The Swedish Model

The Swedish Model, by Richard W. Rahn
This article appeared in the Washington Times on August 18, 2009

Do you think America would be better off with a Swedish-type welfare state? This question tends to evoke strong reactions from both the left and right, yet few understand Sweden's economic history and the revisions it has been making to its welfare-state model in recent years. Sweden was a very poor country for most of the 19th century.

The poverty of those years caused many to emigrate from the country, mostly to the U.S. Upper Midwest. Beginning in the 1870s, Sweden created the conditions for developing a high-growth, free-market economy with a slowly growing government sector. As a result, Sweden for many years had the world's fastest-growing economy, ultimately producing the third-highest per capita income, almost equaling that in the United States by the late 1960s. Sweden became a rich country before becoming a welfare state.

Sweden began its movement toward a welfare state in the 1960s, when its government sector was about equal to that in the United States. However, by the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP.

Most full-time employees faced marginal tax rates of 65 percent to 75 percent, as contrasted with 40 percent in 1960. Labor-market regulations were introduced to make it very difficult to fire workers. Business profits were taxed heavily, and financial markets were regulated heavily. By 1993, the government budget deficit was 13 percent of GDP and total government debt was about 71 percent of GDP, which led to a rapid fall in the value of the currency and a rise in inflation.

These policies and outcomes greatly diminished the incentives to work, save and invest. Economic growth slowed to a crawl. Other countries that avoided the excess spending, taxing and regulation of Sweden grew more rapidly, leaving Sweden in the dust. Sweden is still a prosperous country, but far from the top, and its per capita income has fallen to just about 80 percent of that in the United States.

In the late 1980s and 1990s, Sweden began an economic course correction that continues today. Marginal tax rates were reduced for most of the population, and this trend is expected to continue.

The wealth tax and inheritance tax were abolished. Financial markets, telecommunications, electricity, road transport, taxis and other activities were deregulated. Privatization of industry was begun, and the current government is continuing the process. The generosity of some welfare and other benefits has been reduced, with the goal of making work more economically rewarding relative to government benefits. Also, trade liberalization has been expanded greatly. The result has been a pickup in economic growth, and Sweden is no longer falling further behind other developed countries.

One notable success has been pension reform. Sweden was the first nation to implement a mandatory government retirement system for all its citizens. Sweden, like the United States and most other countries, was faced with an increasing, unfunded social security liability as a result of low birthrates and people living much longer. After studying the problem in the early 1990s, the Swedes approved, in 1998, moving toward a Chilean private pension system, first developed by former Chilean Labor Minister Jose Pinera. (Seventeen countries have adopted variations of the Pinerian system, which has been very successful in Chile.)

The new Swedish pension system has four key features, including partial privatization, individual accounts, a safety net to protect the poor and a transition to protect retirees and older workers. The benefits have been substantial budgetary savings, higher retirement income and faster economic growth.

Those who wish to chase the Swedish model need first to decide which model they seek: The high-growth, pre-1960 model; the low-growth model of the 1970s and 1980s; or the reformist, welfare-state model of recent years. The irony is that the current Democratic Congress and administration are rapidly emulating the parts of the Swedish model that proved disastrous and rejecting those parts that are proving to be successful.

Most Swedes now understand that they still have a good distance to go to further strengthen the market economy to ensure continued growth. Thus, they continue to move toward reducing the size of government rather than increasing it.

If the Obama Democrats were wise enough to learn from the Swedes, they would be moving toward trade liberalization rather than away from it. They would be moving to at least partially privatize Social Security. They would not seek to prevent the abolition of the death tax. They would be reducing rather than increasing regulations. They would be reducing rather than trying to increase marginal tax rates on work, saving and investment. They would be reducing the corporate income tax as was done in Sweden.

Finally, the Obama Democrats would be reducing government spending rather than increasing it and not running deficits as large as those that almost sank the Swedish economy 16 years ago.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Germany’s Recession vs. America’s: Doing Worse, but Feeling Better

Germany’s Recession vs. America’s: Doing Worse, but Feeling Better. By Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy
The Brookings Institution, Jul 28, 2009

The world recession that began in the U.S. is hitting Germany much harder than us, due to a collapse in world trade that has damaged an economy that Germans constantly refer to as “the World Export Champion.” Their economy will have shrunk by about 8% by the time it bottoms, whereas America’s GDP should fall less than 4% from its peak. Intriguingly, the German public and elites feel much better about their situation than Americans do about ours. The key question is whether this represents: a justified faith in a system that works well for them; government measures that delay the pain; German complacency; or some combination of these factors.

I spent a week in Germany recently meeting with dozens of policymakers, academics, journalists, and policy analysts, as a guest of the Konrad Adenauer Foundation[1], a German public policy institute. The overwhelming impression I received was of a fundamental disconnect between the horrible recession and the calmness with which the Germans were facing it. This paper will briefly explore that disconnect, but is not intended as an overall criticism of Germany and its economy. An American observer should be humble indeed in these times about giving economic advice to other countries. However, it still seems to me that the extraordinary recent decline of the German economy should foster more serious questioning than has occurred to date. There seem to be three principal factors behind the phlegmatic German reactions.

First, the public has yet to feel the pain directly and is unlikely to do so until after the Federal elections on September 27th that will determine the make-up of the new parliament. Government programs are providing major subsidies to keep redundant employees on the payroll, at substantially reduced hours. This still has some cost for businesses, but they generally do not want to lay off significant numbers of employees prior to the elections, both out of a desire to support the more business-friendly parties and because they would not wish to be singled out by the politicians in the frenzy of a close election campaign. The clear consensus of those with whom we spoke was that there would be a massive spike in unemployment starting in the Fall.

I was told that a private poll found that only 6% of respondents had felt a significant direct effect from the recession. Another 20-30% had close friends or relatives who were affected, which still left a clear majority who just were not seeing the impact. In fact, about a third of respondents did not think they would ever see significant harm to themselves or others close to them from the recession. In addition to the delayed reaction caused by the temporary unemployment measures, the level of anxiety is almost certainly reduced by Germany’s generous social safety net, which provides a considerable degree of cushioning for those who do end up unemployed.

These polling figures contrast sharply with those for American attitudes. Here, fear is widespread, in part because unemployment has risen sharply already and is poised to go higher still. We have also been struck by the housing crisis that affects tens of millions of Americans directly or indirectly and which does not plague Germany. (Germany had a massive construction bubble after Reunification. The bursting of that bubble played a major role in preventing them from following in the over-optimistic path of the U.S., the U.K., and Spain in recent times.)

Second, Germans have great faith in their overall economic model. There is a very widespread belief, across the great middle ground of the political landscape, that their “social market” system is right for Germany. The term is amorphous, but refers to a consensus approach in which business is allowed to operate in a fundamentally capitalist manner, but with high levels of taxes/social contributions and a number of operating limitations. These limitations include such things as restricted opening hours for shops and a requirement that many corporate decisions are approved by a Supervisory Board that includes union representation.

Equally importantly, Germany is justifiably proud of its prowess in exports, particularly industrial machinery and automobiles. Somewhere between 40% and 50% of Germany’s GDP comes from exports, depending on when and how you measure it. This is more than three times that of the U.S., although it is important to note that Germany is a considerably smaller country and is closely integrated with its European neighbors, who are the largest importers of German products. (If the U.S. counted sales from the Northeast to California as exports, our figure would be sharply higher than it is.) Germans view their trade surplus as a sign of virtue and the source of overseas investments that will carry the country through a future in which their aging population cuts back on output and necessarily lives more on the fruits of past labor.

