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Europe's looming crisis

It all started with sub-prime loans in the United States. Or did it? As the IMF is called in to bail

It was Europe’s dark secret. While American banks were lending irresponsibly to homeowners who couldn’t pay, European banks were lending to emerging countries who couldn’t pay. Europe’s sub-prime crisis has now come home as heavily-indebted nations of the eastern bloc – Hungary, Ukraine, Belarus, Bulgaria, the Baltic states – are collapsing one by one into the arms of the IMF. “Icelandisation” is the new spectre stalking Europe.

And, as with sub-prime in urban America, this latest crisis was shockingly predictable. I visited Latvia at the height of the credit bubble 18 months ago, and it was clearly an accident waiting to happen. Riga, the capital, was bristling with upmarket shopping malls and classy bars that were all quite empty. Stalin-era flats were being sold for $200,000 in a country where the average wage was less than $400 a month. Latvia has hardly any industry, no energy and few natural resources apart from trees. But such was the irrational exuberance of foreign banks like Swedbank, it was awash with credit.

According to the Bank for International Settlements, western European banks have lent more than $1.5trn to eastern Europe. Austria has loans equivalent to 80 per cent of GDP and stands to make huge losses as Hungary and Ukraine collapse.

This week, the Austrian government had to cancel an auction of government bonds because it could not be sure that investors would buy them. It is not inconceivable that Austria itself could end up needing to be rescued.

Other European countries implicated in global sub-prime include Spain, which has loaned immense sums ($316bn) to Latin American countries such as Argentina. Britain has $329bn tied up in Asia - or did until values collapsed in the Asian stock market rout. Japan's Nikkei index fell to a 26-year low this week, wiping out tens of billions of yen. The losses are now winging their way home to British pension funds and banks such as the Royal Bank of Scotland and HSBC.

Banks behaving badly, then, but what's new there? Well, the Bank of England told us this week that global losses so far from the financial crisis amount to $2.8trn. But this includes only a fraction of the likely losses from global sub- prime, which have yet to land on balance sheets.

Until last week's rout in the Asian bourses, there were still economists who believed that emerging markets would not be greatly affected by the credit crunch. But the theory that developing countries, led by China and India, have "decoupled" from the west, no longer holds water. It is clear that they have been dependent on consumer spending in America and Europe all along - and now that western consumers are staying away from the shops, no one is buying their goods. The Baltic Dry Shipping Index, which tracks the cost of hiring ships for international trade, has fallen by 79 per cent this year, itself a signal of a severe global recession.

Gordon Brown's hints that Britain might be able to spend its way out of this recession has to be considered in this light. There is no guarantee, in such a climate, that the British government would be able to borrow sufficient to pay for further bank rescues (they are sure to come), along with the cost of three million unemployed plus a programme of Keynesian infrastructure spending, however desirable that may be.

Investors are already shunning the pound because of anticipated losses from the UK property crash. Sterling has fallen 28 per cent this year, further than in the Exchange Rate Mechanism crisis of 1992, when interest rates rose to 15 per cent. We could be heading for a classic 1960s run on the pound.

The government had hoped that a devalued pound would stimulate exports and pull Britain out of recession, as happened after Black Wednesday 16 years ago, but the economic climate is different. We make few things to export now and the world is not in a buying mood anyway. And it has had quite enough of our "innovative" financial services. Thus Britain's current account deficit of 6 per cent - what used to be called loosely the balance of payments - has suddenly re-emerged as a major economic issue. Borrowing may be a good thing in a recession, but international financiers, sovereign wealth funds, hedge funds and banks may not agree.

The UK has the honour of having been the last G7 country to call in the IMF - during the 1976 sterling crisis - and while the government is not yet filling in the application forms, Britain's finances would not impress the Fund's economists. Standard IMF lending conditions are: privatisation, cuts in government spending and increased interest rates.

We are going in precisely the opposite direction, slashing interest rates, borrowing to spend and nationalising the banks.

Seen another way, this is only an indication of the extent to which the IMF is no longer fit for purpose in the Great Deleveraging. In recent years, the Fund has been an engine of Wall Street neoliberalism and financial deregulation, which leaves it ill-equipped to deal with the new international environment of deflation and banking crashes. In addition, there is a fiscal crisis facing the IMF. It has only about $250bn in reserves to throw at a rolling financial crisis that has now engulfed half the planet, from Iceland to Pakistan. Gordon Brown has called on energy-exporting nations to stump up more cash for the Fund, but there is a strong case, too, for reviewing how the IMF operates. Set up as part of the Bretton Woods financial system in 1944, the Fund was designed to cope with episodic currency crises. It is now having to deal with potential insolvencies in countries the size of Argentina as well as bailing out entire regions such as eastern Europe.

It will have to be very much better capitalised if it is going to perform this role, and it will have to abandon much of its free-market ideology.

