Paris, Sharm el-Sheikh, and the Resurrection of Old Europe

John Mauldin 

On several occasions in the last few years I have mentioned the anti-immigration pressures that are spreading in Europe, and a few months ago I talked about how the refugee crisis was sparking more concern. I have also engaged my friend George Friedman, one of the truly world-class thought leaders on geopolitics, in numerous discussions on those issues.

A couple days after the Paris attacks, I picked up the phone to talk over the situation with George, and we had a very animated conversation for the next 20 minutes. I didn’t particularly like what I heard about the difficulties of dealing realistically with ISIS. The more I read – and the more I listen to people like George who have worked these issues for decades – the more uncomfortable I become. The simple truth is that we as a culture need to face reality.

I asked George if he would pour his thoughts into a short essay that I could send out as an Outside the Box, and he agreed.

Just a quick quote from his piece, which I just received:

Once it has been established that this implicit right [by nation states instead of the entire EU to protect their borders] can be used and the basic boundaries inside of Europe are the old European borders, we have entered a new Europe, or rather the old one. It is not clear when or if the border checkpoints will come down. After all, the war with the jihadists has created a permanent threat. Since there is no one to negotiate with, and no final blow that will end the war, when should the borders be opened again? What IS created, without intending it, is the fragmentation of Europe, with each state protecting itself. When will Europe decide it no longer needs checkpoints at the borders? When is it safe? And, if it is not safe, how do the borders come down?

You cannot control the movement of people without controlling the movement of goods. Whatever the rules at the moment, the nation-state has reasserted its right to determine what vehicles enter. Once that principle is in place, the foundation of Maastricht does not disappear. The agreement is still there, but the claim to ultimate authority is not in Brussels or Strasbourg, but in Madrid and Budapest and Berlin. This causes more than delays at the border, it essentially creates a new mindset.

This is a very thought-provoking piece with a very different take from anything else I have read. Which is what you expect from George.

I am back in Dallas after a quick trip to Detroit. I am rereading Andy Kessler’s boffo little book called How We Got Here. It is part of the research for my own book on the emerging “age of transformation,” along with other books on the history of innovation. It’s a rather humorous telling of how we got from the Industrial Revolution to today’s technological marvels. The amount of research that went into it is mind-numbing, and it’s is a book I recommend to everyone.

And for those of you who have offered to help me with the research on the new book, please be patient for another week or so, as we have had so much response that it’s a lot of work just to get the organization organized on our end!

On a personal note, I am finding it hard to reconcile the general optimism of the book I’m writing (Investing in an Age of Transformation), which in general lays out a positive view of the future (with a few dark spots here and there, to be sure), with the trepidation I feel about the continued fundamental conflicts between cultures, with all the implications those conflicts have for so many areas of our lives, and all the suffering and death they entail.

But it is time to hit the send button to get this out. Have a great week.

Your thinking hard about the future of Europe analyst,

John Mauldin, Editor
Outside the Box

Paris, Sharm el-Sheikh, and the Resurrection of Old Europe


By George Friedman

The attacks in Paris last Friday night were part of a long-term pattern of occasional terrorist attacks by jihadists on targets in Europe. In the European context, this stood out for two reasons. First, the scale of the attack was substantially larger than other attacks in recent years, both in the number of participants and the number of casualties. Second, it was different in the level of sophistication and planning. Securing weapons and explosives, gathering at least three teams, identifying the targets and the manner in which these targets were to be attacked involved fairly complex logistics, intelligence and above all coordination. Most impressive was their counter-intelligence and security. There were at least seven attackers and additional support personnel to secure weapons, gather information and help them hide out in preparation for the attack. No one detected them.

The large majority of attacks are detected and disrupted prior to execution by European and American intelligence services, using information, communications intercepts and the other tools available to them. No one detected this group, indicating that the group, or at least its leaders, were aware of the methods used to identify attacks and evaded them. Lone wolves evade detection being lone wolves.
These attacks required coordination and support. Their communications, movement and surveillance should have been detected. They weren’t. That means there was a degree of training that could only be obtained through a more sophisticated group like Islamic State (IS).

It is noteworthy that IS took credit for the attacks in Paris because up until recently, such attacks have not been directly ordered by IS. Terrorist attacks on Europe or the United States designed to create maximum casualties were the modus operandi of al-Qaida. IS has generally focused on taking and holding ground in Syria and Iraq, leaving terror attacks to self-actuated lone wolves. IS was capable of terror attacks but their focus was on creating the caliphate, a territory ruled under their interpretation of Sharia, rather than on carrying out terror attacks.

That apparently has changed. The attack on Paris was part of a cluster of strategic terror attacks including the downing of the Russian airliner at Sharm el-Sheikh (which yielded more deaths than Paris) and the attack in Beirut. The planning for the attacks, assuming that explosives and weapons had been secured, probably began no later than Oct. 1, 2015.

When we go back to the days surrounding Oct. 1, there are two things that stand out. First, the French began bombing targets in Syria on Sept. 27 and the Russians started bombing Syria on Sept. 30. IS was not particularly damaged by these events, but it was clear that forces were gathering against them. IS needed to do two things. The first was to demonstrate to their own troops that they would not simply be bombed without response. This was critical to morale. Second, they had to demonstrate to France, Russia and anyone else planning to get into the Syria game, that it does not come without cost. They were not afraid of Russia and France moving against them in response. They were already moving against them.
IS wanted to start shaping French and Russian public opinion. Certainly, the first response would be rage but jihadists have learned that the rage dies down in the West and so does the appetite for war. IS needed to demonstrate its reach, speed and deadliness. W hat followed was the downing of the Russian airliner at Sharm el-Sheikh and the Paris attacks. Most of the operators would have been in Europe already, as well as in the Sinai, if not working at the airport. But the actions took place in a broader European context.

The wave of immigration that has swept into Europe from the Islamic world in general, but particularly the more recent stream of refugees from Syria, has created a political crisis in Europe and one that was particularly raucous prior to Oct. 1. Charges were being levelled by Germany against Central European countries for refusing to accept refugees. In turn, those countries charged that Germany was demanding that small countries transform their national character with the overwhelming numbers of refugees housed there. In addition, these countries, particularly Hungary, argued that among the genuine refugees there would be members of terrorist groups and that it was impossible to screen them out.

Had Europe been functioning as an integrated entity, a European security force would have been dispatched to Greece at the beginning of the migration, to impose whatever policy on which the EU had decided. Instead, there was no European policy, nor was there any force to support the Greeks, who clearly lacked the resources to handle the situation themselves. Instead, the major countries first condemned the Greeks for their failure, then the Macedonians as the crisis went north, then the Hungarians for building a fence, but not the Austrians who announced they would build a fence after the migrants left Hungary. Between the financial crisis and the refugee crisis, Europe had become increasingly fragmented. Decisions were being made by nation-sates themselves, with no one being in a position to speak for Europe, let alone decide for it.

From IS’s point of view, this provided two opportunities. Tactically, it gave them an opportunity to insert agents into Europe in the midst of migration. But this was a secondary issue, since IS could insert operatives at somewhat a greater risk if they wanted. However, there was a much more significant problem and opportunity for IS.

