nazi DNA left over by that era’s collaborators to spawn the hideous Golden Dawn. But it is not just Greece. In France, in Belgium, in the Netherlands, in Denmark, in Scandinavia, even in Spain, Europe’s Dark Side is rearing its ugly head as a direct repercussion of the loss of the dream of shared prosperity. As a result of Ponzi Austerity which, being of a Ponzi type, can only be pursued by authorities which resort to greater doses of its poison and increasing levels of authoritarianism in order to do so. Poverty, loss of hope and increasing authoritarianism. The ideal incubator for the serpent’s egg.

If I am even remotely right that a Dirty War against Europe’s Integrity and Soul is raging, we must end it forthwith. To end it we need to identify the underlying historical causes and to propose simple, logical, humane remedies that all Europeans can embrace.

History, Part A: 1944-1971

Moving from my European Union tales to a brief history of the European Union, let me begin by exploding two self-satisfying myths that Europeans hold dear. First, that the European Union is founded on principles of free-market liberalism. And, secondly, that it was a European design implemented by brave Europeanists. It was neither. The European Union began life as an American design conceived by the New Dealers and implemented in the context of the Cold War in order to stabilise Western Capitalism as part of America’s Global Plan, a Plan that included the Bretton Woods System of Fixed Exchange Rates.

From 1944 onwards, the New Dealers’ great fear was that the American economy would slip into another depression after 1949, as factories would lay off workers once the war economy was wound down. With the dollar the only convertible currency, the new crisis would spread like a bushfire through the rest of the capitalist world at a time of rising Soviet influence and power. Being the sole surplus nation globally, they understood that the only way of avoiding this calamity would be to recycle America’s surpluses to Europe and to Japan in order to create the demand that would keep their own factories producing all the gleaming new products, washing machines, cars, television sets that American industry would switch to. Thus, the project of dollarising Europe began. A most impressive hegemonic program that I only wish today’s Europe understood. A program that demonstrates vividly the sharp difference between hegemony and authoritarianism. And reminds us of how badly today’s Europe needs an hegemonic Germany.

Very early on, in 1946, the New Dealers also grasped that their Global Plan could not rest on the single pillar of the US economy and the dollar. It required secondary pillars to underpin it. They selected the yen and the DM for that role and set out to reinforce the industrial foundations on which these currencies sat. So Germany and Japan, the recently defeated nations, were to become the regional powerhouses east and west of the American Goliath. However, powerhouses need vital spaces; large markets around them capable of producing the demand for all the goodies that come off the production lines and which the German and the Japanese markets could simply never absorb. So, the New Dealers had a pressing question to answer: Where would demand come from for German and Japanese manufactures? In the case of Germany, the answer was: the rest of Europe. In the case of Japan the original idea was to turn China into Japan’s vital space.

This dazzling plan had two major hitches: Mao Ze Dong wrecked its basic ‘eastern’ tenet as his triumph meant that China would never become a hinterland for Japanese industry. The United States responded to this problem by turning its own backyard into Japan’s vital space. Meanwhile in Europe, the plan clashed with the French demand that German industry be dismantled. Indeed, seven hundred German factories were destroyed by the allies as per an earlier agreement within Allied Command that 1700 German industrial plants be destroyed. Another thousand were about to be wrecked. That had to change, if the New Dealer’s plan were to have a chance. To bring the French elites around to their idea of a German Powerhouse at the heart of a United Europe, the New Dealers offered Paris a simple deal: “Accept the notion of a re-industrialised Germany dominating a Northern and Central European heavy industry cross-border cartel. In return we guarantee to the graduates of your Grand Ecoles that they will be administering the new cartel’s institutions, and to your French bankers access to German surpluses with which to make Paris a major financial centre.” The French had been made an offer they could not refuse. With one exception: General Charles De Gaulle who opposed it tooth and nail, unable to accept that France would be embedded in an Anglo-Saxon Global Plan in which Germany would be the European powerhouse; a position that pushed him into the political wilderness from 1946 till the eruption of the Algerian War which he, uniquely, had a capacity to end.

