SAMPLE CHAPTER


I

EUROPE’S HUBRIS AND NEMESIS

In 1939, just before the outbreak of the Second World War, the Austrian economist Friedrich von Hayek wrote a powerful defense of the idea of a European federation. Hayek, one of the most prominent classical liberal thinkers of the 20th century, later received the Nobel Prize in economics and made substantial contributions to legal theory and political philosophy. In the essay, he called a European federation a “goal in whose value [he] profoundly [believed]”[i] and outlined how it could prevent the recurrence of Europe’s destructive waves of nationalism and protectionism. Hayek reiterated his message several years later in his world-famous book, The Road to Serfdom, which in 2010 achieved a new level of popularity in the United States, including a rise to the top of Amazon’s best seller list after Glenn Beck mentioned it on his television program.[ii] “What we need,” Hayek writes there, “is a superior political power which can hold the economic interests in check and in the conflict between them can truly hold the scales.”[iii] Europe should therefore create a federal structure with an “international government under which certain strictly defined powers are transferred to an international authority,” [iv] while leaving other competences to individual countries. In Hayek’s opinion, there is no conflict between the idea of a European federation and the principles of classical liberalism and free enterprise. Quite the contrary, the two are mutually reinforcing, with open markets being a prerequisite of a successful federation and “the abrogation of national sovereignties” being “the logical consummation of the liberal program.”[v]

Hayek did not see himself as a political conservative. A self-professed classical liberal, he even authored an essay[vi] bearing the unambiguous title “Why I am Not a Conservative.” However, his work has been central to the historic success of modern conservatism in the United States and the United Kingdom. Also known as fusionism in the United States, it brought together elements of center-right thinking in a coalition that advocated for free markets, robust international leadership of Western democracies, and, to a limited extent, social conservatism. The rise of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom—both heavily influenced by Hayek’s thought—is perhaps the most significant illustration of how consequential his work was for the fusionist movement. Thatcher is reported to have pointed to her copy of The Constitution of Liberty—a tome that, paradoxically, includes Hayek’s critique of conservatism—declaring “this is what we believe.”[vii]

The contrast between his enthusiastic embrace of European integration and the scathing criticisms of today’s European Union (EU) by Hayek’s followers could not be greater. In a famous speech in 1988, Thatcher compared the EU to the Soviet Union, a country “which [has] tried to run everything from the center.” In the wake of the financial crisis, a rejection of the EU has almost become one of the defining characteristics of the free-market movements. Barbara Kolm, president of the Hayek Institute in Vienna, Austria, predicts that the European Union will not be able to avoid its social unrest and will eventually collapse.[viii] At meetings of the Mont Pèlerin Society, a prestigious scholarly association founded by Hayek in 1947, lambasting the EU, the Euro, or even the freedom of movement[ix] on the continent has become de rigueur. “[N]o matter how much the Eurocrats huff and puff, the European Project no longer is the Europeans’ project,” writes Doug Bandow, a fellow at the libertarian Cato Institute in Washington, DC,[x] which once featured Hayek as its distinguished senior fellow.[xi] Conservatives and advocates of free enterprise are by no means alone in their criticisms. The trust of Europeans in their common political institutions, gradually falling since the 1990s, plummeted in the aftermath of the Great Recession, giving birth to new Euroskeptic parties and empowering old ones.[xii]

The central argument of this book is that, although the criticisms directed at the EU are often justified, Hayek’s followers are mistaken in their wholesale rejection of the European project. Furthermore, their critique comes at a time when the EU is facing unprecedented stress, created not only by its own institutional deficiencies, but also by the rise of extremist politics in Europe, sluggish economic performance, and Russia’s resurgence as an aggressive, revisionist power. Instead of being at the forefront of discussions about how Europe’s common market and political cooperation can be repaired, strengthened, and defended against their enemies, conservative critics of the EU have become cheerleaders for Europe’s disintegration, with potentially catastrophic consequences. True, today’s EU is far from being the free-market ideal outlined in Hayek’s essay. However, even in its current, flawed form, it represents a momentous achievement, which ought to be celebrated by friends of free enterprise and liberal democracy. It secures the functioning of the European single market, restrains protectionist and authoritarian impulses of politicians, and provides a platform for peaceful collaboration between European states. None of those should be taken for granted.

The Rise of Europe and the Roots of the European Idea

The story of the EU’s rise and of its current crisis cannot be fully understood without appreciating the horrific experience of the two world wars that ravaged the continent in the first half of the 20th century. Hayek’s own life was affected by the turmoil. He was born to a wealthy and cultured Viennese family in 1899—at a time of exuberant optimism and progress across Europe. Hayek’s father was a botanist, who lectured at the University of Vienna. His mother, in turn, was related to the parents of the philosopher Ludwig von Wittgenstein. But Europe’s self-evidently bright future took a dark turn in 1914. Hayek served in an artillery regiment on the Italian front toward the end of World War I, reportedly suffering damage to his hearing in his left ear.[xiii] After the war, Austria went through a period of political and economic upheaval, including a period of hyperinflation, and frequent clashes between right-wing and left-wing paramilitary groups. Already established as a respected academic economist, Hayek joined the London School of Economics in 1931 and became one of the world’s most influential business cycle theorists. His return home became impossible after Adolf Hitler annexed Austria in 1938. Hayek thus became a British subject, moving to the United States in 1950 and returning to Austria and Germany only in the 1960s.

