The Financial Guns of August

Is it too late to stop Europe's impending economic disaster?

Among the great and tragic questions of modern history, one of the most important is: How did the assassination of an Austrian prince turn into the conflagration of World War I, a disaster that in turn produced Nazism and Soviet communism, and which swept away most of the states that went to war in 1914? The answer, in part, is both simple and shocking. Following the rise of railways and the growth of mass armies, European countries had developed systems of military mobilization that, once set in motion, could not be reversed. As a result, they stumbled into war before they even realized they had passed the point of no return.

The conditions for an even greater disaster existed during the Cold War, when the doctrine of mutually assured destruction (with the appropriate acronym MAD) meant that any confrontation between the superpowers ran the risk of wiping out the entire human race. The United States and the Soviet Union built up systems that in effect were automatic doomsday switches, guaranteeing that a nuclear exchange, once started, could not be halted.

We escaped that disaster and now tend to imagine that the system worked as a force for stability. Arguably, though, this was a matter of good luck rather than good sense. With different people in charge, or a slightly different course of events, the Cuban missile crisis could easily have ended in all-out nuclear war, as could the Hungarian crisis of 1956 and the Yom Kippur War of 1973.

The problem is that systems built on deterrence and automatic responses work well much of the time, but when they fail, can lead rapidly to catastrophe. In a crisis, everyone tends to assume that it is up to someone else to avert disaster.

Europe's current economic crisis seems to be headed in the same direction. All of the main parties are set on autopilot, and each seems to expect someone else to fix the problem.

The Greek political system is clearly incapable of implementing further austerity, and yet there is essentially zero support in Greece for an orderly exit from the eurozone, even if such a thing were possible. The only way an exit can occur is if the so-called troika consisting of the European Commission, the International Monetary Fund, and the European Central Bank (ECB) enforces it by provoking a banking crisis in Greece. Such an action would be the economic equivalent of a mobilization order.

Meanwhile, the central European institutions are making noises about preparations for a Greek exit, as if such an outcome will be the automatic result of any Greek refusal to continue the failed policies of austerity. Such saber rattling allows them to avoid thinking about any effective alternative to further growth-killing budget cuts.

The obvious alternative, a shift to fiscal expansion, faces two major obstacles, one of which has been the subject of much comment, while the other has been largely ignored. The clear obstacle is the unwillingness of German voters to pay more taxes that, in their view, will be used for the benefit of profligate Southern Europeans. The reality, that the primary beneficiaries of the bailouts have been German and French banks, is almost never mentioned.

The much bigger problem is that because European governments cannot print their own money, any fiscal expansion must be financed by debt, and any increase in public debt is likely to produce a new crisis. The proposal for a shift to Eurobonds, backed collectively by European governments, would spread the pain but not resolve the problem.

In Europe, as in the United States, the problem underlying the crisis was an excessive buildup of debt, partly public, but mostly private. The rub is that whereas the United States was able to resolve the most critical problems through quantitative easing (large-scale purchases of public debt by the U.S. Federal Reserve), this option has been closed off in Europe because the ECB refuses to buy government bonds and remains fixated on controlling inflation.

In retrospect, the ECB's creation looks like a repetition of the systems of military mobilization built up before 1914, or of the doomsday switches built into the MAD system. The ECB's design reflected the policy preoccupations of the 1990s, most notably the belief that low inflation would ensure macroeconomic instability, and fears that a common currency would encourage national profligacy. These preoccupations produced an institution carefully insulated from any kind of democratic control and explicitly precluded from any action that could sustain fiscal stimulus. As long as the ECB remains on its current course, disaster is inevitable.

But even in 1914, there were a few weeks between the assassination of Archduke Franz Ferdinand in June and the general mobilization at the end of July, during which determined action could have prevented war. The time is similarly short today, and there are few signs of hope. But there is still time for European leaders to act to save themselves.

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Party Like It's 1989

Why China's post-Tiananmen political model is running out of steam.

In 1989 Deng Xiaoping, then China's paramount leader, made a long-term calculation that is now receiving its most severe test. Deng knew that China's authoritarian power structure, in which officials at each level are beholden to the people above, had one glaring weak point. Who appoints the person at the very top -- where by definition there is no superior to do the appointing? In China before the twentieth century, the seed of the emperor normally performed this function (as so it is even today in North Korea). If Mao had left a healthy son, his regime might have gone this way as well. But Mao had no such heir, and the top spot was left open for jockeying among peers.