Recapping, out of necessity and in a remarkable display of pragmatism, Washington embraced the idea that European Unity would be built upon a cartel of heavy industry, rather than on their cherished principle of competitive markets. While of a democratic disposition themselves, the New Dealers went to bed with traditionalist Frenchmen like Jean Monnet who felt only disdain for their New Deal, who harboured a Platonic contempt for liberal democracy, and whose vision of a United Europe was beholden to the idea of some central European cartel administered by ‘technocrats’.

The process, once it began, was inexorable. First a German dominated cartel of coal and steel emerged (the European Coal and Steel Community), with a cross-border French-dominated administration. Once tariffs on coal and steel were removed, it was a natural next step to remove all tariffs (i.e. the establishment of the European Economic Community in 1957). But to co-opt French farmers, a common agricultural policy was established (in 1962) the purpose of which was to secure the farmers’ consent to a free trade zone by handing over to them a chunk of the cartel’s monopoly profits.

This fledgling European Economic Community created large surpluses that fuelled post-war prosperity in a stable world environment where the fixed exchange rate regime known as Bretton Woods was constantly stabilized by the United States which took it upon themselves to recycle to Europe and to Asia almost 70% of their surpluses , while ruthlessly regulating all large cross-border financial flows. A Golden Age of low unemployment, low inflation high growth followed throughout western capitalism. It created the conditions in which the dream of Europe’s shared prosperity could materialise. At the expense of treading on European sensibilities, it was an American triumph.

Alas, by the late 1960s it was dead in the water. Why? Because America lost its surpluses and could no longer stabilise the global system by recycling surpluses it no longer had. Never too slow to accept reality, the United States announced the end of that era. The calendar read: 15th August 1971. The dollar was de-coupled from gold, from the yen and from Europe’s currencies. John Connally, Richard Nixon’s Treasury Secretary, visited Europe to tell our gob smacked leaders: “The dollar is our currency but it is your problem”. Europe had become unhinged!

History, Part B: Europe Unhinged

Europe’s ‘unhinging’, circa 1971, was the reason that Giscard d’ Estaing and Helmut Schmidt ended up seeking solace at Charlemagne’s resting place, after their decision to embark upon monetary union in 1978. Germany was buffeted by a DM rising against the dollar while Italy and other countries crucial for northern European exporters were pegging their currency to the devaluing dollar. The post-war American design of a Europe rotating around the axis of a North-Central European heavy industry cartel was in peril. A fixed exchange rate regime was imperative to keep it going. Thus Europe set off on the road to creating its own Bretton Woods within the EU. The European Monetary System was thus born. It marked the first time that France and Germany were improvising, designing the next step of European integration without the active help of the Americans who, I submit to you, knew better.

What did they know better? They knew that is impossible to stabilise a fixed exchange rate or common currency system without large-scale surplus recycling. They understood that, unless there is federation and large scale recycling, it is impossible to combine (A) free trade, (B) free capital movement, and (C) monetary union. That you can choose up to two of these features, any two, but never all three. For instance, you can have free trade and free capital movements as long as exchange rates vary (e.g. NAFTA). Or you can have free trade and fixed exchange rates with capital movements restricted (e.g. contemporary China vis-à-vis the Rest of the World). Or you can have fixed exchange rates and free capital movement without free trade (a combination that never implemented). American policy makers understood that, if you set up such a fixed exchange rate regime with free trade and free capital movements, but without a surplus recycling mechanism, you will end up with something like the 1920s Gold Standard.

Fixing exchange rates between disparate economic regions always brings benefits in the short term; even if it is unsustainable in the long run (i.e. in the absence of surplus recycling). But these benefits resemble past invasions of Russia: a brisk beginning full of enthusiasm and hope, rapid progress that seems unstoppable, followed by a heart-wrenching slowdown as a Cruel Winter takes its toll, ending up with blood on the snow and infinite retributions thereafter.

Did Giscard and Schmidt not know this? Did Mitterrand and Kohl wallow in ignorance? Were Europeans merely unschooled to this very simple economic principle? I have it on good authority that at least President Francois Mitterrand understood perfectly well all of the above. And I am happy to assume that the others did too. My explanation is that, while they did they understand how crucial large scale surplus recycling was to any monetary union, in their minds they presumed that surplus recycling can only be properly instituted in the context of a federal system. But they also knew well that the very DNA of the EU was inimical to the idea of Federation. That was, if you recall, Mrs Thatcher’s error: To mistake the Central European, traditionalist, conservative notion of a Europe of Nations for a penchant for Federation.