In popular imagination, of course, the idea of a European federation is associated much more strongly with Winston Churchill’s “United States of Europe” speech than with anything Hayek wrote. Delivered in Zurich in 1946, Churchill used the speech to show that Europe’s federal state was the only possible solution to “frightful nationalistic quarrels” on the continent. The purpose of such a state is to restrain the individual nation-states and impose a formal equality between European countries:

Small nations will count as much as large ones and gain their honor by a contribution to the common cause. The ancient states and principalities of Germany, freely joined for mutual convenience in a federal system, might take their individual places among the United States of Europe.[xiv]

The idea of a common European state predates both Churchill’s speech and Hayek’s writings. In the early 1920s, while Europe was recovering from the war, Richard Nikolaus von Coudenhove-Kalergi, an Austrian contemporary of Hayek, wrote a book Pan-Europa,[xv] which gave birth to the eponymous political movement. Coudenhove-Kalergi, born in 1895 to a Japanese mother, was also the scion of an ancient family, tracing its lineage to Byzantine emperors. His father, an Austrian diplomat, known also for his writings on the origins of anti-Semitism, held numerous postings, including in Argentina and Japan, where he met his future wife, Mitsuko Aoyama, who later became one of the first Japanese citizens to ever emigrate to Europe.[xvi]

Both in its substance and style, Pan-Europa reflected the anxieties of the era, marked by the recent war, hyperinflation, and political extremism. Coudenhove-Kalergi says:

A fragmented Europe leads to war, oppression, misery; a united Europe to peace, freedom, prosperity! Once this either-or in its full meaning is clear to Europeans—then everyone will choose which of these two paths they want to go down: the path of European anarchy—or the way toward European organization; the path of death—or the way of life.[xvii]

Before 1914, many intellectuals simply assumed that deeper economic ties among Western nations had made military conflicts obsolete—and indeed impossible. The British politician Norman Angell, who was later awarded the Nobel Peace Prize,  popularized this view in his 1910 book, The Great Illusion.[xviii] The title referred to the purportedly illusory idea that nations had anything to gain from warfare. However, the book came to illustrate a very different kind of misguided illusion: namely that rational arguments about the costs and benefits of warfare could stop politicians from making foolish choices.[xix] Thirteen years later, Coudenhove-Kalergi understood that economic interdependence was not in itself enough to prevent conflict, unless accompanied by a system of political cooperation. Like Hayek, he saw the two as sides of the same coin. “Without a backup of European permanent peace a European customs union is impossible. As long as each state lives in constant fear of its neighbors, it must be prepared to produce all its necessary goods like a besieged fortress even in the event of war.” And, “conversely, national industries and their protection by the state are a hotbed of European nationalism and a threat to the European Peace.”[xx]

The idea of a European federation resonated with many intellectuals, including Thomas Mann, Albert Einstein, and Sigmund Freud. Hayek’s mentor, Ludwig von Mises, who is generally seen as an even more radical defender of free-market capitalism than his protégé, is reported to have studied the monetary implications of Coudenhove-Kalergi’s plan[xxi] and agreed that “the evils that those who champion the idea of a United States of Europe are trying to combat undoubtedly exist, and the sooner they are eliminated, the better.”[xxii] However, he remained critical. Unlike today’s conservatives, Mises was not concerned by the risk of undermining the sovereignty of Europe’s nation states. Quite the contrary, for him, that was a selling point of the whole project. Instead, his concern was that the United States of Europe would replace the destructive nationalistic chauvinism that existed in Europe with its equally damaging, pan-European version, directed against America or Asia. What was needed instead, he argued, was a genuinely cosmopolitan, peaceful outlook toward the entire world, which he did not think could be found in attempts to reconstitute the nation-state on a larger scale.[xxiii]

Mises’ worries about the chauvinism of a united Europe were purely hypothetical, given the circumstances of the era. The interwar period was hardly an auspicious time to translate European federalism into practice. Only the 1950s saw the emergence of institutions establishing tighter economic and political ties between once-warring countries. The European Coal and Steel Community was created in 1951, followed by the European Atomic Energy Community (Euratom) and the European Economic Community (EEC) in 1957, which later formed the fundamental elements of Europe’s political architecture. Its enlargements in the 1970s and 1980s brought the UK, Greece, Spain, and Portugal into the club. Gradually, the project started to take a more state-like form. The European Parliament, for example, originally a purely consultative body, was beginning to appear as a real legislature. The Single European Act of 1987 and the Maastricht Treaty, adopted in 1992, consolidated the numerous components of the project into the “three pillars” of the EU: economic integration, common foreign and security policy, and a common approach toward justice and home affairs.

In the decades that followed the war, also known as the trente glorieuses (the 30 glorious [years]) or the Wirtschaftswunder (the economic miracle), the European project seemed to have everything going for it. Between 1950 and 1971, the 12 Western European economies grew by an impressive annual rate of 4.7 percent.[xxiv] Even after the oil shocks and the global productivity slowdown of the 1970s, integrated Europe enjoyed unprecedented levels of economic prosperity. The collapse of Soviet communism liberated millions of Europeans who had been living behind the Iron Curtain, and gave a new sense of purpose to European integration: to create a “Europe whole and free,” as the US President George H. W. Bush put it in his speech in Mainz, Germany, in May 1989.[xxv]

The economic success of Europe that facilitated European integration also became its hidden enemy, as it fostered the hubris of European elites.[xxvi] In good times, the deficiencies of the European construction were not clearly visible. Neither were Europe’s leaders particularly concerned that the popular support for deeper integration was falling since the early 1990s.[xxvii] The euro, another product of the Maastricht Treaty, was born out of this hubris as a step toward Europe’s future political union. In fact, the single currency would not have come as a shock to Hayek, who in his 1939 essay defended the creation of a single monetary unit to limit the discretion of national central banks.[xxviii] However, the ratification of the Maastricht Treaty exposed the growing gap in opinion between the public and Europe’s political elites. In the UK, which had just left—with a degree of bitterness—the European Exchange Rate Mechanism (an early precursor of the euro), the prospect of monetary union led to a rebellion by Conservative MPs when the Parliament considered treaty ratification. In Denmark, voters rejected the Treaty in a referendum. Only after the country was granted a number of exemptions—most importantly a permanent opt-out from the euro—was the treaty put to a popular vote again in 1993 and ratified.

