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The Fund is back in town

The tough remedies of the IMF won it few friends and, in recent years, countries have found more obl

A year ago I attended an informal briefing in Washington by a senior British policymaker who lamented the passing of the International Monetary Fund as an institution of any worth. Globalisation meant that bankrupt nations no longer needed IMF medicine to cure their ills. Rather, they could obtain all the finance they required from the global banking system without strings attached.

Instead of a nasty IMF able to topple governments - as almost happened in Britain during the sterling crisis of 1976 - the world needed a different kind of international authority: one that was slimmer, cheaper to run, fleeter of foot and able to provide advice on the great global issues of the day, such as the mismatch of exchange rates between the US dollar and the Chinese yuan.

The IMF could no longer rely on the interest rate charges it received on loans to support its operations, as the last of a previous generation of big borrowers, Argentina and Brazil, paid back their debts by the start of 2006, two years ahead of schedule. To stay afloat, the IMF would have to sell off some of its huge gold reserves, paid in by western governments as the Second World War drew to a close. That same year, the governor of the Bank of England, Mervyn King, warned that the Fund was in danger of "slipping into obscurity".

How rapidly things changed. By the spring of 2008 the IMF, under the leadership of the then recently appointed managing director, Dominique Strauss-Kahn, a socialist and former French finance minister, was among the first global organisations to predict doom for the world's banking system. When it suggested the eventual losses from the US sub-prime debacle could reach $1trn, this was airily dismissed by bankers and policymakers as scaremongering. It is now clear that the eventual cost could be at least twice that.

Now, a crisis that began in the more recherché areas of the banking system is spreading far and wide. Countries from Iceland to Pakistan are knocking on the doors of the IMF's fortress-like headquarters in Washington, a few hundred yards from the White House, asking for advice and money. The Fund is back in business.

It is unfortunate, therefore, that just as the IMF is starting to be revitalised by the task of saving global capitalism from itself, it has been bedevilled by allegations concerning the priapic behaviour of its leader. Strauss-Kahn now finds himself under investigation by one of the world's largest law firms (on behalf of the IMF's board) over allegations of an improper relationship with a former member of staff, Piroska Nagy, an economist who worked in the Fund's Africa department. Nagy, a Hungarian national, has since moved on to work for the European Bank for Reconstruction and Development but, according to the Wall Street Journal, may have received "an excessive pay-off" when she left.

The incident will rekindle memories of the departure of Paul Wolfowitz from the World Bank in June 2007, after similar allegations of an affair with a member of staff. In both cases, the complex politics of the Bretton Woods institutions played a part. Wolfowitz was under fire for his neoconservative views and for using the Bank to support regimes he favoured. Strauss-Kahn is being targeted for his advocacy of tight market regulation and his support of Keynesian policies to refloat the global economy.

Irrespective of what the investigators turn up at the IMF (in the Wolfowitz case, a huge dossier of documents eventually emerged), it would be calamitous if Strauss-Kahn were forced to step aside at present.

The IMF's previous boss, Rodrigo Rato, resigned for mysterious "personal reasons" in October 2007, midway through his term of office. This exposed a huge rift over the traditional, undemocratic way in which the leaders of the IMF and World Bank are chosen. His torically, the Europeans - when they eventually agree among themselves - have chosen the managing director of the IMF, while the Americans have chosen the president of the World Bank.

This convention has so far blocked Asian, Russian and Latin American access to these hugely influential jobs.

The last thing the world needs now, with the banking and financial system on the edge of a precipice and the capital markets all but closed down, is a long-drawn-out fight over financial leadership. As we saw in the US Congress, when the Treasury's $700bn bailout of American banking was first rejected, politics plays badly on Wall Street and financial markets around the world. A fight for the soul of the IMF, in the middle of a crisis, could be dangerous.

The flow of capital from the west to emerging market economies is under severe pressure because of the banking catastrophe. Last year, emerging markets received inflows of $900bn from western financial institutions. This year, the figure will be only $56bn, thus starving countries across the world of the money they need to service their debts, to invest and to buy goods on global markets.