First, the mass migration from Syria did not show itself at this level during the first phase of the Syrian civil war, when IS was not yet involved. It showed itself when IS became operational. As such, this posed a political problem for the group. The refugees were overwhelmingly Sunni, and IS presented itself as the guarantor of Sunni rights. The fact that they were fleeing IS affirmed the sense in other parts of its territory that IS represented a threat not only to Shiites, Kurds and others, but also to Sunnis. Ultimately, this represented a threat to IS’s power because if the Sunni base saw IS as a threat, then IS would become unsustainable.

That was the strategic threat of the migrants. There was also a strategic opportunity in two ways. First, Europeans for the most part were not eager to receive large numbers of refugees, and the reception for refugees that made it to Europe was often unwelcoming, particularly as displayed on TV. The ability to demonstrate to the Muslim masses that the Europeans were now hostile not only to the principles of Islam, but to Muslims themselves, would potentially position IS as the defenders of Islam or at least the Sunnis. IS had been careful, in the midst of a rigorous interpretation and implementation of Sharia in areas under its control, to also create a system of social services that provided at least a safety net to Sunnis. Fleeing the IS safety net for Europe, Muslims now discovered how despised they were. From IS’s point of view, the more hostile the greeting to the migrants, the more solid their position. The chaotic arguments in Europe supported their position.

In late October, the atmosphere began to shift, or at least the intensity. Europe remained united, but the decision by Angela Merkel to very aggressively champion the case for sanctuary in Europe for the refugees not only created a battle with some European countries and the European right, but it also began to shift the center of gravity of European positions toward the idea that some sort of sanctuary had to be granted. This shift did not particularly please IS, since a more hostile stance satisfied its needs better.

Whether this was the reasoning that led to the attack in Paris is something we do not know. We do know that a passport for a Syrian refugee was found on one of the attackers. The French authorities have also said that the passport is a fake. Clearly, the organizer of the attack had to know that the passport would be found. Once found, authorities would believe him to be a refugee. Care could have been taken to exclude refugees, or at least take greater steps to hide identities. Instead, the fact that he may have been a Syrian refugee, or at least was holding the passport of one, was discovered in hours. Whoever organized this attack was not careless and he undoubtedly knew the consequences of a Syrian refugee being among the attackers. This was obvious to anyone in Europe or elsewhere. Nevertheless, the attacks went forward, knowing that the attackers would be killed and identified.

Therefore, IS, or the subgroup in command of this operation, had to know that the consequence of this attack would not only be increased hostility to IS, but intense re-examination, in the context of legitimate fear, of the policy of admitting Syrian refugees into Europe. In the most extreme case, the refugees would be either placed in camps under careful guard until their identities and links could be determined, which would take a long time, or alternatively, a program or simple ad hoc expulsion of the refugees would take place. In either case, a process of potential radicalization, one with plenty of historical enmity from which to develop, would begin that would both paint the Europeans as an enemy, clarifying sides, or create a base for recruiting troops for IS. There was only upside in this for the Islamic State.

The point that made this strategy attractive is that once the dead IS operative holding a Syrian passport was found, any reasonable European assumption would have to be that there were more. Given the numbers of dead and wounded, the presence of even a handful of such operatives would be cause for serious alarm.
Given the fact that the operation was undertaken without any detection of movements or communications, it followed that the ability to discriminate between harmless refugees and IS operatives was uncertain. Considering this logic, any European not frightened was out of touch with reality.

It may all be an accident, but if it is an accident, it is a remarkable one. With this attack and its threats for more, IS has struck at the heart of Europe’s sense of security and regardless of what they do, the Europeans will be alienating huge numbers of people who not only have no where to go, but also have no way to get there in any reasonable time frame. What comes out of this is something Europe hasn’t seen for a long time: camps, carefully guarded, with interrogation. The refugees must be brought under control from the European point of view. That requires them to be confined. But how do you confine several million people?

It also had an effect that was likely not anticipated by IS, and which poses only tactical problems for them, but which dramatically changes how Europe works. European countries, one after the other, revived their border controls, effectively negating the principle that the EU is about the free flow of goods, money and people. Money still flows, but goods and people must now face a hurdle at some of Europe’s old borders.

I have long made the claim that the transnational nature of Europe cannot be sustained. The divergent economic interests of EU countries, some with unemployment over 20 percent, some with it under 5 percent, meant that it was impossible for all of them to live not only under the same monetary regime, but under the same trade regime, which we cannot call free trade with agriculture, among other things, being protected. This would lead to a focus on national interest and on a resurrected nation-state.

This was the fundamental problem of Europe and the migration crisis simply irritated the situation further, with some nation-states insisting that it was up to them to make decisions on refugees in their own interest. The response of Europe to the Paris attacks brought together all of these matters, and Europe only responded when some nations decided to use their national borders as walls to protect them from terrorists.

It is important to notice that this was not the EU creating checkpoints independent of national borders to trap terrorists or block them. The EU wasn’t built for that.
Rather, it was the individual nation-states, reasserting their own rights and obligations to secure their own borders that acted. Despite all the rhetoric of a united Europe, the ultimate right of national sovereignty and the right of national self-defense was never removed.

Once it has been established that this implicit right can be used and the basic boundaries inside of Europe are the old European borders, we have entered a new Europe, or rather the old one. It is not clear when or if the border checkpoints will come down. After all, the war with the jihadists has created a permanent threat.
Since there is no one to negotiate with, and no final blow that will end the war, when should the borders be opened again? What IS created, without intending it, is the fragmentation of Europe, with each state protecting itself. When will Europe decide it no longer needs checkpoints at the borders? When is it safe? And, if it is not safe, how do the borders come down?

You cannot control the movement of people without controlling the movement of goods. Whatever the rules at the moment, the nation-state has reasserted its right to determine what vehicles enter. Once that principle is in place, the foundation of Maastricht does not disappear. The agreement is still there, but the claim to ultimate authority is not in Brussels or Strasbourg, but in Madrid and Budapest and Berlin. This causes more than delays at the border, it essentially creates a new mindset.

This started as a counter to Russian and French airstrikes. It has culminated in unintended and unanticipated consequences, as is the norm. An airstrike in Syria, attacks in Paris, and the borders are back. Only to stop terrorists, of course. But that “of course” is dripping with historical irony.

The Fed Induced Farce

By: The Burning Platform

The minutes from the last Fed meeting were released on Wednesday afternoon. The minutes, along with a squadron of jabbering Fed heads lying about the economy doing great, pretty much locked in the most talked about .25% interest rate increase in world history. Evidently the Wall Street titans of greed have convinced the muppets higher interest rates are great for stocks, as the market soared by 250 points. As institutional money exits the market on these rigged up days, the dumb money retail investor buys into the market with dreams of riches just like they did with in 2000, McMansions in 2005, and Bear Stearns in 2007.

The Fed has lost any credibility they ever thought they deserved by delaying this meaningless insignificant interest rate increase for the last three years, so they will make this token increase in December come hell or high water. They want to give themselves some leeway for easing again when this debt saturated global economy implodes in the near future. The Fed is trapped by their own cowardice and capture by the Wall Street cabal. If they raise rates the USD will strengthen even more than it has already.