But this was not the last time that Europe’s political elites, convinced of the historical importance of what they were doing, asked voters to rectify their choice. In 2001, inspired by America’s Founding Fathers, European leaders organized a “European Convention,” which was given the task of drafting the EU constitution. The convention was chaired by Valéry Giscard d’Estaing, former president of France (1974–1981). An aristocratic figure already in his late seventies at the time of the convention, Giscard d’Estaing was a former Résistance fighter and a lifelong supporter of the European project, which he defended against attacks from the French “gaullistes.” The convention was drawn from members of national parliaments and representatives of national governments, as well as the European Commission and European Parliament.

After two years of deliberations, EU leaders signed the Treaty Establishing a Constitution for Europe.[xxix] Unlike the Constitution of the United States, written on five parchment pages, the European version had 484 pages and featured an extensive list of positive rights guaranteed by the Union, including the rights to paid leave, maternity leave,[xxx] and housing assistance.[xxxi] The treaty granted the EU legal personhood and added a number of new shared competencies on matters that were previously managed solely by member states. It created the function of the president of the European Council selected for a term of two and a half years, scrapping the system of a six-month rotational presidency. It introduced the position of the Union Minister for Foreign Affairs and Security Policy, who would also serve as the vice president of the European Commission. In the Council, more decisions would be taken by qualified majority rule. To the ire of many of its critics, the Treaty also contained a “passerelle clause,”[xxxii] which enabled the Council to move certain policy areas to qualified majority rule, as opposed to unanimity. That would create space, the critics feared, for even more majoritarian, nonconsensual decision making in the future.

If European leaders felt that they were writing history, voters were increasingly alienated. Some countries ratified the document in their national parliaments; Luxembourg and Spain held referenda. In Spain, just 42 percent of voters showed up to the polls. But the real shock came in the end of May and beginning of June 2005, when France and the Netherlands held their popular votes. Turnout rates were high—over 60 percent—and in both cases, voters rejected the proposed constitutional arrangement for Europe.

Some leaders, including Giscard d’Estaing, were in denial. “It is not France that has said no. It is 55 percent of the French people—45 percent of the French people said yes,” he claimed, adding that he wished that “we [would] have a new chance, a second chance, for the constitutional project.” Furthermore, “if we had chosen to have a parliamentary vote last year the constitution would have been easily adopted. It is the method that has provoked the rejection.”[xxxiii] In the aftermath of the referendum, there were rumors that ratification in other member states could still continue, in order to pressure France and the Netherlands to put the treaty to another vote or to rush it through their parliaments. Given France’s size and importance, that was a tough sell—unlike similar repetitions in EU-related referenda earlier in Denmark or later in Ireland. After a two-year period of “reflection,” a committee was created under the leadership of former Prime Minister of Italy Giuliano Amato, another veteran of European politics, and populated by retired European politicians and such other grandees as Dominique Strauss-Kahn, at the time the managing director of the International Monetary Fund, to create an alternative solution.

Within less than a year, the Amato Group released a document that was essentially a rehashed version of the constitution. If it were shorter, it was only because much of its material was relegated to protocols amending previous treaties. Unlike the Constitution for Europe, the Treaty of Lisbon,[xxxiv] as the new document was called, did not replace previous European treaties, but amended them in ways that were largely equivalent to the earlier document. It again created a permanent presidency of the Council and a version of the EU “foreign minister,” and extended the number of policy areas that were to be decided by qualified majority. The treaty also contained the controversial “passerelle clause,” which would enable European leaders to reduce the scope of decision making by unanimity in the future.[xxxv]

“People have the right to change their opinion. The people might consider they made a mistake,”[xxxvi] Giscard d’Estaing said about the unsuccessful referendum in France. But this time around, European politicians were not taking any chances. Only one referendum was held, in Ireland, where it was required by constitution. Elsewhere the text was ratified by parliamentary majorities. But in June 2008 Irish voters rejected the proposal. Toughened by the precedent set by the Danish ratification of the Maastricht Treaty and two earlier Irish referenda on the Treaty of Nice (in 2001 and 2002) Europe’s political leaders did not blink. Then-President of the European Parliament Hans-Gert Pöttering alleged supposed irregularities around the funding of the Irish “no” campaign, which was organized by the Libertas movement led by businessman Declan Ganley.[xxxvii] To some public outrage,[xxxviii] the architects of ever-closer Europe decided to ask the Irish again, until they got the answer right. The new pre-referendum campaign was intense, with the EU providing funding to the “yes” side.[xxxix] On October 2, 2009, over 67 percent of Irish voters said yes, at a turnout rate of 59 percent.

EU’s Nemesis

If the convoluted constitutional changes shoved down the Europeans’ throats were a sign of the EU’s hubris, its nemesis was just around the corner. Since the onset of the global financial crisis, which triggered a series of debt crises on the Eurozone’s periphery, the pendulum of European integration has swung firmly in the opposite direction. Some, including the former President of the European Commission José Manuel Barroso, still believe that a European federation should be “our political horizon,”[xl] but the European public and the leaders of European countries display little appetite for deeper integration. At the time when Barroso delivered his 2012 “State of the Union” address that urged for tighter federalization, only 8 percent of Europeans reported that they were “very attached” to the EU. In contrast, as many as 51 percent were very attached to their country, and 49 percent reported the same degree of attachment to their town or village. On the same survey, Europeans also saw EU institutions as largely irrelevant. When asked to name the public authorities with the greatest impact on their lives, 51 percent mentioned the national government, 34 percent their local or regional governments, and only 9 percent mentioned the EU.[xli]

Today’s crisis of confidence in Europe should not be a surprise. Already in 2002, the eminent Oxford philosopher Larry Siedentop warned that “[b]y allowing an elitist strategy for rapid European integration to shape the image of liberal democracy in Europe, . . . centrist politicians may unwittingly be fostering the things which are the most antithetical to liberal democracy—xenophobic nationalism and economic autarky.”[xlii] It is possible that the dwindling enthusiasm for the EU will serve as an impetus to make the European project more restrained and humble. But there is also the risk that the erosion of support for the project, coupled with centrifugal forces on the continent and in the UK, will recreate political dynamics similar to those witnessed by the contemporaries of Hayek and Coudenhove-Kalergi in the 1930s.