Moreover, nations holding large foreign exchange reserves, such as China and the oil-rich Gulf states, are pulling in their horns because of market uncertainty. It is when the flow of capital dries up that the global “lender of last resort”, the IMF, comes into play.

In the 1980s, the IMF was at the forefront of economic reform in Latin America. The arrival of IMF teams with proposals to end food subsidies would often result in rioting on the streets. In the 1990s, the Fund turned its attention to the former Soviet Union and its satellites, unleashing a period of klepto-capitalism.

This time around, Iceland, which has caused so much grief for British local authorities and consumers, is at the front of the queue and will collect $3.5bn in loans. Iceland is a classic case of a country in need. The banks have been nationalised. The currency, the krona, has fallen 18 per cent since March, and interest rates have been raised to 15 per cent with little noticeable effect.

But what is true of Iceland is typical of many nations around the world that have been able to live beyond their means because of the explosion in free capital flows. No one has worried about running a balance-of-payments deficit, because the assumption has always been that there will be a bank or foreign investment fund willing to meet the difference.

The year 2008 is starting to feel like 1996-97, when the Asian economies were under siege and suffered a precipitous drop in living standards.

Eastern European economies led by Hungary and Ukraine are struggling to remain solvent. South Korea, having had a run on its currency, has made a desperate call to Washington. Tur key, a perennial IMF client, is back in trouble. And Pakistan, up to its neck in debt and political unrest, also needs a bailout.

It could all become much worse, and developing nations are likely to be the victims hardest hit. One of the features of a slump is falling prices for primary goods and commodities. Just since July, commodity prices have fallen 37 per cent, cutting off a huge source of income for growers and people working in the mining industry. With western banks in disarray, there is little possibility that private capital flows will fill the vacuum. The only choice countries will have is to borrow from the IMF, whose money does not come cheap. And its loan fees come with austerity packages attached.

Strauss-Kahn may plead the Keynesian case to save the world from depression, but the IMF economists have been trained on a diet of balanced budgets, an end to subsidy, and privatisation. The result can be politically disruptive and socially divisive. The Fund is back and there is no reason to believe that it will be any more accommodating than in the past. That is not its way.

Alex Brummer is City editor of the Daily Mail

This article first appeared in the 27 October 2008 issue of the New Statesman, The death of Gucci capitalism

Photo: STEFAN BONESS/PANOS
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What Britain needs to understand about the profound and ancient divisions in Germany

As Angela Merkel campaigns for re-election, the balance of power in Europe is changing.

On 24 September, Angela Merkel will be re-elected chancellor of Germany and that, we might think, will be that. With Merkel and France’s Emmanuel Macron in control of the European project, populism will surely be vanquished and the old Franco-German core of the EU restored. Yet things are changing, and if western Europe wants Germany to keep singing “Ode to Joy” as enthusiastically as “Deutschlandlied”, it will have some work to do. Our Brexit negotiators need to see how important this is to Macron, to other European leaders and, above all, to thinking Germans.

For we may all soon miss the old, self-effacing Germany. Despite having such economic power, it always seemed to have no greater wish than to exist as part of a larger whole. Konrad Adenauer, its first postwar chancellor and founding father, made Westbindung (“binding to the West”) the heart of West German politics. Adenauer came from the deeply Catholic Rhineland, “amid the vineyards” as he put it, “where Germany’s windows are open to the West”. His instinctive cultural sympathy was with France, but he knew that West Germany’s existence depended on keeping America in Europe. France he courted out of profound conviction, the US out of clear-eyed necessity, and he was worried that after him this twin course might be abandoned. His demands for reassurance during his final year in office led to John F Kennedy’s “Ich bin ein Berliner” speech of 1963. Every West German knew about that, and about the Berlin Airlift: these became locations of national memory from which West Germany triangulated its sense of self.

There were some Germans for whom this was too much. Anti-Americanism was ingrained among West Germany’s hard left, the early Green Party and the tiny hard right. But even Germans who were suspicious of America had no fear of tying themselves closer to Europe. On the contrary, that was exactly what they wanted. The standard explanation of this is guilt. West Germans, in this argument, felt so remorseful about the horrors of the Second World War that they wanted to make amends. This idea fitted with others’ belief that Germany did indeed have much to feel guilty about.