Third, Germans are somewhat puzzled when pushed by outsiders to make changes to their overall model. They believe it has worked extremely well for them and consequently were resistant in the past to all but the most compelling changes when foreigners were lecturing them about rigidities in their system, even though those foreigners were then enjoying better growth and lower unemployment than Germany. Now that it appears to Germans that the advice was coming from people who have massively messed up their own systems, they are even less inclined to change. In addition, I believe that there is a sense of resignation about being able to change very much while staying consistent with the social market approach and the reality of their business systems.

The largest vulnerability of the German economy is their heavy reliance on exports. However, there is great resistance to changing this. Germans often seem to interpret the suggestion to do so as a call to do a worse job of exporting, which would indeed be a mistake. The real advice is to free up their service sector more and to reduce the disincentives to consume. If domestic consumption and the service sector grew, Germans would become less dependent on the success of their manufacturing exports.

It seems ironic to an American that Germans, generally so careful, would build an economy so exposed to a single factor. There appears to be an almost unconscious belief that since the world crisis was not their fault, there is no need to change their model. However, this ignores the likelihood that other major countries will have problems in the future. Germany will remain exposed to the mistakes of others as long as exports dominate their economy. Even a great German driver in one of their best cars is exposed to the risks posed by drunk drivers on the road, which is one reason for the many safety features built into their autos.

In sum, the German views can be over-simplified, indeed caricatured, as follows. The U.S. and the U.K. created a catastrophe in the financial system, leading to a severe recession in those countries, which then spread around the world. The global recession created an “export shock” for Germany as world trade fell by about a quarter. The effects of that one-time shock should stabilize soon, allowing Germany to find its feet and then shift to growth, albeit slow growth. The economy will be 8% smaller at the bottom, but the basic German model of export orientation and a social market will remain intact and provide a good future. It makes sense for Germany to make a few changes around the edges, such as somewhat tougher financial regulation, but there is no need to pursue anything more sweeping.

To an American ear, it sounds unreasonable to be so little inclined to examine your core assumptions at a time when your economy is suffering twice as badly as the supposedly severely mismanaged U.S. economy and your experience is significantly worse than anything since the trauma of World War II and the immediate post-war period. It does not make it any more understandable that the only other major economy suffering so badly is Japan, which has been struggling for many years to find its way economically.

Of course, the Germans could be right in their two core premises: (a) the German way of doing things provides them the right balance of security and growth over the long haul and (b) the export shock will pass soon and they will be able to gradually move back to their pre-crisis growth rates. Only time will tell.

However, if I were a betting man, I would put my money on a significantly less complacent Germany in six months to a year. By that point, the Germans are likely to have discontinued their expensive labor subsidies, given their horror of budget deficits. That horror is exemplified by a recent constitutional amendment to phase them out over time. Unemployment will have shot up by at least a million people, largely undoing one of the proud achievements of the current government in bringing unemployment down from about 5 million to well under 4 million. This unemployment shock should bring home the magnitude of the crisis to most Germans, even with the strong safety net available to protect the unemployed. All of this will be worse still if, as I fear, the rest of the world does not resume its imports of German cars and machinery as quickly as is hoped. A slowdown in consumption could hold auto purchases down more than expected and it is likely that parts of the world over-invested in industrial machinery in the recent past and will take some time to resume buying in volume.

The German economy has done extremely well in some respects, particularly in exports, and the Germans have shown an admirable thrift. However, all economic models should be re-examined periodically and a period of extreme stress such as today seems an especially good time to review one’s assumptions.


[1] The Konrad Adenaeur Foundation is closely associated with the Christian Democratic Union, the party of Chancellor Angela Merkel. However, I do not believe this created a significant bias in the messages that we heard. The meetings included a wide range of people in and out of politics and the views expressed about the economy were consistent with media accounts of German views

Germany and the U.K. resist France and the U.S. on green tariffs

Resisting Green Tariffs. WSJ Editorial
Germany and the U.K. resist France and the U.S. on green tariffs.
WSJ, Jul 28, 2009

One of the most dangerous but least reported undercurrents of the global-warming movement is trade protectionism. Now some politicians in Europe are beginning to push back, and we’re delighted to see it.

A carbon tariff has been popular on the intellectual left for some time, as a way to sell heavy new energy taxes to Western voters worried that their jobs will get shipped to countries that don’t also punish carbon use. The U.S. House of Representatives wrote a tariff provision into its recent cap-and-tax bill, rolling over the muted objections of President Obama. Coming from the world’s largest economy and ostensible free-trade leader, the bill is an invitation to the world’s protectionists to camouflage their self-interest in claims of green virtue.

French President Nicolas Sarkozy—a mercantalist in the best of times—escalated the threat last month by suggesting import duties to “level the playing field” with countries that oppose binding greenhouse-gas targets at December’s United Nations climate talks in Copenhagen. Just what a world trying to rebound from recession needs: beggar-thy-neighbor environmentalism.

Now other leaders are beginning to recognize and speak up about the peril. With typical British understatement, U.K. Secretary of State for Energy and Climate Change Ed Miliband said Saturday his government was “skeptical” about the French proposal for carbon tariffs. Germany’s Deputy Environment Minister Matthias Machnig was even more forthright on Friday, branding the exercise as “eco-imperialism” for attempting to punish countries that don’t follow these green dictates. “We are closing our markets for their products, and I don’t think this is a very helpful signal for the international negotiations,” he added. Both statements are notable coming as they do from parties on the political left.

Berlin’s criticism is especially important. Germany has been at the forefront of Europe’s eco-movement from the start, enriching the French language with such words as “le Waldsterben,” a German compound meaning “forest death.” The idea of the man-made destruction of Europe’s trees was the great green scare of the 1970s and 1980s. The forests are still with us, and scientists now believe that the tree decline was as much due to natural phenomena as to “acid rain.” That episode is a lesson in the need for skepticism about proposals that would do tangible economic harm in the heat of environmental manias.

A climate tariff would be damaging even on its own green terms. To the extent it reduced global trade, carbon protectionism would slow the rise in income that we know from the last half century has been crucial to antipollution progress. The richer people are, the more of their income they are willing to devote to cleaner air and water. Several hundred million people have risen from poverty in the last generation thanks to expanding trade, and the world doesn’t need a reversal thanks to old-fashioned protectionism dressed in green drag.

The economic reality of climate-change policy is sinking in at last in Europe

European Hot Air. WSJ Editorial
The economic reality of climate-change policy is sinking in at last.
WSJ, Jul 08, 2009

Climate change is set to figure prominently in this week's Group of Eight summit in Italy, but take any pronouncements about greenhouse-gas emissions targets with a grain of salt. While leaders may still think it's good politics to sing from the green hymnal, other realities are finally starting to sink in, especially in Old Europe. To wit: Restrictions on greenhouse-gas emissions involve huge costs for uncertain gains and are just what economies in recession don't need.

Concerns about high costs and lost jobs have already threatened carbon-emissions control plans in Australia and New Zealand, and to make sure cap-and-trade would pass in the U.S. House of Representatives, supporters had to push through the legislation before anyone could read it. The fraying of the anti-carbon consensus in Western Europe is especially striking. Polls consistently show that voters in most Western European countries support attempts to ameliorate climate change, at least in the abstract. The EU implemented a cap-and-trade Emissions Trading Scheme in 2005.