A Rising Russia

The ingredients for a major political and economic calamity are already here. First, as in the 1930s, the European continent is facing a formidable challenge in the form of a rising revisionist power: Vladimir Putin’s Russia. Of course, one should not overplay this parallel. Putin is no Adolf Hitler. He does not embrace a murderous ideology that would command him to try to take over the world or annihilate any ethnic groups. However, much like Germany in the 1930s, today’s Russia is emerging as a belligerent, revisionist autocracy, bent on challenging the international order. Like Germany’s defeat in World War I, the collapse of the Soviet Union has left an imprint on the Russian psyche, which Putin has leveraged masterfully to strengthen his own hold on power.

Following the collapse of USSR, Russia was perceived as just another, albeit somewhat larger and more complicated, postcommunist country. Notwithstanding its various flaws and idiosyncrasies, the eventual integration of Russia into Western political structures was seen as a matter of course. In 1994, Russia joined NATO’s Partnership for Peace program. In 2002, the NATO-Russia Council was created to provide a platform for strengthening the ties between Russia and its former Western adversaries. In a move vastly out of proportion to the role that Russia played in the world economy, it joined the G7 in 1997.

But Russia is not just a scaled-up, more corrupt, version of Bulgaria or Slovakia. Its regime is not trying to integrate the country into the international political structures devised by liberal democracies, but to subvert them and to reassert itself in its traditional sphere of influence, through militarism and destabilization of its neighbors, including Moldova, Georgia, and Ukraine.[xliii] The methods of warfare are different than in the 1930s. Russia’s control of energy resources and skillful propaganda have enabled the Kremlin to reach even farther West and to erode the democratic gains made by Central European countries that escaped the bosom of the Soviet Union. Following the end of the First World War, the United States retreated from Europe, leaving European countries to organize their own affairs. Today, in light of its pivot to Asia and of the continuing turmoil in the Middle East, the United States, the long-standing guarantor of security in Europe, can no longer be expected to continue to play the same role that it did throughout the Cold War. But no other liberal democracy is ready to take on the responsibility. The UK is drifting away from the continent and has little appetite to play the role of a great world power again. Germany, the EU’s natural leader, lacks the ambition to come across as truly assertive in today’s world, perhaps due to the trauma of Second World War.

Economic Pains

Second, just like in Hayek’s time, Europe is living through a protracted economic crisis. The world, both in the aftermath of the Great Depression and today, is sluggishly recovering from a deep recession, which has tainted the perceptions of free-market capitalism in the popular imagination and paved the road toward political extremism. Some economists, including Milton Friedman, one of the intellectual leaders of the free-market movement, blamed the severity of the Great Depression on inept monetary policy.[xliv] In the face of a large shock, central banks let Western economies contract and undergo painful downward price adjustments, instead of aggressively providing them with liquidity. One reason was their commitment to gold convertibility. The euro is today’s version of the interwar gold standard. While not anchored to the price of a real commodity and therefore allowing for the conduct of a countercyclical monetary policy, it prevents peripheral Eurozone countries, such as Italy or Greece, from using exchange rate adjustments to alleviate economic pain.

The interwar gold standard eventually disintegrated, probably for the best. Countries that left it first and devalued, such as the United Kingdom and the Nordic countries, experienced more vigorous economic recoveries than those that remained trapped in the “golden fetters” for longer. However, leaving the Eurozone is technically and politically a much riskier enterprise than severing the link to gold, which goes a long way toward explaining the length and severity of the recession in a country like Greece. It does not explain, however, why the European Central Bank (ECB) exacerbated the economic downturn by systematically undershooting its own inflation target and by letting countries on the Eurozone’s periphery slip into deflation.

The ECB, I argue in chapter 4, deserves a substantial amount of blame for the lackluster performance of European economies after 2008. But it would be misleading to reduce Europe’s economic malaise to a cyclical issue. Already in 2008, Alberto Alesina and Francesco Giavazzi, two of the most prominent Italian economists, published a popular book that argued that because “there [was] a good chance that the twenty-first century will be the century of European decline.”[xlv] Their reasons are not difficult to imagine: the lack of incentives encouraging entrepreneurship, innovation, and hard work (when they work, Europeans work much shorter hours than Americans), falling quality of university education, overregulated labor markets, and bloated welfare states. To illustrate the risk of Europe’s absolute economic decline, Chart 1.1 depicts the evolution of total factor productivity in the “old” EU countries (i.e., the 15 economies that formed the EU before its 2004 enlargement) and compares it with the United States. Total factor productivity (TFP) is a measure used by economists to capture the underlying dynamism of an economy. It tracks the growth of income (output) that cannot be accounted for by the growth of the underlying factors of production (capital and labor) and needs to be explained by other factors, such as technological innovation and entrepreneurship. TFP matters because it is what drives modern economic growth. In our era, prosperity does not come from ever-larger numbers of workers or from larger amounts physical capital. Western populations are not growing substantially, and there are limits on how much can be invested into new production capabilities. To a great extent, the improvements in our living standards result from the ability of innovators to come up with new ideas about how to put the available resources to productive uses.