Screen Shot 2013-10-25 at 2.26.41 PMThe ‘Europe of Nations’ concept that Jean Monnet and Robert Schumann were advocating, and which was the foundation stone of the EU, was diametrically opposed to the notion of a Federal Europe, in which a strong federal government is elected on the basis of one-person-one-vote. The ‘Europe of Nations’ purposely implied a withering of the nation-states without a new federal tier of democratic governance to replace the lost democratic accountability. It was, indeed, utterly consistent with the dominance of a cartel of capital goods’ producing heavy industry that was the foundation and motivating force of United Europe. The notion of a Federal Republic where the sans culottes of France, of Spain, heavens forbid of Greece, would have a real influence on how United Europe would be administered was anathema to our elites and leaders. It simply did not compute. So, like the Bourbons who remembered everything and learned nothing, they set out to recreate the Gold Standard, demonstrating a grandiose failure of perception of what they were about to do. Keynes had described the Gold Standard as “a dangerous and barbarous relic of a bygone era”. Little did he know that Europe would recreate it in the late 1990s.

During those early days of Monetary Union three were the main protagonists that shaped today’s European Union: One was the vicious clash between the Bundesbank (BB hereafter) and Germany’s federal government. BB always suspected that Bohn was about to sacrifice its control over the DM on the altar of a bargain with Paris. A bargain that would allow France to borrow from Germany’s economic power and Germany to borrow from France’s stock of geopolitical, administrative and banking advantages.

A second factor was the Presidency of Francois Mitterrand and, in particular, his government’s failure to reflate the French economy autonomously between 1981 and 1983. Realising that it could not stabilise the French economy on its own without challenging France’s elites, President Mitterrand and his astute finance minister Jacques Delors decided, in 1983, that the only way of stabilising the French economy in the new post-Bretton Woods era without challenging the French elites was by implementing their policies not at the level of the French government but at the level of the European Union. But to do so they had to find a way to neutralize a BB that would never consent to these policies. Thus began a series of alliances between Paris and Bohn, later Berlin, which were constantly destabilised by a worried, angry, moody BB.

Mitterrand’s importance was also due to his unique achievement of co-opting much of the traditionally ‘recalcitrant’ French Left into the conservative core that was the political expression of the North-Central European Cartel. When Mitterrand was promising a ‘rupture with money-driven capitalism’ he was not making a socialist point. Instead of socialism-in-one country he had espoused cartelized-corporatism-on-one-continent. A large number of French Marxists were impressed by Mitterrand’s crushing determinism which reminded them, subliminally, of the Stalinist enthusiasm for being on the right history of some inevitable historical process. Some would become his loyal runners, playing a significant role to this day.

The third factor was, of course, German re-unification for which Chancellor Kohl was ready to make large concessions to Paris. This gave the BB an almighty headache. Shortly after reunification, the BB’s boss at the time, Helmut Schlesinger, a shrewd Bavarian, understood well that which Helmut Kohl had chosen to ignore: That there could exist no true mutual gains for France and Germany from monetary union in the context of the already established form of European Union. Schlesinger knew that France had to choose between a Vichy-like subjugation to the BB or to attempt to take the BB over. When Paris tried the latter, by pushing the BB around over interest rate policy, at a time Kohl was too immersed in the troubles of managing reunification to respond, the BB smacked it down by famously killing off the European Monetary System, enriching George Soros in the process, and pushing Europe into an artificial recession.

The Parisian elites were crushed and lost al hope of dominating the BB. So the BB felt comfortable enough to proceed with the Eurozone. Paris could be counted to be unable to imagine dominating the BB or a future outside the North-Central European Cartel. Its Vichy-like acquiescence was therefore a foregone conclusion. Berlin would promote the new currency as a means of exporting German virtue to the Periphery and Paris would sell it within the French political class as a golden opportunity to rein in the French trades unions and to give the French banks an opportunity to overtake the hated City of London.

