By George Friedman
An important disconnect over the discussion of the
future of
the European Union exists, one that divides into three parts. First, there
is the question of whether the various plans put forward in Europe plausibly
could result in success given the premises they are based on. Second, there is
the question of whether the premises are realistic. And third, assuming they are
realistic and the plans are in fact implemented, there is the question of
whether they can save the European Union as it currently exists.
The plans all are financial solutions to a particular set of financial
problems. But regardless of whether they are realistic in addressing the
financial problem, the question of whether the financial issue really addresses
the
fundamental dilemma of Europe — which is political
and geopolitical — remains.
STRATFOR has examined the plans for dealing with the financial crisis in
Europe, and we find them technically plausible, even if they involve navigating
something of a minefield. The eurozone’s bailout fund, the European Financial
Stability Facility, would be expanded in scope and reach until it can handle the
bailout of a major state, the default of a minor state and a banking crisis of
unprecedented proportions. Given assumptions of the
magnitude of the problem and assuming general
compliance with the plans, there is a chance that the solution we see the
Germans moving toward could work.
The extraordinary complexity of the plans being floated in Europe is
important to note. It is extremely difficult for us to understand the specifics,
and we suspect the politicians proposing it are also less than clear on them. We
have found that the more uncertain the solution, the more complex it is. And the
complexity of the European situation is less driven by the complexity of the
economics than by the complexity of the politics. The problem is relatively
easy: Banks and countries under massive financial pressure almost certainly will
default without extensive aid. By giving them money, default can be avoided. But
the political complexity of giving them money and the
opposition by many Europeans on all sides to this
solution contributes to the complexity. The greater the complexity, the more
interests can be satisfied and — ultimately — the less understanding there is
about what has been promised. Some subjects require complexity, and this is one
of them. The degree of complexity in this case tells another tale.
The Foundation of the Crisis
Part of that tale is about two dubious assumptions at the foundation of the
crisis. The first is the assumption that interested parties are genuinely aware
of the size of the financial problems, and to the extent they are aware of it,
that they are being honest about it. Ever since 2008, the singular truth of the
financial community globally has been that they were either unaware of the
extent of the financial problems on the whole or unaware of the realities of
their own institutions. An alternative explanation is, of course, willful
ignorance. This translates as the leaders being fully aware of the magnitude of
the problem but understating it to buy time or to position themselves personally
for better outcomes. It could also simply be a case of their being engaged in
helpless hopefulness — that is, they knew there was nothing they could do but
remained hopeful that someone else would find a solution. In sum, it combined
incompetence, willful deception and willful delusion.
Consider the charge that the Greeks
falsified financial data. While undoubtedly true,
it misses the point. The job of bankers is to analyze data from loan applicants
and to uncover falsehoods. The charge against the Greeks can thus be extended to
bankers. How could they not have discovered the Greek deception?
There are two answers. The first is that they didn’t want to. The global
system of compensation among financial institutions — from home mortgages to the
purchase of government bonds — separates the transaction from the outcome. In
other words, in many cases bankers are not held responsible for the outcome of
the loan and are paid for the acquisition and resale of the loan alone. They are
therefore not particularly aggressive in assessing the quality of a given loan.
Frequently, they work with borrowers to make their debt look more
attractive.
During the U.S. subprime crisis, in the
mortgage crisis in Central Europe and in the
sovereign debt and banking crisis in Europe, the system placed a premium on
transactions, immunizing bankers from the repayment of loans. The validity of
the numbers systematically were skewed toward the most favorable case.
More important, such numbers — not only of the status of loans but also about
the economic and social status of the debtors — inherently are uncertain. This
is crucial because part of the proposed European solution is the imposition of
austerity on debtor nation states. The specifics of that austerity and its
effect on the ability to repay after austerity heavily depend on the validity of
available economic and social statistics.
There is an interesting belief, at least in the advanced industrial
countries, that government-issued statistics reflect reality. The idea is that
the people who issued these statistics are civil servants, impervious to
political pressure and therefore likely providing accurate data. A host of
reasons exists for looking at national statistics with a jaundiced eye beyond
the risk of politicians pressuring civil servants.
For one, collecting statistics on a society is a daunting task. Even small
countries have millions of people. The national statistical database is based on
the assumption that all of the transactions and productions of these millions
can be measured accurately, or at least measured within some knowable range of
error. This is an overwhelming undertaking.
The solution is not the actual counting of transactions — an impossible task
— but the creation of statistical models that make assumptions based on various
methodologies. There are competing models that provide different outcomes based
on sampling procedures or mathematical models. Even without pressure from
politicians, civil servants and their academic mentors have personal commitments
to certain models.
The center of gravity of our global statistical system, particularly those of
advanced industrial countries, is that the selection of statistical models is
frequently subject to complex disputes of experts who vehemently disagree with
one another. This is also a point where political pressure can be applied. Given
the disagreements, the decision on which methodology to use — from sampling to
reporting — is subject to political decisions because the experts are divided
and as contentious as all human beings are on any subject they care about.
And this is the point at which outside decisions are made, based on outcome,
not on the subtleties of mathematical modeling. There is a connection between
the numbers and reality, but the mathematics of a bailout rests on a statistical
base of sand. It is always assumed that this is the case in the developing
world. This creates a certain advantage, in that it is understood that the
statistics are unreliable. By contrast, the advanced industrial countries have
the hubris to believe that complex mathematics has solved the problem of knowing
what hundreds of millions of people in billions of transactions actually have
done.