But that enthusiasm may be reaching its limit. Governments in industry-heavy countries are now less willing to sacrifice jobs for cooler temperatures. Germany's generally environmentalist Chancellor Angela Merkel insisted on exemptions for her country's industry from December's EU climate package, which pledged to reduce carbon emissions by 20% below 1990 levels by 2020. Germany also plans to build several dozen coal-fired power plants in the next few years.

Italy insisted on a clause in the December climate deal that requires the EU to renegotiate its climate policy after the United Nations summit in Copenhagen later this year. That amounts to a veto since China and India aren't expected to sign up for aggressive emissions targets; any renegotiated EU deal is likely to contain even more loopholes and exemptions to keep from denting European competitiveness.

Just as telling, Europe has been at best half-hearted in meeting its emissions-reduction targets under the 1997 Kyoto Protocol. To the extent Europe appears on track to meet its targets, it's largely because warmer weather and higher market prices for energy have driven consumption down.

Credit a deteriorating economy for this about-face. Businesses and unions finally are starting to speak out against intrusive and expensive emissions regulations. In December, Phillipe Varin, chief executive of Corus, Europe's second-largest steel producer, told the London Independent that the cost of carbon credits and new technologies needed to reduce emissions would destroy European steel production, forcing manufacturing overseas.

Jaroslaw Grzesik, deputy head of energy at Poland's Solidarity trade union said last month that the union estimated the EU's climate policy would cost 800,000 European jobs. Before the December negotiations, the London-based think tank Open Europe estimated the EU climate package would cost governments, businesses and householders in the EU-25 more than €73 billion ($102 billion) a year until 2020. No wonder leaders decided to water it down.

Meanwhile, the supposed economic benefits of climate-change amelioration are evaporating. In Germany, government subsidies for installing solar panels -- and, it was presumed, thereby creating domestic manufacturing jobs -- backfired when it turned out that it was cheaper to make solar panels in China. A recent paper by Gabriel Calzada Álvarez, an economics professor at Universidad Rey Juan Carlos, said that since Spain starting investing in "green jobs" policies in 2000, the country has lost 110,500 jobs in other parts of the economy. That amounts to 2.2 jobs lost for every new "green job" created.

This has politicians worried. They might have been willing to sacrifice a few jobs when they signed Kyoto in 1997. But economic times were flush then. Now a global slowdown is forcing a rethink on whether emissions control is worth the cost. With the scientific debate about the causes, effects and solutions of climate change growing more vigorous, that's a question worth asking.

Despite all the backtracking in practice, climate rhetoric is still alive and well. Sweden, which assumed the EU presidency last week, promises more action on emissions control. Gordon Brown, Nicolas Sarkozy and other leaders continue to talk a good game. Mr. Brown has even proposed a $100 billion-a-year fund to help countries like China and India clean up their emissions acts. Good luck getting that passed in the current fiscal and economic environment.

In other words, Western European leaders are the latest to discover that climate-change talk is cheap, but carbon-emissions regulation is expensive. That might be bad news for green activists, but it's very good news for Europeans worried about their jobs and their economy.

The President's Mission to Moscow

The President's Mission to Moscow. By DAVID SATTER
Obama doesn't need to engage Russia's leaders. He needs to deter them.
The Wall Street Journal, Jul 06, 2009, p A13

Moscow

President Barack Obama arrives here today facing a dilemma of his own making. Having called for a "reset" in U.S.-Russian relations, the U.S. side is virtually obliged to make some new overtures. But Russia does not need to be engaged. It needs to be deterred.

The expectations that Mr. Obama has inspired are substantial. Both officials and ordinary citizens in Russia interpret the call for a reset as an admission of U.S. guilt for ignoring Russia's interests. Sergei Rybakov, the Russian deputy foreign minister, said that mutual trust was "lacking over the last several years." It was the task of the U.S. to show its good intentions with "concrete actions" because in Russia, the U.S. is "deeply distrusted."

Accepting the Russian view of reality on the issues that divide the U.S. and Russia, however, would be a grave mistake. Russia aspires to resurrect a version of the Soviet Union in which it projects power and dominates its neighbors. To encourage its ambitions in any way would be to undermine not only U.S. security but, in the long run, the security of Russia as well.

There are three important areas of conflict between the U.S. and Russia: NATO expansion, the U.S. missile shield in Eastern Europe and the Russian human rights situation. In each case, any reset should be on the Russian side.

The most urgent issue may be NATO expansion. There are serious indications that Russia is preparing for a second invasion of Georgia. The first Georgian war was accompanied by a burst of patriotism in Russia but didn't achieve its strategic objectives. Georgian president Mikheil Saakashvili remains in power and Georgia remains a supply corridor to the West for energy from Central Asia and the Caspian Sea. Many Russian leaders want to finish the job. At a televised forum in December, Prime Minister Vladimir Putin was asked about press reports that he had told French president Nicolas Sarkozy that Mr. Saakashvili should be "hung by his ba**s." He replied, "Why only by one part?"

Under these circumstances, the best protection for Georgia is NATO membership. According to Pavel Felgenhauer, a defense analyst with Novaya Gazeta, the decision to invade Georgia last August came in April after NATO failed to offer outright a Membership Action Plan to Georgia and Ukraine at its annual summit in Bucharest.

Russia will argue strenuously that Georgia, Ukraine and the other former Soviet republics are part of its sphere of "privileged interests." This is an issue on which Mr. Obama cannot give way. If the former Soviet republics are denied NATO membership at Russia's behest, they either will be turned into Russian satellites with manipulated elections and a controlled foreign policy or form a zone of instability along Russia's borders with unpredictable consequences for both Russia and the West.

Beside the issue of NATO expansion, Russia and the U.S. have a critical conflict over U.S. plans to install a missile shield in the Czech Republic and Poland. Not only have U.S. experts argued that the anti-missile system is not aimed at Russia but Russia's military experts agree. Nonetheless, the system is described by Russian leaders as a threat and denunciations of the missile shield are a staple of the anti-Western programming on Russian state television.

According to Mikhail Delyagin, who served as an adviser to former Russian Prime Minister Mikhail Kasyanov, the placement of rockets in Poland is unacceptable to Russia for emotional and symbolic reasons. "It shows that the U.S. is now the master in Eastern Europe," he said. Any decision to yield to Russian objections, however, would effectively divide NATO into countries that need Russian approval for deployments and those that do not. Even dubious Russian promises to help with Iran would not compensate for the damage done to the alliance by such a concession to Russian pretensions.

Finally, there is the conflict between Russia and the U.S. over human rights. The status of human rights is a universal concern but it also has strategic implications. A population that lacks democratic rights and is subject to constant anti-Western propaganda can easily be mobilized against the U.S.

By any measure, the state of human rights in Russia is unacceptable. Russia today lacks honest elections or a separation of powers. The regime allows a degree of freedom but the features of daily life include police torture, prisoner abuse, political control of the courts and, for democratic activists, the danger of being beaten or killed. The result is that fear has returned to Russia less than two decades after the fall of the Soviet Union.