A nuanced version of this held that the western Germans thought they had somehow “got away with it”, compared with their brethren in the east, who had felt the weight of Soviet vengeance: rape, pillage, occupation. Accordingly, Germany’s willingness to subsume itself so thoroughly, even as it footed the bills for the European Economic Community and later the European Union, was accepted with little gratitude, almost as an ongoing war debt repayment.

This guilt thesis is based on a misunderstanding of German history, especially of the experience of western Germans. The most graphic illustration of this comes from Adenauer. In 1955, he privately informed the British that while he was obliged to act in public as though he wished for reunification, he intended to devote his remaining years to blocking it. In 1961, he secretly proposed to the Americans that they offer the Russians a swap: they and he should, he said, give up West Berlin in return for Thuringia (the region containing Leipzig and Weimar). He wanted, in effect, to make the River Elbe the eastern border of Germany.

Why did Adenauer dislike the eastern Germans, think Berlin was expendable and consider the River Elbe to be the natural frontier? Simple: he knew that the Elbe was Germany’s Mason-Dixon line. Beyond it lay the flat, grim Prussian heartlands, which until 1945 stretched into present-day Russia. This vast region was known to Germans as “Ostelbien” – East Elbia. Adenauer viewed the “unification” of Germany in 1871 as East Elbia’s annexation of the west. That’s why in 1919, as mayor of Cologne, and again in 1923, he tried to get Britain and France to back a breakaway western German state. Having failed, he is said to have muttered, “Here we go, Asia again,” and closed the blinds every time his train crossed east over the Elbe.

Prussia was a different country. The victorious Allies agreed. On 25 February 1947, they declared: “The Prussian state, which from early days has been a bearer of militarism and reaction in Germany… together with its central government and all its agencies are abolished.” The name Prussia was eradicated. The Prussian hegemony of 1871-1945, an anomaly in the two millennia of German history, was over.

If we understand this, we understand what West Germany really was and why it acted as it did; why the “reunification” of 1990 – or, at least, the way it was handled – was such a mistake; why we may all have to stop taking Germany quite so much for granted now that East Elbia is back; and why our Brexit negotiators are on a hiding to nothing if they believe that the Germans have no more urgent business to consider than their car exports to us. Far more important to liberal Germans is keeping safe the western soul of Germany.

***

West Germany was anything but an artificial construct. It was the historical Germany, being almost geographically identical to what was, for almost 1,200 years, the only Germany. Julius Caesar named the land, together with its people, in 58 BC; 49 years later, Drusus, the greatest commander of the infant Roman empire, is said to have been supernaturally advised that after defeating every tribe he met in Germania, he should halt at the River Elbe. By 100 AD, Roman rule was shown by a fortified border, the Limes Germanicus. You can still walk large stretches of it; it encompasses most of the richest land in modern Germany and all of the great cities except Hamburg, Berlin and the 19th-century industrial monocultures of the Ruhr. Even these last were born as trading posts or forward bases within what archaeologists call the “market region” of Germania – the lands beyond the limes where commerce with the Roman empire defined the whole culture. Southern and western Germany’s cultural roots are almost as Roman as France’s.

But what about 9 AD and the destruction of three Roman legions by the German tribes under Arminius? There is a popular myth that this kept all Germany free and different. We owe this idea to Martin Luther and his supporters: Luther claimed from 1520 onwards to be a German, anti-Roman hero and identified himself with the newly rediscovered tale of Arminius. More decisively, the events of 9 AD were an obsession of later Prussian historians, who had an interest in claiming that the real Germany was one that was pure and un-Romanised. Yet the reverse is true. Under the Romans, then the Merovingians, then the Franks, the Rhine/Danube super-region of Germany remained politically and culturally a part of western Europe. After Charlemagne, a Rhineland German, “restored the Roman empire” (as his seals put it) in 800 AD, western Germany was the very centre of things. It was never a nation state, but always the key part of a greater whole, the Holy Roman empire.