We need a new set of interventionist institutions capable of managing financial rescues on an international scale.

Ultimately, what is needed is an international central bank with the resources to provide liquidity guarantees, recapitalise banks and regulate international financial flows. This is an immense task, and the world may not yet be ready for it. But it is not a new idea: John Maynard Keynes argued for precisely this during the Bretton Woods negotiations in 1944. He even suggested a world reserve currency "bancor". This is the kind of thinking we need today.

The alternative, if nothing is done, is international tension, even war. Consider failing Ukraine with its large Russian population and its dependency on Russia for energy supplies, right at the moment when Russian dreams of becoming an energy superpower have been dashed by the collapse of the oil price bubble. Or look at nuclear Pakistan, where the entire country is disintegrating in financial chaos. And what about China? Will all those unemployed workers - where half the toy manufacturers have gone bust - go peacefully back to the paddy fields?

When heads of the "G20" group of nations meet in Washington on 15 November for what is being called "Bretton Woods II" they will not just be dealing with a banking crisis. They will be deciding the future of civilisation.

This article first appeared in the 03 November 2008 issue of the New Statesman, Israel v Hamas

REGIS BOSSU/SYGMA/CORBIS
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How memories of the Battle of Verdun inspired a new era of Franco-German co-operation

The fight at Verdun in 1916 set a precedent for peace that lives on at the heart of Europe.

How do you clear up after a battle that took the lives of more than a quarter of a million men? In Britain we don’t have much experience of this kind. There hasn’t been a major war on British soil since the 1640s, and that wasn’t a shock-and-awe inferno of industrial firepower (although it is estimated that a greater percentage of Britain’s population died in the civil wars than in the Great War).

The French, however, fought the Great War on home soil. The ten-month Battle of Verdun in 1916 stands out as the longest of the conflict, and one of the fiercest, with fighting concentrated in a small area of roughly 25 square miles. The terrain was pounded by heavy artillery and poisoned with gas; nine villages were reduced to rubble and never rebuilt – remaining on the map to this day as villages détruits.

In November 1918, soon after the Armis­tice, Monseigneur Charles Ginisty, the bishop of Verdun, was appalled to see mounds of unburied corpses and myriad bones still scattered across the blasted landscape – what was left of men who had been literally blown to bits by shellfire. “Should we abandon their sacred remains to this desert,” he asked in anguish, “littered with desiccated corpses . . . under a shroud of thorns and weeds, of forgetting and ingratitude?”

Ginisty became the driving force behind the ossuary at Douaumont, at what had been the very centre of the battlefield. This he intended to be both “a cathedral of the dead and a basilica of victory”. It is a strange but compelling place: a 450-foot-long vault, transfixed in the middle by a lantern tower, and styled in an idiosyncratic mix of Romanesque and art deco. To some visitors the tower looks like a medieval knight stabbing his broadsword into the ground; others are reminded of an artillery shell, or even a space rocket. Creepiest of all is what one glimpses through the little windows cut into the basement – piles of bones, harvested from the field of battle.

Sloping away downhill from the ossuary is the Nécropole Nationale, where the bodies of some 15,000 French soldiers are buried – mostly named, though some graves are starkly labelled inconnu (“unknown”). Each tomb is dignified with the statement “Mort pour la France” (no British war grave bears a comparable inscription). The nine villages détruits were given the same accolade.

For the French, unlike the British, 1914-18 was a war to defend and cleanse the homeland. By the end of 1914 the Germans had imposed a brutal regime of occupation across ten departments of north-eastern France. Verdun became the most sacred place in this struggle for national liberation, the only great battle that France waged alone. About three-quarters of its army on the Western Front served there during 1916, bringing Verdun home to most French families. Slogans from the time such as On les aura (“We’ll get ’em”) and Ils ne passeront pas (“They shall not pass”) entered French mythology, language and even song.

Little wonder that when the ossuary was inaugurated in 1932, the new French president, Albert Lebrun, declared: “Here is the cemetery of France.” A special plot at the head of the cemetery was set aside for Marshal Philippe Pétain, commander at the height of the battle in 1916 and renowned as “the Saviour of Verdun”.

The ossuary must surely contain German bones. How could one have nationally segregated that charnel house in the clean-up after 1918? Yet officially the ossuary was presented as purely French: a national, even nationalist, shrine to the sacrifice made by France. Interestingly, it was the soldiers who had fought there who often proved more internationally minded. During the 1920s many French veterans adopted the slogan Plus jamais (“Never again”) in their campaign to make 1914-18 la der des ders – soldier slang for “the last ever war”. And they were echoed across the border by German veterans, especially those on the left, proclaiming, “Nie wieder.”