Screen Shot 2013-10-25 at 2.26.46 PMAt the ‘constitutional’ and institutional level, this accommodation took the form of the Maastricht Treaty: a document that set up conditions which had to be violated so that monetary union could be activated for the reasons it was conceived – for instance, in order to bring Italy into the fold and thus stop the Bank of Italy from undercutting northern European competitiveness through competitive devaluations. Never before has logical incoherence been given a constitutional expression that reality was bound to wreck with such cruel abandon. A document of stupendous inanity, the Maastricht Treaty, and all subsequent Treaties that are meant to discipline member-states, ended up playing the role of the Eurozone’s book of common prayer.

And yet that prayer was answered. Despite the flimsy foundations, the Eurozone was, all things considered, doing reasonable well. Until 2008 that is. How come? The answer, yet again, is: Because of the United States of America! You see, as the American authorities were dismantling the Bretton Woods system in 1971, they were adopting an audacious strategic move: instead of tackling the nation’s burgeoning twin deficits, America’s top policy makers decided to do the opposite: to boost deficits. And who would pay for them? The rest of the world! How? By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s deficits. The deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and surplus capital. In turn, powered by America’s deficits, the world’s leading surplus economies, Germany, Japan and, later, China, kept churning out the goods that America absorbed. Almost 70% of European profits were being transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with it? It financed the rise of financialisation; a process which the French and German banks joined in enthusiastically. [For the complete argument, along these lines, see my The Global Minotaur]

This was the reason why Europe, despite having introduced an unsustainable Gold Standard in its midst, seemed to be prospering. Through its expanding deficits, the United States was generating aggregate demand for European exports capable of stabilising an inherently unstable Eurozone. Meanwhile, the flow of European, Japanese and Chinese profits into Wall Street were generating the production of toxic money that buoyed the French and German banks and allowed them to go on a lending spree in the European Periphery; a spree that ended up adding significantly to the German economy’s success at amassing large surpluses that allowed its corporations (including middle sized firms) to globalize and thus to spread their wings aggressively into Eastern Europe, the Americas and, of course, China.

Throughout the Eurozone, a conviction spread that a new Golden Era was in train. Until 2008 when, following Wall Street’s collapse, America could no longer provide the European Union with the aggregate demand for its exports that had, until then, stabilised it. Even worse, the Crash of 2008 produced a gargantuan credit crunch that saw liquidity disappear and, soon after, guaranteed the deep insolvency of French and German banks.

The rest is history. Governments dutifully transferred from taxpayers to bankers whatever mountains of credit and capital were necessary to keep up the pretense that the banks were safe. Nonetheless, these moves, while successful in keeping the ATMs going, could never disguise the brutal fact that the Eurozone’s architecture was simply incapable of sustaining the shockwaves of the 2008 global earthquake. Since then our monetary union has been unraveling and the European Union’s denial of this systemic crisis threatens to bring the EU down.

What lies behind Europe’s stubborn denial?

These days, European politicians and officials are telling a very different story. The Eurozone, they insist, is on the mend and the EU is on the road to greater integration. If they are right, my analysis above deserves to be confined to the bin. But if I am even remotely correct, a pressing question emerges: What explains their denial and the associated optimistic statements?

Let me begin by noting that this would not be the first time that EU officials adorn a disaster with the rhetorical attire of a grand success. Take the traumatic collapse, in 1993, of the Exchange Rate Mechanism (which as an advanced manifestation of the 1978 European Monetary System). For two years it was evident that it was coming. Yes, the more their cherished Exchange Rate Mechanism was exposed as unsustainable the greater the tenacity with which Brussels officials were clinging to it; and the more optimistic their narratives became. The problem is not that they get the economics wrong. No, the problem is that their failure to comprehend reality leaves them shameless.

EU officials regularly defend their position in a manner that is simultaneously Jesuit, Orthodox, Catholic and Calvinist: Jesuit in the sense that bureaucrats, like Mr Olli Rehn, habitually prove every proposition and its contrary depending on how events pan out. Orthodox in that economic analyses are accepted only to the extent that they suit the purposes of Prophecy. Catholic because of a presumption that debt must condemn whole nations to some institutional Purgatory in which collective suffering will deliver them from the sin of debt. And Calvinist in the sense of excluding more and more Europeans from the Circle of the Select, until those left inside it would achieve salvation through Faith in the impossible idea of recovering via universal austerity. The American institutionalist Clarence Ayers once wrote, as if he were referring to our EU officials, that: “They pay reality the compliment of imputing belief to ceremonial status, but they do so for the purpose of validating status, not for the purpose of achieving efficiency.”