Along the Elbe, things were different. Charlemagne extracted tribute from the pagan Slavs across the river, and his successors tried to build on this, but the German conquest and settlement of East Elbia only really began with the Wendish Crusade of 1147, the northern arm of the Second Crusade. Three centuries later, the entire region was still hotly disputed by Balts and Slavs, with German supremacy threatened by major defeats at Tannenberg (1410) and in the Hussite Wars (1419-34).

Long-contested frontier lands breed a special kind of society. The German incomers cowed the natives, such as the pagan Pruscie from whom they ultimately borrowed their name, through brute force. Where they couldn’t, they had to make armed deals with local elites. In this new sort-of-Germany, the Junkers, an aggressive landowning caste, lorded it over the Slavs and Balts – as well as poorer Germans, who knew that the locals would cut their throats if the Junker castles fell, so were loyal and subservient to their masters. East Prussia remained like this within living memory.

In 1525, Prussia named itself and declared itself the first Protestant state. From then on, it had absolute rulers, the Hohenzollern dynasty, backed by a quiescent Lutheran state church. The Junkers swore loyalty in return for exclusive access to all officer-level jobs in the army and the administration. By the mid-18th century, Voltaire quipped that while other states had armies, the Prussian army had a state. The overriding strategic concern of Prussia was always with the east. In his 1758-59 campaigns, Frederick the Great was shocked to find the Russians extremely hard to beat. He bequeathed to his successors a policy of keeping the tsars onside. Partitioning Poland between them was the sticking plaster that masked this Russian-Prussian rivalry, right until 1941.

This thoroughly east-facing power was, by the normal standards of European statehood – history, social structures, religion, geography – a different country from the Rhineland, Swabia or Bavaria. It defeated them all in 1866, laying the ground for the “unification” of 1871. The Prussian empire (for that is what it was) could now enlist the wealth, industry and manpower of Germany in pursuit of its ancient goal: hegemony over north-eastern Europe. By 1887, the future imperial chancellor Bernhard von Bülow was already musing on how to destroy Russia “for a generation”, cleanse Prussia of its Poles, set up a puppet Ukrainian state and take the Prussian armies to the banks of the Volga. This is the bloody Prussian – not German – thread that leads directly to the Nazi onslaught of 1941. In 1945, that centuries-long struggle was settled, in almost inconceivable violence. Half of East Elbia was ruthlessly stripped of Germans and handed over to Poles or Russians; the rump became the German Democratic Republic (GDR), a mere satrap of the Red Army.

So while it is easy and comfortable to say that the otherness of eastern Germany today is the result of that 40-year Soviet occupation, history says otherwise. East Elbia has always been different. Take the voting patterns: from 1871 to 1933, East Elbia outside Berlin (always a left-liberal political island) was the main electoral reservoir for the authoritarian right. The Prussian Conservative Party under the empire, the Deutschnationale Volkspartei until 1928 and the Nazis from 1930 depended on rural and small-town East Elbian voters. It was they who (just) swung things in 1933, by going 50-60 per cent for the “Hitler coalition”. Had all Germany voted like the Rhineland or Bavaria, Hitler and his Junker allies would have got nowhere close to a majority. Small wonder that Adenauer didn’t want East Elbia back and was secretly delighted to have it safely fenced off behind the Iron Curtain.

***

West Germany (1949-90) – Germany shorn of Prussia – was, then, no historical fluke, and nor was the supra­national way it acted. This was the real Germany. But the hasty reunification of 1990 (there was no referendum or election on the issue) changed things. Why should the inhabitants of the former GDR, rather than Poles and Czechs, get immediate access to the wealth and benefits of the West? Because they were Germans. With that, the chancellor Helmut Kohl embraced the notion that being German overrode all considerations of social, economic or historical difference. He also subliminally revived the idea, common to the Second Empire and the Third Reich, that East Elbia was special and needed subsidising by the rich west of Germany. The director of the Bundesbank, Germany’s central bank, resigned in 1991 over this abandoning of economic sanity for political nationalism.

Since 1990, the former East Germany has received more than €2trn from the old West Germany, for a fast-ageing, shrinking and disproportionately male population of only 16 million, including Berlin. That’s the equivalent of a Greek bailout every year since 1990, and as a straight gift, not a loan. This represents a huge shift in financial priorities, overshadowing Germany’s annual net EU budget contribution (currently €15.5bn). In 1990, Kohl promised that western German aid would soon turn the new states into “blooming” areas, but they have become, instead, proof that age-old differences resist even the most gigantic subsidies.