The regime is also taking steps to curtail freedom of speech. Freedom of the press has long been restricted under Mr. Putin with censorship on state run television and pressure on newspapers through their owners, to exercise self censorship. Peaceful demonstrations have also been forcibly dispersed. In recent weeks, however, a bill has been introduced in the State Duma that would make it illegal to deny the role of the Soviet Union in the victory in World War II or the crimes of Hitler's cronies (but not the crimes of Stalin and his entourage). The punishment both for Russian citizens and for foreigners will be three to five years in prison.

In the run up to Mr. Obama's visit, Russian academics and self described realists in the U.S. have called for a "grand deal" in which the U.S. accedes to Russian demands in the former Soviet Union in return for Russian help on Iran, North Korea and Afghanistan. In the case of Iran, Russia, which has repeatedly thwarted tough United Nations resolutions on that country's nuclear energy program, is offering to assist in dealing with a problem that it helped to create.

Unfortunately such a deal, the only "reset" in which the Russians have shown any interest, would eliminate moral criteria from the U.S.-Russian relationship and deprive the U.S. of any basis for limiting Russia's demands in the future. Under those circumstances, Russia's appetite is likely to grow.

Mr. Obama may wish to improve the U.S.-Russia relationship but the problems in that relationship come not from our actions but from assumptions on the Russian side about the prerogatives of power that we cannot possibly accept. Instead of resetting relations, we may just have to content ourselves with resisting Russian pretensions until such time as the mentality that gives rise to them can be changed.

Mr. Satter is a senior fellow at the Hudson Institute and a visiting scholar at the Johns Hopkins University School of Advanced International Studies (SAIS). He is writing a book on the Russian attitude to the Soviet past.

Leonard: Why many MEPs don't believe in the European Union

Europe's Self-Hating Parliamentarians. By Mark Leonard
Why many MEPs don't believe in the European Union.
WSJ, Jun 09, 2009

The European Parliament is in the throes of an early midlife crisis. Although newspaper headlines are focused on the strong performance of center-right parties, the 2009 vote is more likely to be remembered for the election of so many self-hating parliamentarians.

A substantial minority of members (MEPs) see their role as reducing rather than expanding the European Union's power. This is a remarkable change for a body that fought tooth-and-nail to extend its authority every time a new EU treaty was negotiated.

The paradox of the European Parliament is that as its power has grown, the public's interest in its activities has declined. Each election has brought lower voter turnout than the one before. Even more brutal than this year's turnout: Many of parliament's new members don't believe that the body in which they sit should be allowed to exist.

Take the colorful Geert Wilders, whose anti-Islamic-immigrant party shot up to second place in the Netherlands with 17% of the vote after the Christian Democrats, who won 19.9%. He ran on a manifesto that included a pledge to abolish the European Parliament. In the United Kingdom, the two biggest parties were the Conservative Party (committed to abolishing the Lisbon Treaty) and the Independence Party (committed to getting Britain out of the EU). The British National Party picked up two seats with its pledge to "end the blood-sucking scam" of the EU.

In Austria, the xenophobic Freedom Party got 13% of the vote with a call to remove the EU from Austria's affairs. A party set up to protest against the abuses of the European Parliament managed to pick up 17.9% of the vote. Anti-European populists also picked up significant support in Hungary, Denmark, Slovakia and Finland.

This trend tells us a lot about the dynamics of the EU as a political system. From the beginning, European integration has been defined by two trends: technocracy and populism.

On the one hand, the EU is the ultimate technocratic project. The so-called Monnet approach -- named after the key architect of European integration, the French official Jean Monnet -- is designed to generate a consensus among European diplomats for limited projects of practical cross-border cooperation. Each of these projects should lead to further integration in various policy areas.

The success of the technocrats has been phenomenal. They created first a coal and steel community, then a customs union, then a single market and even a single currency.

It was the very success of the EU as a bureaucratic phenomenon that fueled a populist backlash. This first started as a localized phenomenon, with Margaret Thatcher famously demanding a refund for Britain in the 1980s. Now, it is a pan-European force. The populists come from the left and right, but their common complaint is that the EU is an elite conspiracy, a project to build "Europe against the people." In its place, they plan to mobilize the "people against Europe."

Though people in Brussels talk about technocracy and populism as opposites, in fact they are mutually reinforcing. The more EU leaders try to remove European integration from national politics, the more brittle the EU's legitimacy becomes, which in turn means that policy makers want to further evade public opinion. And the more technocratic the EU becomes, the stronger the calls for democracy and referendums, which in turn create a space for populist parties to emerge.

Since the moment that Jean Monnet turned his mind to uniting Europe, technocracy has been a cornerstone of the EU. Populism has now been sanctified as part of the EU's structure through the introduction of referendums and elections to the European Parliament.

If national and EU officials are going to avoid total gridlock going forward, they will need to deepen their understanding of the domestic politics of the 27 states of the EU and spend time analyzing and engaging public opinion.

In order for the EU to emerge from its midlife crisis, the next generation of EU technocrats will need to be populists as well.

Mr. Leonard is executive director of the European Council on Foreign Relations.

The Geography of Recession

The Geography of Recession. By Peter Zeihan
Stratfor, June 2, 2009 1844 GMT

The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.

Let’s begin with some simple numbers.

As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)

But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.


The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

(click image)

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.


Russia and the State

If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.

Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.

Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.

Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.

Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.

But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.


China and Separatism

China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.

Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

(click image)

With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.


Discordant Europe

Europe faces an imbroglio somewhat similar to China’s.

Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.

These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.

Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.

And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.

Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.

And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.

Federal President's Visit to Germany: Mythologies of Dresden Must Be Rejected

President Obama's Visit to Germany: Mythologies of Dresden Must Be Rejected. By Ted R. Bromund
Heritage WebMemo #2460, May 28, 2009

On June 5, President Obama will visit the German city of Dresden. This visit will be intensely controversial. Dresden is most famous for the Anglo-American bombing raid against it on February 13, 1945. The Dresden raid did cause serious loss of life, but in the Second World War it was not unprecedented or unusual. The myths that have grown up about the raid were fostered by the Nazis and spread by post-war Soviet propaganda.

Because of this spurious symbolism, President Obama's decision to visit Dresden is ill-advised. During his visit, the President must absolutely reject any equation of the Western Allies and the Nazis. He must avoid accepting as true the claims of the Nazi and Soviet propagandists about the Dresden raid. Finally, he must stoutly defend the Anglo-American air campaign, which served vital military purposes and which led to the liberation of Western Europe from the Nazis in 1945, and, ultimately, of Eastern Europe from the Soviet Union in 1989.


The Raid on Dresden

On February 13, 1945, 1,100 British and American bombers attacked the city of Dresden, which lies south of Berlin. The bombers dropped a mix of high explosives and incendiary bombs, which created a firestorm that destroyed the center of the city. The number of casualties will never be known, but at the time Nazi authorities privately estimated that 25,000 people lost their lives. A 2004 study of the raid by British historian Frederick Taylor sets the toll at between 25,000 and 40,000 killed,[1] while in 2008 an authoritative commission of German historians estimated the likely toll at 18,000 and definitely no more than 25,000.[2]

The attack on Dresden was not unusual. In July 1943, a British raid on Hamburg created a similar firestorm that destroyed 56 percent of the city's dwellings and killed 40,000 people.[3] Both attacks were part of the Anglo-American strategic bombing campaign that was launched after U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill met at the Casablanca Conference in January 1943. That campaign followed the German bombing of Warsaw in September 1939 and Rotterdam in May 1940, the Nazi blitz against London in the summer and fall of 1940, the German destruction of Belgrade from the air in April 1941, and the British bombing campaign against Germany that began in May 1940 and intensified in 1942.