The USD is already at 11 year highs. It has appreciated by 25% in the last year versus the basket of world currencies. The babbling boobs on the entertainment news channels authoritatively expound with a straight face about the rise in the dollar being due to our strong economic performance. It's beyond laughable, as the economy has been sucking wind since the day the Fed turned off the QE spigot in October 2014.

Anyone with a working brain and an IQ over 100 (eliminates the bimbos and boobs on CNBC) can see the USD isn't strengthening of its own accord. We've had 0% interest rates for the last six years, real median household income is lower than it was in 1989, consumer spending (which accounts for 67% of GDP) has been dreadful for at least a year, Obamacare is destroying the finances of middle class households, small businesses, and the nation, and the percentage of people in the labor market is the lowest since 1978. In other words, the U.S. economy is in recession. The reason the USD has been strengthening is because Europe, China, Japan, Russia, Brazil, and the rest of the world are either in recession or depression, and their "solution" to their woes is to debase their currencies.

The Japanese continue to redefine insanity as they wallow in their second decade of recession while debasing their currency and rolling out QE 9 - because it will surely work this time. The Chinese "miracle" is coming apart at the seams as their debt based mal-investment is revealed by the crash in global trading. Their solution is for the government to buy stocks and bad debt, while executing short sellers. Brazil is on the verge of revolution as their oil/commodity based economy implodes. Russia has been in recession for over a year as $40 oil doesn't pay the bills.

And lastly, the EU continues to crush their citizens with negative interest rates, debasement of the Euro, suicidal immigration schemes, and an ever growing mountain of unpayable debt, in order to prop up their mega-banks and the corrupt political establishment.

When every country in the world debases their currency in order to boost exports, the USD appears strong. It's like being the best looking horse in the glue factory. The problem for the Fed and the mega-corporations in the S&P 500 is that a strong dollar makes our exports much more expensive to foreigners and reduces their profits from their overseas markets. You won't see the talking heads on CNBC, Fox, or CNN truthfully analyzing the impact of a 25% increase in the value of the dollar.

But it seems the buyback happy CEO's of the S&P 500 conglomerates have used the strong dollar as their excuse de jour for their profits falling. Good old globalization has not only resulted in millions of good paying jobs being shipped to foreign lands, it has now made the S&P 500 corporations dependent on foreign markets for 30% of their sales and 40% of their profits. The continued appreciation of the dollar will result in lower profits for our mega-corporations, which will prompt the CEOs to fire more Americans and ship their jobs to the Far East, while ramping up the billion dollar buybacks of their stock.

It's the American way.

The Fed has created a dead end street for everyone not in their .1% clientele. They have kept rates too low for far too long and with the 99.9% already experiencing a recession, their desire to raise rates will hit a brick wall of reality. Their easy money schemes to enrich their owners has resulted in the issuance of trillions more in debt by the government, corporations and consumers. 

The $60 trillion of total credit market debt will implode if rates go up by even 1% or 2%. The corporate titans are now facing huge headwinds, as consumers have nothing left to spend, the strengthening dollar is sapping their profits, and higher interest rates will put an end to the faux housing recovery.

The Fed has destroyed the finances of senior citizens, savers and the pension plans of corporations and local governments with their 0% interest rates. The Wall Street bankers and their Fed puppets can surely see the writing on the wall. They will drive stocks as high as possible so they can cash out before the next collapse. They don't care about their clients, the middle class, or the future of the country. We're all muppets to the banking cabal running this morally and financially bankrupt military empire of debt.

Bad Brussels' Sprouts

Belgium Has Become Center of European Terror

By Markus Becker and Jörg Diehl in Brussels

 Is the Brussels neighborhood Molenbeek the center of terrorism in Europe?
AFP/Is the Brussels neighborhood Molenbeek the center of terrorism in Europe?

With 19 municipal mayors and six different police authorities, Brussels is a tangle of bureaucracy. It's also home to the suspected perpetrators behind Friday's Paris attacks. The failure of Belgian authorities has become a security problem for all of Europe.

The terror attack was the consequence of the opening of the borders on the European Continent, said Belgian Prime Minister Charles Michel. He added that police authorities in European Union member states exchange too little data. Michel also questioned the Schengen Agreement, which regulates the freedom of borderless travel within the EU. "We are now confronted with a new threat level in Europe," he said.

But these words didn't come this weekend, following the massacre in Paris of 132 people across the French capitol city on Friday night. They came after Islamists murdered the editors of the Paris-based French satire magazine Charlie Hebdo in January. Back then, the perpetrators also had links to Belgium. It wasn't the first time either. Police arrested 13 jihadists in Belgium and two even died in a shootout at the time.

Belgium now finds itself at the center of a major terror investigation once again. The suspected masterminds of the Paris terror attack came from Brussels' Molenbeek neighborhood, and at least one further perpetrator lived here. Security officials arrested several suspects during raids in the district over the weekend.

The greater Brussels area has long been considered to be a hotbed for radical Islamists. Troubled neighborhoods like Molenbeek and Anderlecht are known as being homes to secluded communities of immigrants in which radicals can easily go underground. So has Belgium become the center of terror in Europe and a security risk for the entire Continent?

Six Police Agencies Working for 19 Mayors

Belgian lawmaker Hans Bonte says he "isn't surprised at all" that several terror suspects got arrested in Molenbeek. He attributes two factors to the development: the sectionalism of Belgium's policing and a lack of monitoring and social control of radicalized Muslims.

Brussels is a city of 1.2 million people and it has not one, but six different police agencies. These agencies answer to 19 different municipal mayors who are often political rivals. "It's unbelievable that something like this exists in Europe's capital," says Bonte.

Furthermore, the unresolved conflict between the country's two largest populations, the Dutch-speaking Flemish and the French-speaking Walloons is casting a shadow over all this. The Belgian government has sought for the past 40 years to defuse the situation through the decentralization of the state. Jan Flambon, the country's Flemish interior minister, has called for the six police authorities in the greater Brussels area to be merged in response to the Paris terror attacks, but he's unlikely to succeed. "That's a Flemish fantasy," sneers Ahmed El Kahnnouss, the deputy municipal mayor of Molenbeek, who says that the French-speaking areas insist on francophone police, in accordance with the country's traditional principle of communal autonomy.

The security agencies are also considered to be poorly equipped, especially in the less-prosperous areas like Molenbeek. "My impression is that they, even more frequently than us, are using outdated technology and that they have to drive around in less-efficient police cars," says one German security official. "Besides, the budgets are always very tight there." The official said that surveillance, wire-tapping and the deployment of informants is costly -- both in terms of personnel and money.

More Intelligence, Not Pólice

Khannouss, who is an expert on the Islamist scene in Molenbeek, doesn't believe that better policing is the answer to the problem of radicalization. "We need more intelligence agents, not police," he says. You have to know who is becoming radicalized in the first place in order to be able to intervene early, he adds.

Parliamentarian Bonte, who is also mayor of the small town of Vilvoorde just outside Brussels, emphasizes the importance of social work. "I take a lot of time for each individual case," the social democratic politician says. For a radicalized young man, you have to find a "custom-tailored solution," he adds. "And that's just not happening in the greater Brussels areas."