For the 20th anniversary in 1936, 20,000 veterans, including Germans and Italians, assembled at Douaumont. Each took up his position by a grave and together they swore a solemn oath to keep the peace. There were no military parades, no singing of the Marseillaise. It was an immensely moving occasion but, in its own way, also political theatre: the German delegation attended by permission of the Führer to show off his peace-loving credentials.

Memory was transformed anew by the Second World War. In 1914-18 the French army had held firm for four years; in 1940 it collapsed in four weeks. Verdun itself fell in a day with hardly a shot being fired. France, shocked and humiliated, signed an armistice in June 1940 and Pétain, now 84, was recalled to serve as the country’s political leader. Whatever his original intentions, he ended up an accomplice of the Nazis: reactionary, increasingly fascist-minded, and complicit in the deportation of the Jews.

***

The man who came to embody French resistance in the Second World War was Charles de Gaulle. In 1916, as a young captain at Verdun, he had been wounded and captured. In the 1920s he was known as a protégé of the Marshal but in 1940 the two men diverged fundamentally on the question of collaboration or resistance.

De Gaulle came out the clear winner: by 1945 he was president of France, while Pétain was convicted for treason. The Marshal lived out his days on the Île d’Yeu, a rocky island off the west coast of France, where he was buried in 1951. The plot awaiting him in the cemetery at Douaumont became the grave of a general called Ernest Anselin, whose body remains there to this day. Yet Pétain sympathisers still agitate for the Marshal to be laid to rest in the place where, they insist, he belongs.

After 1945 it was hard for French leaders to speak of Verdun and Pétain in the same breath, although de Gaulle eventually managed to do so during the 50th anniversary in 1966. By then, however, la Grande Guerre had begun to assume a new perspective in both France and Germany. The age-old enemies were moving on from their cycle of tit-for-tat wars, stretching back from 1939, 1914 and 1870 to the days of Napoleon and Louis XIV.

In January 1963 de Gaulle – who had spent half the Great War in German POW camps – and Chancellor Konrad Adenauer, who first visited Paris to see the German delegation just before it signed the Treaty of Versailles, put their names to a very different treaty at the Élysée Palace. This bound the two countries in an enduring nexus of co-operation, from regular summits between the leaders down to town-twinning and youth exchanges. The aim was to free the next generation from the vice of nationalism.

France and West Germany were also founder members of the European Community – predicated, one might say, on the principle “If you can’t beat them, join them”. For these two countries (and for their Benelux neighbours, caught in the jaws of the Franco-German antagonism), European integration has always had a much more beneficent meaning than it does for Britain, geographically and emotionally detached from continental Europe and much less scarred by the two world wars.

It was inevitable that eventually Verdun itself would be enfolded into the new Euro-narrative. On 22 September 1984 President François Mitterrand and Chancellor Helmut Kohl stood in the pouring rain in front of the ossuary for a joint commemoration. In 1940 Sergeant Mitterrand had been wounded near Verdun, and Kohl’s father had served there in 1916, so personal memories sharpened the sense of political occasion. During the two national anthems, Mitterrand, apparently on impulse, grasped Kohl’s hand in what has become one of the most celebrated images of Franco-German reconciliation.

“If we’d had ceremonies like this before the Second World War,” murmured one French veteran, “we might have avoided it.”

Institutional memory has also moved on. In 1967 a museum dedicated to the story of the battle was opened near the obliterated village of Fleury. It was essentially a veterans’ museum, conceived by elderly Frenchmen to convey what they had endured in 1916 to a generation that had known neither of the world wars. For the centenary in 2016 the Fleury museum has undergone a makeover, updated with new displays and interactive technology and also reconceived as a museum of peace, drawing in the Germans as well as the French.

With time, too, some of the scars of battle have faded from the landscape. Trees now cover this once-ravaged wasteland; the graveyards are gardens of memory; the EU flag flies with the French and German tricolours over the battered fort at Douaumont. Yet bodies are still being dug up – 26 of them just three years ago at Fleury. And even when the sun shines here it is hard to shake off the ghosts.

Exploring the battlefield while making two programmes about Verdun for Radio 4, the producer Mark Burman and I visited l’Abri des Pèlerins (“the pilgrims’ shelter”) near the village détruit of Douaumont. This was established in the 1920s to feed the builders of the ossuary, but it has continued as the only eating place at the centre of the battlefield. Its proprietor, Sylvaine Vaudron,
is a bustling, no-nonsense businesswoman, but she also evinces a profound sense of obligation to the past, speaking repeatedly of nos poilus, “our soldiers”, as if they were still a living presence. “You realise,” she said sternly at one point, “there are 20,000 of them under our feet.” Not the sort of conversation about the Great War that one could have anywhere in Britain.

David Reynolds is the author of “The Long Shadow: the Great War and the 20th Century” (Simon & Schuster). His series “Verdun: the Sacred Wound” will go out on BBC Radio 4 on 17 and 24 February (11am)

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle