Sunday, 22 April 2018

Eurozone roommates have family-sized problems

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“Houston, we’ve had a problem”. As markets roll their eyeballs and hit the “sell” button once again at the sight of squabbling European leaders, I must admit that I can’t blame them – the markets, that is.

Anthony Peters, SwissInvest Strategist

Francois Hollande appears to believe that he has a popular mandate to pursue his policies of tax and spend, even if it is someone else’s money he’s trifling with. I, for one, wish to take issue.

First up, I’d wish to challenge all those journos who have been pursuing the line that European voters are rejecting austerity and that therefore Hollande has the moral right, nay, duty, to fight the anti-austerity corner. I had the privilege of studying history under the incomparable Professor Sir Ian Kershaw (back then and to me he was just plain “Ian”) now of Nottingham, but then in his and my home town of Manchester.

Ian is now regarded as one of the absolute authorities on the seizure of power by the National Socialists in Germany. Adolf Hitler was appointed Chancellor by President von Hindenburg in January 1933 and by way of the immediate elections of March 5 1933, the NSDAP became utterly legitimately and quite democratically by far the largest elected party in the Reichstag. By March 23, so within less than three weeks of the elections, the Ermächtigungsgesetz (Enabling Act) had been promulgated and the Nazi dictatorship was firmly in place.

Please don’t get me wrong, I am not attempting to draw any particular comparisons between the German parliamentary elections of 1933 and the French Presidentials of 2012 but I would just like to raise a warning that even simple populism during an economic crisis is very, very dangerous, but also that to believe in the unassailable supremacy of the democratic election process is fraught with risks.

Simple populism during an economic crisis is very, very dangerous, but also that to believe in the unassailable supremacy of the democratic election process is fraught with risks

As corny as this might sound, Joe, Hans, Jean-Jacques and Stavros SixPack only have a highly imperfect way of expressing their mood which is by way of a call to stick a bit of paper into the ballot box every few years (or weeks, if you happen to be Greek). A more immediate and hopefully more educated response to politicians and their vanities can be read in the performance of markets which are possibly a (marginally) more sensible vox pop. Current volatility must be telling the polis that they’ve still got something horribly wrong, even if the ballot boxes aren’t. I don’t see how Hollande thinks he’s going to save the boat by tossing the navigator overboard.

After a brutal day in the European equities with all the principal stock indices down over 2-1/2%, the US equities rallied back sharply to close more or less flat. I guess that somehow the Americans still seem to believe that our politicians are like their politicians who like nothing more than a jolly good game of brinkmanship and, once they have cynically garnered a few headlines in the news, will swing back on to the path of something approaching reason and vote as expected.

Sadly, that is not the case. In fact, the gridlock is becoming more pronounced and rather than settling down in the back-room in order to thrash out a compromise, the fronts are hardening. The EU mini-summit of yesterday was a case in point and even the normally highly upbeat Muppet-in-Chief, Jean-Claude Juncker, had to admit defeat in stating: “We had a not unheated discussion on eurobonds”, adding that joint borrowings “didn’t find much support, particularly in the German-speaking area but found a certain enthusiasm in the French speaking area”. Another summer of useless summits ahead? Yikes!

On Martin Wolf

Meanwhile, I should like to express my thanks to M2 Davies of Shepherdstown, West Virginia for the following comment on Martin Wolf and his excurse into US Treasury history in general and into Alexander Hamilton in particular. She wrote the following in response to my already critical comments on Wolf’s FT article of yesterday:

Wolf misses two important points:

1. Alexander Hamilton “got something” in return for assuming those debts. (And by the way, he didn’t take all of them.) Hamilton essentially gained complete control of monetary and fiscal policy from the previously sovereign states. He turned “federal”, in the sense of distributed power, into *Federal, *meaning nationally and centrally controlled. The recently-adopted Constitution had provided what looked like a porthole-sized opening for the national government to directly tax and to fund interstate projects. Hamilton turned that porthole into the Crystal Palace.

2. The debts the states tendered to the US were their shares of the expense of the Revolutionary War. They had already been deeply discounted in the secondary market and were mostly held in the hands of wealthy investors. The primary holders, soldiers and suppliers, had been legged over good and proper. Hamilton’s funding scheme actually redeemed the things at a premium to market prices. My point is that the states weren’t in the business of racking up still more debts – can anyone say the same about European nations?”

The eurozone confused having roommates with building a family. Families have joint bank accounts. Roommates divvy up expenses, but they keep receipts. Stavros doesn’t pay for Mary’s mascara, Mary doesn’t pay for Jacques’ lap dances, and Jacques doesn’t pay for Helga’s weed. Most of all, Helga’s mom Angela shouldn’t have to pay for any of it.”

There’s not much I can add to that.    

Readers' comments (4)

  • Robert P. Smith of PFI comments (via email):

    Aside from comparing a decent man like Francois Hollande to Adolf Hitler (and then using the weasel phrase “I am not attempting to draw any particular comparisons between the German parliamentary elections of 1933 and the French Presidentials of 2012” while this was clearly his intention), Mr. Peters’ grasp of German history is simplistic at best and willfully dishonest at worst. Professor Sir Ian Kershaw would be most upset with his former student.

    Hitler did indeed receive 37% of the vote in the July 1932 elections, making the Nazis the largest party in Germany and allowing him to approach his former opponent in presidential race Hindenburg to form a government. President Hindenburg met Hitler but rightfully refused him the Chancellorship. Hindenburg decided that it would be undemocratic to give political power to a single party that did not represent the majority of the electorate.