The result is that many Muslims who have become radicalized or received military training and may even have been traumatized are returning home from Syria without anyone checking on them whatsoever. It's a problem that is bigger in Belgium than anywhere else in Europe. No other country on the Continent has seen as many jihadists travel to Syria relative to the overall population. Belgian authorities estimate that out of a population of 11 million residents, around 500 have so far made the journey to jihad in Syria. By comparison, it is estimated that 800 people from Germany, a country with a population of 81 million, have traveled to Syria. And even with its much larger security apparatus, the dimension of the Islamist terrorist threat has already taken Germany to the limits of its capabilities, and at times beyond them.

Belgium's Problem Is Europe's Problem

In this sense, Belgium's problem is a European problem. "The exchange of information is working, but it is slow and cumbersome," says one German official, who adds that in acute crisis situations, especially, channels of communication are frustratingly complex. For example, European police authorities do not use common databases. Information has to be transferred from country to country by fax or email and then fed into national systems.

Despite this, politicians in EU countries are still placing their emphasis on policing in order to finally get a lid on the problem of Islamism. "Almost every time, there's a link with Molenbeek," Belgian Prime Minister Michel said on Sunday. "We've tried prevention. Now we'll have to get repressive. It's been a form of laisser faire and laxity. Now we're paying the bill."

Some are calling for more work in the long term to convince Muslim youth that there is an alternative to radicalism. "These people who are firing their weapons and blowing themselves up don't appear out of nowhere," respected Belgian sociologist Felice Dassetto wrote on his blog after the Paris attacks. "They were not born yesterday, in the last months or solely in the context of Daesh (editors: the pejorative Arabic term for Islamic State). They are the children and grandchildren of 50 years of radical ideology and jihadists." And whereas it has taken a half-century to create this jihadi culture, it will take many more (than 50) to convince Muslims that the culture of jihad has led Islam to its current moral and intellectual disaster, "but it is never too late to start."

Corporate surpluses are contributing to the savings glut

Martin Wolf

This behaviour raises important policy questions. Should there be higher taxes on retained earnings?

James Ferguson illustration, Savings
The notion of a “savings glut” helps explain the ultra-low real interest rates we have seen since the global crisis of 2007-09. But the idea of “secular stagnation” suggests that this glut had emerged even before that. To explain why this was so, we must look at the behaviour of the corporate sector.
Where, then, do corporations fit into an analysis of the shifting balance between planned savings and investment? The answer starts with the fact that companies generate a huge proportion of investment. In the six largest high-income economies (the US, Japan, Germany, France, the UK and Italy), corporations accounted for between half and just over two-thirds of gross investment in 2013 (the lowest share being in Italy and the highest in Japan).

Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings, but their own retained earnings are also a huge source of savings. Thus, in these countries, corporate profits generated between 40 per cent (in France) and 100 per cent (in Japan) of gross savings (including foreign savings) available to the economy.

In a dynamic economy, one would expect corporations in aggregate to use the excess savings of other sectors, notably those of households — thereby generating both buoyant demand and growing supply.
If investment is weak and profits strong, however, the corporate sector will, weirdly, become a net financer of the economy. The result will be a mixture of fiscal deficits, household financial deficits and current account surpluses (that is, capital account deficits). In Japan, fiscal deficits offset huge corporate surpluses. In Germany, a capital account deficit offsets corporate and household surpluses.
Since the crisis, the corporate sectors of the big high-income economies have run surpluses of savings over investment, with the exception of France. The surplus savings of Japanese corporations are, amazingly, close to 8 per cent of gross domestic product.

The corporate sectors have therefore contributed substantially to the savings glut. This is not just a post-crisis phenomenon. Even in the run-up to the crisis, corporate sectors ran surpluses in Japan, the UK, Germany (except in 2008) and the US (except in 2007 and 2008). A US Federal Reserve paper notes that the Great Recession has been partly responsible for these surpluses, but it adds that even in the half-decade before the crisis, rates of corporate investment “had fallen below levels that would have been predicted by models estimated in earlier years”.
The rise in the surplus of corporate savings over investment is driven by a combination of strong profits and weakening investment. This weakening of investment is both structural and cyclical. Moreover,the weakening is widespread. Nevertheless, Japan’s corporate savings glut is unique in scale. Any analysis of Japan’s economic challenges that does not start from this fact is essentially worthless.

It is also important not to confuse the excess of corporate savings over investment with the widely noticed accumulations of cash by many companies. Businesses can acquire cash not only by hoarding retained earnings but also by borrowing or by selling assets.

The observation that a structural surplus of savings over investment appears to have emerged in the corporate sectors of the big high-income countries is highly significant. It is significant for the growth of potential supply, since it reflects relatively feeble investment, but it is also significant for the shape of aggregate demand.

If the corporate sector runs a structural surplus of savings over investment, other sectors must run offsetting structural deficits. If the government is to be in financial balance, either households or foreigners must run these deficits. In the eurozone, this logic has led to huge current-account surpluses (a financial deficit for foreigners). For the UK and US, it is likely to mean renewed household deficits — a perilously destabilising possibility.

Why is corporate investment structurally weak? The ageing of societies is one reason: by slowing potential growth, it lowers the level of investment needed.
Globalisation is another: it motivates relocation of investment from the high-income countries.

Another reason is technological innovation. Much investment today is in IT, whose price is collapsing: constant nominal investment finances rising real investment. Again, much innovation seems to reduce the need for capital: consider the substitution of warehouses for retail stores. Another explanation could be that management is not rewarded for investing.

Together, all this might explain why, to take the US example, the ratio of corporate investment to profits has declined substantially since 2000.

The behaviour of the corporate sector also raises important policy questions. Corporate taxation, for example should surely encourage both investment and the distribution of profits.

The way to achieve these joint objectives could be through higher tax rates on retained earnings, together with full deductibility of both investment and dividends.

Beyond this, it has to be accepted that, so long as the corporate sector runs a structural financial surplus, macroeconomic balance is likely to require fiscal deficits. Moreover, if the corporate sector is unable to invest even its own savings, savings in the rest of the economy are bound to have a low marginal value. In such a world, both ultra-low real interest rates and high equity prices are not at all surprising. They are to be expected. So stop complaining.

ISIS Claims Responsibility, Calling Paris Attacks ‘First of the Storm’


SINONE, Iraq — The Islamic State claimed responsibility on Saturday for the catastrophic attacks in the French capital, calling them “the first of the storm” and mocking France as a “capital of prostitution and obscenity,” according to statements released in multiple languages on one of the terror group’s encrypted messaging accounts.
The remarks came in a communiqué published in Arabic, English and French on the Islamic State’s account on Telegram, a messaging platform, and then distributed via its supporters on Twitter, according to a transcript provided by the SITE Intelligence Group, which tracks jihadist propaganda.
An earlier statement was released but was deemed unlikely to be authentic because of anomalies in the language, as well as an error in a date provided, according to experts on jihadist propaganda. 

The statement was released on the same Telegram channel that was used to claim responsibility for the crash of a Russian jet over the Sinai Peninsula two weeks ago, killing 224 people. As in that case, it made the announcement in multiple languages and audio recordings.
President François Hollande of France said on Saturday that the Islamic State was responsible. Analysts said the nature of the attacks was more in keeping with actions of the Islamic State than with those of Al Qaeda, and the timing and extent of the celebration expressed online by the group’s supporters added weight to the claim. 