Even prior to the Great Recession, TFP growth in Western Europe was slower than in the United States. The chart deliberately excludes postcommunist countries that joined the EU in the 2000s, because those have seen significant catch-up growth, including improvements in productivity, and the problem of secular stagnation is less relevant there. When the recession hit, the contraction in productivity was much deeper in Europe than in the United States. Whereas TFP growth in the United States has quickly rebounded, it continues to fall in Europe, where it is currently lower than in 2000, suggesting that the continent has in many ways “unlearned” how to combine productive resources in useful ways. This is a result of Europe’s lack of pro-growth reforms that would, among other things, improve market flexibility and accelerate the creation and diffusion of new technologies.[xlvi]

FIGURE 1.1

Figure 1.1: Total factor productivity in the United States and in EU-2004 (2000=100) Data from: Conference Board, Total Economy Database.

Of course, the divergence in productivity between the United States and the EU has been amplified by the greater severity of the Great Recession in Europe relative to the United States. But the underlying problem is a much older one. Spain, for example, has seen a negative TFP growth every year since 1995. Similarly catastrophic performances have been witnessed by other countries on the EU’s Mediterranean periphery. The risk, as Alesina and Giavazzi warn, is not just of relative decline, but also of absolute economic decline, as observed in Argentina during the 20th century.

If growth accounting sounds abstract, consider another measure of economic health: the labor market outcomes of young people. Figure 1.2 displays the rate of unemployment among young people in the United States and in the “old Europe,” alongside the particularly alarming example of Spain. Young people are typically more vulnerable to cyclical fluctuations, as companies will typically hold on to their time-tested, experienced employees in times of crisis, rather than the junior staff. For years prior to the Great Recession, youth unemployment in the EU had been substantially higher than in the United States, driven by rigidities on its labor markets. In many countries, particularly in the Mediterranean, close to a third of all young people in the labor force were actively seeking employment. The numbers skyrocketed in Greece, Italy, Spain, and Portugal with the onset of the financial crisis and have never returned anywhere near their pre-crisis levels. Although some American commentators and economists deplored “jobless recovery” in their country[xlvii] at a time when US job growth was slow in spite of a vigorous recovery, the situation has been much bleaker in Europe. Again, the Mediterranean countries, such as Spain, where youth unemployment rates have exceeded 50 percent, show a distinctly sad picture. In the aftermath of the crisis, Spain has experienced net emigration for the first time since the 1970s, as around 400,000 Spaniards leave each year for Germany, the UK, the United States and other countries that offer more and better economic opportunities.[xlviii]

FIGURE 1.2

Figure 1.2 Unemployment under 25 years of age, seasonally adjusted. Data from: Eurostat, Unemployment Statistics.

Who Is Winning the War of Ideas?

In addition to its social costs, the lack of enticing economic prospects for young people breeds populism and political extremism. Liberal democracy and free enterprise, after all, derive a lot of their popular legitimacy from their ability to deliver tangible economic benefits. That disillusion drives the third worrying parallel with Europe’s past: rise of anti-democratic and anti-capitalist thinking.[xlix] In the aftermath of the Great Depression, many Westerners were convinced of the superiority of the Soviet system, including some leading thinkers. Among economists, the famous “socialist calculation debate” raged between defenders of the free enterprise and the mainstream of the economic profession, which concluded, for a period, that planned economies could perform just as well as economies that relied on private ownership and free markets.[l] In all fairness, some pro-Soviet intellectuals, such as André Gide or Arthur Koestler, sobered up after visiting the USSR.[li] Neither were fascism and Nazism confined just to Italy and the German-speaking lands. In the UK, Oswald Mosley’s British Union of Fascists became a respectable political force, attracting support from a significant portion of the British elite, including figures such as Harold Harmsworth, the publisher of the tabloid Daily Mail.

Today, liberal democracies and proponents of free enterprise are doubting themselves again. Notwithstanding China’s recent slowdown, the “Beijing Consensus”[lii] has gained some currency in the West, suggesting that authoritarianism and a government-dominated economy can be a viable alternative to the model founded on democratic capitalism. In some conservative circles, Putin’s authoritarianism is praised for his “defense of traditional values against a so-called tolerance that is genderless and infertile,” as Patrick Buchanan, a former US presidential candidate, put it.[liii] Much like at the time when Hayek wrote about the prospects for a European federation as an antidote to nationalism, the populist far right and far left are again on the rise. In Poland, the Law and Justice Party secured a parliamentary majority thanks to a virulently xenophobic electoral campaign. In Hungary, the governing Fidesz party of Viktor Orbán have been trying to capture the electorate of Jobbik, a Neo-Nazi group that has grown into the second most popular party in the country. In Greece, the economic crisis brought to power Syriza, a coalition of Marxists, Maoists, and other far-left radicals, some of them with connections to the Kremlin.[liv] The UK’s Labour Party has elected Jeremy Corbyn, a man with a troubling network of friends[lv] and fringe views on matters ranging from economic policy to security matters, as its leader. In political spaces once occupied by mainstream political parties, we find increasingly Front National, Jobbik, Podemos, or Sweden Democrats.

Decay of Trust Among Europe’s Nations

The fourth and last echo from the 1930s is the gradual erosion of trust and cooperation between European countries. The interwar period was an era of nationalism and lack of leadership by liberal democracies. Firstly, the United States, the world’s leading economy, failed to uphold the principles of free trade by introducing the Smoot-Hawley Tariff in 1931, which was followed by a wave of protectionist measures that disrupted trade in Europe. Secondly, until it was too late, European countries failed to form binding alliances that could have prevented the aggression of Hitler’s Germany against its neighbors. Today, Europe lacks leadership again, and seems more divided than ever before.

