After my first week there, when the ecstasy of simply being in Paris began to fade, I had what you’d call a bad day. I didn’t mind it; a bad day is a good thing once in a while, and I decided to take a stroll to indulge my grumpiness. Problem was, I was in Montmartre. Even though I purposefully avoided the joyful Place du Tertre, and the remarkable views of the city from the Sacré Coeur, and tried to stick to the more residential area, my mood was not safe: I found a vineyard. A splash of green unfolding on the backside of Montmartre, right on Rue St. Vincent, next to a traditional little French cabaret. As I stood there, dazzled, it occurred to me that not only had my bad mood been forced out of me, worse, it had been replaced by mild euphoria. Annoyed, I hurried back home, shut the windowpanes, and tried to reclaim my dark thoughts, but with little success.

Dark thoughts are generally hard to come by when there is an abundance of good food and good wine. As a result, I did a lot of eating and drinking in Paris, and very little thinking. The rest of the time, I consciously avoided falling into the lone traveler’s trap of “soul-searching,” by marching around, exploring the city. However, at the peak of tourist season, it was hard to lose myself in the experience. For one thing, organized tour groups were a constant obstruction. They’d take over entire sidewalks, forming circles around a guide who, more often than not, was just pointing at the Eiffel Tower. Like you can miss the Eiffel Tower in Paris.   You find it on key chains, on tote bags, on t-shirts, cookies, pens… Eiffel Towers of every color, everywhere.

That’s actually my problem with Paris—it’s like there’s some sort of plan, an evil-French-genius-plan, to make Paris uber-Parisian, more Parisian than the Paris Casino. It’s not just the Eiffel Tower and the Arc de Triomph and the Moulin Rouge. You can’t really turn a corner without bumping into an accordion player, or someone shoving roses into your face. Every cobblestone street comes with its own picture-perfect backdrop that some young couple, perpetually locked in embrace, will try to capture with a digital camera. The couples are another issue. Some of the more enthusiastic lovers will climb on lampposts, raise one foot to the sky, and pose for their partners as they direct them from below: “Wait, one more, one more!” they’ll yell, snapping away. I’d stare, somewhat perplexed by the effect that Paris had on people; if my partner ever climbed on a lamppost and asked me to take a picture of him, I’d walk away, leaving him hanging there permanently.

Only the Seine is as over-the-top beautiful as it should be. It doesn’t look that deep for a river, so it doesn’t quite inspire the tragedy that a river should. Much like everything else in Paris, the Seine is simply “romantic”, but also somehow suitable for loners too. I crossed it several times, often just to cross it, especially in the nighttime when crowds stretch out on its banks. They bring music and wine with them, and lounge there, without a care in the world. That’s the side of the French people that I’ve come to appreciate—they cherish their free time and smoke like it’s 1960. But they have that other side too, the one they are infamous for.

I did try to keep an open mind about it. Maybe it’s not that the French are rude, I thought, maybe it’s that the Americans are too polite. Perhaps I felt it more because I was a woman traveling alone but sometimes it seemed like they actually enjoyed being mean to me. A cabdriver refused to take me where I wanted to go because the distance was “too short,” a dry-cleaner refused to clean my dress because the stain was “not worth his time,” and a shoe repairman refused to fix my heels, simply because “it was a Monday.” One day, a chubby patisserie lady, annoyed with me for holding her up from closing, wrapped a coffee éclair in place of the tarte au chocolat I had ordered and innocently handed it to me. “Here’s your tarte au chocolat,” she said, smiling. From that point on, I decided that if they were going to be obnoxious to me, I’d be obnoxious right back. If they dared correct my French, I’d repeat the mispronounced words, only with more determination. Also, I started correcting their pronunciation of English words too.  “Vous voulez les cookeeseh?” a baker would ask, as I pointed at the chocolate chip cookies.

“It’s ‘Cookies,’” I’d respond, with pride. “COOKies.”

Not that the French can’t be friendly too. The men are, in fact, very friendly. And due to all that surplus romanticism surrounding me, my resistance eventually crumbled. So I experienced some romance too in Paris. There were no roses in my case, no accordion players, and definitely no lamppost climbing. Actually, there wasn’t even much wooing. To be fair, he did try to speak to me in English, but it was hopeless and his efforts were embarrassing us both. We initially faked a conversation just for form’s sake, but soon resolved into doing things that did not involve talking. Even dirty talk, I came to realize, was out of the question. When I attempted it, he took it too literally, and it confused him. He said something that sounded like “I am Peking you!” and I said “Never mind.” I saw him a few more times after that, but the lack of words gave a rather routine feel to our meetings. Then, one day, he said he’d call and didn’t, and I was thankful. At least, I thought, I could now say that I had a little adventure in Paris too. My journey was complete, I could go back home. Home, in New York, where romance is dead and lampposts are unclimbable.

The Four Hedge Fund Managers of the Apocalypse

The gloomy chorus has been building for months now: it is the leitmotif of the hyper-powered fund managers who are, as I write this, wagering on the demise of the euro, or profiting off the fear of its demise, or even, perversely enough, the fear of that fear. A February piece in the Wall Street Journal, “Hedge Funds Try ‘Career Trade’ Against Euro,” summed up the fervid atmosphere. The piece covered a private lunch in a Manhattan townhouse, hosted by a “boutique investment bank,” where elite managers huddled together over an “idea dinner” to share their views on the state of the euro. Their forecasts were extremely dire—which, for alert speculators, always means a potential windfall: “This is an opportunity . . . to make a lot of money,” said one manager present.

You bet it is. And when major financial institutions can disappear overnight, and the Dow can “flash-crash” 1000 points for no well-explained reason, dire predictions seem more plausible than modest ones. Fear of contagion can itself become a contagion. We accept the assertions of experts with vested interests without asking for the details, and blithe predictions begin to masquerade as anxious questions. How exactly is Greece going to hit U.S. companies? How is it going to undermine confidence in the U.S. treasury?

In the case of Greece, fear of contagion has allowed a debt crisis in an economic backwater to swell into a major liquidity crisis across Europe. Investors have punished the euro, while ignoring the positive, longer-term effects that a cheaper euro implies. In response, the finance ministers of Europe produced a massive bailout package, with new facilities meant to address the currency’s institutional weaknesses. There are even signs of a new willingness among member states to address the structural inadequacies that have been present since the launch of the European currency. Yet euro-skeptical fund managers continue to press their bets, and commentators peddle their ideological agendas as necessary reforms, as if the unprecedented nature of the euro were evidence enough of its ultimate failure.

Photo by zemistor.

Is there an actual crisis of the euro? Ever since the Greek government’s surprise upward revision of its budget deficit to 12.7% of GDP last winter, the focus has been on Greece’s ability to service its Olympian debt. Of chief concern was the rollover of 25 billion euros worth of Greek bonds coming due this spring. The yield on Greek sovereign credit default swaps shot up; by April, Greece had rolled over 15 billion worth of its paper at successively higher and higher rates of interest, until the costs became prohibitive. European finance ministers were thrust into the role of lenders of last resort.

The perennially indecisive character of European politics, which makes it nearly impossible for European policymakers to hold one another to account, allowed the Greek situation to get out of hand. For months it seemed the most that European leaders could manage was a muddle of bluffs, half-measures, and mixed-messages. Upcoming regional elections had the Germans dithering at the rank unfairness of pay-ing for the Greeks to retire at 55 when they retire at 67. And before long, what had begun as a bad debt problem in Greece had degenerated into a broad liquidity crisis for the Eurozone.

George Soros. Photo by Jeff Ooi.

