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Coda: Hedging Disaster

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From the Winter 2014/2015 Issue “Europe Under Fire

By David A. Andelman

PARIS—Just inside the front door of the sprawling mother ship of the Hermès empire on the Rue Saint-Honoré stands a young Chinese woman prepared to welcome the wealthy shoppers from Beijing and Shanghai who share her mother tongue. Just beyond her, one recent Fall morning, were several of her countrymen who’d filled the largest bright orange Hermès shopping bags with cartons of €6,000 ($7500) handbags, €650 ($800) sneakers, and a few €2,700 ($3350) wristwatches thrown in for good measure. This was all they could reasonably manage, staggering out of the store to their limousines waiting outside.

But down the street, in the less brand-name boutiques that represent the true height of French fashion, at least to the real cognoscenti, two or three sales persons stared gamely at each other, hoping someone would walk through the door. In Madrid, on the fashionable Serrano, even the likes of Gucci and Cartier had barely a shopper or two casually browsing the otherwise empty aisles. Chinese billionaires, Russian oligarchs, these are the lubricants of commerce in today’s Europe—but a thin veneer on a fragile, often fracturing structure that is teetering beneath the surface. Europe today is a disaster waiting to happen. Indeed, in many corners it is already upon us.

The continent is firmly in the grip of a crisis from which the United States is only just emerging and on the brink of which China and Russia are balancing as well. Disasters can take many forms, morph in strange, often unpredictable ways. There are economic disasters, terrorist attacks, tsunamis, and earthquakes of every stripe. How nations and their leaders cope is very much a measure of their resilience and innovation, indeed their very viability, not to mention their success in providing for their people now and for decades to come. Governments rise and fall on the effective- ness of this coping mechanism, but often simply on the perception of their adequacy to the task.

Today, with all too many uncertainties in life and commerce, often overlaid by terror and mayhem, no corner of the world is in any sense comfortable, nor should any leader be complacent at all.

In the economic sphere, the hedge has become the most prized economic vehicle—an inoculation against catastrophe—from Wall Street to Threadneedle to the Place de la Bourse to Shanghai. But there are political and social hedges as well that are less easily denominated, though no less tangible, if not apocalyptic. So when the violence spawned by the Islamic State (IS) in northern Syria is carried to the very doorstep of neighboring Turkey, President Recep Tayyip Erdoğan hedges his bets, forbidding the launch of lethal air strikes from NATO bases in his nation that could turn the tide of battle, while quietly allowing hundreds of Western jihadi fighters to slip from Turkey into IS strongholds.

SCALING DISASTERS

The physical scale of Europe has not changed in centuries. It is still geographically defined as the vast land mass between the Ural Mountains in Russia and the Atlantic Ocean. Its political and diplomatic area, however, has morphed dramatically, ever since the immediate post-World War II years. With the arrival of the European Union, which has continued to expand its borderless frontiers to the very doorsteps of Russia, to the introduction of the euro and the expansion of the eurozone where the eponymous currency is accepted at face value, Europe continues to change its inner and outer essence, often with little understanding of the consequences.

The speed of this transformation and the scaling of the continent have failed to keep pace with many of the external forces preying on its weaknesses.
And these disasters are only
looming larger.

Demographics plays
 a central role. The fastest
growing country in Europe
is Norway, whose popula
tion is expanding at an annual clip of 1.32 percent. 
But that’s only the 97th
most rapid growth regis
tered in the world. In Eu
rope, Norway is followed by Switzerland at 1.07 percent. And though geographically in the heart of Europe, it’s not even a member of the European Union or the eurozone. Every other EU nation is growing at less than 1 percent. Indeed Greece, Hungary, Portugal, Lithuania, and Latvia are actually shrinking in population, which puts them alongside Japan, in the same economic boat—a once surging economic power, now rowing desperately just to stay in the stream.

The scale of Europe is shrinking or stagnating as clearly as its economic pros- pects. Lisbon’s magnificent opera house, the Teatro Nacional de São Carlos in the heart of the Chiado, was in hiatus in the middle of September. The building, a precise replica of Milan’s magnificent La Scala and inaugurated July 30, 1793 by Queen Maria I, is empty. The Portuguese government had been forced to cut its subsidy in half, slashing €15 million ($18 million). Instead of performing, the great singers were hanging outside at the stage door preparing to rehearse, and rehearse again. The lights were illuminated briefly for two visitors, to show off the magnificent interior. The lights were dimmed immediately after the visitors’ departure.