One such division is over fiscal governance in the Eurozone. When Angela Merkel visited Athens in 2012, in one of many heated moments during Greece’s debt crisis, 7,000 police officers, including sharpshooters and navy divers, were dispatched in what had been the biggest security operation in the history of the country since US President Bill Clinton’s visit in 1999. The Wall Street Journal described “six-foot-high metal barriers outside Parliament, two police helicopters, and 10 extra riot-police units—with a water cannon on standby.”[lvi] The fiscal consolidation programs that have been introduced in Greece—which used to be among the countries where the EU enjoyed the highest levels of support—have been seen by its public as impositions by the Germans and the global financial elites and fueled a violent backlash. On Greece’s far-right, this backlash is epitomized by the rise of Golden Dawn—a neo-Nazi group, which almost dissolved itself in 2005, only to grow into the third largest political group in the country during the crisis. The far-left Syriza, meanwhile, is Greece’s leading political formation and an inspiration for left-wing radicals elsewhere. In the Eurozone’s Northern member states, a reciprocal problem has appeared. There, populists are lambasting the rescue packages extended by the Troika to Greece on the grounds of the Greeks’ being unreliable, lazy, and undeserving of help. The opposition against the bailouts contributed to the emergence of new Euroskeptic parties in Germany, Finland, or Slovakia, as well as to the rise of nationalism across Europe. Regardless of which side—if any—is right in this debate, the sense of victimhood in Greece combined with the perception of Germans, Slovaks, and the Balts that the Greeks are taking advantage of them will make future cooperation more difficult.

Another division has arisen in response to the influx of asylum-seekers into the EU, which accelerated in 2015. Whereas Germany, Sweden and a number of “old” EU countries expressed an accommodative attitude toward refugees fleeing Syria, Central and Eastern European leaders have been much more reserved. They have rejected, for example, the idea of a common EU response, which would involve the resettlement of fixed quotas of asylum seekers in their countries. Throughout the EU, the refugee crisis has propelled the resurgence of xenophobic populism and of heated anti-immigration rhetoric, making it increasingly uncertain whether a common European response, which would not jeopardize the freedom of movement of people in the EU, can be found.

Finally, the United Kingdom, one of the EU’s most prominent members, is slowly drifting away from the bloc and, depending on the outcome of this year’s referendum, might decide to leave it altogether. The Eurozone, the refugee crises, and the possible consequences of Brexit are all discussed later in this book. Unsurprisingly, I argue that the EU’s hubris has contributed to some (although not all) of these crises, just as the EU’s critics are keen to point out. However, the EU’s downfall would be the wrong answer to Europe’s problems. Quite the contrary, its unraveling would unleash the political forces of nationalism and protectionism, which can destroy, as they did in the Hayek’s lifetime, liberal democracy and free enterprise on the continent. It is high time for conservatives and advocates of free markets to stop being cheerleaders for the EU’s nemesis, and to become—as they did many times before—a fresh source of reform ideas that will help save the EU from itself.

NOTES

[i] Hayek “The Economic Conditions of Interstate Federalism,” 272.

[ii] “Essential Reading,” The Economist.

[iii] Hayek, The Road to Serfdom, 238.

[iv] Ibid., 239.

[v] Hayek “The Economic Conditions of Interstate Federalism,” 269.

[vi] Hayek, “Postscript: Why I Am Not a Conservative.”

[vii] Margaret Thatcher Foundation, “Thatcher, Hayek & Friedman.”

 [viii] Feine and Manning, “Why the European Union Will Fail.”

[ix] Klaus, “Careless Opening Up of Countries.”

[x] Bandow, “The European Union: Pretension Without Power.”

[xi] See Cato Institute, “F. A. Hayek (1899–1992).”

[xii] See Torreblanca and Leonard, “The Continent-Wide Rise of Euroscepticism.” It is important to stress the extent to which the erosion of trust in European institutions precedes the crisis. See, e.g., Hix, What’s Wrong with the European Union and How to Fix It, 50–66.

[xiii] Gordon, “Friedrich Hayek as a Teacher.”

[xiv] Churchill, speech at the University of Zurich.

[xv] Coudenhove-Kalergi, Pan-Europa.

[xvi] The idea goes even further back in time. As Simms notes, already in 1871, J. R. Seeley published an article in the Macmillan’s Magazine with the title “United States of Europe.” See Simms, “Towards a Mighty Union,” 49.

[xvii] Coudenhove-Kalergi, Pan-Europa.

[xviii] Angell, The Great Illusion.

[xix] The idea is criticized also in Röpke, International Economic Disintegration, 68-70. Wilhelm Röpke was a German economist, a contemporary of Hayek, with whom he shared a number of beliefs, including the idea of a system of international political cooperation in Europe.

[xx] Coudenhove-Kalergi, Pan-Europa.

[xxi] Coudenhove-Kalergi, An Idea Conquers the World, 247.

[xxii] Mises, Liberalism, 143.

[xxiii] Mises, Liberalism, 143–46.

[xxiv] Eichengreen and Vazquez, Institutions and Economic Growth in Postwar Europe.

[xxv] Bush, “Remarks to the Citizens in Mainz” (emphasis added).

[xxvi] On the disconnect between elites and popular opinion about European integration, see Hooghe, “Europe Divided?”

[xxvii] See Mudde, “Three Decades of Populist Radical Right Parties in Western Europe,” 12.

[xxviii] “[T]he states within the Union will not be able to pursue an independent monetary policy. With a common monetary unit, the latitude given to the national central banks will be restricted as much as it was under a rigid gold standard—and possibly rather more since, even under the traditional gold standard, the fluctuations in exchanges between countries were greater than those between different parts of a single state, or than would be desirable to allow within the Union.” Hayek, “The Economic Conditions of Interstate Federalism,” 259.

[xxix] Treaty Establishing a Constitution for Europe.

[xxx] Ibid., 54.

[xxxi] Ibid., 55.

[xxxii] Ibid., art. IV-444, 197.

[xxxiii] Beunderman, “Giscard Demands Second Chance for EU Constitution.”

[xxxiv] Treaty of Lisbon.

[xxxv] Ibid., art. 48 (7).

[xxxvi] Beunderman, “Giscard Demands Second Chance for EU Constitution.”