    Having refused Hitler the role on democratic grounds, Hindenburg was then pressured by anti-democratic (or perhaps, more charitably, apolitical) forces. Firstly, he was lobbied by representatives of the business community that Mr. Peters so adores, such as the economist and banker Hjalmar Schacht. Schacht told Hindenburg that Hitler should get the Chancellorship for the good of Germany. The general perception among the business community was that the mass of people would side with the Communists or the Nazis, and that for all of Hitler’s faults he would be kinder to business.

    Then Hindenburg received a report from the army stating that in the case of civil unrest they could not control both the Nazis and the Communists. This was pressure not from the Nazis strong electoral showing, but from their open thuggery on the strasses of Germany. I failed to see Mr. Hollande’s brownshirts beating up Jews and political opponents in the run up to the 2012 election, but then it is true I’m overdue for an eye-test.

    So there was a perception among the nervous elites that the Nazis were an ascendant force. This, however, was mistaken. In the November 1932 election the Nazi share of the vote declined to 32%. Popular support for the party was fading fast. Behind the scenes, party finances were in disarray, causing many powerful backers to withdraw support, and the party was skirting close to bankruptcy. The party was a busted flush, in other words.

    However, at this point the party was saved, not by the forces of popular democracy, but the oligarchic tradition of backroom deals proffered by hubristic aristocrats. Former conservative Chancellor von Papen feared a decline in popular support, and saw the national mood switching to the left. To protect his position he cut a private deal with Hitler. Hitler would become Chancellor if von Papen was made Vice Chancellor and only two Nazis held cabinet positions, surrounded by traditional conservatives. Von Papen thought he could tame Hitler.

    Under these pressures, Hindenburg reluctantly offered the Chancellorship to Hitler on January 30th 1933. The conservatives thought they had brought Hitler to heel. Instead he was about to rip up the Weimar Constitution. The rest, as they say, is history.

    Hitler was not elected on a wave of popular support. His party had peaked and was a declining force. The national mood was swinging to the left, not the right. Instead Hitler was helped into power by a backroom deal, that very old and very anti-democratic technique used by members of the old guard to subvert the popular will and maintain the status quo. It was the very bastions of industry and finance that Mr. Peters prostrates himself before that handed Hitler control of Germany. It was not given to him by the people, whose supposedly rash judgments Mr. Peters holds in disdain.

    Hitler was able to come to power due to a weak democracy, easily subverted by men of means with little regard for the judgments of “little people”. The answer to a weak democracy is more democracy, not less.

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  • I appreciate Mr Smith's response. I was trying to use the outcome of the March 1933 elections as an illustration that the expression of the popular vote should not always be treated as being correct and legitimate.

    However, I take issue in the fact that I refer to the Reichtag elections of 5th March 1933. Mr Smith is showing the results of the November 1932 elections which led to the von Papen compromise which was, as he correctly notes, a case of classic back-room politics.

    In March '33, after Hitler had been appointed Chancellor by Hindenburg and who then forced new elections, the NSDAP polled over 17 million votes which was 43.9% and which resulted in the party gaining some extra 90 seats seats over the 1932 election. The NSDAP thus held 288 seat and with the support of Hugenberg's NDVP held a majority in the Reichstag. This was the grouping which passed the Enabling Act.

    Nothing Mr Smith writes is factually wrong but he seems to be stopping short of the significant events which occurred two months after Hitler became Chancellor.

    Maybe Ian wouln't be so upset with me after all.

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  • Mr. Peters,

    I now have an IFR log on, so can issue a speedy response.

    Counterfactuals are always thorny in History, but then any exercise in History or Historiography is always predicated on a counterfactual. Why would we even try and analyse events if they were inevitable, if they could not have happened any other way?

    The fact is all the so-called “democratic” elections you cite happened after democracy had been subverted by von Papen’s naïve perfidy. Hitler gained the Chancellory at a time when he was not polling 43.9%. Of course, we cannot be sure that his support would not have risen to this level if he had not seized power through the back door thrown open for him by industrialists and aristos. I, however, somehow doubt it. You cannot consider conditions in the sheep pen to be normal once the wolf has been let in.

    I understand your general point Mr Peters, but in the March 1933 elections the popular vote was not being cast through a correct and legitimate system. Weimar Democracy had always stood on a knife edge. By this point it was already in the abyss.

    They say that you have already lost an argument when you resort to “reductio ad Hitlerum”. I am not quite so proscriptive. Hitler’s rise to power can be an illustrative point of comparison. Tacitly comparing it to a free election in an advance democracy, in which a relatively moderate socialist was elected, is not illustrative. It muddies the picture, rather than providing clarity.

    If you question the legitimacy of France’s election, just imagine how much worse it would have been if conducted under Weimar conditions. If politicos sent their bully boys out into the street to induce the correct vote. If Sarkozy, seeing the swing to the left, had been able to cut a backroom deal with Le Pen to subvert democracy. Imagine what the sacred bond market would have made of that.

    You equate the market to the vox populi. Although it may be the vox Dei in your opinion, the bond market is most definitely not the voice of the people. It is the voice of a tiny subset of society, those with access to capital and the ability to bring it to bear. International finance may seem egalitarian from the outside. In reality access to capital is often handed down from one generation to another as a sinecure.

    The bond market is a voice that should not be ignored. It is not a voice that should be able to shout over all others.

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