With the shrinking scale comes an end to what philosopher George Steiner calls l’esprit européen, which he traces to the destruction wrought by the two great wars of the last century in Europe that left 100 million soldiers and civilians dead. But why stop there? Further back, there were the Napoleonic Wars, or the earlier Thirty Years War that laid waste vast stretches of Germany and Italy, Bohemia and the Low Countries. This conflict was brought to an end only by the Peace of Westphalia in 1648, enabling the rise of the Europe’s modern nation states. Or we could go even further back, another two centuries, to the Hundred Years War be- tween England’s ruling Plantaganets and France’s House of Valois for control of France. That conflict could well have set the stage for the British view that “the wogs begin at Calais”—perhaps another, if a trifle offbeat, reason why the British have insisted on retaining the pound as their currency rather than join the Franco-German-led euro. 
If we are seeking demographic disasters, we can also continue back through the 200 years worth of Crusades that destroyed much of the flower of European chivalry in the High and Late Middle Ages, or even before that to the Gothic Wars that laid waste the Roman Empire, or the Peloponnesian Wars that pitted Athens against Sparta a half century before Jesus. Along the way there were a host of other disasters, notably the Black Death, the epidemic of bubonic plague that wiped out half of Europe’s population—as many as 200 million people in four years, and as many as 80 percent of the population in the south of France, Italy, and Spain.

EUROPE LOSES ITS WAY

Yet despite these wars and scourges that have swept across Europe in the previous three millennia, after each, the continent and its people have managed to recover and prosper. Along the way, Europe came to dominate the world or at least large portions of it. Yet in some ways, today is different. Suddenly Europe seems to have its back to the wall with no apparent exit. In some respects, Steiner is correct. Europe has lost its heart and soul somewhere and is seeking, at times desperately, to reclaim it. Yet in doing so, by agglomeration, it has truly lost its way.

I have long believed that the real strength of a nation is in its uniqueness—its language, culture, history, the human spirit of its people, and the courage and will to preserve what is its own at all cost. It is this spirit that enables nations to survive disasters of any stripe and regain their strength. But Europe today has lost its uniqueness. In its efforts to craft a single, unitary entity—without borders, currencies, tariffs, or a host of other uniquely indigenous qualities, Europe risks losing more than it gains.

Japan’s great error was to lose its sense of itself—what made it great. At one point, this small chain of islands off the east coast of Asia dominated the region. Sadly it used that power malevolently—believing that armed conflict was a solution to its own demographic, political, and economic troubles. But the unique resilience of its people enabled it to rise from the ashes of World War II and the horrors of two nuclear bombs dropped on its territory. Again, however, it squandered this energy. Imitation became its mantra. The hard work and innovative efforts of its people were misdirected. In 1974, I accompanied my new bride and her father to Japan for a “buying trip.” He was a dress manufacturer who discovered that Japan was able to produce fine silk and other fabrics for his company’s dresses to be sewed in Hong Kong and shipped to America. The fabrics were produced, flawlessly and on his precise timetable. But in the end, they were little more than “knockoffs.” On the second leg of our trip, in Hong Kong, at dinner one night we were interrupted by a furtive Chinese salesman with a large book of fabric swatches that he thrust eagerly into my father-in-law’s face. He glanced casually at them, then waved off the salesman. “Why?” I asked. “Communist Chinese,” he sniffed, “You can’t count on when the goods will ever show up.” The moment China began operating on Western timetables, producing its own, cheaper knockoffs, Japan was finished. Now, Bangladesh and Vietnam are waiting in the wings, just as the Philippines man call centers for every- one from Citi cards to Microsoft. Yet all of these nations are losing their way as definitively as Japan.

Now, Japan, for one, is seeking to recover its mojo. The tsunami that caused the Fukushima nuclear plant disaster of 2011 could not have come at a worse moment. The nation’s growth rate had shrunk to barely 1 percent, and these two catastrophes would push it into negative territory for the year. It is still the world’s third largest nation by GDP, but at the expense of being the world’s largest creditor nation as well. It built this financial muscle at least in part on the strength of spending virtually nothing on military preparedness—trusting its security entirely to the United States ever since it emerged as a conquered power at the end of World War II. But no longer. Suddenly, Japan has begun to recognize that it must assert its uniqueness and stand on its own two feet at every turn.