A Culture of Opaque States
Compounding this challenge, the European Union has incorporated societies on
its periphery that never have accepted the principle that states must be
transparent, a problem exacerbated by EU regulations. Southern and Central
Europeans always have been less impressed by the state than Germans, for
example. This is not simply about paying taxes but about a broader distrust of
government, something deeply embedded in history. Meanwhile, regulations from
Brussels, whose tax and employment laws make entrepreneurship and small business
ownership extraordinarily difficult, have forced a good deal of the economy “off
the books,” aka underground.
While not an EU state, Moldova — said to be the poorest country in Europe —
is an instructive example.
When I visited it a year ago, the city (and
villages outside the city) was filled with banks (from Societe Generale on down)
and BMWs. There was clear poverty, but there also was a wealth and vibrancy not
captured in intergovernmental statistics. The numbers spoke of grinding poverty;
the streets spoke of a more complex reality.
What exactly is the state of the Greek, Spanish or Italian economy? That is
hard to say. Official statistics that count the legal economy suffer from
methodological uncertainty. Moreover, a good deal of the economy is not included
in the numbers. One assessment says that 10 percent of all employees are off the
books. Another says 40 percent of Greeks define themselves as self-employed. A
third estimates that 40 percent of the total Greek economy is in the grey
sector. When evaluating what tries to remain hidden, you’re reduced to
guesswork. No one really knows, any more than anyone really knows how many
illegal immigrants are participating in the U.S. economy. The difference,
however, is that this knowledge is of profound importance to the entire EU
bailout.
The level of indebtedness and the ownership of the debt of European banks and
countries are as murky as who held asset-backed securities in the United States.
Yet there is a precise plan designed to solve a problem that can’t be quantified
or allocated. The complexity and precision of the plan fails to recognize the
uncertainty because the governments and banks are loath to admit that they just
aren’t certain. The banks have grown so big and their relationships so complex
that the uncertainty principle parallels the state’s. The United States — where
the same governing authority handles all fiscal, monetary and social policies —
powered through such uncertainties in the 2008 financial crisis by sheer mass
and speed. Europe, with dozens of (often competing) authorities, so far has
found it impossible to exercise that option.
The countries that face default and austerity have no better understanding of
their own internal reality than the financial institutions understand their own
internal reality. Greek numbers on the consequences of austerity for government
workers do not take into account that many of those workers show up to work only
occasionally while working another job that is not taxed or known to the state
statistical services. Thus, one has a complete split between the state and
banking systems’ ability to honor debt obligations, the
insistence on austerity and the social reality of
the country.
Germany has always been different. Ever since the early 19th century German
philosopher Georg Hegel declared the German civil service had ended history, the
idea of the state as the embodiment of reason has meant something to Germans
that it did not mean to others — in both a noble and a horrible sense. We are
now at the noble end of the spectrum, but the idea that the state is the
embodiment of reason still doesn’t capture the European reality. The Brussels
bureaucracy is based on the German view that a disinterested civil servant can
produce rational solutions that partisan politicians and self-interested
citizens could not.
The founding concept of the European Union involves joining nations that do
not share this view, and even find it bizarre, with a nation for which it is the
cultural core. This has created the fundamental existential issue in the
European Union.
The realization that the rational civil servants of Brussels and Berlin have
failed to create systems that understand reality strikes at German
self-perceptions. There is a willful urge to retain the perception that they
understand what is going on. From the standpoint of Southern and Central Europe,
the realization that the Germans genuinely thought that the states on the EU
periphery had reached the level of precision of the German civil services
(assuming Germany had in fact reached that stage), or that they even wanted to,
is a shock. Their publics, which saw the European Union as a means of getting in
on German prosperity without undergoing a massive social upheaval putting the
state and the civil service — disciplined and rational — at the center of their
society, experienced an even greater shock.
The political and geopolitical problem is simply this: Germany is unique in
Europe in terms of both size and values. It tried to create a free trade zone
based on German values allied with France that looked at the world in a much
more complex way. The crisis we are seeing, which Germany is trying to solve
with extraordinary complexity and precision, rests on a highly unstable base.
First, the European banking system, like the American banking system, does not
understand its status. Second, the entire mathematics of national statistics is
inherently imprecise. Third, the peripheral countries of the European Union have
economies that cannot be measured at all because their informal economies are
massive. The fundamental principles and self-conception of Germany and Central
Europe diverge massively. The elites of these countries might like to think of
themselves as Europeans first — by the German definition — but the publics know
they are not, and they don’t want to be.
The precision of the bailout schemes reveals the
underlying
misunderstanding of reality by Europe’s elites, and specifically by the
Germans. To be more precise, this is willful misunderstanding. They all know
that their precision rests on a foundation of uncertainty. They are buying time
hoping that prosperity will return, mooting all of these problems. But the
problem is that a precise solution to a vastly uncertain problem is unlikely to
return Europe to its happy past. Reality — or rather the fundamental unreality
of Europe — has returned.
In some sense, this is no different from the United States and China. But the
United States has its Constitution and the Civil War’s consequences to hold
itself together in the face of this problem, and
China has the Communist Party’s security apparatus
to give it a shot. Europe, by contrast, has nothing to hold it together but the
promise of prosperity and the myth of the rational civil servant — the cultural
and political side of the underlying geopolitical problem.
Read more:
European
Crisis: Precise Solutions in an Imprecise Reality | STRATFOR
European Crisis: Precise Solutions in an Imprecise
Reality is republished with permission of STRATFOR."
missile system as their upper-tier air defense system on land. Singapore already uses the missiles at sea, aboard its Formidable Class frigates, so the land-based buy will draw on an existing support network. It isn’t entirely clear whether or not a contract has been signed, which isn’t unusual for Singapore.