Then European leaders stunned everyone. They announced a massive, one-trillion euro emergency stabilization package—a plan big enough to meet the funding needs for the next three years of every Euro-zone state currently under a cloud. More significant, the plan corrects what has emerged as one of the common currency’s key institutional flaws in times of crisis: the lack of a European Treasury to back the Euro. The European Central Bank has the power to set interest rates and manage monetary policy through traditional banking operations. But only a Treasury has the power of the printing press; it can issue debt. As George Soros himself (whose managers attended the doomsday townhouse lunch) pointed out in an editorial in the Financial Times in February: “A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency.” With its power to issue bonds, the special purpose vehicle that the $1 trillion bailout package creates is, in effect, Europe’s new shadow treasury.

That’s where things stand today. Except, a perusal of the papers would suggest otherwise. Much coverage continues to ascribe the panic sell-off in the euro to “lingering worries” over the debt crisis, and “continuing nervousness over Europe’s finances.” Though it does seem a bit strange to judge the success of this plan by the market’s short-term reaction to it, since the whole idea is to build a bulwark against the market’s short-term vagaries. The fact that the EU has now effectively ring-fenced the PIGS (the financial community’s shorthand for Portugal, Ireland, Greece, Spain) seems not to matter. But the market is a myopic, panic-prone indicator; over the short run, it creates its own reality. What’s doubly odd is how many still haven’t shaken the habit of attributing wisdom to it.

May Day Riots in Greece.  Photo by PIAZZA del POPOLO.

But let’s put things in perspective. The sixteen countries that make up the Eurozone have a combined population just shy of 330 million, making it a tad larger than the US. In 2009, the Eurozone had a combined GDP just below 9 trillion euros (about $11¼ trillion). Greece, by contrast, is a country of 11 million people. In 2009, Greek GDP was about 234 billion Euros ($292 billion), according to Eurostat. That rep-resents 1/40th of the total Eurozone output, putting it on a par with Michigan’s percentage of US GDP. We should keep this in mind as we watch the angry Greek protestors and imagine the conflagration spreading, leaving Europe a smoldering, post-apocalyptic setting for the “Left Behind” series. Without doubt, Greece will face daunting political choices as it struggles to pare back its unaffordable state sector. Yet the weight of her troubles, measured on the scale of Europe, is comparatively small.

On the whole, the fiscal predicament facing the Eurozone is no different from that facing every other major western country. According to the OECD, in 2010 Germany and France will have debt to GDP ratios of 82% and 92%, and budget deficits of 8.6% and 5.3% respectively. Italy has a larger debt (120%) but a low deficit (5.4%) and Spain has a high deficit (8.5%) and a lower debt (67%). None of this looks particularly bad when compared to the US, which according to the OECD will have a 2010 budget deficit of 10.7% and a debt ratio of 92%. And California, its wealthiest state, is not looking so fiscally sound either.

Still, let’s assume the worst case scenario. Say the Greeks ultimately reschedule their debts, as many feel they must. Now that the Eurozone has bought bailout protection from the market havoc wreaked by the “wolf pack” speculating on the likelihood of a sudden disorderly default by Greece, the EU should have enough time to analyze and implement the necessary fiscal restructuring in an orderly fashion. This, in turn, will allow the market time to discriminate, as markets do, among the Eurozone states, and to evaluate their progress in trimming their budgets—individually and relative to one another—which makes a catastrophic domino default by Greece and other southern European members a very unlikely scenario. Let’s say, then, the Greeks do in fact leave the Euro, choosing the inflationary costs of currency devalua-tion over the onerous burdens of debt deflation. The notion that even this extreme scenario would some-how lead to the dissolution of the euro begs credulity, for it completely underestimates the level of commitment of Europe’s political class to monetary union.

More to the point, there are limits to how low the euro can go before Eurozone export growth scotches its fall. According to the OECD model, every ten percent drop in the value of the euro translates into a one and a half percent rise in the growth rate of the Eurozone. The massive export economies at the core of Europe, such as Italy and particularly Germany, heat up as the euro cheapens. And France, as the world’s number one vacation destination, hosts more tourists than there are Frenchmen. Such effects are likely to overwhelm the margins. Europe’s core economies—France, Germany, Italy and the Netherlands—combined produce 70% of the region’s GDP. The Greek situation, while dire, is more or less peripheral to the European economy.

None of these calculations, which can be made by anyone even a little familiar with the relative size of European economies, seem to daunt the euro-skeptics, who continue to soberly declare that the common currency is a utopian dream from which the Europeans must inevitably awake. What is perhaps not apparent from the sporadic American coverage, however, is that such critics are a fixture on the European scene. They have been grinding their organs for over a decade now, foretelling the imminent demise of the common currency. Every time there is disagreement among members or protest among voters they portray it as an existential crisis of the Eurozone. True, many of their arguments begin with reasonable critiques of the euro currency regime as it is currently configured. But more often than not, they are a mask for vested interest and ideology.

Certainly the first decade of the euro has made its shortcomings plain—we probably should have expected that an endeavor as ambitious and unprecedented as the common currency zone would never come off without a hitch. Fiscal coordination and regulatory oversight in the Eurozone have been deficient. Eurozone fiscal pacts over-emphasized balanced budgets. They were no stand-in for pan-European economic governance. Thus the overly optimistic Growth and Stability pact targeted fiscal deficits and debt levels, but didn’t ensure that members would manage their growth wisely or behave in good faith. As long as growth was robust, deficits and debt levels remained manageable. All the while, Spanish governments were enabling their frenzied property markets, and Greek governments were fudging the numbers.

French Europe Minister Pierre Lellouche.  Source Wikimedia.

But there are signs we’ve entered a new era of coordination. Last Thursday, Pierre Lellouche, France’s Europe minister, told the FT that the emergency stabilization package, “institutionalized solidarity between states.” The bailout mechanism, he argued, “is nothing less than the importation of Nato’s Article 5 mutual defense clause applied to the Eurozone. When one member is under attack the others are obliged to come to its defense.” It is, he said, a step toward Eurozone economic government. Of course, this is quite a controversial claim. But then again, the history of central banking is replete with ad-hoc solutions to unprecedented problems, which are institutionalized after the fact. Perhaps the speculators may have it backwards: the crisis may be helping cement, rather than undermine, Eurozone solidarity.

As we listen to the fund managers and pundits who benefited disproportionately from the boom and binge lecture Europeans about their debts, it is worth remembering who helped us get here in the first place. We have just come through a twenty-year boom in asset prices that fostered a complacent and short-term culture, and enabled the regulatory fecklessness that refused to acknowledge the US housing bubble, the Wall Street credit bubble, and the global debt bubble. And now the costs of all the bailouts are reflected in the yawning budget deficits and ominous debts of the developed world.

One thing should by now be clear: The seizures of the stock market and the short-term gyrations of currencies are not reliable indicators of the health of an economy; policies meant to assuage market fear should not take precedence over long run economic and social goals. For the Euro-skeptics have got one thing very right about the European dream: it is utopian. It is a political, as much as it is an economic union, and its goals are pacifist and social democratic. “Structural reform” of the sort advocated by neoliberals has long been code for lower wages, fewer social protections, and the abolishment of the sort of pro-grams that mitigate wage and wealth inequality—in other words, it’s wealth transfer from normal people to commanders of capital.

This is what lies behind the rhetoric (and practice) of euro-speculation. And its consequences are scrawled across societies everywhere. In the 2007 UNICEF report card, the US and UK underperformed every other economically advanced nation in measures of their children’s well-being. Any economic calculus that places the US ahead of the Eurozone, and overlooks such costs, is simply the wrong measuring stick.

This article originally appeared in n+1.

Nicolas Sarkozy. Photo by Christophe Grébert

The socialists out-distanced the center right by a historic margin of over three percentage points in the first round—about 29 ½ to 26%. As if that weren’t enough, Tuesday night came the announcement that the socialists had formed an alliance with the French Green Party, Europe Ecologie, and the Front de Gauche, a coalition of the far left. (In the French system, any party that garners more than ten percent in the first round may team up for the second round with any other party that secured more than five percent.) As a result, the left has established a pretty daunting lead.