“Eight brothers, wrapped in explosive belts and armed with machine rifles, targeted sites that were accurately chosen in the heart of the capital of France,” the group said in the statement, “including the Stade de France during the match between the Crusader German and French teams, where the fool of France, François Hollande, was present.”
“Let France and those who walk in its path know that they will remain on the top of the list of targets of the Islamic State,” the statement added, referring to the attacks at the Bataclan concert hall and elsewhere in Paris.
The style of the attack was in line with the Islamic State’s tactic of indiscriminate killings and goes against Al Qaeda’s guidelines. In a 2013 directive, the leader of Al Qaeda, Ayman al-Zawahri, stated that Qaeda operatives should avoid attacks that could inadvertently cause the death of Muslim civilians and noncombatant women or children. 

ISIS Is Likely Responsible for Nearly 1,000 Civilian Deaths Outside Iraq and Syria

He argued that targeting markets, for example, was unadvisable because innocent Muslims might accidentally be killed.
Although Qaeda branches have deviated from these guidelines on numerous occasions, their attacks reflect more carefully defined targeting. That was the case in the killings at the Charlie Hebdo office in Paris in January, when cartoonists were singled out and defined as legitimate targets because of what the group considered to be blasphemy against the Prophet Muhammad.
A Dutch fighter for Al Qaeda’s branch in Syria commented on the distinction in a series of posts on Twitter. “Al Qaeda focuses mostly on political & military targets instead of civilians. That’s why this could be an I.S. attack,” wrote the fighter, who goes by the name Abu Saeed Al-Halabi.
Celebrations by Islamic State supporters online were such that the SITE monitoring group said they could suggest the Islamic State’s involvement.
“The extent of the celebration far exceeded past online rallying by I.S. supporters,” SITE said in an analysis. “The way I.S. supporters have embraced this attack appears much more coordinated at a much earlier stage than massive reactions to past attacks.”

You Can't Understand ISIS If You Don't Know the History of Wahhabism in Saudi Arabia

Alastair Crooke

BEIRUT -- The dramatic arrival of Da'ish (ISIS) on the stage of Iraq has shocked many in the West. Many have been perplexed -- and horrified -- by its violence and its evident magnetism for Sunni youth. But more than this, they find Saudi Arabia's ambivalence in the face of this manifestation both troubling and inexplicable, wondering, "Don't the Saudis understand that ISIS threatens them, too?"

It appears -- even now -- that Saudi Arabia's ruling elite is divided. Some applaud that ISIS is fighting Iranian Shiite "fire" with Sunni "fire"; that a new Sunni state is taking shape at the very heart of what they regard as a historical Sunni patrimony; and they are drawn by Da'ish's strict Salafist ideology.

Other Saudis are more fearful, and recall the history of the revolt against Abd-al Aziz by the Wahhabist Ikhwan (Disclaimer: this Ikhwan has nothing to do with the Muslim Brotherhood Ikhwan -- please note, all further references hereafter are to the Wahhabist Ikhwan, and not to the Muslim Brotherhood Ikhwan), but which nearly imploded Wahhabism and the al-Saud in the late 1920s.

Many Saudis are deeply disturbed by the radical doctrines of Da'ish (ISIS) -- and are beginning to question some aspects of Saudi Arabia's direction and discourse.


Saudi Arabia's internal discord and tensions over ISIS can only be understood by grasping the inherent (and persisting) duality that lies at the core of the Kingdom's doctrinal makeup and its historical origins.

One dominant strand to the Saudi identity pertains directly to Muhammad ibn ʿAbd al-Wahhab (the founder of Wahhabism), and the use to which his radical, exclusionist puritanism was put by Ibn Saud. (The latter was then no more than a minor leader -- amongst many -- of continually sparring and raiding Bedouin tribes in the baking and desperately poor deserts of the Nejd.)

The second strand to this perplexing duality, relates precisely to King Abd-al Aziz's subsequent shift towards statehood in the 1920s: his curbing of Ikhwani violence (in order to have diplomatic standing as a nation-state with Britain and America); his institutionalization of the original Wahhabist impulse -- and the subsequent seizing of the opportunely surging petrodollar spigot in the 1970s, to channel the volatile Ikhwani current away from home towards export -- by diffusing a cultural revolution, rather than violent revolution throughout the Muslim world.

But this "cultural revolution" was no docile reformism. It was a revolution based on Abd al-Wahhab's Jacobin-like hatred for the putrescence and deviationism that he perceived all about him -- hence his call to purge Islam of all its heresies and idolatries.


The American author and journalist, Steven Coll, has written how this austere and censorious disciple of the 14th century scholar Ibn Taymiyyah, Abd al-Wahhab, despised "the decorous, arty, tobacco smoking, hashish imbibing, drum pounding Egyptian and Ottoman nobility who travelled across Arabia to pray at Mecca."

In Abd al-Wahhab's view, these were not Muslims; they were imposters masquerading as Muslims. Nor, indeed, did he find the behavior of local Bedouin Arabs much better. They aggravated Abd al-Wahhab by their honoring of saints, by their erecting of tombstones, and their "superstition" (e.g. revering graves or places that were deemed particularly imbued with the divine).

All this behavior, Abd al-Wahhab denounced as bida -- forbidden by God.

Like Taymiyyah before him, Abd al-Wahhab believed that the period of the Prophet Muhammad's stay in Medina was the ideal of Muslim society (the "best of times"), to which all Muslims should aspire to emulate (this, essentially, is Salafism).

Taymiyyah had declared war on Shi'ism, Sufism and Greek philosophy. He spoke out, too against visiting the grave of the prophet and the celebration of his birthday, declaring that all such behavior represented mere imitation of the Christian worship of Jesus as God (i.e. idolatry). Abd al-Wahhab assimilated all this earlier teaching, stating that "any doubt or hesitation" on the part of a believer in respect to his or her acknowledging this particular interpretation of Islam should "deprive a man of immunity of his property and his life."

One of the main tenets of Abd al-Wahhab's doctrine has become the key idea of takfir. Under the takfiri doctrine, Abd al-Wahhab and his followers could deem fellow Muslims infidels should they engage in activities that in any way could be said to encroach on the sovereignty of the absolute Authority (that is, the King). Abd al-Wahhab denounced all Muslims who honored the dead, saints, or angels. He held that such sentiments detracted from the complete subservience one must feel towards God, and only God. Wahhabi Islam thus bans any prayer to saints and dead loved ones, pilgrimages to tombs and special mosques, religious festivals celebrating saints, the honoring of the Muslim Prophet Muhammad's birthday, and even prohibits the use of gravestones when burying the dead.

"Those who would not conform to this view should be killed, their wives and daughters violated, and their possessions confiscated, he wrote. "

Abd al-Wahhab demanded conformity -- a conformity that was to be demonstrated in physical and tangible ways. He argued that all Muslims must individually pledge their allegiance to a single Muslim leader (a Caliph, if there were one). Those who would not conform to this view should be killed, their wives and daughters violated, and their possessions confiscated, he wrote. The list of apostates meriting death included the Shiite, Sufis and other Muslim denominations, whom Abd al-Wahhab did not consider to be Muslim at all.

