April 30, 2010

Op-Ed Columnist

The Euro Trap

By PAUL KRUGMAN

Not that long ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe’s march to monetary union. “On the whole,” declared an article published just this past January, “the euro has, thus far, gone much better than many U.S. economists had predicted.”

Oops. The article summarized the euro-skeptics’ views as having been: “It can’t happen, it’s a bad idea, it won’t last.” Well, it did happen, but right now it does seem to have been a bad idea for exactly the reasons the skeptics cited. And as for whether it will last — suddenly, that’s looking like an open question.

To understand the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus. And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.

But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.

Hence the crisis. Greece’s fiscal woes would be serious but probably manageable if the Greek economy’s prospects for the next few years looked even moderately favorable. But they don’t. Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece has no hope of growing out of its troubles.

All this is exactly what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.

So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.

So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.

Meanwhile, what are the lessons for the rest of us?

The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.

And when crisis strikes, governments need to be able to act. That’s what the architects of the euro forgot — and the rest of us need to remember.

Copyright 2010 The New York Times Company

POLITICS

MAY 1, 2010.

New Life for 'the Volcker Rule'

Senate Weighs Curbs on Bank Trading Sought by Former Federal Reserve Chief.

By BOB DAVIS

Former Federal Reserve Chairman Paul Volcker is 82 years old. He can't hear so well. And for a time he was outmaneuvered by President Barack Obama's economics team.

But as the Senate moves toward the biggest rewrite of financial rules since the 1930s, Mr. Volcker's ideas are having a profound impact on the debate.

Agence France-Presse/Getty Images Presidential candidate Barack Obama meeting Mr. Volcker in Florida in 2008.

The Senate is considering writing into law what Mr. Obama calls "the Volcker rule," which would effectively bar banks from the risky and often lucrative practice of trading for their own accounts. The Volcker rule is aimed at undoing a side-effect of the bailouts of 2008 and 2009: An assumption that government will always rescue big financial institutions, and thus make it easier for them to borrow heavily to make risky bets.

Mr. Volcker, now head of the president's economic recovery advisory board, proposes that the government's safety net be extended only to banks that stick to taking deposits and making loans, not to those that engage in proprietary trading for their own profit. Banks would be forced to give up such trading or surrender banking licenses. If they choose to retain proprietary trading, they would be allowed to fail.

"We'll give you a nice coffin and an easy cushion...but you're not going to be saved," Mr. Volcker said.

"We're talking about changing the rules governing global finance for the next 25 or 50 years," said Harvard University economist Kenneth Rogoff. "Thought leaders like Paul Volcker help shape the accepted wisdom."

On Jan. 21, Mr. Obama stood beside Mr. Volcker at a White House press conference and embraced the Volcker rule. The spirit, if not the letter, of Mr. Volcker's proposal is embodied in legislation pending in the Senate—and some senators are vowing to toughen the language before the bill is final, especially in the wake of civil securities-fraud charges against Goldman Sachs.

Associated Press Mr. Volcker in 1969 as undersecretary of the Treasury talking with President Nixon and another undersecretary.

Details are still in flux, but bankers are alarmed. J.P. Morgan Chase & Co. and Barclays PLC oppose the proposal. Industry lobbyists argue that it isn't essential and are seeking to consign it to legislative purgatory.

"Trading—proprietary or otherwise—didn't lead to the recent crisis," said Rob Nichols, president of the Financial Services Forum, an industry trade group. "Let's focus on correcting the major deficiencies in our current supervisory framework first."

At the outset, Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers weren't convinced the Volcker rule would prevent future economic crises. Proprietary trading didn't ignite or deepen the current crisis, they argued, and the Volcker rule wouldn't have prevented it. Instead, the initial Obama regulatory blueprint they backed emphasized stiffened oversight of financial institutions and new government authority to take over failing financial firms.

But while Mr. Volcker was relegated to overseeing a powerless advisory board, he has prominent allies, including Bank of England Governor Mervyn King and current and former Citigroup executives, some of whom have been pushing for his proposal.
Former Citigroup Chief Executive John Reed has said that combining investment and commercial banking was disastrous because investment bankers "overwhelmed the traditional culture" at the bank "and now Citi is in trouble." Current CEO Vikram Pandit recently wrote Mr. Obama: "I believe banks should be banks serving clients. I believe banks should not speculate with their capital."

