After the US and Europe launched their joint “shock and awe” sanctions against Russia, Michael Hudson was quick to point out that a major target of the US campaign was the EU, and that Europe was committing economic suicide. Indeed, Hudson argued just before the war began that America’s Real Adversaries Are Its European and Other Allies, which gave prominent play to US opposition to the Nord Stream 2 pipeline. Hudson argued:
The only way left for U.S. diplomats to block European purchases is to goad Russia into a military response and then claim that avenging this response outweighs any purely national economic interest.
This may have seemed to be an extreme view then but the attack on the Nord Stream 2 pipelines, whether instigated or merely approved by the US,1 plus the acceleration of the Europe’s economic decline, appears to have focused some minds.
I must confess not to having yet subscribed to Thomas Fazi’s site to access his new article on Europe’s tsuris, but he provides a thesis statement on Twitter:
The Ukraine war — or more precisely the West’s response to the latter — is causing Europe to deindustrialise at frightening speed. What’s worse, there is ample evidence that, from America’s perspective, this was the intended outcome all along.
— Thomas Fazi (@battleforeurope) August 9, 2023
The opening section of Fazi’s article, available in Compact Magazine, triggered a line of thought I wish had occurred to me a long time ago:
For decades, the European Union was regarded as an emerging counterweight to US geopolitical hegemony that would accord its member states greater autonomy from the superpower across the Atlantic. The Russia-Ukraine conflict has revealed the emptiness of this promise. Today, Europe’s “vassalization” (in the words of an analyst for the European Council on Foreign Relations) is arguably more pronounced than at any time since the middle of the 20th century. On geopolitical questions, as the current war has made clear, Brussels has no meaningful independence from Washington. In the economic sphere, Europe’s relative decline and growing dependency on America—which predate the Ukraine conflict but have been exacerbated by it—are if anything even more evident.
In 2008, the European Union’s economy was slightly larger than America’s; America’s economy in 2023 is one-third larger than those of the European Union and Britain combined, and 50 percent larger than that of the European Union without the United Kingdom. To put it differently, the eurozone’s economy has grown about 6 percent over the past 15 years, compared with 82 percent for the United States, according to data from the International Monetary Fund.
The economic fortunes of the European Union and the United States had already started to diverge well before the Ukraine conflict for several reasons, not least Europe’s post-2008 suicidal austerity policies, which led to a continent-wide demand and investment collapse. Over the past year and a half, however, this process has undergone a dramatic acceleration. Unlike America, Europe has suffered a huge economic blowback from the conflict—or more precisely, from the West’s response, especially its decoupling from Russian gas, which before the war accounted for almost half of the bloc’s demand. This drastic move led to a “massive and historic energy shock,” as the Organization for Economic Cooperation and Development put it, exacerbated by speculation on the part of the big energy companies, which crippled industry and households alike.
This is the money quote:
The economic fortunes of the European Union and the United States had already started to diverge well before the Ukraine conflict for several reasons, not least Europe’s post-2008 suicidal austerity policies…
Economists, particularly non-neoliberal European economists, correctly point out the considerable flaws in Eurozone design (the budget deficit restrictions on member states, the lack of meaningful Eurozone level spending to reduce differences in growth levels among states, the northern countries perverse stance of wanting to run trade surpluses with other members, the so-called PIIGS, but not wanting to lend or otherwise provide capital to them, which is inherit in this sort of arrangement, the lack of adequate deposit guarantees).
However, why did Europe suffer this shock in the first place? The global financial crisis, despite the label, was substantially a US creation. Whether you believe the conventional narrative (that it the result of a US housing bubble, and housing bubbles in Ireland, Spain and the UK also went into reverse.2) or our version, that it was a derivatives crisis which greatly amplified real economy exposures and concentrated them at over-leveraged, systemically important financial institutions, the US was the prime culprit.
First, European financial institutions, particularly German ones like its Landesbanken, bought a lot of US subprime mortgage related paper (including CDOs) which blew big holes in their balance sheets, leading to bank failures and emergency rescues.
And in what amounts to an admission of US culpability, the US opened up dollar swap lines. These were holes in Eurobank dollar books that needed to be plugged. But the ECB, which was the party responsible for salvaging up Euro-based institutions, could not create dollars, only Euros. So it had to swap its Euros to dollars to rescue these institutions.