There is nothing here that separates Wahhabism from ISIS. The rift would emerge only later: from the subsequent institutionalization of Muhammad ibn ʿAbd al-Wahhab's doctrine of "One Ruler, One Authority, One Mosque" -- these three pillars being taken respectively to refer to the Saudi king, the absolute authority of official Wahhabism, and its control of "the word" (i.e. the mosque).

It is this rift -- the ISIS denial of these three pillars on which the whole of Sunni authority presently rests -- makes ISIS, which in all other respects conforms to Wahhabism, a deep threat to Saudi Arabia.

BRIEF HISTORY 1741- 1818

Abd al-Wahhab's advocacy of these ultra radical views inevitably led to his expulsion from his own town -- and in 1741, after some wanderings, he found refuge under the protection of Ibn Saud and his tribe. What Ibn Saud perceived in Abd al-Wahhab's novel teaching was the means to overturn Arab tradition and convention. It was a path to seizing power.

"Their strategy -- like that of ISIS today -- was to bring the peoples whom they conquered into submission. They aimed to instill fear. "

Ibn Saud's clan, seizing on Abd al-Wahhab's doctrine, now could do what they always did, which was raiding neighboring villages and robbing them of their possessions. Only now they were doing it not within the ambit of Arab tradition, but rather under the banner of jihad. Ibn Saud and Abd al-Wahhab also reintroduced the idea of martyrdom in the name of jihad, as it granted those martyred immediate entry into paradise.

In the beginning, they conquered a few local communities and imposed their rule over them. (The conquered inhabitants were given a limited choice: conversion to Wahhabism or death.) By 1790, the Alliance controlled most of the Arabian Peninsula and repeatedly raided Medina, Syria and Iraq.

Their strategy -- like that of ISIS today -- was to bring the peoples whom they conquered into submission. They aimed to instill fear. In 1801, the Allies attacked the Holy City of Karbala in Iraq. They massacred thousands of Shiites, including women and children. Many Shiite shrines were destroyed, including the shrine of Imam Hussein, the murdered grandson of Prophet Muhammad.

A British official, Lieutenant Francis Warden, observing the situation at the time, wrote: "They pillaged the whole of it [Karbala], and plundered the Tomb of Hussein... slaying in the course of the day, with circumstances of peculiar cruelty, above five thousand of the inhabitants ..."

Osman Ibn Bishr Najdi, the historian of the first Saudi state, wrote that Ibn Saud committed a massacre in Karbala in 1801. He proudly documented that massacre saying, "we took Karbala and slaughtered and took its people (as slaves), then praise be to Allah, Lord of the Worlds, and we do not apologize for that and say: 'And to the unbelievers: the same treatment.'"

In 1803, Abdul Aziz then entered the Holy City of Mecca, which surrendered under the impact of terror and panic (the same fate was to befall Medina, too). Abd al-Wahhab's followers demolished historical monuments and all the tombs and shrines in their midst. By the end, they had destroyed centuries of Islamic architecture near the Grand Mosque.

But in November of 1803, a Shiite assassin killed King Abdul Aziz (taking revenge for the massacre at Karbala). His son, Saud bin Abd al Aziz, succeeded him and continued the conquest of Arabia. Ottoman rulers, however, could no longer just sit back and watch as their empire was devoured piece by piece. In 1812, the Ottoman army, composed of Egyptians, pushed the Alliance out from Medina, Jeddah and Mecca. In 1814, Saud bin Abd al Aziz died of fever. His unfortunate son Abdullah bin Saud, however, was taken by the Ottomans to Istanbul, where he was gruesomely executed (a visitor to Istanbul reported seeing him having been humiliated in the streets of Istanbul for three days, then hanged and beheaded, his severed head fired from a canon, and his heart cut out and impaled on his body).

In 1815, Wahhabi forces were crushed by the Egyptians (acting on the Ottoman's behalf) in a decisive battle. In 1818, the Ottomans captured and destroyed the Wahhabi capital of Dariyah. The first Saudi state was no more. The few remaining Wahhabis withdrew into the desert to regroup, and there they remained, quiescent for most of the 19th century.


It is not hard to understand how the founding of the Islamic State by ISIS in contemporary Iraq might resonate amongst those who recall this history. Indeed, the ethos of 18th century Wahhabism did not just wither in Nejd, but it roared back into life when the Ottoman Empire collapsed amongst the chaos of World War I.

The Al Saud -- in this 20th century renaissance -- were led by the laconic and politically astute Abd-al Aziz, who, on uniting the fractious Bedouin tribes, launched the Saudi "Ikhwan" in the spirit of Abd-al Wahhab's and Ibn Saud's earlier fighting proselytisers.

The Ikhwan was a reincarnation of the early, fierce, semi-independent vanguard movement of committed armed Wahhabist "moralists" who almost had succeeded in seizing Arabia by the early 1800s. In the same manner as earlier, the Ikhwan again succeeded in capturing Mecca, Medina and Jeddah between 1914 and 1926. Abd-al Aziz, however, began to feel his wider interests to be threatened by the revolutionary "Jacobinism" exhibited by the Ikhwan. The Ikhwan revolted -- leading to a civil war that lasted until the 1930s, when the King had them put down: he machine-gunned them.

For this king, (Abd-al Aziz), the simple verities of previous decades were eroding. Oil was being discovered in the peninsular. Britain and America were courting Abd-al Aziz, but still were inclined to support Sharif Husain as the only legitimate ruler of Arabia. The Saudis needed to develop a more sophisticated diplomatic posture.

So Wahhabism was forcefully changed from a movement of revolutionary jihad and theological takfiri purification, to a movement of conservative social, political, theological, and religious da'wa (Islamic call) and to justifying the institution that upholds loyalty to the royal Saudi family and the King's absolute power.


With the advent of the oil bonanza -- as the French scholar, Giles Kepel writes, Saudi goals were to "reach out and spread Wahhabism across the Muslim world ... to "Wahhabise" Islam, thereby reducing the "multitude of voices within the religion" to a "single creed" -- a movement which would transcend national divisions. Billions of dollars were -- and continue to be -- invested in this manifestation of soft power.

It was this heady mix of billion dollar soft power projection -- and the Saudi willingness to manage Sunni Islam both to further America's interests, as it concomitantly embedded Wahhabism educationally, socially and culturally throughout the lands of Islam -- that brought into being a western policy dependency on Saudi Arabia, a dependency that has endured since Abd-al Aziz's meeting with Roosevelt on a U.S. warship (returning the president from the Yalta Conference) until today.

Westerners looked at the Kingdom and their gaze was taken by the wealth; by the apparent modernization; by the professed leadership of the Islamic world. They chose to presume that the Kingdom was bending to the imperatives of modern life -- and that the management of Sunni Islam would bend the Kingdom, too, to modern life.

"On the one hand, ISIS is deeply Wahhabist. On the other hand, it is ultra radical in a different way. It could be seen essentially as a corrective movement to contemporary Wahhabism."

But the Saudi Ikhwan approach to Islam did not die in the 1930s. It retreated, but it maintained its hold over parts of the system -- hence the duality that we observe today in the Saudi attitude towards ISIS.

