Thursday, June 23, 2005

The Madness of Elites - The Euro Disaster

Much is made of the madness of crowds. But crowds are actually wise, and the madness of elites is more pervasive and more damaging - here's the first of several examples.

The 17th Century tulip-mania and 1990s dot-com boom are cited as proofs of the madness of crowds. In fact these are examples of investors acting rationally (buy on the up), & all but the later investors did well.

The madness of elites is a nasty phenomenon that is common in Europe - elites there model themselves on the monarchs and courtiers they've replaced. Mark Steyn remarks:

My favorite headline last week was in the International Herald Tribune: "EU leaders and voters see paths diverge." Traditionally in free societies, when the paths of the leaders and the voters "diverge", it's the leaders who depart the scene.

Not so in Europe. The Euro is a great example of a mad elite. When the Euro was mooted in the mid 90s, the Germans felt their economy was being stifled by the Mark being "too strong". All the others (France, Greece, Italy etc) thought their currencies too weak. The magic solution was to merge them, and like Goldilocks and baby bear's prorridge, get something that was just right.

Things went well for a while - the Euro dropped to 82 cents. The German elite was happy with a weak currency (the German people were not, but who cared about them). The other countries had stronger currencies, and mortgages got cheaper. However prices shot up - when we were in Rome a while back there was strike against this. Still, that was just the proletariat.

Sadly, the German economy continued to tank - turned out that their problem was high taxation and regulation, not the high Mark.

Then reality intervened. 9/11 had the US fighting for its life, and the $ weakened. Many Americans stopped buying weasel-goods - my neighbor in Virginia put a placard on his (Daimler) Chrysler minivan: "Made In America, Not Germany". The US withdrawal from continental Europe started, moving billions of $ annually out of Germany. The Euro rose, as the markets worried about American failure in the war.

In a clever move, the Germans and French reduced the Euro to junk status by dumping the Stability Pact they'd enacted to underpin the Euro. But it still kept rising because the markets thought it safer than the wartime US$.

By now the whole of continental Europe was in trouble. Double-digit unemployment, stagnant or declining economies. not able to afford to defend itself - Israel has superior armed forces to the whole bunch combined.

But then, the voters in just two of the nations finally got to rate the EU, and gave it failing grades. The markets decided the EU is a house of cards & the Euro is back where it was 18 months ago, and is forecast to hit $1 by the year-end.

The voters were wise, since a weak Euro is good for Europe. Economies will pick up as they sell more and they'll buy more domestically.

Longer term though, I think Europe is not democratic enough to solve the problems of its declining population, huge entitlement programs, over-regulation, and weak technology base. It's best hope is it becomes a suburb of India. Failing which, it'll end up a suburb of Egypt.

Let's hope the voters get to choose the option.