The raid on Dresden was made at the request of the Soviet Union, which wanted the city's railway junction destroyed to prevent the Germans from concentrating forces against advancing Soviet armies.[4] Dresden also contained over a hundred factories engaged in war-related work. As Taylor sums up, "Dresden was ranked high among the Reich's wartime industrial centers." This work included firms that made parts for torpedoes and machine guns.[5] Though Dresden was known as a cultural center, it was not, as later myth had it, a city of no military importance.


The Myths Surrounding Dresden

The Nazi regime, frustrated by its inability to stop the Anglo-American attacks, countered by waging a propaganda campaign against them. After the raid on Dresden, Propaganda Minister Joseph Goebbels, instead of downplaying it, decided to exaggerate the attack. He leaked falsified documents to the press that multiplied German casualties in the attack by 10: 25,000 became 250,000. He also played on Dresden's reputation by claiming that it was a city of cultural and artistic treasures only, not a center of war work.[6]

Goebbels's lies were widely accepted. As Taylor concludes, "The extent of the wide, long-lasting ripple of international outrage that followed the Dresden bombing represents, at least in part, Goebbels's final, dark masterpiece."[7]

After the war, Dresden was part of the Soviet zone of occupation and, later, East Germany. The Soviet and East German authorities used the Nazi myth of Dresden as part of their Cold War propaganda campaign against the U.S., Britain, and West Germany. By 1953, mass meetings in East Germany were being told that former Allied Commander Dwight Eisenhower--by then, President of the United States--was personally responsible for the attack of the "Anglo-American Air Gangsters," a term invented by Goebbels. In 1954, the death toll for the raid was officially set by the Communist regime at "hundreds of thousands."[8]

This Nazi-inspired falsehood was widely accepted. It was repeated in Kurt Vonnegut's Slaughterhouse-Five (1969), which was informed by David Irving's The Destruction of Dresden (1963). In a 2000 libel trial in Britain, Irving was described by the judge as an "active Holocaust denier" who "for his own ideological reasons persistently and deliberately misrepresented and manipulated historical evidence."[9] Irving's treatment of the Dresden raid marked the beginning of an ideological assault on the morality of the war and of the Western Allies.


The Achievements of the Air Campaign

In reality, the raid on Dresden was part of the broader Anglo-American strategic bombing campaign. This campaign achieved five vital objectives that were central to the defeat of Nazi Germany.

First, from 1940 through 1942, it demonstrated that Britain retained the will to fight back. This was vital for British relations with the U.S. and, after June 1941, with the U.S.S.R.

Second, as eminent historian Richard J. Evans argues, the campaign "did even more than the defeats at Stalingrad and in North Africa to spread popular disillusion about the Nazi Party."[10]
Third, the campaign did immense damage to German war production: The Germans calculated in January 1945 that bombing had reduced their tank production by 25 percent.[11]

Fourth, the campaign compelled Germany to expend substantial resources on an air defense system, resources that could have been devoted to fighting the Western and Soviet armies. It also led Hitler to emphasize the development of the V-1 and V-2 rockets. Both were amazing technological achievements but military irrelevancies that consumed scarce resources.

Finally, the air campaign drew the German Luftwaffe away from the Eastern Front--so aiding the Soviet advance--and ultimately destroyed it in the West. Without this air superiority, the D-Day landings would not have been possible. It was those landings that liberated Western Europe from the Nazis and created a base of freedom that led to the collapse of Communist Eastern Europe in 1989. The air campaign did not win the war on its own, but its contributions were immense, and they did not end in 1945.


The Symbolism of Dresden and of Obama's Visit

But for many critics, the Dresden raid has come to symbolize the wrongs of the entire Anglo-American air war against Nazi Germany. For these critics, who are as strong on the far left as on the far right, the attack on Dresden was only the most egregious example of the Anglo-American conduct of that campaign, which they allege constituted a war crime.

The city of Dresden, thus, is the focal point of an effort to establish a degree of moral equivalence between the Western Allies and Nazi Germany and, more broadly, to discredit and criminalize U.S. and British foreign policy when--as in 2003 in the Iraq War--it moves in a direction the critics dislike.

This effort began with the Communist propaganda after 1945. As long as the Cold War lasted, it made little headway, but with the fall of the U.S.S.R. and the reunification of Germany, it grew in popularity. By 2002, with the publication of Jörg Friedrich's Der Brand, which subtly equates the air war on Germany with the Holocaust, the campaign had reached best-seller status.

The symbolism of Dresden, even if it is poorly grounded in the facts of history, is a reality: It stands in mythology for the supposed war crimes committed by the Americans and the British in their war against the Nazis and, by implication, for their supposed offenses since 1945. By choosing to visit Dresden, of all Germany's cities, President Obama will have this myth as his backdrop. He would have been better advised to avoid Dresden.

Obama's decision to visit the city raises the concern that he will use the opportunity to apologize for the Dresden raid. As that raid has come to symbolize the supposed evils of the entire air war, an apology for Dresden would have far reaching implications about the morality of the Second World War itself. It is particularly unfortunate that Obama will visit Dresden and the Buchenwald concentration camp on the same day. The fact that both the camp and Dresden have been deemed worthy of a presidential visit could be taken to imply the moral equivalence between them that revisionists like Friedrich have sought to create.


What Obama Must Do

The President must not fall for the Nazi- or Communist-inspired myths about Dresden, such as the number of people killed in the raid or the importance of the war-related work being done in the city.

He must also avoid giving any credence whatsoever to efforts to equate the Western Allies and the Nazis, or the air war and the Holocaust. Indeed, he should counter the unfortunate scheduling of his visit to the Buchenwald camp by making an explicit statement that Dresden was part of the broader Anglo-American air campaign against the Nazi regime and that this campaign was vital to the defeat of the Nazis and the victory of the West in 1945.

Finally, he should make the broader point that the lesson of the Second World War is not that there should never again be a war nor that pacifism is a moral choice. The lessons of that war are that evil is a reality, that appeasement is not a virtue, and that no war--even in pursuit of just ends like the defeat of Nazi Germany--can be won without difficult but necessary choices.

Ted R. Bromund, Ph.D., is Senior Research Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.


References

[1]Frederick Taylor, Dresden: Tuesday, February 13, 1945 (New York: HarperCollins, 2004), pp. 443-48.
[2]Frederick Taylor, "How Many Died in the Bombing of Dresden?" Spiegel Online, October 2, 2008, at http://www.spiegel.de/international/germany/0,1518,581992,00.html (May 27, 2009).
[3]Richard J. Evans, The Third Reich at War (New York: Penguin Press, 2009), p. 446.
[4]Taylor, Dresden, pp. 190-191.
[5]See Taylor, Dresden, ch. 13, and in particular p. 148.
[6]Ibid., pp. 370-371.
[7]Ibid., p. 372.
[8]Ibid., pp. 392-393.
[9]"The Ruling Against David Irving," The Guardian, April 11, 2000, at http://www.guardian.co.uk/irving/article/0,,181049,00.html (May 27, 2009).
[10]Evans, Third Reich, p. 463.
[11]Ibid., p. 462.