On the one hand, ISIS is deeply Wahhabist. On the other hand, it is ultra radical in a different way. It could be seen essentially as a corrective movement to contemporary Wahhabism.

ISIS is a "post-Medina" movement: it looks to the actions of the first two Caliphs, rather than the Prophet Muhammad himself, as a source of emulation, and it forcefully denies the Saudis' claim of authority to rule.

As the Saudi monarchy blossomed in the oil age into an ever more inflated institution, the appeal of the Ikhwan message gained ground (despite King Faisal's modernization campaign). The "Ikhwan approach" enjoyed -- and still enjoys -- the support of many prominent men and women and sheikhs. In a sense, Osama bin Laden was precisely the representative of a late flowering of this Ikhwani approach.

Today, ISIS' undermining of the legitimacy of the King's legitimacy is not seen to be problematic, but rather a return to the true origins of the Saudi-Wahhab project.

In the collaborative management of the region by the Saudis and the West in pursuit of the many western projects (countering socialism, Ba'athism, Nasserism, Soviet and Iranian influence), western politicians have highlighted their chosen reading of Saudi Arabia (wealth, modernization and influence), but they chose to ignore the Wahhabist impulse.

After all, the more radical Islamist movements were perceived by Western intelligence services as being more effective in toppling the USSR in Afghanistan -- and in combatting out-of-favor Middle Eastern leaders and states.

Why should we be surprised then, that from Prince Bandar's Saudi-Western mandate to manage the insurgency in Syria against President Assad should have emerged a neo-Ikhwan type of violent, fear-inducing vanguard movement: ISIS? And why should we be surprised -- knowing a little about Wahhabism -- that "moderate" insurgents in Syria would become rarer than a mythical unicorn? Why should we have imagined that radical Wahhabism would create moderates? Or why could we imagine that a doctrine of "One leader, One authority, One mosque: submit to it, or be killed" could ever ultimately lead to moderation or tolerance?

Or, perhaps, we never imagined.

Finland's depression is the final indictment of Europe's monetary union

Finland has lost a quarter of its industry since 2008 even though it is the poster-child of EMU competitiveness

By Ambrose Evans-Pritchard

President Risto Ryto was Finland's great inter-war economist. He was unfairly sentenced to hard labour as a war criminal even though the Bank of England tried to save him

President Risto Ryti was Finland's great inter-war economist. He was unfairly sentenced to hard labour as a war criminal even though the Bank of England tried to save him Photo: Getty Images
Finland is sliding deeper into economic depression, a prime exhibit of currency failure and an even more unsettling saga for theoretical defenders of the euro than the crucifixion of Greece.

A full six-and-a-half years into the current global expansion, Finland's GDP is 6pc below its previous peak. It is suffering a deeper and more protracted slump than the post-Soviet crash of the early 1990s, or the Great Depression of the 1930s.
Nobody can accuse Finland of being spendthrift, or undisciplined, or technologically backward, or corrupt, or captive of an entrenched oligarchy, the sort of accusations levelled against the Greco-Latins.
The country's public debt is 62pc of GDP, lower than in Germany. Finland has long been held up as the EMU poster child of austerity, grit, and super-flexibility, the one member of the periphery that supposedly did its homework before joining monetary union and could therefore roll with the punches.

Finland tops the EU in the World Economic Forum’s index of global competitiveness. It comes 1st in the entire world for primary schools, higher education and training, innovation, property rights, intellectual property protection, its legal framework and reliability, anti-monopoly policies, university R&D links, availability of latest technologies, as well as scientists and engineers.

Its near-perfect profile demolishes the central claim of the German finance ministry - through its mouthpiece in Brussels - that countries get into bad trouble in EMU only if they drag their feet on reform and spend too much.

The country has obviously been hit by a series of asymmetric shocks: the collapse of its hi-tech champion Nokia, the slump in forestry and commodity prices, and the recession in Russia.

The relevant point is that it cannot now defend itself. Finland is trapped by a fixed exchange rate and by the fiscal straightjacket of the Stability Pact, a lawyers' construct that was never intended for such circumstances. The Pact is being enforced anyway because rules are rules and because leaders in the Teutonic bloc have an idee fixee that moral hazard will run rampant if any country in the EMU core sets a bad example.

Finland's output shrank a further 0.6pc in the third quarter and the country's three-year long recession is turning into a fourth year. Industrial orders fell 31pc in September. "It's spooky," said Pasi Sorjonen from Nordea.

Sweden was able to navigate similar shocks by letting its currency take the strain at key moments over the last decade. Swedish GDP is now 8pc above its pre-Lehman level.

The divergence between Finland and Sweden is staggering for two Nordic economies with so much in common, and it has rekindled Finland’s dormant anti-euro movement.

The Finnish parliament is to hold ‘Fixit’ hearings next year on exit from monetary union and a return to the Markka, the currency that saved Finland in the early 1990s (once the ill-judged hard-Markka policy and the fixed ECU-peg was abandoned).

Paavo Väyrynen, a Euro-MP and honorary chairman of the ruling Centre party, forced the euro hearings onto the parliamentary agenda after collecting 50,000 signatures. “The eurozone is not an optimal currency area and people are becoming aware of the real reasons for our crisis,” he said.

“We are in a similar situation to Italy and have lost a quarter of our industry. Our labour costs are too high,” he said.

Voters in Sweden and Denmark stopped their governments abolishing their ancient currencies. Finnish voters were never given a referendum. The decision to join the euro was rammed through against widespread opposition, and was camouflaged as a national security issue.

Mr Väyrynen said the pro-euro camp whipped up the Russian threat in the 1990s, claiming that Finland needed to lock itself as deeply as possible into all aspects of the EU system for added security, (though not join Nato, the more relevant body) “They played the foreign policy card. It was a trick,” he said.

It is hard to avoid the conclusion that Finland handled its economic affairs with more skill in the 1920s and 1930s under the guiding hand of Risto Ryti (much praised by the Bank of England’s ex-Governor Lord King), who understood the evils of a misaligned exchange rate, and freed his country early from the ravages of the Gold Standard in 1931. He would never have been seduced by the easy promises of monetary union.

Ryti was an anti-Nazi anglophile. By a tragic sequence of events he found himself forced into alliance with Hitler against Stalin, and ultimately into war with Britain. It is arguably the only time in history that two developed democracies have come to serious blows.

The Bank of England tried to intercede at the end of the Second World War to prevent him being treated as a war criminal (as Stalin demanded), but failed. His sentence was hard labour. But I digress.

Finland's centre-Right coalition is determined to press ahead with an ‘internal devaluation’, the very policy that tipped half Europe into debt-deflation four years ago and caused debt ratios to rise even faster through the denominator effect. This is likely to be self-defeating for Finland as well, even on its own crude terms, given that household debt is over 100pc of GDP.

The government has failed to secure a social contract with the labour unions so it is now trying to circumvent this by chipping away at collective-bargaining powers – the latest example of how the euro system erodes workers’ rights and is fundamentally incompatible with the political values of the Left. The unions launched the biggest strikes for two decades in September.

It remains a mystery to me why the European Left continues to apologise for what can only be described as reactionary policies, but the mood is at last changing. Stefano Fassina, an Italian social-democrat and former deputy-finance minister, is leading a push for an "alliance of national liberation fronts" spanning Left and Right to overturn the EMU order.