There is consensus that the regional elections, coming as they do half way through the French presidential term, should be seen as the President’s mid-term performance evaluation. Certainly Mr. Sarkozy’s abysmal popularity rating—36%, a new low according to a CSA poll from a couple weeks ago—encourages this view. And considering all the scandals in his administration, his stalled reform program, and (d’oh!) the financial crisis, there’s an compelling narrative logic to the idea that Sarko is about to get his comeuppance.

“Waterloo? … Agincourt?” That’s how the leftwing daily Libération crowed on Monday. Unsurprisingly, the left is trumpeting its victory as a turning point in French politics and a hopeful indication of things to come.  Of course, it should come as no surprise that Mr. Sarkozy and members of his party are downplaying the significance of the results—that’s politics. But there are, in fact, a couple features of last Sunday’s vote that call such easy interpretations into question.

Photo by Harald Dettenborn

The first is turnout. The abstention rate was 53%, another record low, which either means that the President’s supporters stayed home, or voters generally didn’t think the vote was that important. The second is the character of the contest. Unlike at the national level, where the UMP enjoys a comfortable majority in the National Assembly, at the regional level, left wing regional councilors already have control over the transportation, education and economic development budgets of 20 of France’s 22 regions. The left, in other words, are the incumbents. But third, and perhaps most importantly, the left were just due.

French voters have been tacking left and then right and then left again since the founding of the fifth republic 50 years ago. The pattern couldn’t be more stark. The two French presidents that preceded Sarkozy—Chirac, and Mitterand before him—suffered major legislative setbacks during their terms. They were forced to share government in cohabitation with opposition parties that reversed their policies. In fact, the socialist Mr. Mitterand had to take on the right-leaning Mr. Chirac as his prime minister, who proceeded to privatize many of the industries Mitterand had nationalized only a few years earlier. And when President Chirac in turn lost the legislative elections in 1997, he had to appoint socialist Lionel Jospin as Prime Minister, who paid him back by introducing the 35-hour workweek, the bane of the right wing.

But the pattern of recent elections is even more zigzag than that, with the center right winning at the national level and losing repeatedly at the local and regional levels. The socialists won the legislative elections in 1997, but failed to make it into the second round of the 2002 presidential election. They pummeled Chirac in the 2004 regionals, got whipped in the 2007 presidential election, triumphed in the 2008 municipal elections, and got smashed in the 2009 European elections.

Daniel Cohn-Bendit, head of Europe Ecologie. Photo by Marie-Lan Nguyen

Obviously, none of these elections was a major turning point in French politics. In a broad sense, France has been at a political impasse since the waning days of the Mitterand era. On a national level, the parties of the center right have been gradually privatizing and liberalizing the French state, yet they have been completely unable to trim the bloated state sector, reform education or pare back the unaffordable pension system. Whenever the right has overreached on reforms, the streets have filled with protestors, and they’ve been battered at the polls. As for the socialists—ever since Mr. Mitterrand secured the French voters’ approval of the Maastricht treaty in 1992, his party has been riven by the question of Europe, protectionism and globalization. This has made forming a consensus on national government nearly impossible for the left, a fact which has helped the pro-Europe greens, led by Mr. Cohn-Bendit, to gain ground against them in recent elections.

There is a constant danger whenever we discuss elections, and try and interpret their results, of reading too much into things. This is because elections are inarticulate. Voters vote, but don’t explain why. And afterwards, politicians and journalists vie to put words in their mouths. Voters are dejected, the ruling party is disarray, and so on. In France, if you look at the broader pattern of the last few years, you see an electorate aware of the need for change, but resistant to the kind of disruption that reform of a slow-growing, high-spending country necessarily entails. Mr. Sarkozy, for his part, sold himself as a major liberalizer and disrupter of the status quo. Yet in the wake of the Great recession, he has signaled that his (it turns out) modest reform efforts are mostly done, and it’s time for a pause. It’s quite likely his reforming days are behind him.

So whatever the results this Sunday, expect no major turning point. Either it’ll be a zig, or it’ll be a zag.

On the other side of the pond, however, where there are actual socialists, public discussion of the crisis has been a little different. Politicians on the left and on the right have been quick to blame the financial crisis on laissez-faire economic policies, and leaders on both sides of the aisle have spoken out in favor of greater regulation of financial markets. No doubt, this is partly instinctive. The European approach always tends to be more technocratic and dirigiste. Here, the public ritual, in times of economic uncertainty, is to emphasize the more protective spirit of the European social model. This is particularly true of right wing French presidents. After the French famously rejected the European constitution in 2005, then-president Jacques Chirac started cheerleading the French and European social models like a roadside convert. And President Nicolas Sarkozy, who’s right at home on the deck of many a billionaire’s yacht, recently felt the need to disrespect the Davos.

European leaders have not shied away from directly criticizing the market’s behavior, when they don’t like it. This has been especially true while the Greek fiscal crisis has wound on. There’s been a lot of talk, for instance, of a “speculative attack” on Greece, and thinly veiled warnings directed at market participants. After the Eurozone Finance Ministers’ meeting last Friday, French Finance Minister Christine Lagarde  went so far as to warn off speculators. They “had better be careful,” she said, “There is clearly a statement of solidarity—we are closing ranks. Whether we are big member states or small member states we are all in this together and we are not going to let any of us down.” She even followed this with an implicit regulatory threat.  “What we are going to take away from this crisis,” she added, “is certainly a second look at the validity, the solidity of [Credit default swaps] on sovereign debt.”

Christine Lagarde. Photo by MEDEF

It’s a little hard to imagine Tim Geithner, or any American politician of sound mind, threatening hedge funds with regulation if they didn’t stop shorting the stock market. (Actually, he’d probably just ban the practice.)  But the swift drop in the Euro last week struck a nerve. It’s just too reminiscent of the speculative attacks (by George Soros, et.al.) that surrounded the establishment of the European Exchange Rate Mechanism, the system that preceded the Euro, in the early nineties. Last week, the short position against the European common currency hit a record high. Still, to call it a “speculative attack” is to take a point of view on the appropriate level of the Euro. Also, it assumes a concerted effort.

Unlike in the Anglophone world, where markets are spoken of like acts of nature, in Europe, it raises few eyebrows when politicians or commentators ascribe motives to the financial market.  Here’s how Jean-Marc Sylvestre, chef economics editor for French TV channel TF1, recently described the speculative attacks on Greece:

The architects are investment funds, in particular hedge funds, with considerable liquidity, whose job it is to put that money to work for maximum profit… these investment funds choose an investment target they feel is fragile and swoop down on it very quickly… on the recommendation of their financial analysts, who returned from Davos brimming with confidence, many hedge funds began to sell Greek debt heavily, and then the Euro, hoping to redeem the paper in two or three weeks when it was worthless.

Note the predatory metaphor, the emphasis on their greed, and their analysts’ pride— “swooping down quickly for maximum profit”, as opposed to, one imagines, less rapacious investors, who invest at a leisurely pace and for middling profits. The point is, there’s a strong mainstream European tradition of belief that markets are controlled by cabals, at least some of the time. It’s a point of view that could get you banned from CNBC.

Though to be fair to Ms. Lagarde, harboring suspicions about recent action in the sovereign credit default swaps (C.D.S.) market hardly means you’re paranoid. Sovereign C.D.S are derivative contracts that work like an insurance policy against government debt default, though some investors use them simply to speculate on the likelihood of default. (Critics argue this is a bit like wagering on whether your neighbor’s house will burn down, but like everything else, it’s not that simple.)  Sovereign CDS are not traded on any exchange. And this lack of transparency has got critics wondering whether they’re suspectible to manipulation. Recently, Barclays Capital looked into the question of whether sovereign CDS are a good tool for measuring investor sentiment, or merely a way for speculators to sow fear of default, as European policy makers have complained. Their report, “Are Sovereign CDS the Canary in the Coalmine, or the Cat Among the Kittens?” concluded that the small size of the sovereign CDS market made it less predictive than the underlying market for government debt it’s meant to insure.