The 6-foot-8 Mr. Volcker is stooped nowadays. He walks slowly. But that didn't stop him from staging an energetic lobbying campaign for his proposal beginning last spring. His influence is evident. Rep. Paul Kanjorski (D., Pa.) said a March 2009 dinner with Mr. Volcker shaped a proposal, for which Mr. Kanjorski won House backing, that would enable regulators to dissolve major financial institutions even if they aren't bankrupt.

Meanwhile, as polls showed that the public viewed Mr. Obama as too friendly to Wall Street, he invited Mr. Volcker to the Oval Office on Oct. 28 along with Vice President Joe Biden and Messrs. Geithner and Summers to discuss regulatory approaches.

Associated Press President Reagan with Fed Chairman Volcker in 1987.

Mr. Biden urged the president to back Mr. Volcker's provision, according to White House advisers, and objections from Messrs. Geithner and Summers faded.

The president assigned Mr. Geithner to craft a proposal based on Mr. Volcker's ideas. The two men met with Mr. Summers at the White House on Dec 23. Mr. Geithner continued the talks with Mr. Volcker at the Treasury the next day, and said he told Mr. Volcker he would recommend that the president endorse a ban on bank proprietary trading, which Mr. Obama did at the Jan. 21 press conference.

Although Treasury officials and Mr. Volcker emailed back and forth about a "fact sheet" to explain how a Volcker rule would work, the White House didn't distribute it. That handicapped Mr. Volcker's advocacy on the Hill and he couldn't clearly define the trading practices he wanted banned.

"It's like pornography. You know it when you see it," Mr. Volcker cracked at a February Senate hearing. "Well you might see it. But would the regulator see it?" responded Sen. Richard Shelby (R., Ala.).

Wall Street watched apprehensively. Some sought to keep the provision from moving forward. Bankers and some economists warned that drawing a line between trading on behalf of customers and trading for profit would prove difficult.

Then came the charges against Goldman Sachs, reigniting controversy over the social utility—and potential conflicts of interest—of banks trading for their own profit. At a hearing, Goldman's finance chief said implementing the Volcker rule would hurt U.S. competitiveness.

Senate Banking Committee Chairman Christopher Dodd, as part of a broader finance bill, is proposing to require a new council of regulators to study the issue for 60 days and then decide how to implement it.

But two Democrats, Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.), are seeking to amend the bill to toughen the language and force regulators' hand.

Another provision of the bill would go beyond what Mr. Volcker suggested and push banks out of the business of trading derivatives altogether.

The issues are likely to be resolved on the Senate floor in May, and the outcome is unpredictable.

Meanwhile, Mr. Volcker promises that he'll continue battling. "I am old. I might be old-fashioned, but I stick with it," he said.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

First Quarter GDP: A Look Inside the Numbers

by: Daryl Montgomery

April 30, 2010

The advance report for first quarter GDP came out today and it indicated that the U.S. economy expanded by 3.2%. Approximately half of that was due to increases in business inventories. Business equipment and software investment supposedly went up over 13% and was the biggest sub-category gainer. Consumer expenditures somehow went up 3.6%, even though real disposable income was flat. Increases in federal government spending helped raise the numbers.

While the biggest contribution to the report was in the inventory category, this represented a lower percent than in the fourth quarter of 2009. Inventories added 3.8% of the 5.6% increase in GDP last quarter, or two-thirds of the total. Inventories didn't actually increase in the fourth quarter either; they dropped by $19.7 billion. Thanks to the peculiarities of GDP math, the slower rate of decline led to a big increase in GDP. Mainstream media then reported this turn of events as the U.S. economy being on fire (if they meant it was burning down, they may have been correct). In Q1, inventories actually increased, though by $31.1 billion. This is certainly more positive, but inventory restocking by itself doesn't indicate a recovering economy. It does however lead to a recovery in the GDP number.

The increase in business equipment and software of 13.4% in Q1 was less than the also very high 19.0% last quarter. Overall this led to nonresidential fixed investment increasing 4.1% in the current quarter even though investments in nonresidential structures (commercial buildings) declined 14.0%. Still, that was better than the 18.0% drop in Q4 of last year. Real residential fixed investment (housing) decreased 10.9% this quarter, in contrast to a supposed increase of 3.8% in the fourth quarter of 2009. Real estate, which was the epicenter of the Credit Crisis and the damage to the economy, is obviously still troubled. How can there be recovery under such circumstances?

