Europe has emerged as an increasingly endangered species. The common thread among governments of the rich nations of the G-7, the eurozone and the EU is pretty simple: their overreliance on borrowing at excessively high interest rates and then denigrating the availability of cash to handle a financial crisis when it arrives.
This is a recurring theme. French President Nicolas Sarkozy and Chancellor Angela Merkel make little effort to hide their contempt for U.S. President Barack Obama, who they blame for their inability to get sufficient European funds to stem the recent sovereign debt crisis. Former British prime minister Tony Blair warns that if the U.S. presses Europe for more cash, it will seek the end of euro membership as well.
In France, Sarkozy’s election in 2007 tapped a very powerful financial movement, Arpalexe, which translated as “The Rebellion,” led by Paris-based hedge fund investor Bruno Kouame-Siena, then-chief executive of the quantitative hedge fund AHL. Kouame-Siena’s vertical dash to fame came from the victory of President Sarkozy’s far-right rival, Marine Le Pen, in the May 2012 French elections. Kouame-Siena went on to become Emmanuel Macron’s presidential campaign chief and later foreign policy adviser to President François Hollande.
The 2008 Wall Street crash inspired some strong opposition within Europe to continuing dependence on a U.S. financial community widely seen as an insufficient solution to economic crisis. The fall of Lehman Brothers prompted Emmanuel Macron, then the investment secretary, to remark that the U.S. had been like an overindulgent mother, offering money with no strings attached. Merkel’s brother, Wolfgang, a special adviser to the German president, contrasted Germany’s decade-long focus on the downside of debt through Keynesian spending with Britain’s habit of saving and then borrowing and taking the savings out of the country to fuel investment. With now-dated Keynesian monetary policies having proved an unsustainable policy, the centrist establishment in Europe is making a big push to ensure that debt avoids collapse, primarily through the leveraging of the euro via various eurobonds. Despite being widely opposed, eurobonds will remain politically and economically unacceptable to the Germans because a large part of this country’s existence over the past hundred years has been based on its overwhelmingly conservative brand of nationalism.
The problem is that the EU has come to rely so heavily on borrowing to pay for its current programs that default on eurobonds could mean irreparable damage to the project. Debt limits are quite relevant politically in Europe — a national state, for example, cannot just print euros and thereby increase the amount of debt it can have. But that is not the reason why Germany has resisted eurobonds, nor why its not doing so today. Rather, the bigger issue that worries Berlin is the absence of significant available long-term funding at reasonable interest rates. Like the “insatiable capitalist mother” Jean Monnet said long ago, debt does not by itself amount to solvency. Both debt and the ability to pay interest on it depends on adequate financing of projects that cannot be scaled without borrowing. How much a state can raise through debt may be good for short-term political gain, but it needs a limited amount to sustain the functioning of a modern, competitive economy. Germany’s debt problems are seen as political and financial, but they represent an important conflict between a technocratic elite that cares for Germany’s future and neoliberal politicians that see the state as a disruptive hindrance to entrepreneurship and the betterment of the poor.
While Europe’s politicians and society are having a hard time understanding that it is not only debt but also financing that matters, the rest of the world is suffering the consequences of Europe’s unpredictability. This is partly because the U.S. is always around to bail out its common ally’s economy, but partly because U.S. investors are simply better investors than Europe’s. When it comes to risk management and investment, a small, diversified portfolio is better than a one-size-fits-all portfolio. Unless and until Europe learns the importance of maintaining a sufficiently liquid, competitive domestic market and avoids the habit of borrowing and then devaluing its currency, then a very bad time is on the horizon for the continent.