The match that lit Germany's radicals was a Stasi spy - Karl-Heinz Kurras

Ghosts of the '60s in Germany. WSJ Editorial
The match that lit Germany's radicals was a Stasi spy.
WSJ, May 28, 2009

The past can never be predicted, and perhaps never more so than when it comes to the German left. Two years ago, we learned that Nobel Laureate Günter Grass -- the literary scourge of all things fascist, especially America -- had himself been a member of the Waffen SS. Now comes another zinger that casts the radical political and social upheavals of the late 1960s in new and revealing light.

The historical surprise concerns a turning point whose ripple effects were felt in Europe and beyond. On June 2, 1967, a West German policeman fatally shot an unarmed, 26-year-old literature student in the back of his head during a demonstration in West Berlin against the visiting Shah of Iran. Benno Ohnesorg became "the left wing's first martyr" (per the weekly Der Spiegel). His dying moments captured in a famous news photograph, Ohnesorg galvanized a generation of left-wing students and activists who rose up in the iconic year of 1968. What was a fringe soon turned to terrorism.

To them his killer, Karl-Heinz Kurras, was the "fascist cop" at the service of a capitalist, pro-American "latent fascist state." "The post-fascist system has become a pre-fascist one," the German Socialist Student Union declared in their indictment hours after the killing. The ensuing movement drew its legitimacy and fervor from the Ohnesorg killing. Further enraging righteous passions, Mr. Kurras was acquitted by a court and returned to the police force.

Now all that's being turned on its head. Last week, a pair of German historians unearthed the truth about Mr. Kurras. Since 1955, he had worked for the Stasi, East Germany's dreaded secret police. According to voluminous Stasi archives, his code name was Otto Bohl. The files don't say whether the Stasi ordered him to do what he did in 1967. But that only fuels speculation about a Stasi hand behind one of postwar Germany's transformative events.

Mr. Kurras, who is 81 and lives in Berlin, told the Bild am Sonntag newspaper that he belonged to the East German Communist Party. "Should I be ashamed of that or something?" He denied he was paid to spy for the Stasi, but asked, "What if I did work for them? What does it matter? It doesn't change anything." Mr. Kurras may be the monster of the leftist imagination -- albeit now it turns out he is one of their own.

To answer his last question, this revelation matters. It belies yet again the claims of the '68 hard left, passed on to our times as anti-globalization riots, that a free market and liberal democracy are somehow "fascistic." This brand of intolerance is at core prone to violence. The true, ruthless heirs to National Socialism and the Gestapo were the East German regime and the Stasi, the Soviets and the KGB. And in turn, some of the terrorist groups that emerged from the radicalization of the 1960s.

Present in Berlin that June day in 1967 were Ulrike Meinhof and Gudrun Ensslin, who went on to found the "Baader-Meinhof Gang," aka the Red Army Faction. From 1968 until 1991, the RAF carried out dozens of kidnappings, bombing and murders -- all to fight the "roots of capitalism" and a "resurgent Nazi state." As 1968 historian Paul Berman notes, the most famous terrorist organization born in this era was the Palestinian Liberation Organization. The analogue in the U.S. became the Weather Underground.

Some '68ers grew up and peeled away. Others took time to see its dark side. An early reveille came at the 1972 Munich Olympics, when PLO gunmen aided by a leftist German group, the Revolutionary Cells, took hostage and killed 11 Israeli athletes and coaches. The 1974 publication of Alexander Solzhenitsyn's "Gulag Archipelago" was another. So was Pol Pot, the Vietnamese boat people; the list goes on.

Historical amnesia makes us vulnerable to repeating mistakes. Particularly in an America, where many quickly forgot the lessons of the Cold War and of 9/11. More than most nations, Germans are condemned to a living history. That turns up the kinds of surprises that force a hard re-examination of the past and the present.

Moving toward Europe--but Do Americans Want to Go?

Moving toward Europe--but Do Americans Want to Go? By Michael Barone
The European model sacrifices growth in the hope of reducing economic inequality.
AEI, Tuesday, April 28, 2009

As the Obama presidency reaches the hundred-day mark, it is becoming apparent that he would like America to take on a more European cast. Increased government spending, greater government control of health care, and the implementation of a cap-and-trade system are all goals that President Obama has tried to further in his first hundred days. Yet pursuing such policies would end up hindering growth in the name of economic equality--and Americans are ambivalent about moving their country in this direction.

Ninety-nine days in, with 1,362 days to go, and we can see with some clarity the trajectory on which Barack Obama wants to take the United States. To put it in geographical terms, he wants to move us some considerable distance toward Europe.

This is apparent in the budget he has presented for the next fiscal year and its projections for the years to come. Government spending is scheduled to rise as a percentage of the economy. This will be accomplished by raising taxes and, even more, by borrowing that will double the national debt in five years and nearly triple it in 10 years. This trajectory can be altered in the future, but much of it is set in stone by the $3 trillion-plus deficit that will, give or take a few hundred billion, be produced by the budget voted this year.

Other Obama goals are less certain of achievement. He wants government to take over much of the one-seventh of the economy that is devoted to health care, but how much and by what means are still unclear. One result, common in Europe, is likely: rationing of care. Obama also wants to reshape the energy sector by imposing a cap-and-trade system to reduce carbon emissions. This will raise energy costs, particularly on the 60 percent of Americans whose electricity is produced by coal, and will provide opportunities for corporations to make profits by gaming the system. But it's not clear that it will encourage development of the one plentiful non-carbon-emitting energy source that France, for one, relies on--nuclear power.

The European model sacrifices growth in the hope of reducing economic inequality. American experience suggests that this can work, but not perhaps at an acceptable cost.

There are two decades in which economic inequality was sharply reduced. One was the 1930s. High earners made less and low earners fell down toward zero, so incomes were more equal. But the cost in lost economic growth and human misery were very high.

The other decade was the 1940s when, in the phrase of the day, there was a war on. Government controlled wages and prices, required workers to join unions, ordered industries to produce arms and mobilized 16 million Americans into the military.

But those policies seem unlikely today.

Obama has only limited plans to take over the private sector economy (he hopes cap-and-trade will produce otherwise uneconomic "green" jobs), and he has abandoned, at least for the moment, the unions' card check bill that would enroll millions of workers in unions by effectively abolishing the secret ballot in unionization elections and then having federal arbitrators impose wage levels and work rules. And he certainly has no plans to expand the military to its proportion of the population in World War II--35 million men and women.

Still, Obama may take us some distance toward the Europe whose "dynamic union" he hailed in Strasbourg, with some marginal gains in economic equality and, if Europe's experience is a guide, considerably less economic creativity and growth.

Abroad, Obama has eschewed American "arrogance" and embraced the European model of diplomatic engagement and avoidance of confrontation. He argues that if we show "persistence" in apologizing for America's past and willingness to negotiate with Mahmoud Ahmedinejad and shake hands with Hugo Chavez, they will come to recognize our good will and make concessions they would otherwise refuse.

Perhaps. But one recalls that this was the European response to the genocide in its own back yard by Serbia's Slobodan Milosevic and that he was brought to justice only by the force of American arms. That lesson has not been lost on Obama who, for all his rhetoric, has ordered troop increases in Afghanistan despite the refusal of Europeans to do more.

Obama and his party were brought to power by George W. Bush's perceived incompetence on Katrina and Iraq, not because of some pent-up and suddenly overwhelming demand for the Europeanization of America.

