Europeans must learn to sound alarm if all is not well

Fri, Nov 26, 2010, 00:00

OPINION:What happened in Ireland has lessons for all Europe: mankind’s capacity for massive self-delusion remains intact, writes THOMAS KLAU

WITH BATED breath, Europe is following the traumatic political economic and financial tale unfolding in a country that not so very long ago was seen by European policymakers, economists and citizens alike as the one triumphant success story vindicating the offerings of European Union membership and many Brussels-designed policies.

True – not all had been celestial harmony between Ireland and its European partners. Ireland’s notorious tax policy towards corporations was widely seen across the continent as predatory: a prime example of unfairly capturing private enterprise through a fiscal system offering taxation at spectacularly low levels made possible only because some Irish State expenditure was being funded through transfers from the EU’s richer member states.

But never mind. Everyone liked the Irish, admired their economic prowess, and forgave them for holding up the machinery of European politics when time after time they voted like dyspeptic Brits rather than proud Europeans, rejecting steps towards deeper European integration in a referendum.

The extraordinary events that have unfolded over the past few days, the announcement by the Government in Dublin of an austerity drive rarely seen in European history, will reinforce the need for a fundamental re-assessment of the strength of the Irish miracle.

They must also serve as a wake-up call for a generation – ours – that had become used to priding itself on being the economically most literate and enlightened in recent history.

All of us citizens of Europe have grown up with schoolbooks highlighting the reckless follies of the late 1920s, when a financial system gone mad coupled with miserable state management ushered in the most catastrophic economic collapse in the history of humanity, triggering a chain of events leading to the second World War and the Holocaust.

To many of us, including this commentator, the notion that folly on a near-similar scale would be repeated before our eyes, in our lifetime as responsible adults, in other words on our watch, would have seemed until very recently utterly preposterous.

It is true that today’s policymakers have tried to learn from the late 1920s and have so far managed to rescue the global financial and economic system from collapse, albeit at huge expense to taxpayers and with dire consequences for the future economic welfare of the West.

But even so, Europe, Ireland and this generation’s collective inability to see and admit the extent to which the Irish boom was built on quicksand must serve as a reminder that the potential for foolishness on a suicidal scale is a near-permanent feature of our species.

The trouble of course with many developments leading to economic or political disaster is that they happen very fast and often in parallel with other trends of a seemingly positive nature, distracting the great majority of observers and witnesses from the danger growing under the calm and shiny surface. Okay, so the houses are ridiculously overpriced – but so what, if we all get richer in the process?

Every visitor coming to Ireland at the height of the boom and peering, as this commentator did, through the windows of an estate agent could only marvel at the staggering sums commanded by poky little suburban residences costing much more than many a chateau in France. Something here is not quite right, one thought, these prices are bound to come down some day.

How easy to make such an observation, how easy then not to follow through on it and to participate lazily in the chorus saluting Ireland’s phenomenally successful policies. And it was nice to be lazy: there was huge sympathy in Europe and the world for an Ireland that had seemingly used with great wisdom its EU membership to achieve wealth and genuine economic and political independence from its erstwhile semi-colonial British oppressor.

It was nice to be lazy, and it would have been cranky not to chime in.

The problem with being Cassandra is that it is such an unpopular part, psychologically a very difficult one to play for any person who does not revel in misanthropy.

On occasion, it can make one antisocial and professionally unsuccessful or even look a little mad.

We know today of course that we would have needed many more Cassandras, and that our own collective legacy means that this generation of Europeans should eat humble pie and stop feeling superior to our great-grandparents who so dramatically mismanaged the pile-up of financial peril 90 years ago.

Rather than pointing the finger at Irish follies, Europeans should not forget to take a hard look at their own prescriptions and policies and wonder why they continued to underwrite the seductive chimera of Irish success long after Irish banks – aided, abetted and enabled by European investors and partners – decided to treat the housing market as a gigantic pyramid scheme.

For let us be honest with ourselves: it did not take economic rocket science to identify the problems and realise the magnitude of the risk that was emerging. All it really took was a look through that window, and then the resolve and courage to think the consequences through.

We can only hope that future generations will remember that in a market economy, the financial services industry, vital as a facilitator of investment and trade, can grow swiftly into a fearsome alien destroying its host whenever it slips the leash of tough regulation and even tougher supervision.

We certainly cannot live without competitive financial services and nor should we try. But the financial industry’s potential for catastrophic systemic havoc may well exceed that of any other single sector in the economy. It is essential to watch and control every change that affects the fundamentals of its operations, be they legal, economic or technological; and it is equally vital to realise that the financial services alien can be all the more dangerous as it is prone to hand out the happy-pill of seemingly easy mass access to ever-greater riches.

The rest of Europe, even where it did not replicate the worst failures of regulation and common sense that are now plunging Ireland into deep and painful austerity, must accept that Ireland’s failure is also to a significant extent its own.

The lesson should not be to deter Europeans from taking an interest in each other’s affair, but on the contrary to encourage them to sound the alarm whenever something looks wrong, and even more importantly to create shared European institutions strong and sovereign enough to do something about it. And should they fail as well, then at least the responsibility will be truly collective.

For the events of the last two years and again these past weeks have demonstrated how we all sit in one and the same boat. When a fire breaks out on one of the decks, it is not a wise option for the other passengers to move aside and remain unconcerned. It is vital for Europeans to accept that restoring stability and the path to growth in Europe must be a genuinely common enterprise.

But this also means that claims to the sovereignty to make foolish decision are unacceptable when consequences must be borne by all.

As Ireland’s woes hurt the Irish, so they hurt Europe’s pride and sense of achievement. As did previous generations, ours is learning the hard way that it is not immune to collective delusion and a refusal to acknowledge reality even when it stares you in the face.

The present is a lesson in humility, but recent history offers reasons to hope. Some of the EU’s newer member states have shown that painful collective retrenchment can pave the path to a resumption of healthy growth.

Ireland’s best asset remains its people. With such capital, there is no reason why Ireland should not become the pride of Europe again.

Thomas Klau is editorial director and head of the Paris Office of the European Council on Foreign Relations

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