When reporting on first quarter GDP, big media highlighted the consumer spending numbers. The 3.6% current number was much higher than the 1.6% number at the end of last year. Durable goods sales supposedly increased 11.3% in Q1 compared to just 0.4% in Q4 2009. Motor vehicles created a 0.52% growth in GDP by themselves. Nondurable goods were up 3.9% compared to 4.0% last quarter, so almost all of the big change took place in durable goods. U.S. consumers managed to increase their spending on these high-ticket items even though real disposable income didn't go up. Consumer credit was also declining in the first quarter. Revolving credit (credit cards) fell at a 13% annual rate in February. So somehow consumers are now spending more money even though they don't have the funds available from their income or credit. That certainly is interesting.

Finally, government spending, which has been the mainstay of the economy for the last two years, increased by 1.4% in the first quarter compared to no change in the last quarter of 2009. Nondefense spending increased 1.7 percent in the beginning of 2010 and this compares to a jump of 8.3% at the end of last year. State and local spending were down in both quarters. At this point it will be hard for the federal government to increase its spending from current levels, so decreases are likely in the future and this will be a drag on GDP going forward. What part of the economy will pick up the slack? Well, I guess that depends on what numbers the statisticians find easiest to manipulate.

Gold: Needed Now More Than Ever

April 30, 2010



Greece’s debt troubles are well known. Less recognized is the worrying truth that Greece is just the tip of the iceberg.

There have been plenty of warnings. These include, for example, the recent downgrades of the debts of Spain and Portugal. By highlighting the risks, the debt rating agencies have sent a signal with one certain outcome. Heightened awareness over sovereign credit risk will grow, and rightly so.

A report released just last month by the Bank for International Settlements, entitled “The future of public debt: prospects and implications”, made some startlingly frank and sobering conclusions. The BIS report began earnestly:

“Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future.”

After a through and well-researched analysis complete with detailed documentation, the BIS walked carefully through this political minefield, no doubt aware the slightest misstatement would leave it open to rebuke by its benefactors, the countries and central banks that fund its operation. But hats-off to the BIS. It left no doubt as to where it stands on this matter by concluding with the following stark assessment.

“First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures. As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing. In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult.

Second, large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk.

Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth.

Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability, unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation.”

Please read that last paragraph again about the significant risk to monetary stability. In other words, governments will not cut spending and bring their budget back into balance. They will simply lean on their central bank to print and print and print. Everyone holding sovereign paper will get their euros and dollars and pounds repaid to them, but those currencies will have only a fraction of their present purchasing power. The rest will have been inflated away.

I have always wondered why people – after paying 40% or so of their income in taxes – then put what they manage to save in government paper. Further, it always struck me as somewhat bizarre that they then call the paper they purchased “risk free”, even though nothing in our real and imperfect world comes without risk. It is a conundrum with only one explanation – it is irrational. All of us have seen this behavior before.

It is the behavior that sent the unthinking crowds into Internet stocks. It is the behavior of unthinking people who bought second and third homes and condos with debt in the expectation of flipping them with a huge profit to someone else. It is the behavior of unthinking bankers who piled into mortgage-backed securities believing that the triple-A rating meant the paper came without risk. The common characteristic of all these manic episodes is that they are the actions of people acting with a ‘bubble mentality’. They are not guided by rational thought, but unthinking and emotional knee-jerk reactions. And the same is true today with sovereign credit risk, but with a difference.

The other examples are past history. The so-called “risk-free” sovereign debt bubble has only recently begun to pop.

The signs are all around us. Iceland, Dubai, Latvia, Greece with Portugal and Spain not far behind, and the UK and even the US and most every other country on the not-too-distant horizon. The sovereign debt crisis – which is actually a latent bank crisis because banks are stuffed full with the worthless paper of over-indebted sovereigns – is a powder keg, and the fuse has already been lit. So what should we do? What can we do?

The answer is simple. Own physical gold instead of someone’s promise. Its time-proven record built up over the centuries clearly illustrates that gold is the ultimate safe haven. Gold is the best way to avoid counterparty risk, which is essential today as the sovereign debt bubble continues to lay bare the stark reality that governments throughout the world are bankrupt, and more to the point, that the bubble has popped. People holding sovereign paper are already heading for the exits. As a result, everyone needs gold now more than ever.

Pioneering prostate cancer drug approved

By Andrew Jack in London

Published: Last updated: April 30 2010 02:29

US regulators on Thursday approved a pioneering treatment for prostate cancer, lifting the value of Dendreon, its Seattle-based developer, by more than 25 per cent.

Sipuleucel-T, known by its brand name Provenge, dubbed by some the world’s first therapeutic cancer vaccine, is an injectable treatment designed to tackle the disease once it has been contracted.

