Murder on the EU Express
With the monetary union coming apart, the
finger-pointing has begun. Who really killed Europe? You remember Agatha Christie’s classic whodunit Murder
on the Orient Express? The problem for the great Belgian
sleuth Hercule Poirot was that there were far too many suspects. The strange death of the European Union may prove to be a rather similar case.
So used are we to hearing the process of European integration likened to an unstoppable train that we discount the idea it could ever stop in its tracks. Yet the reality is that Europe has been quietly disintegrating for some time. Outwardly, it’s true, Europe’s leaders still appear to be inching toward their long-cherished goal of ―ever closer
union.‖ Last month they agreed to set up a new European
Stability Mechanism to deal with future financial crises. It’s still a long way from being the United States of Europe, but most Americans assume that’s the ultimate destination: a truly federal system like their own. Think again. Not only has the economic crisis blown holes in the finances of
nearly all EU states, it has also revealed a deep reluctance on the part of those least affected to bail out the hardest
Americans bemoaning their own economy’s sluggish
recovery should look on the bright side: it’s worse in
Europe. The International Monetary Fund projects growth of 3 percent for the United States this year but just half that for the euro zone. Even more striking is the extent of economic divergence within the euro area. While the German economy is currently growing at an annualized rate of around 6 percent, Greek growth in the fourth quarter of last year was minus 6 percent. So much for the convergence monetary union was meant to bring.
The underlying problem is the euro’s failure to create a
truly integrated market for labor. In the decade after the euro’s creation in 1999, German unit labor costs rose by less than 40 percent; the equivalent figure for Spain was 80 percent. Workers in the periphery took monetary union
to mean they should be paid as well as workers in the German core. But their productivity didn’t rise to German levels. At the same time, people in countries like Ireland
took the post-1999 reduction in interest rates—one of the
most obvious benefits to the periphery of euro membership—as a signal to go on a borrowing binge. The
result: Ireland and Spain behaved a lot like Florida and Nevada. House prices bubbled, then burst.
In the wake of the American crisis, some banks failed—most spectacularly Lehman Brothers—but most
were bailed out, and the federal deficit soared. Dollars were transferred by the U.S. Treasury from Texan
taxpayers to welfare recipients in New Mexico. In Europe the story was different. There was no big bank failure; all ―too big to fail‖ institutions were rescued. National deficits
soared. But when some countries ran into fiscal trouble—when financial markets started to demand sharply higher interest rates—things got ugly, because there is no mechanism to transfer euros between countries other than in tiny amounts.
The crisis has driven not just one but two divisive wedges
into the European economy. First there is the fundamental political rift between the 17 EU members who joined the monetary union and the 10 who didn’t. Then, within the
euro zone, there is the widening economic rift between the German-dominated core and the ailing periphery—the
countries cursed with the unflattering acronym PIGS
(Portugal, Ireland, Greece, and Spain).
In this whodunit, the prime suspect is not the real culprit. At
first sight, the fingerprints on the murder weapon belong to
feckless finance ministers of the PIGS. It’s true that those countries had been heading for fiscal trouble even before the onset of the financial crisis. The Bank for International Settlements was forecasting that by 2040 they would all have public debts equal to at least 300 percent of gross domestic product.
In the cases of Greece and Ireland, the financial markets decided some months ago that they were likely to default; hence the surge in their borrowing costs as investors sought compensation for this risk in the form of higher rates; hence the need for bailouts from the other EU members.
But why exactly is Ireland’s deficit so huge? Step forward
suspect No. 2: Europe’s banks. For it was by bailing out
the country’s bloated banking sector—the total assets of
which now exceed Irish GDP by a factor of 10—that the
last Irish government created the present fiscal crisis. In much the same way, worries about Spain have much more to do with the still-uncertain losses of the country’s cajas
(savings banks) than with the government’s own fiscal health.