Mr Fassina, Germany's Oskar Lafontaine, France's Jean-Luc Melenchon, and Greece's Yanis Varoufakis, launched a branch of this front in Paris over the weekend, proposing a 'Plan B' of parallel currencies and ultimately exit from the euro if EMU continues to enforce contractionary policies and operate outside democratic control - as they put it.

Finland is digging itself into an ever deeper hole. The International Monetary Fund warned this week against austerity overkill and “pro-cyclical” cuts before the economy is strong enough to take it.

The IMF spoke softly but the message was clear. Finland should not even be thinking of a “front-loaded” fiscal contraction or slashing investment at a time when its output gap is 3.2pc of GDP.

The Finnish authorities admitted in their reply to the IMF's Article IV report that they had no choice because they had to comply with the Stability Pact. This is what European policy-making has come to.

Some in Finland were quick to throw stones at Greece during the debt crisis, seemingly unaware at the time that they too lived in a glass house. Their own story is not really that different from the EMU disasters that unfolded in the South.

Interest rates were too low for Finland’s needs during the commodity boom, causing the economy to overheat. Unit labour costs spiralled up 20pc from 2006 onwards, leaving the country high and dry when the music stopped. Public debt was low but private debt was high (somewhat like Spain and Ireland). The crisis hit later merely because the commodity bubble did not burst until 2012.

The 'Fixit' movement is a warning shot, as is the election of a triple-Left majority in Portugal vowing to tear up the austerity script - and still blocked from taking power on a constitutional pretext almost six weeks after the vote.

The eurozone may be enjoying a tentative recovery for now, thanks to the stimulus of a cheap euro, cheap oil, and quantitative easing, but it has wasted a full global economic cycle and is running out of time to restore its defences before the next global storm hits.

When the storm does hit, total public and private debt will be 270pc of GDP, 36 percentage points higher than it was just before the Lehman crisis in 2008. Society will already have suffered almost a decade of mass unemployment, and the poltical capital of the EMU elites will be almost exhausted.
The question has to be asked in any case: if the euro cannot be made to work for what is supposed to be the most competitive country in the EU, who can it work for?

The Decline of the West Revisited

Robert Skidelsky

 Shadow of Eiffel Tower. LONDON – The terrorist slaughter in Paris has once again brought into sharp relief the storm clouds gathering over the twenty-first century, dimming the bright promise for Europe and the West that the fall of communism opened up. Given dangers that seemingly grow by the day, it is worth pondering what we may be in for.
Though prophecy is delusive, an agreed point of departure should be falling expectations. As Ipsos MORI’s Social Research Institute reports: “The assumption of an automatically better future for the next generation is gone in much of the West.”
In 1918, Oswald Spengler published The Decline of the West. Today the word “decline” is taboo. Our politicians shun it in favor of “challenges,” while our economists talk of “secular stagnation.” The language changes, but the belief that Western civilization is living on borrowed time (and money) is the same.
Why should this be? Conventional wisdom regards it simply as a reaction to stagnant living standards. But a more compelling reason, which has seeped into the public’s understanding, is the West’s failure, following the fall of the Soviet Union, to establish a secure international environment for the perpetuation of its values and way of life.
The most urgent example of this failure is the eruption of Islamist terrorism. On its own, terrorism is hardly an existential threat. What is catastrophic is the collapse of state structures in many of the countries from which the terrorists come.
The Islamic world contains 1.6 billion people, or 23% of the world’s population. A hundred years ago it was one of the world’s most peaceful regions; today it is the most violent. This is not the “peripheral” trouble that Francis Fukuyama envisioned in his 1989 manifesto “The End of History.”
Through the massive influx of refugees, the disorder in the Middle East strikes at the heart of Europe.
This movement of peoples has little to do with the “clash of civilizations” foreseen by Samuel Huntington. The more mundane truth is that there have never been any stable successors to the defunct Ottoman, British, and French empires that used to keep the peace in the Islamic world.

This is largely, though not entirely, the fault of the European colonialists who, in the death throes of their own empires, created artificial states ripening for dissolution.
Their American successors have hardly done better. I recently watched the film “Charlie Wilson’s War,” which relates how the United States came to arm the Mujahideen fighting the Soviets in Afghanistan. At the end of the film, as America’s erstwhile clients turn into the Taliban, Wilson, the American politician who got them the money, is quoted as saying “We won a great victory, but fouled up the end game.”
This “fouling up” is a continuous thread running through American military interventions since the Vietnam War. The US deploys overwhelming firepower, either directly or by arming opposition groups, shatters local governmental structures, and then pulls out, leaving the country in shambles.
It is unlikely that US policymaking reflects the grip of some ideal view of the world, in which getting rid of dictators is the same thing as creating democracies. Rather, the belief in ideal outcomes is a necessary myth to cover an unwillingness to use force persistently and intelligently enough to achieve a desired result.
However much military hardware a superpower owns, decay of the will to use it is the same thing as a decay of effective power. After a time, it ceases to overawe.
That’s why Robert Kagan’s 2003 neo-conservative proposition, “Americans are from Mars, Europeans from Venus,” offered such a misleading guide. True enough, the European Union has gone farther down the pacifist road than the US. It is the weak nerve center of a flabby semi-state, with almost defenseless frontiers, where humanitarian rhetoric masks spinelessness.
But America’s sporadic, erratic, and largely ineffective deployment of power is hardly of Martian quality.
The decline of the West is juxtaposed with the rise of the East, notably China. (It is hard to tell whether Russia is rising or falling; either way, it is disturbing.) Fitting a rising power into a decaying international system has rarely occurred peacefully. Perhaps superior Western and Chinese statesmanship will avert a major war; but this, in historical terms, would be a bonus.
The increasing fragility of the international political order is diminishing the global economy’s prospects. This is the slowest recovery from a major slump on record. The reasons for this are complex, but part of the explanation must be the weakness of the rebound in international trade. In the past, trade expansion has been the world’s main growth engine. But it now lags behind the recovery of output (which is itself modest), because the kind of global political order hospitable to globalization is disappearing.
One symptom of this has been the failure after 14 years to conclude the Doha Round of trade negotiations. Trade and monetary agreements are still reached, but they increasingly take the form of regional and bilateral deals, rather than multilateral arrangements, thereby serving broader geopolitical goals. The US-led Trans-Pacific Partnership, for example, is directed against China; and China’s New Silk Road initiative is a reaction to its exclusion from the 12-country TPP.
Perhaps these regional bargains will prove to be a step toward wider free trade. But I doubt it.
A world divided into political blocs will become a world of trade blocs, sustained by protectionism and currency manipulation.
And yet, even as trade relations become increasingly politicized, our leaders continue to urge us to gear up to meet the “challenges of globalization,” and few question the benefits of cost-cutting through automation. In both cases, politicians are trying to force adaptation on reluctant populations who crave security. This strategy is not only desperate; it is also delusive, for it seems obvious that, if the planet is to remain habitable, competition in economic growth must give way to competition in quality of life.
In short, we are far from having developed a reliable set of precepts and policies to guide us toward a safer future. Small wonder, then, that Western populations look ahead with foreboding.