THE TIMES 4.6.09
something much more interesting and relevant to the future of Europe
and Britain. I am travelling to Riga to speak at the centenary
celebrations for Isaiah Berlin, the great Latvian- Jewish
philosopher, who explained why democracy and freedom do not always
work hand in hand. Why is this trip to Latvia more important than
voting? Because, believe it or not, the future of Europe could be
decided by this tiny Baltic state.
Before explaining why this is so, allow me another digression - about
a remarkable TV documentary to be broadcast on June 19 on BBC Two.
Linked to another cultural centenary - that of Felix Mendelssohn - it
is called Mendelssohn, the Nazis and Me. This film, charming,
hilarious and horrifying in equal measure, is about the bizarrely
legalistic efforts of the Nazis to expunge all traces of Jewish
pollution from Germany's music culture, as well as the population, in
the 1930s - and more generally about the sudden descent of one of the
world's most highly educated and civilised nations into a state of
collective insanity. Specifically the film is about bureaucratic
attempts to determine whether Mendelssohn's German descendants were
more or less "Jewish" than his music - a literally life-and-death
issue that rested on the Nazi authorities' inability to establish
whether the exact proportion of Jewish heredity in the Mendelssohn
family was one-quarter or three-sixteenths.
What does this nightmarish experience, which ended luckily for
Mendelssohn's descendants, have to do with the future of Europe?
Plenty - and the connection runs through tiny Latvia, where I am
writing this.
Europe is now in the middle of a perfect storm - a confluence of
three separate, but interconnected economic crises which threaten far
greater devastation than Britain or America have suffered from the
credit crunch: the collapse of German industry and employment, the
impending bankruptcy of Central European homeowners and businesses;
and the threat of government debt defaults from loss of monetary
control by the Irish Republic, Greece and Portugal, for instance on
the eurozone periphery.
Latvia, partly because it has followed an Argentine-style policy of
"fixing" its exchange rate [it almost HAD TO, under the terms of its
accession trearty -cs] and encouraging its citizens to borrow in
euros and Swiss francs, is now in the front line of the battle
between governments and financial markets - and a humiliating
devaluation looks increasingly likely. Last weekend a former Swedish
finance ministry official brought in by the Government as an adviser
admitted that devaluation was no longer a matter of "if" but of "when
and how". If Latvia does devalue, then the two other Baltic states
will almost certainly be forced to follow and the panic will probably
move to Romania and Hungary. Beyond that, the contagion is likely to
spread to the weakest members of the eurozone - Ireland, Greece,
Portugal and probably Austria.
If the crisis expands, other EU governments - and especially
Germany's - will face an existential question. Do they commit
hundreds of billions of euros to guarantee the debts of fellow EU
countries? Or do they allow government defaults and devaluations that
may ultimately break up the single currency and further cripple
German industry, as well as the country's domestic banks?
Publicly, German politicians have insisted that any bailouts or
guarantees are out of the question. Germany has vociferously blocked
proposals from Italy, Spain and the European Commission for the EU as
a whole to issue bonds and use the proceeds to support the
governments with weaker credit. But as so often in Europe, the pass
has been quietly sold in Brussels, while politicians loudly protested
their unshakeable commitment to defend it.
Last October a previously unused regulation was discovered, allowing
the creation of a ?25 billion "balance of payments facility" and
authorising the EU to borrow substantial sums under its own "legal
personality" for the first time. This facility was doubled again to
?50 billion in March. If Latvia's financial problems turn into a full-
scale crisis, these guarantees and cross-subsidies between EU
governments will increase to hundreds of billions in the months ahead
and will certainly mutate into large-scale centralised EU borrowing,
jointly guaranteed by all the taxpayers of the EU. [or of the
eurozone? -cs]
This policy of "fiscal federalism", long advocated by France and high-
debt countries such as Italy, Spain and Greece, has been fiercely
opposed by Germany and Britain. In terms of its potential costs, it
makes the agricultural policy and budget rebates seem like a vicarage
tombola.
How could German politicians accept such a policy, having repeatedly
sworn to oppose it, without sacrificing their unbending sense of
moral righteousness? And how can they pervert democracy by telling
their electorates that they are doing one thing, while advocating the
exact opposite within the EU? [especially during their coming
general election -cs]
Much as they did in the case of Mendelssohn and the Nazis, the
Germans focus on the letter of the law when they cannot bear to think
about the spirit of the rules they are applying - whether unspeakably
evil, as in the 1930s, or merely profligate and dishonest, as in the
EU today. The new EU borrowing, for example, is legally an "off-
budget" and "back-to-back" arrangement, which allows Germany to
maintain the legal fiction that it is not guaranteeing the debts of
Latvia et al. The EU's bond prospectus to investors, however, makes
quite clear where the financial burden truly lies: "From an
investor's point of view the bond is fully guaranteed by the EU
budget and, ultimately, by the EU Member States." [THAT inclides US! -
cs]
And so the juggernaut of euro-federalism rolls on; but viewed from an
increasingly liberal central Europe, there is a great consolation:
the history of euro-federalism keeps being repeated but, as Marx once
said, what began as tragedy tends to end in farce.