Nor is it only the banks of Euroland’s periphery who are suspects. Equally culpable are the banks of the core. German banks, for example, have close to ?500 billion of
exposure to the PIGS. The dirty little secret of euro-zone finance is that if one of the periphery countries were to default, German banks—in particular the state-owned
Landesbanken—would be among the biggest losers. And
that, of course, is why it makes sense for the core to bail out the periphery: in truth, they are all in this banking crisis together.
It is the political difficulty of selling this proposition to German voters that is set to derail the EU train. A euro-barometer poll last year revealed that only 34 percent of Germans thought the euro had mitigated the effects of
the financial crisis. Germans are overwhelmingly for fiscal
austerity—88 percent favor a policy of deficit reduction, much higher than for the EU as a whole. That is why the German government keeps insisting that the recipients of bailout money impose painful austerity measures on themselves.
The mood of the German voter can be summed up as follows: No More Herr Nice Guy. So the tax-dodging
Greeks, the feckless Irish, and the bone-idle Portuguese expect the thrifty German worker to write them yet another check? For five decades after World War II, a penitent
Germany paid up. The Federal Republic was the single biggest net contributor to the process of European integration. But the era of war guilt is now over—witness
the humiliating electoral defeat inflicted on Germany’s governing parties in Baden-Württemberg at the end of last month. No matter how tough Chancellor Angela Merkel seems to the hard-pressed Greeks, to her own people she seems way too soft.
For years the train of European integration ran on German subsidies. No longer. So as the process of disintegration accelerates this year—as the economies of the periphery
languish and their governments topple—don’t blame the
victim. It’s the German voter who dun it.
The Chinese repressed personal style during the Mao Years. Now they’re ready to express themselves with élan.
Ian Teh for Newsweek
From left: Guests at a fashion party by ENK International during Beijing Fashion Week
When Angelica Cheung was growing up in Beijing in China’s Maoist era, her grandma sewed her a pair of fitted black-and-white pants. She loved those pants—her
grandma was a skilled seamstress—and proudly wore
them to school. But her classmates taunted her, calling her ―xiao zi, xiao zi,‖ or petty bourgeoisie. Cheung stopped
wearing the beautiful pants because of the bullying. ―Maybe that’s why I love black and white so much now,‖ she says, with an easy laugh.
These days, no one is denigrating Cheung over her fashion choices—as editor in chief of Vogue China, she’s
an icon in the country’s fast--growing world of fashion and
luxury. The magazine’s fifth-anniversary edition last
September boasted 622 pages—a factoid that reflects the
decade-long explosion of China’s luxury market, now on track to become the world’s largest by 2020. This isn’t just another case of the newly rich in a developing country embracing top-drawer brands from the West—though
there’s plenty of that. Instead, China is becoming a destination in its own right for fashion’s elite. Last week designer Diane von Furstenberg’s DVF label threw a Red Ball in Shanghai and launched an exhibition at Pace Beijing, the first big New York commercial gallery to open a branch in the Chinese capital. German fashion
photographer Peter Lindbergh just opened his first exhibition in China. Upcoming events on the mainland read like a fashion who’s who: Burberry, Lanvin, Armani.
A few decades ago, von Furstenberg’s dresses—with their
fluid fabric and plunging necklines—would have stopped
traffic in China. Today, her designs are popular among Chinese fashionistas. Von Furstenberg—who is married to
Barry Diller, CEO of NEWSWEEK/THE DAILY BEAST’s parent company, IAC—says she has long been fascinated
by the Middle Kingdom and became convinced of the country’s potential as a huge fashion market. ―I never doubted China would become grand, because it has been grand in the past,‖ she says. Four years ago DVF opened its first store in Shanghai, and in 2010 the designer made a New Year’s resolution: ―I want to be known in China.‖ Last year she opened a second shop in Beijing, which quickly exceeded initial sales projections by 30 percent. DVF’s Red Ball cemented China’s role as a venue for legendary fashion bashes. The designer held the event in a massive studio belonging to conceptual artist Zhang Huan, known for his use of ashes from Buddhist temples in paintings. The black-tie affair drew more than 500 partygoers, including actress Jessica Alba and high-end shoe designer Christian Louboutin, who plans to open a series of shops on the mainland. The event recalled the