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Niall Ferguson: Can Europe Fail and Is America Next?

Niall Ferguson
Niall Ferguson. Image: The Aspen Institute//flickr

Probably no questions are more relevant today than those Niall Ferguson considered in his lecture on Monday (30 January 2012), hosted by the Swiss Institute of International Studies, at the University of Zurich.  Fresh from the World Economic Forum (WEF) in Davos, the answers he gave were far from comforting:  Can Europe collapse? Of course it can.  Is America next?  Maybe.

But more importantly, Ferguson told us, we should have seen this coming. Ten years ago, in an article he co-authored in Foreign Affairs, he predicted that Europe’s newly minted Economic and Monetary Union (EMU) was doomed without a fiscal union to accompany it.  Indeed, Ferguson was one of the original ‘Cassandras’ of the project, warning as early as 2000 that “monetary unions can be undone by fiscal imbalances.”  This, he told us, was one of the lessons of history.  The closest precedent of the EMU, after all, was the obscure Latin Monetary Union, comprising France, Belgium, Switzerland, Italy, and Greece between 1865 and 1927.  Why is it so obscure?  Because it was destroyed by “asymmetric fiscal problems” – by the divergence between French fiscal probity, on the one hand, and Italian and Greek fiscal laxity on the other.

Back then, war was the catalyst. This time around, he predicted, welfare would be “the fatal solvent,” as “fiscal problems caused by bloated social security and pension systems” would cause the EMU to unravel.  On Monday, Ferguson reminded us that the root of Europe’s malaise remains the strain on its public finances caused by its aging populations.  “Roman holidays,” he joked, have become a thing of the past for American women now that “the lotharios have all become pensioners.” The post-2008 economic crisis has only made things worse.  When it hit, wages in Spain had long been spiraling out of control.  German banks were even more highly leveraged than American ones.  These challenges called (and still call) for a common fiscal response, which the present system makes impossible.  To make matters worse, Germany doesn’t understand the problem, Ferguson argues. While it pays lip-service to a European Federation based on the German Federal Republic, it lacks the political will to make that happen.   For the first time in fifty years, he continued, the UK has a logical stance toward Europe:  it favors a Federal Europe, but wants no part in it.

The travails of the EMU, however, are just a small (and recent) component of a bigger picture, according to Ferguson.  Much more important to him (predictably enough) is the sweeping historical narrative.  In his latest book, Civilization: The West and The Rest (published in March of last year), he argued that we are living in a period of special historical significance — the global financial crisis notwithstanding. The last five hundred years of world history, Ferguson observes, have witnessed the political and economic rise of European societies (or ‘the West’) relative to all the others on the planet (which he refers to as ‘the Rest’).  This phenomenon, sometimes called the “great divergence,” is one of the defining features of modern history.  But, as Ferguson has not been the only one to notice, this great divergence may be coming to an end.  In developments that are historically unprecedented, the Rest are rapidly catching up. What we are witnessing, Ferguson tells us, is a great ‘reconvergence’ of economic and political power across the globe. (For an interesting visual representation of this re-convergence, see slide 15 of our case study on Critical Geopolitics from December).

The most important part of Ferguson’s book is its exploration of this re-convergence. There is no shortage of persuasive explanations for the rise of the West to begin with.  One of the most highly regarded is Jared Diamond’s Guns, Germs and Steel, which chalks it up (basically) to environmental factors.  Ferguson, by contrast, argues that the West rose primarily because of a certain set of institutions, or – in the term he coined, he says, “to annoy academics” – six “killer apps” of prosperity, to include things like ‘modern medicine’ and ‘the rule of law,’ which the West developed and societies in other areas of the world did not.  Whereas Ferguson’s story, like Diamond’s, persuasively explains (more or less) the historical rise of the West, it does so in a way that also accounts for the anticipated rise of the Rest. This is happening, Ferguson argues, for exactly the same reasons the West rose in the first place: because, in the last few decades, societies in the rest of world have been adopting these originally Western institutions, while they are being eroded in the West.  In Ferguson’s trendy language, the Rest has ‘downloaded’ the “killer apps,’ while the West is ‘deleting’ them.

Briefly, the decisive institutions, or ‘killer apps,’ are:

1) competition, both within and between societies;

2) the scientific revolution, which, Ferguson reminds us, was confined to a few areas of Northern Europe;

3) the rule of law, which as Hernando de Soto and others have argued explains much of the historical divergence between North and South America;

4) modern medicine, which doubled life expectancy in the West between 1850 and 1950;

5) the consumer society, without which, Ferguson quips, “there isn’t much point in having an industrial revolution”; and, finally

6) the work ethic, once thought exclusive to certain Protestant denominations.

See Ferguson’s Ted Talk on the subject, for a fuller treatment of this:

According to Ferguson, history teaches us that societies possessing these institutions prosper and those lacking them do not.   Today, as the societies of the Rest are rapidly establishing these institutions, there are alarming signs that they are disappearing from the West.  Western societies, for example, are no longer the most economically competitive in the world.   Nor will they continue to lead the pack for long in the natural sciences. Though the majority of Nobel Prize winners in Physics, Chemistry and Medicine are still Westerners, the disparity in math and science attainment between students in New Jersey and those in Shanghai is already quite striking and made news last year. In a measure of the quality of the rule of law (calculated by the WEF), the United States is no longer among the top thirty countries in the world.  In America, Ferguson writes, the rule of law has been supplanted by something much more sinister: “the rule of lawyers.”  Much farther down on that particular list, he continued, is Italy, where widespread corruption and the influence of criminal organizations is well-known. Ironically, as well, the work ethic seems to be vanishing from the home of the Protestant reformation. Max Weber must be turning in his grave.  Whereas the average South Korean works 2357 hours per year, his German counterpart works only 1391.

“That’s why when you go on holiday,” Ferguson joked, drawing a knowing chuckle from the crowd, “the Germans are already there.”

Despite all the doom and gloom, Ferguson ended on a positive note.  Though the six all-important institutions are being eroded just as much in the United States as in Europe, prospects are better over there.  There is reason to think, he told us (without going into much more detail) that “the US might solve all of this.”  In America, he said, unlike in Europe, “there is a sense of how things ought to be; [an idea] that salvation comes from the individual.” As Churchill said (and Ferguson repeated) about America: “it always does the right thing … after every other option has been exhausted.”  To that famous quotation, Ferguson added, enigmatically, that the fateful time might come “as soon as later this year.”

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