The approval could pave the way for new approaches to tackling a range of cancers using immunotherapy, sparking fresh investment and research by rival companies. It would also mark a boost to the biotech sector in the northwest of the US, extending the corridor of growing companies that stretches from San Diego in the south and Los Angeles northwards, through the industry’s traditional US hub in the San Francisco area.

Provenge works by stimulating the body’s own immune response, in contrast both to traditional vaccines, which build defences ahead of infection, and to existing cancer drugs that passively trigger an immune response.

George Farmer, an analyst with Canaccord Adams, said Provenge had the potential to bring in $4.3bn in annual sales by 2020. “Demand will be very high given the simplicity and convenience of administration combined with the extremely benign safety profile,” Mr Farmer said.

Dendreon ended $10.56, or 26.7 per cent, higher at $50.18. The shares have gained 51 per cent this year as investors looked ahead to the FDA decision. The approval follows nearly two decades of development costing Dendreon nearly $800m, and a series of regulatory setbacks including a demand in 2007 for additional clinical studies from the company.

Karen Midthun, acting director of the FDA’s centre for biologics evaluation and research, said in a statement: “The availability of Provenge provides a new treatment option for men with advanced prostate cancer, who currently have limited effective therapies available.”

The results approved by the agency showed an increase of just over four months in overall survival in 512 patients with advanced prostate cancer, most with only mild or moderate side effects. Median survival was 25.8 months compared with 21.7 months for those not receiving the treatment.

The company will need to overcome concerns by health insurers in persuading them to use its product, given both the relatively short proven extra benefit and the high cost. Analysts have estimated treatment will be priced at around $75,000.

Some specialists believe the use of the drug could ultimately be extended to provide earlier stage treatment, offering the prospects for greater efficacy.

Copyright The Financial Times Limited 2010.

April 30, 2010

EDITORIAL

The Cost of Delay

When the European Union and the International Monetary Fund first talked about a $60 billion rescue for Greece it looked as though that might be enough to calm Europe’s panicky markets. Then Germany dragged its feet, and investors raced to dump Greek bonds and bonds from the financially troubled Portugal and Spain.

Now the managing director of the I.M.F., Dominique Strauss-Kahn, says that as much $160 billion will be needed over three years to cover Greece’s debts and replace private financing that has become prohibitively expensive. Investors took comfort especially after the German government — which may or may not have learned its lesson — said that it hoped a rescue would be in place by the weekend and opposition lawmakers agreed to fast track debate on Germany’s $11 billion contribution this year.

Greece needs money by May 19 when about $12 billion worth of government bonds come due. And if Europe’s politicians balk again, the situation could spin out of control — fast. The crisis could spread beyond Greece, Spain and Portugal and cripple financial institutions in Germany, which own $36 billion worth of Greek debt, and France, which own $54 billion. This isn’t a question of charity. It is one of Europe’s self-preservation.

The Greek government, the European Union and the International Monetary Fund must all work to convince investors that are prepared to do what is needed to keep the country afloat and current on its debt. The $160 billion mentioned by Mr. Strauss-Kahn may do the trick. And it comes with very tough conditions attached. As part of the deal, the I.M.F. and European Union are pressing Greece to cut $26 billion from its budget — almost 10 percent of G.D.P. — by reducing military spending, raising value added taxes, cutting pension benefits and slashing public sector bonus payments.

Some economists believe that Greece may still have to restructure its $360 billion in public debt — agreeing on a plan with its creditors to reduce the principal or interest rates or extend its payouts over several more years. Greece would still need large-scale assistance while it negotiated terms and to be able to pay its bills while it recovered access to private capital markets.

Even shoring up Greece may not be enough to stave off a financial crisis in Europe’s other weak economies. Portugal, Spain and Ireland are all in deep fiscal messes. Instead of waiting for things to get out of control there, the European Union and the I.M.F. should move quickly to put together a large and credible financial package — economists have mentioned up to $1 trillion — and be prepared to release it quickly if needed. Europe’s battered financial markets, and its battered credibility, cannot afford many more weeks like the past one.

Copyright 2010 The New York Times Company

Europe unravels in a tangle of national interests


By Philip Stephens

Published: April 29 2010 20:34

Watching the slow-motion train crash that is the Greek debt crisis invites the question as to whatever happened to European solidarity. Listening to politicians in Berlin explain that parsimonious German voters will not stomach a bail-out of their spendthrift continental cousins offers only half an answer.

There is more to the story than an angry collision between Greek profligacy and German moral superiority. Behind the proximate threat lies a more unsettling truth. The crisis is symptom as well as cause. For all its upheavals, there used to be something reassuringly ineluctable about the European Union. Now the enterprise is beginning to unravel.