But then again, small markets are easier to manipulate. Enter the conspiracy theory: on Wednesday, Jean Quatremer, who reports on the Brussels beat for the French daily Liberation, broke the story that Goldman Sachs and the hedge fund run by John Paulson are behind the attacks against Greece and the euro…

The most shocking aspect of this affair is without doubt the role played by Goldman Sachs, which, while at the same time advising the Greek government, has also taken secret positions against Greece and the euro.

And this coming in the same week that it was reported in Der Spiegel and the New York Times that, back in 2002, Goldman helped the Greek government conceal some of its debts from the European Union through a series of complex derivative transactions.  The sole purpose of these transactions would appear to be to sidestep EU reporting requirements and paint a misleading picture of Greek finances. That news drew a lot of ire. Even the normally circumspect German Chancellor Angela Merkel lashed out, saying, “It’s a scandal if it turned out that the same banks that brought us to the brink of the abyss helped fake the [Greek] statistics.”

But potentially more damning is the assertion made by Mr. Quatremer, that Goldman Sachs has been taking advantage of its advisory role, and profiting at the expense of Greece.

… on 25th of January, Greece managed to place 8 billion euros in 5-year paper, even though the original intention had been to issue only 3 billion: demand had reached 25 billion euros! Goldman Sachs was certainly among the syndicate that placed this Greek paper. Up to that point, nothing out of the ordinary… After this spectacular success, everyone thought that the markets had calmed down… But then starting Wednesday [Jan. 27th] another storm hit. An article from the Financial Times… had just confirmed news to the effect that China had refused to buy 23 billion euros of Greek debt, a “private placement” engineered by . . . Goldman Sachs. What was this about? When a government fears that it won’t be able to place its debt, it asks a bank directly to place it on its behalf with one or several investors. It’s a sign of panic. And the fact that Beijing was said to have declined the offer was downright disturbing. In short, two reasons for the markets to flee Greece. [Athens] denied this, but the markets nevertheless increased the risk premium they assigned Greece, boosting [Goldman's] profits.

Of course, Goldman Sachs is a huge bank, with a massive derivatives business that entails managing tremendously complex and often offsetting positions. But if the story’s true, Goldman’s actions have been ethically dubious at best. And in the eyes of the European public, it all must seem downright nefarious.  Politicians respond to the public mood, and regulators in Europe don’t need much more motivation to start clamping down on financial market shenanigans. Already the new EU Internal Market Commissioner, Michel Barnier, has stated his intention to regulate the sovereign CDS market. But that’s just the tip of the iceberg. As he recently told Le Figaro, “No market, no actor, no product and no territory can go without relevant regulation and efficient supervision.” So, look out, markets: here come the regulators.

But for Goldman, at least in Europe, the tarnish on their image may be more worrisome. Goldman Sachs was already a lightning rod for conspiracy theory. Now this Greek episode may burn that image into Europe’s retina. As the French magazine Marianne recently put it, “How do you never lose? If you’re Goldman Sachs, you play from both sides of the table.” I can think of another group of people who profit no matter if their clients win or lose: arms dealers…

Well, it’s enough to start you thinking like a socialist!

The 1950 US National Soccer Team

On the 29th of June in 1950, the United States national soccer team pulled off one of the great upsets in the history of soccer. At the World Cup tournament in Brazil, they beat England, without question the dominant national team of their time with a roster boasting some of the best players in the professional game. None of the Americans were full-time pros, and they had lost each of their previous seven games with an aggregate score of 45-2. The English, for their part, had only lost three of their last 30 games. The US Head Coach William “Bill” Jeffrey confessed before the match: “We have no chance.”

Yet that day, at Independência Stadium in  Belo Horizonte, Team USA ran out 1-0 winners, a feat so shocking it’s known as the “Miracle on Grass”. It went on to provide the inspiration for a book and a 2005 feature film, and prompted USA defender Harry Keough to comment after the game: “Boy, I feel sorry for these b*stards. How are they ever going to live down the fact we beat them?” (1950, as it turned out, was a world cup chock-a-block with “greatest upsets in History”; the Uruguyan defeat of Brazil in the finals was so stunningly unexpected that the Brazilians changed their uniforms afterwards, fearing a jinx.)

David Beckham. Photo by CLF

60 years to the month, the two nations are set to lock horns again in a World Cup match for the very first time since. This 12th of June, they will contest the opening game of Group C in South Africa, and two players hoping to line up against one another in that game are currently plying their trade together stateside for the LA Galaxy. Teammates Landon Donovan and David Beckham have shared the Galaxy captaincy, as well as a war of words, since the latter’s controversial arrival in 2007. And with the World Cup squarely in their sights, both men are currently on loan to European soccer clubs during the Major League Soccer off-season.

Beckham, of course, is more than simply a player. He’s an international sports celebrity, who was brought to Los Angeles to help raise the profile of American professional soccer. Of course, as one would expect, his arrival has failed to stem the flow of top American players eager to put their abilities to the test across the Atlantic. Soccer clubs in Spain, Germany, Italy and England offer not only the crème de la crème in terms of competition, but also the wages to match. Whereas the opposite happens in the women’s game-the best women in England are usually lured to America-for the men, the top American pros flow to Europe.

Donovan was no exception. At a young age, his talent was clear, and he was widely courted by European clubs, yet he has always struggled to make his mark there. Until now, that is. The 27-year old striker has scored 42 goals in 120 outings with the American squad, still his potential wasn’t met when first moved to Germany’s Bayer Leverkusen at the age of 17. The young American striker has never caught his stride in Germany. Ultimately, he was loaned to the San Jose Earthquakes for what turned out to be four very successful years, which also featured a run to the World Cup quarterfinals in 2002. In 2005, he ventured to Europe once more, returning to Leverkusen, but ended up leaving, having failed to score a goal. Finally, he headed to the LA Galaxy, and yet more success in American soccer. Last season saw him named league MVP; he and Beckham took the Galaxy to the MLS Cup final.

Landon Donovan. Photo by Jarrett Campbell

But Europe hasn’t seen the last of Donovan. Done with Germany (after another disappointing spell in 2009), he has come instead to the English Premier League, and is finally showing Europe what he can do. In January, he joined American teammate Tim Howard at Everton, and is already making a big splash. British sportswriters are calling him the best signing of this season’s winter transfer window, and legendary pundit Mark Lawrenson has credited him with turning Everton’s fortunes around.

Indeed, it took just 12 minutes for that impact to be felt. On his debut outing, Donovan provided an assist with a delightful corner kick from which Leon Osman scored the first goal in a 2-2 draw on Arsenal’s home turf. It was an impressive Premier League debut that day in the driving snow. Though a draw, for his Everton teammates it meant redemption, since it was Arsenal that humiliated them 6-1 at Everton’s home field on opening day. Everton fans took to Donovan quickly. At his home field debut at Goodison Park in Liverpool, he left the field in the 91st minute to a standing ovation, after an impressive 2-0 win against Manchester City. This was also the game that truly marked the return to form of the talented Everton team, which has been hampered by injuries all season. Donovan continues to be a force at Goodison Park; he netted his first goal against Sunderland at the end of January. Before his arrival, Everton had won just five in 19 league outings. Immediately after, they went three for four. As you can imagine, Everton are looking keen to retain his services beyond the end of the season.