[xxxvii] Smyth, “MEPs Transparent in Their Suspicions About Libertas.”

[xxxviii] Collins, “Demonstrators Claim EU Is Trying to Railroad Irish Voters.”

[xxxix] Waterfields, “EU Intervention in Irish Referendum ‘Unlawful.’”

[xl] Barroso, “2012 State of the Union Address.”

[xli] European Commission, “European Citizenship.”

[xlii] Siedentop, Democracy in Europe, 219.

[xliii] The kleptocratic nature of the regime is discussed in Dawisha, Putin’s Kleptocracy. For a discussion of the geopolitical threat posed by Putin’s regime, see Lucas, The New Cold War. See also Aron, Putin’s Russia.

[xliv] Friedman and Schwartz, A Monetary History of the United States.

[xlv] Alesina and Giavazzi, The Future of Europe. Even earlier, the 2004 Sapir report noticed Europe’s stagnation and proposed remedies. See Sapir et al., An Agenda for a Growing Europe.

[xlvi] For a more thorough assessment of the productivity slowdown in Western Europe and its causes, see Crafts, Western Europe’s Growth Prospects.

[xlvii] For an early discussion, see Kolesnikova and Liu, “Jobless Recoveries.”

[xlviii] See Izquierdo et. al., “Spain.”

[xlix] Existing research suggests that the financial crises have a significant impact on the rise of political extremism. For historical evidence from the Great Depression, see Bromhead et. al., “Political Extremism in the 1920s and 1930s.” A more systematic account from a broader view of history is offered by Funke et. al., “Going to Extremes.”

[l] For a history of the debate, see Hoff, Economic Calculation in the Socialist Society.

[li] Both of them later authored penetrating discussions of the process of their disenchantment with the Soviet regime. See Gide, Retour de l’U.R.S.S..  See also, the edited volume by Crossman, The God That Failed.

[lii] Cooper Ramo, The Beijing Consensus.

[liii] Buchanan, “Is Putin One of Us?” For a journalistic take on the Putin’s reinvention as a defender of “traditional values” and social conservatism, see Matthews, “Vladimir Putin’s New Plan for World Domination.”

[liv] Jones et. al., “Alarm Bells Ring over Syriza’s Russian Links.”

[lv] Rohac, “Jeremy Corbyn and His Sinister Friends.”

[lvi] Pangalos and Angelos, “Athens Braces for Visit by Merkel.”

REFERENCES

Alesina, Alberto and Francesco Giavazzi. The Future of Europe: Reform or Decline. Cambridge: MIT Press, 2008.

Angell, Norman. The Great Illusion: A Study of the Relation of Military Power to National Advantage. New York & London: G.P. Putnam’s Sons, 1910.

Aron, Leon, ed. Putin’s Russia: How It Rose, How It Is Maintained, and How It Might End. Washington DC: American Enterprise Institute, 2015.

Bandow, Doug. “The European Union: Pretension Without Power.” Forbes, February 7, 2011. http://www.cato.org/publications/commentary/european-union-pretension-without-power.

Barroso, José Manuel. “2012 State of the Union Address.” September 12, 2012. http://europa.eu/rapid/press-release_SPEECH-12-596_en.htm.

Beunderman, Mark. “Giscard Demands Second Chance for EU Constitution in France.” EU Observer, May 23, 2006. https://euobserver.com/institutional/21674.

Bromhead, Alan de, Barry Eichengreen, and Kevin H. O’Rourke. “Political Extremism in the 1920s and 1930s: Do the German Lessons Generalize?” Journal of Economic History 73 (2012): 371–406.

Buchanan, Patrick J. “Is Putin One of Us?” Patrick J. Buchanan—Official Website, December 17, 2013. http://buchanan.org/blog/putin-one-us-6071.

Bush, George H. W. “Remarks to the Citizens in Mainz.” Mainz, Federal Republic of Germany, May 31, 1989. http://usa.usembassy.de/etexts/ga6-890531.htm.

CATO Institute. “F. A. Hayek (1899–1992)—Distinguished Senior Fellow.” http://www.cato.org/people/hayek.html.

Churchill, Winston. Speech at the University of Zurich. September 19, 1946. http://www.coe.int/t/dgal/dit/ilcd/Archives/selection/Churchill/ZurichSpeech_en.asp.

Collins, Sarah. 2008. “Demonstrators Claim EU Is Trying to Railroad Irish Voters.” Irish Times, December 12, 2008. http://www.irishtimes.com/news/world/europe/demonstrators-claim-eu-is-trying-to-railroad-irish-voters-1.922609.

Conference Board. Total Economy Database, May 2015. http://www.conference-board.org/data/economydatabase/.

Cooper Ramo, Joshua. The Beijing Consensus. London: Foreign Policy Centre, 2004.

Coudenhove-Kalergi, Richard Nicolaus. Das Paneuropäische Manifest. 1923. http://vv.varzil.de/II-01.PDF.

Coudenhove-Kalergi, Richard Nicolaus. Pan-Europa. Vienna: Pan-Europa-Verlag, 1923.

———. An Idea Conquers the World. London: Hutchinson, 1953.

Crafts, Nicholas. Western Europe’s Growth Prospects: An Historical Perspective. Competitive Advantage in the Global Economy Research Centre, University of Warwick, 2011. http://ec.europa.eu/economy_finance/events/2011/2011-11-21-annual-research-conference_en/pdf/session012_crafts_en.pdf.

Crossman, Richard, ed. The God That Failed. New York: Columbia University Press, 2001.

Dawisha, Karen. Putin’s Kleptocracy: Who Owns Russia? New York: Simon & Schuster, 2014.

Eichengreen, Barry and Pablo Vazquez. Institutions and Economic Growth in Postwar Europe: Evidence and Conjectures. Mimeo, 1999. http://eml.berkeley.edu/~eichengr/research/vanark.pdf.

