May 31, 2010
‘The lamps are going out all over Europe. We shall not see them lit again in our time’
These famous – and now seemingly prophetic – words were uttered by Sir Edward Grey, the British foreign secretary, as dusk fell over London on August 3,1914.Grey had just sent an ultimatum to Germany, following the latter’s invasion of Belgium, but he knew it would have no impact and that the next day his country, along with all the European powers, would be at war.
Seeing the lamplighters turning up the gas lamps on Whitehall and King Charles Street on that late summer evening, he linked the humdrum daily routine to the epoch-making events then getting under way. The same was happening here. People went about their business in the most leisurely way. Dun Laoghaire Pier was full, as was the centre of Dublin; there was no real sense of what was to come.
Technically, of course, Grey was wrong.
The lights went on again across Europe, albeit over four terrible years later, and life resumed some kind of normality.
However, substantively, his assessment was entirely accurate. August 1914marked a true turning point in European and world history, the end of an era which stretched back at least to 1870 and, in many ways, to the post-Napoleonic settlement almost a century before.
Most of the European ‘great powers’ that entered the war did not survive it – the Austro-Hungarian, Ottoman, Russian and German empires were all shattered and destroyed between 1914 and 1918.Even those that seemingly emerged intact – and even victorious – namely Britain, France and Italy, were irreparably scarred and weakened.
For example, by 1921, following our independence, Britain, the victorious World War I power, had lost more of its pre-1914 landmass than Germany, the defeated power.
The crisis gripping and steadily strangling Europe today is equally devastating, although fortunately almost bloodless. By ‘today’, I mean since 2008, when Europe first awoke to the fact that the supposedly ‘limited’ ‘regional’ subprime crisis in the US involved the Old Continent too – up to its neck.
The meltdown of Iceland and the abrupt collapse of the Irish property binge were the harbingers of a much more widespread disaster, as were the bank runs in Britain and the bailouts in Germany.
But, like London in 1914,most people were determined to pretend that it was irrelevant to them and continued to live in la-la land.
It is a historical fact – amazing, but steadily less so in light of current developments – that for several weeks following the declaration of war, the 1914 English cricket season continued under the banner of ‘business as usual’.
Only after WG Grace, the Grand Old Man of English cricket, wrote a letter to the Times in late August did the MCC come to its senses. ‘‘I think the time has arrived when the county cricket season should be closed, for it is not fitting at a time like this that able-bodied men should be playing cricket by day and pleasure seekers look on,” he harrumphed.
‘‘I should like to see all first-class cricketers of suitable age set a good example and come to the help of their country without delay in its hour of need.”
We are seeing the same today, as the EU tries to patch things up and focus on ‘important’ events such as the Eurovision Song Context. However, the recent mega bailout, which no one really believes will do anything but buy time, has evocative undertones not just for the pre-war delusion, but the post-war economic solution.
Think about the idea of burdening the taxpayer with the sins of the European banks as reparations. JM Keynes argued that if the Allies lumbered Germany with huge reparations, the German economy would have to become hyper-competitive to find the extra hard currency to pay the reparations and it would destroy jobs in Britain and France as a result.
He argued that the debt relief for Germany would ultimately make Britain and France safer and that imposing reparations would make them less, not more, secure.
He also threw in the idea that an unstable Germany might be a dangerous Germany and spiced his polemics up with the forecast that the major currency arrangement of the time, the gold standard, was the problem, not the solution. All this was heresy to the people who had failed to see the war coming but felt entitled to be listened to after the devastation.
Yet Keynes was right and Churchill, when asked in later life about the biggest mistakes of his life, stated that one of them was not listening to Keynes in 1927 when he told him as chancellor to take Britain off the gold standard.
The euro is the gold standard of today. Under the gold standard, companies and countries lent and borrowed huge sums across borders. Banks, believing the gold standard was immutable, financed all sorts of cross-border commerce. Thus America became Britain’s banker. Britain became Germany’s banker and France too lent huge sums to Germany.
Germany needed all these loans to grow more quickly than the rest of the world so it could payoff the reparations to France and Britain. The Americans always wanted to offer debt forgiveness to Germany, but the old allies disagreed. So Germany borrowed money and got into more debt to deal with a dilemma that was caused by too much debt/reparations in the first place.
We are building up the same reparation system in Europe now. Here, all of the banks’ debt is guaranteed indefinitely, courtesy of the EU bailout plan for countries in trouble. So too is Greece’s, Portugal’s and Spain’s.
The only beneficiaries of such lunacy are the banks who lent the money in the first place. As the EU has now stepped in to act as a backstop to anyone in trouble, there is surely no reason why our own bank guarantee should be extended beyond its end date of September 30.
The real problem is that it is quite clear that none of these countries will be able to grow within the straitjacket of fiscal tightening and the strong currency that is the euro.
One of the iron rules of monetary economics is that weak countries with strong currencies get weaker, not stronger.
This will happen to us – and all the others. Ultimately, like the gold standard, the countries will see that the euro is not a facilitator of recovery but an impediment.
It will be stitched together again and again until the European Central Bank not only becomes the lender of last resort, it becomes the lender of any resort.
Europe has a choice between sorting out its currency and banks or its economy and unemployment. Seems pretty clear, doesn’t it?