Beckham, surprisingly enough, also has something to prove during his three month stint in Europe. He wants to remain a part of England manager Fabio Capello’s World Cup plans. No other outfielder has played as many games for the English side as Beckham. All the same, he’s facing stiff competition for a place in the national team’s midfield. For now, he’s on loan to Italian giants AC Milan, where he spent January to May last year. Capello, it so happens, won the Italian league title with Milan, once as a player and four times as a manager (back when the team was bankrolled by a certain Silvio Berlusconi.) So there is scarcely a better place outside the English Premier for Mr. Spice Boy to get the attention of England’s manager.

That said, there’s still no guaranteed place for Beckham either on the English side, or even at AC Milan. Mr. Capello is known as a coach who won’t kowtow to big names or sentiment. He recently stripped John Terry of the England captaincy after revelations about the highly decorated Chelsea captain’s personal life. And Beckham will have to stay in top form simply to retain a starting place with the Rossoneri, as Milan are known, given the bumper crop of talent currently sporting their trademark red and black shirt. But the 34 year-old is managing it. He performed so well there last year that Milan wanted to take him away from Los Angeles to play for them on a permanent basis.

While Beckham is fighting for the chance to appear at his fourth consecutive World Cup tournament, Donovan, his LA Galaxy team-mate, is a sure-fire starter for a US team. The Americans beat current European Champions Spain on the way to the Confederations Cup final last year, and are currently ranked 14th in the FIFA World Rankings. England will still definitely be the favourites, just as they were 60 years ago, but if Donovan maintains his form, the USA will certainly not need another Miracle on Grass to have a chance against Beckham’s countrymen.

Eric Besson. Photo by Adam Tinworth

I went to the Paris meeting, because I wanted to see if, as advertised, the debate was a genuine attempt to come to terms with what it means to be a nation in postindustrial 21st-century Europe, or if it was merely an excuse to motivate the right wing vote and rile up the crazies. What I found was a little of both.

Outside the meeting, a young woman expressed to me what many suspect—that it’s all a gambit by an unpopular government and its divisive Immigration Minister, Eric Besson, to change the subject in an election year and monopolize discussion. “During the Mitterand era,” she said, “The question of immigration was used by the socialists under the pretext of fighting the National Front, as a way to rally the young. Now what Besson and Sarkozy are doing is practically the same. I think it’s a political tactic.” Except this time, it’s not the young they’re trying to rally, but the older, more conservative voters who are core supporters of Mr. Sarkozy’s ruling UMP party.

An old advertisment for the Paris Winter Circus

And the 16th is prime poaching for pensioners. This mostly affluent neighborhood hasn’t really been chic since “The Discreet Charm of the Bourgeoisie” (1972) was shot here, and walking around, you get the feeling that that’s when many in the neighborhood took up residence. Certainly, there was a strong contingent of dapper men in excellent coats and well-turned-out ladies in furs at the conference room next to the athletic club founded by the baron Edmond de Rothschild in this swanky 70s building. One of the crowd, a very nice lady in a cashmere hat told me, “For me, it was a very interesting debate, except that I couldn’t hear everything… it should have been more calm, that’s all.” At which point, her husband piped up, “You’re an American journalist? It’s not any worse in the United States! I lived for two years in Iowa City, Iowa. You begin elections with the Iowa caucus, and this was about the same thing!”

In fact, the meeting did have that kind of feel. Something like half the crowd were retirees, another quarter were either journalists or attached to various politicians, and the rest were a mishmash of curious citizens, cranks and activists. Mr. Besson has been running all over France conducting these little “debates”, which are really more like town hall meetings, as part of the “grand national identity debate” announced by the Sarkozy government at the end of last year.

It goes without saying that it is a huge and unwieldy topic. And immediately, it raises a more practical question: how the heck can you even talk about it in a useful way? National identity sounds a lot like a code word for nationalism, minus the inconvenient historical baggage. Call it nationalism-lite. Some critics have questioned the wisdom of holding such a discussion to begin with. An open-ended debate on a heated topic with no clearly defined endpoint seems more like a recipe for stirring up the passions, not for promoting reconciliation.

Mr. Besson, on the government website setup for the debate, offers this rather windy justification:

…the excesses of nationalism, the development of new forms of ethnic identity and regionalism, the gradual creation of the European identity, and the accelerated globalization of trade appear to some to call into question the very idea of the nation. The often-asked question, what is a nation, that it makes individuals identify themselves body and soul with people they don’t even know, seems more relevant than ever.

So, Europe, History, Globalization, Ethnic identity (read: Muslims): how to make sense of it all? Here to answer your questions is Eric Besson, the national identity impresario, waxing on about the values of the French republic and the history of French immigration. And you kinda have to admire the guy for his aplomb—the way he fielded four our five questions at a time, cherry-picking the best questions and ignoring the uncomfortable ones. He praised a young woman of North African descent who considers herself French, and simply French; fended off the tirade of an old Lebanese gentleman raised in Paris, who’s convinced they don’t even teach French history in the schools anymore; agreed with another old gentleman about the threat of the thankfully small but growing minority of French Islamists, though of course he’s at pains to distinguish them from the vast majority of French Muslims; lectures a North African gentleman (grandson of a French World War II veteran) about the fact this a post-colonial period we live in, and that it’s time to put the old colonial discourse behind us; and warmly accepted an elderly lady’s heartfelt thanks for tackling such a difficult issue.

But then the initially polite crowd grew restive. A noisy and cantankerous klatch of ulta-right wing National Front supporters hogged the microphone for a while, with a series of questions about Jewish groups and illegal immigrants. Later, I asked one how he felt about the meeting and he said: “I thought we expressed ourselves openly. We all said our piece. We all listened. It wasn’t a debate just between the [main opposition] socialists and the UMP. All the parties expressed themselves, it’s true a bit forcefully at times. But’s that’s liberty. Just because we don’t agree with those in charge doesn’t make us extremists. That’s freedom of expression,” he exclaimed, and then repeated, “We’re not extremists.”

In the back of the room, a couple of voluble of young men with buzz cuts and dark suits barked when they didn’t like the minister’s answers. The crowd grew uneasy. Next, a bearded man with spiky hair took the microphone and read some prepared remarks.

We are pleased this evening to raise the level of the “great debate over national identity”. A debate that smells rancid in a country closed in on itself, a hollow debate that turns Arabs and Muslims into scapegoats instead of ensuring social justice, a debate that excludes instead of establishing a real equality of rights between each and every resident of this country. A debate that is nauseating…

At which point, the crowd emitted a spontaneous moan, and the man, part of a leftwing protest group called “the Pink Panthers,” pretended to vomit, spraying something from a can onto the floor. Here’s the video:

The group chanted for a while, then were escorted out. The local UMP politician and host of the evening, Bernard Debré, fustigated before the crowd, “What you have just seen here is an example of fascism!” After that outburst, things settled down. It was hard to escape the feeling that the evening has crossed over into farce. The attendees headed to the exit looked visibly relieved.

In the hallway, folks were less than enthused about how the debate turned out. A lady of a certain age with a blond bob, who told me she works in politics, called the debate “animated”, but didn’t think the minister said anything new. While outside, another lady brooding over an ultra-slim cigarette was scathing. “Yeah, it was interesting,” she granted, “but there are other problems that we should be occupying ourselves with besides the burqa and national identity. What gets me, is everyday there are people dying in the streets and nobody does anything about it.”

Women wearing the niqab in Turkey. Relatively rare in France, the French parliamentary debate to have it banned has drawn criticism from the left and from members of President Sakozy's ruling party. Mr. Sarkozy has sought to avoid an outright ban, which many feel would provoke a backlash and mostly likely conflict with the European Convention on Human Rights.

The young woman who earlier drew comparisons between this debate and the Mitterand era told me that she came to tonight’s meeting because she had attended one the previous week in Créteil, a suburb to the southeast of Paris that is home to many recent immigrants and people of north African origin. “I wanted to see how it would go in a rich neighborhood,” she said. “In Creteil. the room where they held the debate was pretty empty. Here, it was standing room only, and the majority were elderly.”