Polls show voters ambivalent about Obama's expansion of government, skeptical of global warming theories, and appreciative despite the financial crisis and recession of the efficacy of market capitalism to produce economic growth. They are also confident, as Franklin Roosevelt and John Kennedy were, that America is a special and unique country. Obama audaciously believes he can lead the country in a direction it's not sure it wants to go.

Michael Barone is a resident fellow at AEI.

Ukraine Powers Chinese Carriers

Ukraine Powers Chinese Carriers
Strategy Page, April 6, 2009

China is working closely with Ukraine to supply key components for the aircraft carriers China is building. Ukraine supplied many components for Russian carriers back in the days of the Soviet Union (which Ukraine was a part of). Now independent, Ukraine is eager to find customers for local manufacturers that can produce carrier components. Russia is no longer building carriers, despite talk of restarting that program.

Last year, Chinese officials visited Ukraine and inspected the naval aviation training facilities that were built there before the Soviet Union dissolved. Ukraine wants to use those facilities to establish an international center for training carrier aviators.

A major Ukrainian product the Chinese are interested in are ship engines, especially the large ones a carrier would require. Chinese gas turbines are not all that efficient and reliable. The Ukrainian UGT-16000 and UGT-25000 turbines, developed from the DT-59 they have been making since 1975, are major competitors for General Electric models used in large ships. Ukrainian firms build a number of other world class components for large ships, and China is looking to acquire equipment, and technology. Ukraine is aware of the fact that the Chinese steal technology, but right now Ukraine needs the business, and China needs the turbines.

Belgium & Spain offer NATO trainers for Afghanistan

Barack Obama fails to win Nato troops he wants for Afghanistan. By Michael Evans and David Charter in Strasbourg
The Times, April 4, 2009

Barack Obama made an impassioned plea to America’s allies to send more troops to Afghanistan, warning that failure to do so would leave Europe vulnerable to more terrorist atrocities.

But though he continued to dazzle Europeans on his debut international tour, the Continent’s leaders turned their backs on the US President.

Gordon Brown was the only one to offer substantial help. He offered to send several hundred extra British soldiers to provide security during the August election, but even that fell short of the thousands of combat troops that the US was hoping to prise from the Prime Minister.

Just two other allies made firm offers of troops. Belgium offered to send 35 military trainers and Spain offered 12. Mr Obama’s host, Nicolas Sarkozy, refused his request.

The derisory response threatened to tarnish Mr Obama’s European tour, which yesterday included a spellbinding performance in Strasbourg in which he offered the world a vision of a future free of nuclear weapons.

Mr Obama – who has pledged 21,000 more troops to combat the growing insurgency and is under pressure from generals to supply up to 10,000 more – used the eve of Nato’s 60th anniversary summit to declare bluntly that it was time for allies to do their share. “Europe should not simply expect the United States to shoulder that burden alone,” he said. “This is a joint problem it requires a joint effort.”

He said that failing to support the US surge would leave Europe open to a fresh terrorist offensive. “It is probably more likely that al-Qaeda would be able to launch a serious terrorist attack on Europe than on the United States because of proximity,” he said.

The presidential charm offensive failed to move fellow Nato countries. President Sarkozy told Mr Obama that France would not be sending reinforcements to bolster its existing force northeast of Kabul.

Germany, Italy, Poland, Canada and Denmark said that they were considering their positions. After a meeting with Angela Merkel, the German Chancellor, Mr Obama tried to apply further moral pressure. “I am sure that Germany, as one of the most important leaders in Europe, will be stepping up to the plate and helping us to get the job done.”

Jaap de Hoop Scheffer, the Nato Secretary-General, warned that new laws proposed by President Karzai in Afghanistan sanctioning child marriage and marital rape had made it harder to raise more soldiers.

“We are there to defend universal values and when I see, at the moment, a law threatening to come into effect which fundamentally violates women’s rights and human rights, that worries me,” he said.

“I have a problem to explain to a critical public audience in Europe, be it the UK or elsewhere, why I’m sending the guys to the Hindu Kush.”

The temporary British deployment falls short of the 2,000 soldiers that the Army had planned to deploy long-term to Afghanistan and appeared to catch defence chiefs by surprise.

Mr Brown announced the commitment as he flew into Strasbourg for the two-day summit, but hopes that it would spur other allies to follow suit were soon dashed. British officials said that the extra troops, expected to number between 500 and 700 – increasing Britain’s military strength there to about 9,000 – would be dispatched to southern Afghanistan for a four-month period leading up to and beyond the election, due to take place on August 20.

The plan is to withdraw them once the election is over. Mr Brown said that the extra troops were only supposed to provide a “temporary uplift”.

Military contingency plans remain on the table to send up to 2,000 more troops long-term, taking the total to 10,000, but that will depend on the political will to approve the deployment.
Although the Prime Minister discussed Afghanistan with President Obama when they held bilateral talks before the G20 summit in London, it is understood that no formal offer of extra troops was made.

The Implications of the European Contribution to the Global Financial Crisis for the G-20 Summit

The Implications of the European Contribution to the Global Financial Crisis for the G-20 Summit. By Ted R. Bromund and Daniella Markheim
Heritage WebMemo #2369
March 30, 2009

The story that Europe is telling about the global financial crisis is untrue: The crisis is not simply the fault of the United States. European policies, on both the national and the EU levels, contributed to the buildup of systemic risk that led to the crisis. These policies reduced European competitiveness, led to high levels of leverage at European banks, helped to create property bubbles across Europe, and--through both the Euro and the broader policy of European integration--introduced moral hazard into European markets.

The basic fallacies of European policies are their emphasis on top-down control and their advocacy of a one-size-fits-all model. The policies the EU is advancing for the G-20 summit repeat these errors on a larger scale. Instead of blaming the U.S., Europe should address its lack of competitiveness and growing entitlements burden. Doubling down on centralized control will result in lower growth and a less stable world economy at a time when Europe needs to promote a sustained recovery.


The European Myth

Europe is telling a story about the origins of the global financial crisis. The story is simple: It is America's fault. The BBC reports that the European resistance to stimulus spending derives from its reluctance to go deeper into debt "to rescue the US economy, which they argue was the country that caused the crisis in the first place."[1] The Economist concluded in October that the European approach to the crisis was based in part on the "flawed" assumption that the financial system is chiefly suffering from "transatlantic contagion."

The first signs of the current global financial crisis did appear in the U.S. But the collapse of the U.S. real estate market, though important, was merely the first stone in an avalanche. As the Economist pointed out, the view that only the U.S. is to blame "fails to take account of ... slowing [European] economies ... the slumping housing markets in countries such as Spain and Ireland ... [and] European banks' dependence on wholesale funding."[2]

The origins of the global financial crash, not surprisingly, are global. Some factors affected some countries more than others, but no country has cause to claim that it was damaged solely by the actions of others. Yet it is those actions that must now face scrutiny. If there is a common theme in the crisis, it can be found in the interaction between politics and economics that created perverse and ultimately dangerous incentives.