That is not to say that European institutions did not get sick on their own cooking, like German Hypo Bank buying Irish highflier (read huge Irish mortgage lender) Depfa, and then at an eyebrow-raising price too. However, even the New York Times cites the subprime bust as a force multiplier for unwind of European housing market bubbles. From an April 2008 story:
The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices down from the Irish countryside and the Spanish coast to Baltic seaports and even in parts of northern India…
In Ireland, Spain, Britain and elsewhere, housing markets that soared over the past decade are falling back to earth. Experts predict that some countries, like Ireland, will face an even more wrenching adjustment than the United States, with the possibility that the downturn could turn into wholesale collapse.
To some extent, the world’s problems are a result of American contagion. As home financing and credit tighten in response to the crisis that began in the U.S. subprime market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states…
“The problems in the U.S. are being transmitted to Europe,” said Michael Ball, professor of urban and property economics at the University of Reading in England, who studies housing prices. “What’s happening now is an awful lot more grief than we expected.”
Without relitigating the entire financial crisis, there are plenty of other ways to point to US culpability in housing bubbles outside the US. Most go back to Alan Greenspan. For instance, in the dot-bomb era, Greenspan dropped policy rates into negative real interest rate terrain for an unprecedented nine quarters (previously the Fed would drop rates that far for only a quarter).
Those sustained low US rates led many countries to drop their interest rates too to keep their currencies from appreciating too much against the dollar and making exports uncompetitive. Unnaturally low policy rates are a subsidy to leveraged investment like housing as well as financial speculation.
So it should come as no surprise that when BIS economists William White and Claudio Borio started to show research as early as 2003 that housing bubbles were well underway in some (and then many) advanced economies, Greenspan pooh-poohed it. And he had the stature to be able to swat these findings off in front of other central bankers.
Second, if you accept our version, US financial system deregulation plays a central role, both directly (the disastrous decision not to put curbs on the unregulated insurance called credit default swaps) and indirectly (evangelizing by US officials and banks around the world in the name of “innovation”; cognitive capture among orthodox economist who dominated policy-making).
So why does this history matter?
The Europeans should have been screaming bloody murder about how they nearly died from bad US financial cooking. That would have given the EU moral standing in policy debates and should have helped jaundice EU officials about blindly following every clever US fad.
Now I was admittedly busy in the post-crisis period documenting inadequate US policy responses, our foreclosure crisis, and then the second stealth US bank bailout, of liability for near-pervasive failure to convey private mortgage loans to mortgage securitizations as their rigid contracts required. This misconduct gave the Obama Administration leverage to cudgel bank servicers into offering principal modifications on many mortgages. But the Team Obama never missed an opportunity to enrich banks as opposed to rescue ordinary Americans.
So this domestic focus, plus the fact that it was painful to watch EU leaders make the likes of Timothy Geithner look good by comparison, meant I am not as conversant with EU post-crisis debates as I might be. However, I have the strong impression that no strong recriminations were directed at the US by anyone authoritative in policy or pundit circles (or if that critique did occurs, it was quickly memory-holed). There should have at least been angry arguments behind closed doors and leaks about them. But I have the strong impression that did not happen either.
And why not? Europeans who know the ways of major government institutions can likely provide much better answers, but here are some starters:
Among economists, suffering from the same cognitive capture as their American counterparts, resulting in undue deference to bankers and fealty to incoherent ideas about free markets. Questioning that would be an admission of personal failure as well as career-limiting.
Among policy-makers, valuing personal and institutional connections to America. Recall how the US dominates advanced education. Many of the highly credentialed Europeans studies in the US. They also likely see participation in various US run forums and NGOs as important to their stature. Unless a large enough group was willing to rock the boat with the US by engaging in fierce criticism and post-mortems to firm up where culpability lay, it would be way too risky to be a lone voice in the wilderness.
Among the European elites generally, possibly a thin bench. The fact that Christine Lagarde went from the IMF to the ECB, that Jens Stoltenberg has been held over as NATO chief, and that the likes of Ursula von der Leyen is European Commission chair suggests that Europe is not long on actual or purported “talent” at top bureaucratic levels. So even if a post-crisis purge might have been possible, a second-order problem may have been lack of enough seasoned people to be credible-seeming replacements.
Sanity checks, particularly from long-standing readers of the European press, very much appreciated.
1 The Baltic is a NATO lake. It is inconceivable that an operation of this sort would have gone unnoticed.
2 Note that the very lofty Canadian and Australian housing markets suffered comparatively little damage.