If it was the intention of the Sarkozy government to use these debates to grab the attention of their supporters and the media, then they’ve had a fair degree of success.  However, the polls suggest that the public isn’t wholly comfortable with the way the debate has been conducted. As the minister of Immigration and national identity, it is appropriate that Besson should moderate the discussion.  Except, he is far from a conciliatory figure. A socialist turncoat who defected from socialist presidential candidate Segolène Royale’s campaign in its closing weeks to join the Sarkozy camp, he has embraced his role as hatchet man for the administration’s tough stance on illegal immigration with the zeal of the converted. More recently, Mr. Sarkozy has had to backtrack on his confrontational stance over the niqab—the full body garment that the French persistently and incorrectly call the burqa—the whole hullabaloo has dominated the headlines nevertheless.

The irony, of course, is this “grand debate,” though nominally about the French, is really focused on French anxieties about those who are not French, or only recently French—the influx of immigrants and children of immigrants, illegal or otherwise, who are making French national culture increasingly difficult to define.

One could argue that simply holding a debate on national identity presupposes that there is a problem.  It is far from clear that national identity should be an easy thing to define—that would assume a narrow and backward-looking notion of identity. Happily, our 21st century self-conception is harder to pigeonhole, because it is more elusive and diffuse. Every one of us, individually, is a harmony of cultural, social, regional, ethnic, religious, gender, political and personal traits. And a noisy, trumped-up debate about national identity can’t drown our collective symphony.

Raymond Domenech. Source: Wikimedia

It’s when the job qualifications don’t seem particularly high that the anger can turn really toxic. Few would consider themselves fit to head the World Bank, for example, or direct a $100+ million dollar motion picture, but plenty of folks feel they could coach a soccer team. This is why Raymond Domenech, coach of the French national soccer team, inspires such fanatical loathing in French fans. And ever since the French team’s embarrassing victory over the Irish in November, the chorus of armchair coaches has been calling for his head.  (More on this is a moment.)

Mr. Domenech has coached les Bleus, as the French team is known, since 2004. Things were rocky from the start. That year, les Bleus struggled to qualify for the 2006 World Cup. Zinedine Zidane, or Zizou as he’s known, came out of retirement just to play the tournament, and thanks to his brilliant on-field leadership, the team rallied. They upset  Brazil, who were favored to win in the quarterfinals, before narrowly losing to Italy on tiebreaker penalties in the final match of the World Cup. Few, of course, credited Domenech, since Zizou was the superstar—one of that rarified group that includes Maradona and Pelé. Crediting Domenech would have been like blaming the Bulls’ success on Phil Jackson. Anyway, Zidane’s performance in the last three games of the cup was characteristically intense and inspired, right up to his ejection from the final match for head-butting Marco Materazzi in response to an alleged racist taunt. (The French of course promptly forgave him his inglorious exit.)

Not so Mr. Domenech, who lost whatever flimsy halo he had garnered just two years later. At the 2008 European football championships, les Bleus, sans Zizou, were shown a humiliating exit from the first round. First the Dutch dealt them their worst tournament loss in over 30 years—a 4-1 drubbing. After the Italians spanked them 2-0, Mr. Domenech’s term as coach seemed in doubt. France Soir, the French daily, ran a cover that implored him: Resign! But Mr. Domenech hung on. French soccer’s governing body, the French Football Federation (FFF), decided, not entirely without reason, that the coach who took les Bleus to finals of the 2006 World Cup deserved another shot.

Louis XVI. Not a Good Football Coach.

Then in 2009, history repeated itself: France again struggled to qualify for the World Cup. Les Bleus barely managed to squeak into the tournament, defeating the Irish on a winning goal scored by William Gallas, off an assist by striker Thierry Henry, who obviously and egregiously hand-balled, twice, yet got away with it. It was an embarrassing way to win. The French had played a lackluster, disorganized game against a lesser Irish team. And many, including France largest sports daily, L’Equipe, fingered Domenech. Former French national player Eric Cantona said, “I think that Raymond Domenech is the worst coach in French football since Louis XVI.”

Of course, you’re only as good as your last win; that truth haunts every coach in every sport. But this doesn’t fully explain Mr. Domenech’s vilification. It’s his style. Many are baffled by his tactics, which he never deigns to explain. The roster of players he calls up for the national team is often quirky and inexplicable, and bizarrely, influenced by astrology. He once blamed his stormy relationship with veteran winger Robert Pirès on the fact that Pirès is a Scorpio. Also, he’s admitted that he thinks Leos aren’t good defenders. “When I’ve got a Leo on defense, I’ve always got my gun ready” he once said. “I know he’s going to want to show off at one moment or another and cost us.” It must be quite a source of anxiety for him, seeing as how William Gallas, a Leo, anchors the French defense.

Leos. Not Good at Defense.

But one gets the sense, watching his press conferences, that anxiety and self-reflection are regions Domenech never really visits. He seems to prefer self-regard to self-criticism. But hey, who doesn’t? In his case, however, it’s a question of degree. Unlike lesser coaches, who when asked whether they intended to resign after a humiliating loss to the Italians in the Euro Cup might use a press conference to, say, explain what happened, Domenech chose the moment to propose to his girlfriend, French TV personality Estelle Denis. “I have only one project,” he answered reporters, “to marry Estelle, which is what I’m asking her today.” Unsurprisingly, the French media pounced on the comments as inappropriate, but he was unapologetic. “Everything was so sad,” he later explained. “I thought life has some beautiful moments and you should tell people you love them. I wanted to show some emotion.”

Franck Ribery. Born in April.

To his credit, Mr. Domenech has proved an occasionally inspired talent scout, despite (or who knows, maybe because of?) his mystical hiring policies. He has definitely unearthed a few diamonds among the unknowns called up to the national team, such as strikers Andre-Pierre Gignac (Sagittarius) and Bafetimbi Gomis (Leo). For the 2006 World Cup, Domenech famously rejected veteran Barcelona winger Ludovic Giuly in favor of an untested midfielder from Marseille named Franck Ribery. Ribery is now regarded as one of the best French midfielders of his generation. He’s also an Aries.

Yet the problem for the beleaguered French coach is that, considering the star-studded squad he manages, anything less than strong results in the World Cup in South Africa this June will probably dissatisfy French fans. According to  Futebol Finance, as of March 2009, six of the 50 highest paid players in the world wear the tricolor jersey. That compares to seven for the absolutely awesome Spanish side and eleven for perennially disappointing England.  Yet, if you believe in the predictive power of markets, then maybe this will be the year for the richly remunerated English. (The English could actually win. Yes, it is possible.) World Cup favorites Brazil have just 5 players on that list (except, two of them are Kaka and Robihno, nuff said.)

There may be hope for the French, considering how poorly they performed during the run-up to the 2006 World Cup, and that worked out.  Yes, but they had Zizou. This time, the stars and planets may not align  for Domenech.

Prime Minister George Papandreou

But they couldn’t dispel the impression that European support for Greece is by no means unconditional. European Economic and Monetary Affairs Commissioner Joaquin Almunia told Spain’s El Pais newspaper “If Greece does not take the necessary measures to overcome its problems, the euro zone won’t be able to take them in the name of Greece.” Hans-Werner Sinn, President of Germany’s Ifo Institute for Economic Research, was more blunt: “The euro zone will not break apart because of Greece. It is too small for that. But it could be the next Lehman Brothers.”