If it can recover, it will be a tribute to the great resilience of its people and a return to its roots—indeed an object lesson of how to emerge from disasters, especially when multiple disasters converge. In this case, there are at least three, all converging. The economic disaster of slow growth and shrinking markets was compounded by the tsunami and nuclear meltdown, and multiplied by the external challenge of a China that recognized it could assert its hegemony in a region so long dominated by an enemy next door.

As a first step on its road to recovery, Japan is starting again to care for its own defense. Last Spring, the Japanese Prime Minister told a gathering of Asian leaders that Japan, responding to threats from China barely a hundred miles away, would begin developing a workable defensive capacity that was already in a position to come to the aid of any neighbor whose sovereignty might be challenged. So far Japan hasn’t been taken up on that offer. But China was clearly listening. Threats against Japan from the mainland have largely melted away, though in the case of other neighbors—especially Viet- nam and the Philippines—have not evaporated. At some point, Japan could still be called upon to demonstrate its newly- articulated resolve.

VANISHING CAREER

Europe could take some lessons from Japan’s experience. The continent broadly and all too many of its component units—I hesitate to say nations since so many have given up vital elements of what has made them truly European nations—are facing disasters like few of their counterparts in Asia or the Americas. These disasters, immediate or incipient, are headlined by unemployment that in too many cases has gotten out of hand. Indeed, unlike Japan, where lifetime service in a company is still in many cases still an achievable constant, the “career” is an all but forgotten memory among millions of a certain age as the French call those in the prime of life. And for their children, the concept is an impossible dream en route to an obsolescence as complete as the Walkman.

In Spain, where the official unemployment rate is 25 percent and for youths it soars to 50 percent or more, the routine is for young people to live “at home” with their parents until they are approaching middle age. “Living at home costs them nothing,” says Sebastian Feinblatt, one of those increasingly few young men who’s succeeded in finding his own flat in Madrid. “The small jobs they get, they spend the money on beer.” And those are the ones who stay. Many, including Spain’s best and brightest, simply pack up and leave. With the totally open frontiers of the various member states of the European Union, “they move to Germany, move anywhere,” says Sara Lumbreras Sancho, a lecturer at the Instituto de Investigación Tecnológica. “Even Spanish people with good degrees from good universities go abroad, if only to learn English.” Indeed, Florencia Cidre, an accomplished molecular biologist researching rare pediatric cancers, loves her work, but says “we are paid so badly here. We get such low salaries compared to anywhere else. That’s why if I got an offer from abroad, I would go, for sure. For doing the exact same thing, I’d get paid twice as much.”

At a dinner in a Basque restaurant in Madrid, six young people, from 27 to 33 years old, gathered to assess their lives and the prospects of their real or adopted country. Each is a Global Shaper, an elite group of young people designated by the World Economic Forum, representing their generation’s best and brightest. And who mince no words in discussing their concerns and those of their fellow youths.

Cedric Kutlu, founding partner of a private equity firm known as the Fools Fund and who speaks five languages, has perhaps the most direct and at the same time most jaundiced views. “There is a lot of mediocrity in Spain,” he begins sadly. “And this is not something that happened from one day to another—it has been an accumulation of things. Culture, aptitude, education are also factors. The public services are a joke in Spain. The majority of politicians have never practiced in the private sector for a minute in their lives. You have mediocre people helping other mediocre people. And they are kind of proud of being that way. Change is inevitable because it is not sustainable.”

The question, however, is not whether the status quo is sustainable, but whether it may be so deeply embedded in so many places in southern Europe that it has become a part of the natural fabric—transplanted from the nation to the broader European Union itself. One Greek-American executive with relatives in Athens returns every few years from a visit shaking her head. “They do nothing but dance and sing in the sunshine,” she says, reiterating a cliché that dates back at least a half century to the film “Zorba the Greek,” but which the Shapers from Spain, in many respects an equally Mediterranean country, echo today.

“Oh yes, I would say the whole Mediterranean region is in a very similar situation in general,” Cedric nods. Esther Paniagua, a top technology journalist, agrees. “You go to places like San Francisco or even Colombia, they have sun and sand, but they are ambitious. When I was there last week, I didn’t want to come back here. Here there is only pessimism, and people are complaining.”