I am satisfied that this explains the manner in which EU officials can say what they say without wincing. But it is not the whole story. The deeper reason behind Mrs Thatcher’s Error, behind the total lack of interest in federating as a solution to Europe’s recycling problem, has to do with the way the Screen Shot 2013-10-25 at 2.26.53 PMEU was put together. No cartel that controls the administration of its vital space directly wants to concede this exorbitant privilege to some democratically elected federal government. Especially when a huge, expensive bureaucracy has been set up in Brussels precisely to preclude this. A bureaucracy that includes some very skilled technocrats. But never forget: Technocrats harbour a deep, Platonic, contempt for both history and democracy.

If this assessment is valid, the conclusion is bleak: It will not be a simple matter to defeat the unholy alliance between: skilled ‘technocrats’, run-of-the-mill Brussels apparatchiks, cartel-like heavy industry, the mage banks that have grown ever so reliant on EU generostity, and local politicians who have their own cosy relationship with bankrupt local bankers. This institutional mélange has evolved in parallel to, and is symbiotic with, the European Union. At the same time, it now constitutes the chief threat to its continuing existence.

Decentralised Europeanisation: A modest proposal

At the beginning of my talk I promised to end with a whiff of optimism. If I am right that Europe’s current path leads inexorably to disintegration and the loss of shared prosperity; and if federalism is impossible now that our peoples are turned against one another as a result of Europe’s Gross Denial, what can we do?

It is tempting to say: To Hell with it. This EU is not worth defending. It was built on foundations that secured an unsustainable institution whose struggle for survival caused a dirty war against Europe’s soul and against its very people. Be that as it may, this is a temptation that we must resist. However deserved an antipathy to the existing EU, and to the Eurozone, may be, its dismantling will immerse Europe into a new, postmodern 1930s. The argument that, in the long run, Europeans will emerge stronger and freer is not one that I am prepared to countenance. At least not more so than the free-marketeers’ claim that in the long run markets achieve equilibrium. For as John Maynard Keynes would retort, in the long run we shall all be dead. Or, perhaps more in tune with the present EU, in the long run whole generations of Europeans will have been condemned to a life that is nasty, brutish and dominated by the Serpent’s offspring.

It is in the context of this assessment that I conclude that those of us who detest the present EU modus vivendi and who find the Eurozone’s architecture ludicrous have a moral duty to work tirelessly toward pushing Europe hard and steadfastly toward reforming itself. Even if we feel that we shall fail. So, what should we work towards in particular? What should we do?

First, we need to be modest. To use existing institutions in creative, in healing, ways. To forget about Treaty changes and federal steps that will be outpaced by the crisis and undermined by toxic politicking. Secondly, we need to deploy these institutions in a manner that ‘Europeanises’ the four realms in which the crisis is unfolding while returning more power to democratically elected national Parliaments. Is this possible? I submit it is.

Take the four realms where the crisis is unfolding. Debt, banks, inadequate investment and the humanitarian crisis. All four are currently left in the hands of governments that are powerless to act upon these ills. Let’s Europeanise them. Stuart Holland, James Galbraith and I have proposed simple ways in which we can do this without any need for steps in the direction of federation.

  • Let existing institutions manage part of the debt of member-states centrally, without fiscal transfers – that is, with each government repaying its own debt but at an interest rate that is set for the Eurozone as a whole.
  • Let us place all banks under one authority immediately and create a single Eurozone-wide deposit insurance scheme to be financed by the existing European Stability Mechanism.
  • Let us allow the European Investment Bank, which is three times the size of the World Bank, play the role of Europe’s missing Surplus Recycling Mechanism; the role of administering a pan-European, investment-led recovery program. And, lastly,
  • Let us use the accounting profits accumulating within the European System of Central Banks to fund a US-style Food Stamp program and even a minimum unemployment benefit scheme that alleviates poverty everywhere in Europe.