Here we all thought it was time to breathe easy. After Monday’s announcement that Abu Dhabi would extend a $10 billion lifeline to neighboring emirate Dubai, it was hoped that the Greek financial scare would also recede. Yet Dubai shook investors’ faith in every sovereign or quasi-sovereign entity whose credit quality depends on unofficial assurances. And that fits Greece to a tee. The land of Plato, gyros and the unstilled Cyclades has a debt load of 300 billion Euros, greater than 110% of its GDP; still it’s been able to continue borrowing from the European Central Bank (ECB). Then came the recent surprise upward revision of its budget deficit to 12.7% of GDP. This prompted the Fitch downgrade. Investors and other credit agencies have since begun to worry that there is, in fact, no guarantee against a Greek default.

Surely, the mixed messages from European central bankers—fearing the moral hazard of promising too much too soon, when the onus is on the Greek government to clean up its books—haven’t helped. As recently as last week, Axel Weber, President of the Bundesbank, was warning that the ECB might stop accepting Greek bonds as collateral. In normal times, the ECB accepts only A-rated securities at its liquidity window. This was relaxed to BBB- during the financial crisis. Since then, the ECB has let it be known that the new, laxer standard would only remain until the end of 2010. With its bonds now triple B+, Greece will have to get its rating boosted—a tall order, considering the parlous state of the Greek budget—or see its banks cut off from their source of funding. It goes without saying that this would be disastrous. And yet, just a day earlier, ECB president Jean-Claude Trichet, was sounding a grave but conciliatory tone:

The situation in Greece is very difficult. We all know the figures and we all know the important and cautious decisions that will have to be taken to put the situation back on track, the situation as regards to fiscal policy. So this calls for very difficult, very courageous but absolutely necessary measures. I am confident that the government of Greece will … take the appropriate measures.

Maybe Trichet and Weber are playing good cop, bad cop? If so, it backfired. Prime Minister George Papandreou disappointed the markets, who wanted a clear signal that the government was willing to cut costs and raise taxes. Instead, Mr. Papandreou presented a modest plan Monday night. His numbers did sound good and ambitious: he committed to slashing the budget gap from 12.7% of GDP to under 3% of GDP within four years. But his proposals were medium term. They may not be enough to help next year’s budget situation—a mix of one-off tax measures, minor cuts in Social Security and public sector spending, and an eye-popping 90% tax on bankers’ bonuses. While certain to guarantee that no Greek banker receives a bonus next year, the plan is likely to fall short of what’s needed. So, the market voted with its feet. By Tuesday morning, Greece’s 5-year sovereign credit default swaps, which measure the likelihood of default, had spiked to 201 basis points, up from 170 bps before the Fitch downgrade.

The 2008 Greek Riots. Photo by Tom Tziros

So here’s the problem: considering the shaky state of Greek politics right now (Mr. Papandreou and Co. still have last year’s riots in the back of their minds) and the feeble state of the Greek economy (demand is expected to fall by 3% in real terms next year) it may be politically and practically impossible for the Greek leader to impose the kind of austerity measures needed to bring their fiscal house in order. And if, as some claim, Greece’s debts are actually far higher than the official figures, some form of intervention to prevent a Greek default may be inevitable. Many fear that a Greek default would go pandemic in Europe, and spread to the other weak economies, like Ireland, Spain and Portugal. Indeed, Angela Merkel has already hinted that some sort of European alternative to the IMF may be necessary. The question is, though, whether the Greek government and Greek voters would be able to stomach the kind of stringent medicine it would entail. And considering the degree of mistrust of Greece by European finance ministers, there would have to be some uncomfortable scrutinizing of the Greek government’s books. (Observers have speculated that Greek governments may have “fudged the numbers” to achieve the convergence criteria for accession into the Euro.)

So what then? Greek voters are going to have to take a long hard look at the benefits of membership in the EU, and weigh them against the economic pain that an austerity plan could afflict. In July, the OECD concluded that to bring Greek government debt down to less than 60% of GDP within 10 to 15 years, the budget deficit will have to be eliminated altogether within the next five years. The Greek state, in other words, needs a complete revamp, otherwise it’s going to go broke. But the sting of such a massive structural readjustment will undoubtedly cause many in Greece to question the benefits of EU membership.

Likewise, many Europeans may wonder whether it’s really necessary to bear the cost of preventing a Greek default. For years, it seems like Greek governments have acted in bad faith on the financial front. Though far from alone in overshooting the three percent budget deficit target laid out in the EU Growth and Stability pact, (since post-crisis and recession, swollen budget deficits are general across Europe), Greece stood alone as the only member state that had taken “no effective action” to address its shortfalls, according to the European commission. This in a year when other members, like Ireland, have faced the gloomy proposition of cutting government spending in a downturn.

Fear of a backlash by Mr. Papandreou's public sector supporters, like the 2007 general strike shown above, may be limiting the scope of proposed reforms. Photo by Tom Tziros.

The Irish did succeed, nevertheless, in avoiding a far greater financial catastrophe.  And that highlights one of the unexpected benefits of the financial crisis in Europe: the crisis has been a stress test, not just for European banks, but for the union itself. It has increased policy coordination among member states; the ECB has been able to fashion a role for itself as de facto lender of last resort; and small countries have come to see the benefit of being in a large economic tent when the financial gales blow.

But that still leaves one last glaring hole in the European system—what economists call the “free rider” problem. What do you do about countries unwilling or unable to achieve the structural reforms necessary for long-run compliance with the European Growth & Stability Pact? As result of its budgetary failure, Greece has now ventured down an untraveled path. The EU commission has begun, in fact for the first time, the enforcement process, as laid out by the pact. If the Greek government fails to demonstrate to the EU commission tangible evidence of permanent reform, this could trigger fines and penalties—remedies no one hoped would ever be necessary. And this begs the question that hitherto few have wanted to consider: should the EU develop exit mechanisms from the monetary union, on either a temporary or permanent basis? It would be a staggering choice to make. The political calculus alone would overwhelm the economic considerations, especially for members whose democratic institutions are young, and who have benefited, as has Greece, from the shoring up that the older democracies of Europe provided it.

Greece could be a test case for other, larger economies that refuse to play by the rules down the road. The Greeks may muddle through, but financial crises also have a way of forcing everyone’s hands.

Part of the problem is that the German economy relies too much on trade. This has resulted in a wage trap, wherein worries over the competitiveness of its high value exports in a strong Euro world have kept wages stagnant. In recent years, Germany’s powerful unions have not pressed for wage increases in order to preserve employment. And last year, the country’s notoriously scrimping consumers spent only 56% of GDP compared with 70% in the US. It is a slow growing, mature economy—less resilient than the more service sector-oriented, free-spending French—and its population is only growing older. According to the German government, there are more people over the age of 65 than under the age of 20 living in Germany today. The population is projected to drop by 3.5 million people in 2020, yet the proportion of over 65 year-olds will continue to grow. Over the long run, this threatens to overwhelm the pensions and healthcare system.

The chancellor’s bet is that cutting taxes, but keeping spending steady, will boost Germany’s rate of growth, create jobs, lift tax revenues and put the social system on firmer footing. But many doubt Ms. Merkel’s math, and fear her program will simply create endless budget deficits, as have plagued the United States after decades of tax cuts. Most damning, the Council of Economic Advisers, the so-called “wise men”, (actually four men plus one woman), denounced the plan as “vague” and “deceptive”. They attacked it for its conspicuous lack of a “comprehensive exit strategy” from the structural deficits it would create.

The Gipper

Over the weekend, members of Merkel’s own Christian Democratic Union party (CDU) were in open revolt. The Premier of Schleswig-Holstein, Peter Harry Carstensen, reportedly threatened to resign unless his state was compensated for revenue lost under the plan. Without Mr. Carstensen’s support, it is unlikely the stimulus plan will pass the Bundesrat, or upper house of parliament. What’s more, Thuringia’s Premier, Christine Lieberknecht, told ZDF television she intended to vote against the measure. “Out of responsibility for the state and the budget,” she announced, “we cannot agree to it.”