Between 30 and 40 per cent of voters in East Elbia have declared over the past two years that at the general election, they intend to support either Alternative für Deutschland (Germany’s Ukip), Die Linke (heirs to the old East German Communist Party) or the all but openly neo-Nazi National Democratic Party (the NPD, currently represented in the Mecklenburg-Vorpommern state parliament). Though theoretical enemies, these three parties are united by cultural affinities: all despise economic liberalism, oppose Nato and the EU and want closer relations with Russia.

East Elbia no longer has the population to swing the entire German electorate of more than 61 million but many liberal western Germans are nervous. They recoil at the sight of anti-asylum-seeker attacks, which are proportionally far more common in East Elbia than in the west, or when they see Merkel heckled by right-wingers. They call East Elbia Dunkeldeutschland (“Dark Germany”) and joke bitterly that if Britain can have a Brexit, why can’t the old East Germans, whom they lump together under the name of Saxons, have a “Säxit”? But it’s no laughing matter. They know there are those only too aware of any anti-western drift in Germany and eager to give succour to it.

Alexander Saldostanov, the rabid leader of Russia’s “Night Wolves” bikers and a public friend of Vladimir Putin, recently told Germany’s bestselling daily, Bild, that he dreams of a grand union between Germany and Russia: “We have so much in common. You simply have to free yourself at last from America, that scourge of humanity. Together, we can, should and must take power.”

There’s no danger of that, but there is a sense in which eastern Europe is, to Germans, no longer “the other”. It’s the place whence natural gas flows from Russia, where labour is cheap but skilled and where the people are keen to work with Germany on setting up new sites of joint national memory. From Kaliningrad to Prague, museums and projects are springing up in which the horrors of the past are neither denied nor used as ammunition in today’s negotiations. In eastern Europe, perhaps because Russia is so close, the Germans are rarely made to feel guilty for their grandfathers’ sins. Meanwhile in the west, from Greece to Britain, people can’t resist mentioning the war whenever the Germans don’t act as desired.

***

Germany’s resources are not infinite. Nor is the patience of the 40 per cent of Germans who “have net worths of essentially zero”, as Die Welt reported last year – largely because German home ownership rates are the lowest in the EU. They are disproportionately concentrated in the old east, the region that never had supranational, western European connections. From them come ever-louder voices saying that Germany’s EU contribution is too high. And with Britain out, the maths will look even worse to such voters. If south-western Germany’s taxes have to keep bailing out the country’s east, while also helping out the old and new EU lands, what is left for, say, the post-industrial Ruhr, which has financial and social problems of its own? There are tough choices ahead, and it’s not hard to imagine a day when Germany decides to aim its subsidies and investments where they seem most welcome. The old idea of Mitteleuropa – a multi-ethnic, German-centred Middle Europe, neither of the West nor of the East – no longer seems so antiquarian. Nothing would gladden Putin’s heart more.

So, yes, Merkel will win the election and will have a chance to revive the EU’s Franco-­German core. Yet the relative strengths of France and Germany are different now. As for their leaders, while Adenauer was a devoted Catholic Rhinelander, Merkel is a Lutheran vicar’s daughter from the east. Bonn was physically close to Paris, Brussels, The Hague, even London; Berlin is closer to Prague and Warsaw.

With Donald Trump’s wavering on Nato and his noisy anti-German protectionism, along with Brexit, the West may no longer seem vital to Germany’s future. During Merkel’s election debate with her main challenger, Martin Schulz, on 3 September, Brexit was not even mentioned. The old EU core will have to work to keep Germany anchored, resisting any new call from the east. Macron and German liberals know that; that’s why there will be no Franco-German split over Brexit just to sell us a few more Audis. The sooner David Davis and Liam Fox realise that the Germans have far bigger issues to deal with, the better.

James Hawes is the author of “The Shortest History of Germany” (Old Street Publishing)

This article first appeared in the 27 October 2008 issue of the New Statesman, The death of Gucci capitalism