The European Reality

In spite of the desire of the EU to pretend otherwise, the European states are very different. Thus, at the national level, the problems these states must confront are not identical. Nevertheless, four features that are present in more than one European state deserve to be highlighted:

1. A loss of competitiveness. European states such as Ireland and Italy have lost competitiveness. In these states, public expenditure has grown faster than private sector pay and productivity. In Ireland, for instance, public spending doubled between 1997 and 2003. This caused inflation to rise two-and-a-half times faster than in the Euro zone as a whole.[3] The loss of competitiveness was the result of government policies that placed excessive burdens on productive employment.
2. The level of leverage in European banks. Leverage is the ratio of a bank's total liabilities to shareholder equity. Higher leverage means the bank is doing more business on a relatively narrower base. Leverage can be excessive, but it is not evil--on the contrary, it is necessary for the functioning of the banking system. There is wide debate on the best way to measure leverage. But it is clear that many European banks were more highly leveraged than their American counterparts. A survey by the Centre for European Policy Studies found that the average leverage ratio of Europe's twelve largest banks as of September 2008 was 35 to 1, compared to less than 20 to 1 in the U.S. The survey described Europe's ratios as "a disaster in waiting."[4] Higher levels of leverage do make more credit available and thus reduce its cost. This was appealing in Europe, because cheaper credit fueled growth in its generally sluggish economies.
3. The European property bubbles. But this rapid expansion of credit in Europe played an important role in the creation of European real estate bubbles. The IMF has pointed out that, in the run-up to the crisis, "credit aggregates grew extremely fast in the United Kingdom, Spain, Iceland, and several Eastern European countries. As in the U.S., these credit expansions fueled real estate booms. House prices rose rapidly in most of the Eastern and Western European countries now caught in the financial turmoil."[5] The bubbles in Europe were as unsustainable as those in the U.S.
4. The moral hazards of the Euro and the EU. These factors speak to the same underlying cause. The years after the Cold War saw high global growth and benign conditions that "fed the build up of systemic risk." As the IMF puts it, "[l]ow interest rates, together with increasing and excessive optimism about the future, pushed up asset prices ... [in] a broad range of ... advanced countries and emerging markets." The result was a search for yield and the creation of ever-riskier assets.[6]

In Europe, the creation of the Euro was both consequence and cause of that excessive optimism. The case for the currency was always fundamentally political: that it would weld Europe closer together. But the Euro zone is not an optimal currency area. The Euro represents the triumph of politics over economics. It is a one-size-fits-all model for a continent where, in fact, one size does not fit all.

Moreover, the Euro was, in essence, a seal of approval on countries such as Spain, Portugal, and Greece. This encouraged investors to regard these markets as less risky than they in fact were. The admission of many of the now-troubled Eastern European states into the EU also created moral hazard in the market by encouraging investors to treat these states as if they ranked with the established economies of the West. This approach did not accord with reality.


The False European Solutions

In short, a series of policies--some national, some European--created a framework that encouraged risky decisions by investors and weakened the national foundations on which the resulting bubbles grew. The irony is that Europe is now proposing to double down on these failed policies in response to the crisis.

Europe's call for a global regulator with a mandate to ensure the stability and balance of the world economy would be a tremendous step toward forcing its slow growth model on the rest of the world. Its campaign against "tax havens" is another part of this effort to force other nations to adopt Europe's own anti-growth, anti-competitive tax regime.[7]

These policies are a return to the concept of one size fits all and to the belief that politicians and unelected bureaucrats on the global level can effectively manage the world's economy. Europeans should ask why, if this model works so well, it failed to stop the build-up of systemic risk in Europe. The campaign to blame the U.S. is a form of denial: By refusing to look in the mirror, Europe seeks to avoid facing the unpleasant reality of failure.

This reality includes the fact that the European states are not all alike. Nothing underlines this more effectively that the fact that Germany, having been one of the cheerleaders of European integration, is now reluctant to bear a disproportionate share of the Europe-wide costs of stabilizing that system.[8] From the national point of view, this reluctance makes sense. But it is a sign of the incoherence of European integration that its leading advocate is not willing to pay the bills for the policies it claims to wholeheartedly back.


The True Solutions

It is legitimate to discuss measures that should be taken in immediate response to the crisis. But neither these measures nor the crisis itself should divert Europe from addressing its underlying problems. These begin with its lack of competitiveness and the entitlements burden that, as in the U.S., poses what will in the long term be an unbearable burden.[9] Instead of turning--as it and its trading partners are now doing--to protectionism, Europe needs to move away from the faith in centralized control and the ability of governments to manipulate markets that has brought turmoil to the U.S. and Europe alike.[10]

Ted R. Bromund, Ph.D., is Senior Research Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, and Daniella Markheim is Jay Van Andel Senior Trade Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.

Full text w/notes here.

Britain Fights Home-Grown Islamists - The Labour government unveils a new antiterror strategy

Britain Fights Home-Grown Islamists. WSJ Editorial
The Labour government unveils a new antiterror strategy.
WSJ, Mar 26, 2009

The only good news from a British security report published this week -- that al Qaeda is "likely to fragment" -- comes with a scary caveat: Islamist splinter groups will continue Osama bin Laden's work and could prove just as dangerous, if not more so.

The possibility of a WMD attack against Britain has never been as grave as it is today, the government report warned: "Changing technology and the theft and smuggling of chemical, biological, radiological, nuclear and explosive materials make this aspiration more realistic than it may have been in the recent past."

This dire outlook may have triggered the long overdue policy change in London's antiterrorism strategy, announced Tuesday by Home Secretary Jacqui Smith. The new objective is to address the real root cause of Islamist terrorism -- its ideology. Ms. Smith promised that the government would "challenge" Muslims in Britain who may not support violence but who reject "our shared values" -- such as democracy and the rule of law -- and promote hatred toward women, homosexuals and other religions and ethnicities. While not criminalizing such ideology, Ms. Smith said, "we should all stand up for our shared values and not concede the floor to those who dismiss them."

This may sound like common sense, but it's actually a dramatic change from past British policy. Until now, the Labour government has "engaged" nonviolent extremists, believing they could help in the fight against violent extremists. To justify this approach, the government dumbed down the definition of "moderate" Muslim to include those who claim to reject terrorism but still support a global caliphate, oppose democracy and justify suicide bombings outside Britain as "resistance." The assumption was that only "moderates" who hold such radical views possess the credibility to dissuade young Muslims from the path of jihad.

The consequences of this policy have been predictably devastating. "The effect has been to empower reactionaries within Muslim communities and to marginalize genuine moderates," according to a study published this month by the think tank Policy Exchange. "The link between non-violent and violent extremism is habitually underplayed." Policy Exchange also found that the government spent almost £90 million over the past three years on nonviolent radical Islamic groups, "underwriting the very Islamist ideology which spawns an illiberal, intolerant and anti-Western world view."

Hazel Blears, secretary of state for communities and local government, has long pushed for changing this approach and seems to have made a start. This week she suspended ties with the Muslim Council of Britain -- once the Labour government's favorite Muslim organization -- because its deputy secretary general, Daud Abdullah, signed a declaration in Istanbul last month that calls for jihad against Israel and any country supporting it, which could include Britain.

The Labour government shares much of the blame for making radical Muslim views respectable in the eyes of British Muslims who may have otherwise shunned them. In the process, it has endangered Britain's national security and that of its allies. Most of Britain's 2,000 terror suspects are home-grown and U.S. officials have warned that British Islamists entering the U.S. under the visa-waiver program pose a severe threat to homeland security.

The threat of a terror attack against Britain, including during next week's G-20 financial summit in London, is "severe," Home Secretary Smith said this week -- meaning "it's highly likely" and "could happen without warning."

The break from the policy of courting radical Muslims is long overdue. Britain, and its allies, will be safer for it.