Deng, the victor of the Mao succession battle, decided not only to appoint a successor but to lay down a plan that he hoped would institutionalize succession, at least for a few generations of leaders. Deng named the then Shanghai Party Secretary Jiang Zemin, who had successfully managed his city during the nationwide student protests that culminated in the June 4th massacre in Beijing, to general secretary, and named Hu Jintao, who was from a different interest group within the power elite, to succeed Jiang. The distinguished Chinese novelist and blogger Wang Lixiong, noting that Hu's apparent successor Xi Jinping is allied with the Jiang camp, has written a shrewd analysis of Deng's long-term plan: Two elite groups, one originating with Jiang and the other with Hu, will exchange 10-year periods of center stage while the other waits in the wings. Each group -- knowing that the other will get a turn later -- will have an incentive to be civil. With luck, long-term stability will result.

But now, a few months before Xi's expected ascension to the position of Communist Party chairman, it is worth asking whether Deng solved the succession problem. Wang points out that Deng's vision calls for neither ideology nor charisma in the people at the top; such things could rock the boat and be dangerous. On the surface, the leader should display no outward disagreement and pretend one has no ambition other than to answer the call of the masses; and under the surface, serve the interests of the power elite. Bland managers like Hu Jintao and Xi Jinping, interchangeable parts in the system, are ideal candidates, no matter how unsatisfying their personalities or governing styles may be to the Chinese people.  

Enter Bo Xilai, ambitious, charismatic, flamboyant, and until recently party secretary of the metropolis of Chongqing and member of the Politburo, China's elite decision-making body. Bo was adept at manipulating Mao-nostalgia as a means to convert popular resentment of corruption into political capital for himself, and, most galling to guardians of the Deng blueprint, appeared ready to skirt any institutionalized arrangement that might block his route to the top. Wang estimates that the elite establishment was ready to slap down Bo even if charges of corruption and wiretapping -- and the bizarre, and still mysterious, allegations of murder by his wife -- had not emerged. Corruption, and even wiretapping, are normal in elite Chinese politics. (A person with knowledge of high-level officials tells me that some secretly record their own conversations as defensive precautions.) Bo's crime was his violation of the unwritten rules about how to rise within the system, and his very public sacking (though officially for "serious disciplinary violations") has brought Deng's question of succession back into the foreground.

Deng's succession blueprint, and his decision to use lethal force to quell the 1989 massacre of unarmed protestors, were both shrewd, long-term political calculations. Deng's police could have cleared Tiananmen Square using billy clubs. It had been done when the government cleared the Square of a similar large demonstration on April 5, 1976 that grew out of mourning for the death of Premier Zhou Enlai; that repression, although violent, resulted in only a few injuries and apparently no deaths. Water hoses and tear gas could have worked against the students in 1989, too, but Deng chose tanks and machine guns. His calculation that a dramatic show of force would buy him about two decades of popular docility all across China was correct.  

It is very likely that Xi will ascend to party secretary as Deng intended. Meanwhile, voices from both the left and right in China have been critical of how the party elite removed Bo on technical grounds, thereby cutting off address of deeper questions about luxian, the "general direction" in which China should be headed, of which there appear to be two main possibilities. One is the emergence of a new core of authoritarian power. Many who have this possibility in mind look to China's military, but the question is deeper than that, and the pattern could emerge from a number of sources. There is a centuries-old tradition in Chinese political culture of the following combination as a formula for gaining and holding political power: a charismatic leader, a millenarian (and often egalitarian) ideology, and an authoritarian bureaucratic hierarchy that guards secrets. Pre-modern peasant rebellions, some of which overthrew dynasties, exemplify this pattern, as does the 19th century Taiping Rebellion, which borrowed an obscure form of Christianity for its ideology and nearly overthrew the Qing dynasty. Mao's revolution fits the formula closely; European Marxism was his magic egalitarian ideology, but his behavior pattern came straight from Chinese tradition. The Falun Gong movement, although cruelly suppressed, resembles this pattern, as do Bo's populist antics in Chongqing, where he briefly recaptured the Mao charisma.  

The other "general direction" would be a move toward modern democratic rule, including elections of officials, civil rights for citizens, and rule of law. The greatest challenge for China's democratization is how to bring together two levels: an elite of pro-democracy intellectuals, people like the writers and supporters of Charter 08 (a group that includes imprisoned Nobel laureate Liu Xiaobo), and hundreds of millions of ordinary people who have been angered by corruption, inequality, injustice, and environmental destruction. China's rulers' huge expenditure on "stability maintenance," which includes hired thugs and Internet monitors in addition to conventional police and prisons, have brought them considerable success in keeping these two levels separate. The power of the Internet, though, remains an open question. Even inside the Great Firewall, the Internet continues to bring people reliable sources of local news as well as platforms for their own public expression that they never had before. Liberal bloggers rightly see grounds for a certain optimism here. But China's transition toward a democratic system has been rocky, and will likely continue to be so.

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