The rancor within her own party, and the open disputes between the CDU and its junior coalition partner, the liberal Free Democratic Party (FDP), have come as a surprise. Many expected the days of bickering should have ended along with the outgoing “grand coalition”, which lumped the CDU together with their social democratic (SPD) opponents in an uncomfortable four year partnership. In part, the contentious atmosphere owes to the brash and relatively young FDP leaders Ms. Merkel has invited into her government. Led by incoming foreign minister Guido Westerwelle, the liberals were the standout success of the last election—remarkable, considering they were a dying party as recently as ten years ago. “The financial crisis has provided an opportunity for the FDP to bring their opposition agenda into the coalition,” Paul Vallet, associate professor at the American Graduate School in Paris, told the Faster Times. “They feel like they are in a position to wield a lot of influence in the new government. At the same time, Merkel is the one in power with [all] the experience. The FDP have been out of power for 11 years. So they don’t have as much leverage as they might have supposed.” The tense atmosphere also reflects the simple fact that in German politics, tax cuts are a live wire.

Guido Westerwelle. Photo by Poeloq

In reality, the Reagan-Merkel comparison begins and ends with tax cuts. The German federal system forces its leadership to take an extremely consultative and consensus-oriented approach to decision making. In fact, the methodical and deliberative Ms. Merkel is a German leader par excellence. Should it pass, it’s likely that the FDP’s aggressive tax cut hopes will be considerably watered down; and that may have been her intention all along. But nothing will lessen the irony of such a very un-German approach to saving the German system, by breaking the rules of tight money, low deficits, and high rates of saving.

“The social market model,” Mr. Vallet points out, “is like the national cement.” And it is something—not merely for the postwar generation, but also for the post-reunification generation—that is increasingly viewed as part of the German identity. In a nation that abhors nationalism for obvious historical reasons, he adds, “the social market model is a concept that they are finally becoming comfortable with as an expression of national patriotic pride.”

The question is whether it will prove flexible enough to survive in the 21st century.

Herman Van Rompuy. Photo by Luc Van Braekel

Media outlets in particular grumbled over their unfulfilled wish for a celebrity politician, who could have played the president’s role with newsworthy élan. The take-away was that this was yet another example of the drab, consensual politics that dominates the EU, and that such colorless figures cannot clear up the leadership muddle that the Lisbon treaty was meant to fix. Spain’s El País openly worried that these two “gray, unknowns” would compound the estrangement between EU citizens and their institutions. In the Nouvel Observateur, former French president Valéry Giscard d’Estaing complained that the choice reflected “a limited ambition for Europe at a time of grand global dialogue… [Van Rompuy] is no European Washington.” And Gideon Rachman at the Financial Times compared the process of selection to a computer-dating program gone terribly wrong. “If the answer is Herman Van Rompuy and Cathy Ashton,” he fumed, “what the hell was the question?”

So much for Tony Blair, who was, until recently, assumed to be the front-runner for the new top post. (Though in reality, this was an idea that mainly fired up English-speaking imaginations. Most “Anglo-Saxons”, as the French weirdly call us, still don’t fully appreciate how roundly Europeans resent Blair for the role he played ginning up public support for the invasion of Iraq.)

For those readers who don’t follow EU politics with all the verve of a comparative government advanced placement student, two of the major changes introduced by the recently ratified Treaty of Lisbon were the creation of a “president” of the EU and also a head diplomat, who could speak for all the foreign ministers of Europe. Many feel that the European Union, which houses 500 million people and has the largest GDP in the world, punches well below its weight on the world stage. In practice, its leadership is diluted—divided between the larger countries of Europe, who individually and collectively don’t seem to have as much pull these days as presidents Obama and Hu.

To this end, it’s obvious Mr. Van Rompuy and Lady Ashton are no remedy; they are the sort of non-threatening backroom picks that the risk-averse European leadership seem to prefer. This is particularly true of Lady Ashton, who, with no foreign policy experience, got the job as a concession to British Prime Minister Gordon Brown for abandoning the Blair bid. This is unfortunate, but such is the horse-trading that determines how most EU positions are divvied out—a far from ideal recruitment strategy.

However, before we get carried away bemoaning lost opportunities, it’s worth taking a closer look at the former Belgian prime minister’s new job description, because the job is not quite as presidential as it sounds. For the next two and a half years, it will be his responsibility to chair and steer the work of the European Council, and also to serve as its spokesman. Unlike Lady Ashton, who will head the newly formed European diplomatic corps, Mr. Van Rompuy will have no formal power, and very little administrative power. Mostly, his presence will ensure greater continuity on the council, which is made up of the leaders of Europe. His office will replace the old, rotating six-month presidency and the inevitable short-termism it fostered. Merkel and Sarkozy reportedly favored Van Rampuy for his reputation as a consensus-builder, which is probably wise, since persuasion is about the only power he’s going to have.

Some critics, however, have sought to portray European leaders as jealous of their own power. Parisian socialist deputy Jean-Christophe Cambadélis told le Nouvel Observateur:

“The hand of Sarkozy and Merkel in the choice of Van Rompuy and Ashton has achieved its goal: to render the European presidency and the High Representative for Foreign Policy banal… we cannot be but sorry.”

If indeed that was the goal—to safeguard the prerogatives of national leaders and their foreign ministers against a more assertive EU leadership—then the members may have inadvertently hit upon a wise choice. But in a broader sense, the decision of Sarkozy, Merkel and Co. reflects the emerging view that after a dizzying decade of enlargement and integration, the onus is on the EU now to demonstrate good governance. Considering the general queasiness about the Union’s democratic deficit the appointment of a swaggering, undemocratic spokesman as its president might have been unwise. It would likely have stoked the kind of popular revolt already seen in Ireland, France, and the Netherlands. Anyway, from a longer-term perspective, there really is something to be said for bland inaugural leaders.

Valéry Giscard d’Estaing’s invocation of George Washington is probably more apt than the former French President realizes; the thing is, he got the comparison wrong. Hype and hagiography aside, Washington was the essence of the bland, consensus leader. Arguably, the two most significant things that our first president did were 1) to listen to Alexander Hamilton and nationalize the war debts of the former colonies (which tied the states to the federal government financially and created a robust domestic financial market that kept us independent of English capital markets, something other fledgling American democracies failed to do), and 2) to step down after eight years, without trying to become an American dictator. Washington’s dignified (read: boring) inaugural presidency ensured that the office has always loomed larger than whoever holds it; we don’t constantly compare our current Commander in Chief with Washington.

The problem with charismatic founding leaders is that their personality exceeds the office. Assuming that Blair had succeeded, and that’s quite an assumption, then two and a half years from now, when he stepped down, the question wouldn’t be “who should be the next president” it would be “who can fill Blair’s shoes?” This is, to a certain extent, a flaw of the French Fifth republic: the French presidency was tailor-made for de Gaulle, and every president since has governed in his shadow.

Maybe it is just too early in the life of the EU to hang it with all the trappings of a super powerful nation state. It is not a military superpower; neither is it a nation state: it is a work in progress. Yet, as is typical of EU politics, pro-Europeans argue as if its very survival and relevance were at stake. This is emerging as one of the most predictable aspects of EU politics: every time a treaty is voted down or enlargement suffers a setback or an uncharismatic leader is appointed to a post, it’s as though the whole damn effort were under existential threat.

Imagine the Fins, the Poles and the Brits speaking as one. Truly, it may take a generation for a trans-European political culture to emerge. For now, the politics of consensus, gray and uninspiring though it is, is probably the only workable way to group the disparate voices of Europe into a single voice, and forge a common EU foreign policy. The notion that a charismatic leader could fast-forward this is probably wishful thinking.

In the meantime, we’ll have to make do with Caspar Van Milquetoast.