STAUNCHING UNREST

Europe is in the midst of a malaise that has produced a crisis so profound that even the blame game is no longer sufficient to staunch the political unrest. Yet still it is played at the highest levels. And the target, especially in southern Europe, is increasingly the chancellor of Germany, Angela Merkel. Portugal’s veteran president, Mário Soares, tells me in a two-hour conversation, in his office in the shadow of the Portuguese Parliament, that “destroying Europe in a certain way are the policies of Merkel— and her concept of the European Union. The politics of Mrs. Merkel and Germany are not accepted by the other European countries. Mrs. Merkel decided these policies should be imposed on these countries. And the policies that have emerged from this crisis so far didn’t help these countries. Moreover, Germany knew that this was the case in Greece, the first such country.” In- deed it is these smaller nations of southern Europe that have been both the greatest victors and victims of Germany and its alternating whims of largesse and parsimony.

The iron chancellor is an easy target. But her tough reputation is well-earned. One German writer, a former general in her army, blanches when he sees how his editor has changed the wording of one of his essays. “Oh we can’t say that,” he exclaims, the words of this powerful military officer virtually quivering as they emerge from his lips thousands of miles away. “I will get a call from Mrs. Merkel, and she will not be happy. That is not good.” So while many quake at her every whim, others, even her greatest detractors, recognize that she holds the future of Europe, its very viability as a unit in her grasp. And then there’s Germany itself.

“Europe can be saved,” Soares continues gravelly. “But I think the situation is very dangerous. The person who should help Europe come through is Merkel. Hopefully, nowadays, it is recognized that the politics defended by Mrs. Merkel are not correct and even the Germans are not convinced.” Still, Soares is confident that Europe can survive and at the same time preserve its own unique identity. When I point out that Portugal is the only country on the continent in a separate time zone with a language spoken nowhere else in Europe, he observes, “I am able to go everywhere, and speak Portuguese and I am understood.” In part, of course, that is a tribute to the fact that Portugal and its fleet of ships ruled half the known world in the 15th and 16th centuries. Its legacy is the fact that the largest nation in South America (Brazil) and several African countries still count Portuguese as their mother tongue. But the colonial era is long past. And Europe, or its various components, must deal with a present that is all but too real and in many cases too depressing.

“Everybody is blaming Merkel,” sniffs Cedric. “But they are still the most profitable country.
 Here, no one is building. It 
needs to be fixed from the
 ground up. I would never
 rely on our government.
 Change is going to take five
to 10 years,” if it can be done
at all. Most of the blame he
heaps on the government,
 but especially the stagnant
bureaucracy that continues
to fuel the mediocrity. So
 far, not a single politician 
in Spain or in much of western and southern Europe has
 seized on the challenge in
 quite the fashion of Japan’s
 Prime Minister Shinzo Abe,
 whose government stunned
 markets by embarking on
 an ambitious new program 
of Quantitive Easing (QE), adding $730 billion to its already bloated balance sheet over the next year in an effort to stimulate the nation out of its doldrums. “Our government has made the economy our priority in order to have it lifted from the deflation which has continued for more than 15 years,” Abe told The Washington Post’s Lally Weymouth recently. “Aggressive monetary policy has been promoted.

As a result, the notion that deflation will continue has been dispelled.” Step by step, Japan seeks to find its way out of disaster.

SHREDDING EUROPE

Yet the disaster inherent in the shredding of Europe is happening at virtually every level and in every portion of the immense bureaucracy that has sprung up to service its needs and desires. At the heart of many of the continent’s troubles is the European Central Bank (ECB). On virtually every important issue there are deep discords that threaten to torpedo its most critical initiatives. Take, for instance, the deeply divisive question of a new round of QE that seems essential to maintain the euro in any semblance of a viable currency—a course that is all but self-evident to many external observers. On this potentially existential question for the future of the euro, however, the governors of the Central Bank are deeply divided, and largely on north-south lines. So divided that some leaders of the German Central Bank (yes, each individual eurozone member is still allowed to maintain its own central bank, though in theory none has any currency of its own to control) want to insist on a thoroughly Teutonic system. For critical votes like a QE, they want voting proportional to the size of the respective country. This would give a few countries, like Germany, an effective veto over any measure they would consider anathema to their interests.

Sadly, Europe in its most fundamental traits is little different than a third of a century ago when I last lived there or even a century ago on the eve of the first of two world wars. But now there are greater expectations. Life moves more quickly outside many of these countries, and especially out- side the entire continent. Now Europeans are perceived to be moving backward.