Greece’s predicament, and the response of its eurozone partners, holds dangers on many levels: a sovereign default within the single currency; contagion as markets test the resilience of Portugal, Spain and Ireland; and a breakdown of the political trust and mutual support mechanisms on which the monetary union depends.

As my FT colleague Alan Beattie observed in a searing commentary earlier this week, recent events have underlined also the sheer incompetence of those charged with stewardship of the eurozone.

Given Angela Merkel’s central role, perhaps we should not have been surprised at the vacillation. Berlin’s stumbling response to the collapse of Lehman Brothers provided a template for the ineptitude that has again left the authorities playing catch-up with unforgiving markets.

Lest I am accused by my German friends of taking the side of the sinner against the sinned against, Ms Merkel has right on her side in saying that Athens must not be rewarded for disdaining its solemn obligations to its partners. It is no use writing cheques unless Greece has a credible fiscal plan.

As Berlin should have learnt, however, there comes a point when finger-wagging becomes self-defeating. The price of righteousness turns out to be chaos; and chaos does not discriminate – as the German banks holding billions of euros of Greek sovereign debt well understand. We sometimes have to live with moral hazard.

More worrying is what all this tells us about the fundamental cohesion of the Union. Until quite recently if someone asked what the EU would look like, say, 20 years hence my reply was that its essential contours would be pretty much unchanged. Sure, my argument would have run, the guiding purpose had changed with the end of the cold war, the reunification of Germany and enlargement to central and eastern Europe. But a collection of middle-ranking powers with common borders, values and interests had sensibly concluded that they were better together than apart.

The rise of new powers – China, India, Brazil and the rest – presaged a much diminished role for Europe on the global stage. Proud nations such as France, Germany, Britain or Spain would not surrender their identities; but they would pursue their interests collectively. Maddening as it could often be, “Europe” would always be around.

That is what I used to think. Even now, I still believe the logic is compelling. Look at any problem touching the peoples of Europe – from crises in the international financial system to global warming, from terrorism and uncontrolled migration to a newly assertive Russia – and they tell the same story. Europeans must act together if they want to exert influence.

For all that, Europe no longer carries the stamp of inevitability. Quite suddenly, it has become almost as easy to foresee a future in which the Union fractures. The risk is not so much of a great rupture – though if Greece defaults the immediate shocks will be profound – but of the atrophy that flows from the absence of political leadership.

European governments still pay lip service to the logic of co-operation; they are no longer willing or able – sometimes both – to admit its implications. They know where their national, and the continent’s, strategic interests lie, but they lack the purpose to marry them.

Germany relishes instead the chance to become a “normal” country, separating what it sees as its national from the European interest. Helmut Kohl’s historical insights are forgotten in the insistence that German taxpayers should not be asked to remain the continent’s paymaster. So too are Berlin’s long-term interests in European-wide political stability and in open markets for its exports.

France struggles with the dynamics of a Union in which more Europe no longer necessarily means more France. Nicolas Sarkozy’s admirable energy is unconnected to strategic purpose. Britain, as ever, stands half on the sidelines. Italy, led by Silvio Berlusconi, has removed itself from influence.

There have been moments of stasis before. But the rules have changed. The fall of the Berlin Wall and the collapse of communism have turned an enterprise of necessity into one of choice. If the Union falls into disrepair everyone will still be the loser; but the threat no longer seems an existential one.

The EU has become a victim of one of the awkward paradoxes of globalisation. Even as it robs nation states of power, global interdependence increases the domestic pressure on national politicians to shelter voters from the insecurities of a borderless world.

The response of Europe’s politicians has been to sacrifice the strategic to the tactical. They boast that they can “reclaim” power from the EU – and promise they will not be pushed around by Brussels. This explains Ms Merkel’s Germany-first approach to the single currency; and the reluctance of other leaders to match pieties about Europe’s role in the world with anything resembling common policies.

There is nothing strange or wrong about politicians pursuing national interests. That is what they are paid for. The problem for the EU is that governments now see this as a zero-sum game.

During the era of postwar reconciliation and the cold war the coincidence of national and European interests spoke for itself. Europe’s waning influence in a world no longer owned by the west means that the convergence is as powerful as it has ever been. But without the threat of war or invasion, it is harder to identify. It requires leaders of stature to make a case to their electorates. Look around the continent and there are no such politicians in sight.

Copyright The Financial Times Limited 2010.