Notice that these moves require no federal treasury, no loss of sovereignty, no fiscal transfers, no German or Dutch guarantees for Irish or Portuguese debt, no need for major Treaty changes, no new institutions. To boot, they give more leeway to elected governments. They limit their impotence. They restore a modicum of democratic control.


A pop-history of the European Union might explain our peoples’ determination to come together as follows:

  • The French feared the Germans
  • The Irish wanted to escape Britain
  • Greeks were terrified of Turkey
  • The Spanish wanted to become more like the French
  • The Italians wanted to become German
  • The Dutch and the Austrians had all but become German
  • The Belgians sought to heal their sharp divisions by joining into both Holland and France under the auspices of a reconfigured DM
  • And, finally, the Germans feared the Germans!

But there is no such thing as the Germans. Or the Greeks. Or the French for that matter. “We are all individuals” as Monty Python have taught us. Or Europeans, as many of us would like to think. And, yes, some Europeans are grasshoppers whereas others are ants. But the notion Screen Shot 2013-10-25 at 2.26.58 PMthat the ants all live in the North and the grasshoppers have all congregated in the South, plus in Ireland, is absurd. There are ants and there are grasshoppers in each of our nations. During the ‘good’ times of the Eurozone, the grasshoppers of the North and the grasshoppers of the Screen Shot 2013-10-25 at 2.30.07 PMSouth went on a frenzy. And when their feeding frenzy led to the crisis, it was the ants of the North and the ants of the South that were made to foot the bill. Tragically, our leaders’ espousal of the grasshoppers’ agenda, everywhere in Europe, ended up turning the ants of the North against the ants of the South in a Europe that is losing its soul because of stereotyping, denial and because of the ironclad determination of grubby so-called elites not to let go of the levers of ill-gotten power.

Diversity and cultural difference was never Europe’s problem. A continent which began uniting under many different languages and cultures ended up divided by a common currency. We tried to deal with the inevitable crisis of a faulty economic design as if the Balkanisation of Europe was the objective!

Screen Shot 2013-10-25 at 2.27.14 PMObserving the European Union’s attempts to deal with the crisis is a bit like watching Othello – one wonders how our rulers can be so deluded. The principle of the greatest austerity for the European economies suffering the greatest recessions would be quaint if it were not the ill wind that blows into the sails of misanthropy, racism, Nazism. In an ironic historical twist, Nazism is now strong in a place that had fought it tooth and nail in the 1940s, in Greece, and almost absent in Germany.Screen Shot 2013-10-25 at 2.27.21 PM

The good news is that the Germans no longer fear the Germans. Europe needs an hegemonic Germany. A confident Germany that understands that the current Gross Denial of the crisis’ nature is costing Germans dearly. That their taxes are being used to build new cleptocracies in the Periphery while the proportion of working poor Germans is skyrocketing. And when the whole ‘thing’ unravels, there will be nothing but losers all over Europe and beyond. It is in this sense that Europeans do have, still have, a powerful, common interest. To confront the bureaucracies, the cartels, the cleptocrats who are preventing them from adapting the European Union to the post-2008 realities.

In this titanic battle for Europe’s integrity and soul, the forces of Reason and Humanism will have to face down the growing authoritarianism. Leonard Schapiro, writing on Stalinism, warns us that: “The true object of propaganda is neither to convince nor even to persuade. But to produce a uniform pattern of public utterances in which the first trace of unorthodox thought reveals itself as a jarring dissonance.” We already see this in Europe. Anyone who dares challenge the official version that all is well in the best of all possible European Unions is treated as a ‘jarring dissonance’. But dissidents should take heart. Just like in the Soviet Union, false gods are condemned eventually to be found out. I hope that they will be found out in Europe quickly. For the daily human toll of this crisis is too high.

When Gandhi was asked what he thought of Western civilisation, he famously replied that: “…it would be a very good idea”. If asked what we think of the European Union today, we could do worse than remarking: “A splendid idea! If only we can pull it off…”

I think we can pull it off. But not without a break from the past and a large democratic stimulus that the fathers of our EU might have disapproved of.

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