“Essential Reading.” The Economist, June 24, 2010. http://www.economist.com/node/16438630.

European Commission. “European Citizenship.” Standard Eurobarometer 77 (Spring 2012). http://ec.europa.eu/public_opinion/archives/eb/eb77/eb77_citizen_en.pdf.

Eurostat. Unemployment Statistics. S.v. “Unemployment Rate by Sex and Age—Monthly Average.” 2015. http://ec.europa.eu/eurostat/statistics-explained/index.php/Unemployment_statistics.

Feine, Paul, and Alex Manning. “Why the European Union Will Fail: Q&A with Austrian Economist Barbara Kolm.” Reason, April 16, 2013. https://reason.com/reasontv/2013/04/16/will-the-european-economy-collapse-qa-wi.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press, 1963.

Funke, Manuel, Moritz Schularick, and Christoph Trebesch. “Going to Extremes: Politics After Financial Crisis, 1870–2014.” CESifo Working Paper No. 5553, 2015.

Gide, André. Retour de l’U.R.S.S. Paris: Editions Gallimard, 1966.

Gordon, David. “Friedrich Hayek as a Teacher.” Mises Daily, May 8, 2009. https://mises.org/library/friedrich-hayek-teacher.

Hayek, Friedrich August von. “The Economic Conditions of Interstate Federalism.” In Individualism and Economic Order, 255–72, Chicago: University of Chicago Press, 1948.

Hayek, Friedrich August von. “Postscript: Why I Am Not a Conservative.” In The Constitution of Liberty, 397–414, London: Routledge, 2009.

Hayek, Friedrich August von. The Road to Serfdom. London: Routledge, 2009.

Hix, Simon. What’s Wrong with the European Union and How to Fix It. London: Polity, 2008.

Hoff, Trygve J. B. Economic Calculation in the Socialist Society. Indianapolis: Liberty Fund, 1981.

Hooghe, Liesbet. “Europe Divided? Elites vs. Public Opinion on European Integration.” European Union Politics 4 (2003): 281–304.

Izquierdo, Mario Juan F. Jimeno, and Aitor Lacuesta. “Spain: From Immigration to Emigration.” Documento de Trabajo No. 1503, Banco de España, 2015. http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/15/Fich/dt1503e.pdf.

Jones, Sam, Kerin Hope, and Courtney Weaver. “Alarm Bells Ring over Syriza’s Russian Links.” Financial Times, January 28, 2015. http://www.ft.com/cms/s/0/a87747de-a713-11e4-b6bd-00144feab7de.html#axzz3veMLITUU.

Klaus, Václav. “Careless Opening Up of Countries (Without Keeping the Anchor of the Nation-State) Leads Either to Anarchy or to Global Governance: Lessons of the European Experience.” Speech at the Mont Pèlerin Society General Meeting, September 1, 2014. http://www.klaus.cz/clanky/3623.

Kolesnikova, Natalia A. and Yang Liu. “Jobless Recoveries: Causes and Consequences.” The Regional Economist, April 2011, 18–19. https://www.stlouisfed.org/~/media/Files/PDFs/publications/pub_assets/pdf/re/2011/b/jobless.pdf.

Lucas, Edward. The New Cold War: Putin’s Russia and the Threat to the West. New York: St Martin’s Press, 2014.

Margaret Thatcher Foundation. “Thatcher, Hayek & Friedman.” Margaret Thatcher Foundation, 2015. http://www.margaretthatcher.org/archive/Hayek.asp.

Matthews, Owen. “Vladimir Putin’s New Plan for World Domination.” The Spectator, February 22, 2014. http://www.spectator.co.uk/2014/02/putins-masterplan/.

Mises, Ludwig von. Liberalism. Irvington-on-Hudson, NY: Foundation for Economic Education, 1985.

Mudde, Cas. “Three Decades of Populist Radical Right Parties in Western Europe: So What?” European Journal of Political Research 52 (2013): 1–19.

Pangalos, Philip and James Angelos. “Athens Braces for Visit by Merkel.” Wall Street Journal, October 9, 2012. http://www.wsj.com/articles/SB10000872396390444024204578044733434528460.

Rohac, Dalibor. “Jeremy Corbyn and His Sinister Friends.” Weekly Standard, August 20, 2015. http://www.weeklystandard.com/jeremy-corbyn-and-his-sinister-friends/article/1015157.

Röpke, Wilhelm. International Economic Disintegration. London: William Hodge & Co, 1942.

Sapir, André, et. al. An Agenda for a Growing Europe. Oxford: Oxford University Press, 2004.

Siedentop, Larry. Democracy in Europe. New York: Columbia University Press, 2001.

Simms, Brendan. “Towards a Mighty Union: How to Create a Democratic European Superpower.” International Affairs 88 (2012): 49–62.

Smyth, Jamie. “MEPs Transparent in Their Suspicions About Libertas.” Irish Times, September 30, 2008. http://www.irishtimes.com/news/meps-transparent-in-their-suspicions-about-libertas-1.941575.

Torreblanca, José Ignacio, and Mark Leonard. “The Continent-Wide Rise of Euroscepticism.” European Council on Foreign Relations Brief No. 79, 2013. http://www.ecfr.eu/page/-/ECFR79_EUROSCEPTICISM_BRIEF_AW.pdf.

Treaty Establishing a Constitution for Europe, October 29, 2004. http://europa.eu/eu-law/decision-making/treaties/pdf/treaty_establishing_a_constitution_for_europe/treaty_establishing_a_constitution_for_europe_en.pdf.

Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, December 13, 2007. http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:C:2007:306:FULL&from=EN.

Waterfields, Bruno. “EU Intervention in Irish Referendum ‘Unlawful.’” Daily Telegraph, September 29, 2009. http://www.telegraph.co.uk/news/worldnews/europe/eu/6239933/EU-intervention-in-Irish-referendum-unlawful.html.