“The standard is so low compared to the United States that someone who comes with a compelling solution for relieving a problem that is affecting thou- sands of people or hundreds of companies, immediately it’s very attractive here,” says Cedric, who admits that his venture capital firm, though based in Spain, has made more of its recent investments in the United States than at home. “In the United States, someone who gives decent service is a dime a dozen. Here, someone who gives decent service, right away you become the black sheep. Service here is largely terrible. Here, you need to pay [by the minute] to contact customer service. And then you get someone in Latin America answering the phone—Argentina, Colombia. You can hear the accent. And you pay all the time you are waiting for them even to come on the line.”

Yet few Europeans, especially southern Europeans, have any interest in leaving the euro or the Union. “Why should we?” winks one elderly Madrid taxi driver. “For every euro we send to Brussels, we get nine euros back,” a slight, but not overwhelming exaggeration. The tax versus subsidy dilemma is an enormous conundrum in Brussels, especially with ever newer and needier nations joining the Union, and others like Albania slavering at the prospect.

Many are becoming increasingly eager to move in the direction of “unwinding,” as Patrice de Beer of Le Monde calls the process that in many countries, especially Britain, is known as “devolution.”

While Brussels may dole out substantial largesse, those funds must then wind their way through various bureaucracies in far off capitals, with bits and pieces shaved off at each stage along the way to satisfy the needs or at least salaries of the layers of bureaucracy, including many new layers in Brussels. Somehow, having many of these powers ceded to a united Europe seems in- creasingly unattractive. Why not simply go it alone? As Britain may well vote in two years, breaking off from a united Eu- rope might be the best choice.

WHERE’S WALDO?

This real or potential shredding of Europe in financial or bureaucratic terms hardly makes it any easier for it to honor its obligations—or take on any more real or potential disasters. So it should be scarcely surprising if no European nation, no NATO member, has yet agreed to accompany American bombers into Syrian airspace to take on IS on its home turf, to deal it a potential mortal blow. The closest NATO airbase, Incirlik in Turkey, can launch only unarmed drones to patrol the skies over northern Syria. The leaders of this NATO member fear not only eventual retribution from IS, but potentially the hostility of the Syrian regime of Bashar al-Assad, who still manages to hang onto power in Damascus. And Turkey’s not even a member of the European Union. No other European nation has been prepared to jump in either.

Taking on disasters of others’ making must be reserved for nations with the capacity, or the existential need to do so. Europe has neither the capacity nor any immediate, perceived threat that would send it into action. Whatever capacity remains needs to be held in reserve for catastrophes still only dimly imagined: Russia cutting gas exports to Western Europe this winter to retaliate for pro-Ukraine sanctions or terrorist assaults by IS sympathizers unable or unwilling to parse the restraint exercised by America’s allies in Iraq versus Syria.

The young Shapers believe that it’s necessary first to get their arms around at least a corner of the problem. So they’ve commissioned a nationwide opinion survey that they hope will provide some concrete answers as to why so many young people have no jobs and, even worse, no hope. Several believe that the answer is education. But reform of the schools, especially the universities, is a gargantuan task. Most young people are educated in state schools that are a mess. There is little real understanding about what students need to begin their lives in the real world. To obtain a copy of a university diploma costs €600, or $750—each one is signed by the king himself. And sometimes the diploma takes up to two years to arrive. Yet few students are very well prepared either scholastically or socially to enter the global marketplace. A working knowledge of English is sparse, largely acquired only by time spent abroad, and this often means additional charges, which few but the most privileged can afford.

As our dinner with the Shapers breaks up, Cedric has a last word: “We change or we die. Our shops close from 1 p.m. to 4 p.m. each day, but there are tourists waiting outside who want to give them their money. That’s fine, then don’t com- plain there’s not enough money coming in, because there’s a customer out there who wants to give you money. And you’re saying, no we won’t take it. In the United States or Turkey, the lights may already be turned off, but if you show up, the shop- keeper is still going to take your money. It’s a question of mentality.”

It’s also a question of time. While Europe ponders how to cope with disasters that are already sweeping the continent, the ultimate question is whether the European mentality can change quickly enough to ward off the consequences if the under- lying issues are not addressed. Bickering among political parties over prospective solutions must ease; concord across party lines and especially across frontiers is essential. Otherwise, Europe may need to return to its roots as a kaleidoscope of in- dependent nations again—some far more successful than others. 

*****

*****

David A. Andelman is the editor and publisher of World Policy Journal. His last book, A Shattered Peace: Versailles 1919 and the Price We Pay Today, has just been issued in a new Centenary edition with a foreword by Sir Harold Evans.

[Cartoon courtesy of Damien Glez]

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