The Orthogonality of Leadership and Crisis

or·tho·go·nal (ôr-thog-uh-nl)

Adj. 1. irrelevant - having no bearing on or connection with the subject at issue; "an irrelevant comment"; "irrelevant allegations."

misregulation (mis-reg-yuh-ley-shuhn)

Noun. 1. wrong or imperfect regulations. 2. a process of deliberately wrong or imperfect regulation for personal gain.

The U.S. does not have a monopoly on leadership failure. In a recent editorial in the New York Times and Herald Tribune, Paul Krugman states the obvious.

...the people who should be steering us away from that abyss are out to lunch.
A leadership vacuum, NYTimes, 3 Oct 2008

The economic crisis in the U.S. is deep and real, and requires leadership to match. The mismatch between leadership needs and the crew in charge is frightening. At the same time, a similar drama is unfolding on the other side of the Atlantic. In some ways, it offers more potential to go wrong in many more frightening ways than in the U.S., as it is exposing historical fractures linked to the most base tribal instincts of the European leadership class. This is one reason why the open letter from academic economists posted on VoxEU to European policy makers needs to be taken seriously.

This is a once-in-a-lifetime crisis. Trust among financial institutions is disappearing; fear may spread. Last week’s US experience showed that saving one bank at a time won’t work. A systemic response is needed and in Europe this means an EU-led initiative to recapitalize the banking sector. Unless European leaders immediately unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath...
Open Letter to European leaders on Europe’s banking crisis: A call to action .

How bad is the crisis in Europe? In a recent posting, I noted that the the European and Asian exposure to the toxic financial sludge floating around global financial markets is probably at least as bad as in the U.S. However, while the U.S. has set aside an initial $700 billion, and the pundits are admitting that more will be required, the only coordinated (meaning European) response so far has been the early renewal of existing European Central Bank credits for €32 billion, and the breaking up of an emerging cross-border banking system back into national sub-units. (In the Fortis bailout out, for example: the government intervention is breaking up the cross-border group along national lines, including the interest in ABN AMRO it bought in a consortium with Royal Bank of Scotland and Banco Santander.) The Irish step to guarantee deposits was also discriminatory (beggar-thy-neighbor) in implementation. The exposure of European banks to bad debt may be as bad as in the U.S. In my view, the relaxed approach to shielding investors from information they might not like (misleading them) is at the core of the problem. Indeed, the editorials and blogs pointing to the "failures of deregulation and market capitalism" miss the point. This crisis is the consequence of globally mixing bad math, misinformation, and good-old-boy politics with financial misregulation.

At one level, the issue is the global nature of the unfolding banking crisis. Recent news includes the nationalization of Fortis Bank by the Dutch government (including the retail banking business of ABN-AMRO), the collapse of the rescue package for Hypo Real Estate this weekend, and increased agitation in Europe as beggar-thy neighbor national solutions are emerging for what is really a Continental problem. In Ireland, for example, the decision of Ireland to provide a 100% guarantee to the deposits of Irish banks is causing a shift in deposits from non-Irish banks, obviously helping Irish banks but at the expense of other (e.g. British) banks operating in the same market but without guarantees.

At another level, this crisis is also a test for Europe. Following an announcement this weekend by European leaders that they would follow a more coordinated approach,

"Germany's Chancellor Angela Merkel insisted states would mainly act individually..."

This position has been backed by the head of the ECB, who has sided with Merkel. In response, like Ireland, Greece has also now guaranteed deposits.

Sigh.... Merkel's reactive undermining of a joint solution should be an alarm bell. Europe has been pushing deeper integration, including cross-border integration of its locally fragmented financial sectors. This is a good thing and a political necessity given history. It reflects hard work and real costs by the post-War generation. However, notwithstanding the pro-German reaction of the ECB, with the benefits of more integrated markets comes a responsibility for a more integrated approach to regulation and crisis management. A piecemeal approach to the current crisis will inevitably be beggar-thy-neighbor. There needs to be an integrated approach at a European level. Failure by European leaders to find a European solution risks setting back decades of European economic and political integration and efforts to exorcize Europe's tribal demons. Without a coordinated and aggressive attack on this crisis of confidence, it may get much much worse. Once European leadership is locked into national solutions, economic borders will grow wider and the slide back go tribal rivalry may begin yet again. The time to sort out responsibility (presumably the ECB is worried over wrong incentives and moral hazard) is after the crisis has been weathered.

Europeans deserve better from their leaders (and their Central Bankers) than a narrow local focus. They need to demand wider vision. A narrow, nationalist approach will not fix this problem, and will carry long term costs. It is important that national leaders in Europe act responsible and talk about positive, European approaches to the problem. Nationalist rhetoric may be appealing and easy. It is also irresponsible and reprehensible, especially given the shared burden of European history.

Quoting the letter again:

The problem is not a lack of understanding of how to stop financial crises. The problem is a lack of political will.

ADDENDUM:
There is a good discussion of the European exposure by Daniel Gross and Stefano Micossi on RGE Monitor: "Crisis Management Tools for the Euro Area." There is also some emerging realization that Europe's schadenfreude at the "American" crisis was premature. This crisis does not prove the "superiority of the general European banking model." Indeed a number of European state-owned banks have been caught in the same mess. As I have noted earlier, European banks have been staging mini-crisis for a while now (look up BAWAG scandal in google). Also see: "Europe Beginning to Realize Its Lenders Share in the Blame."

References:

[1] Open Letter to European leaders on Europe’s banking crisis: A call to action, VoxEU, October 2008.
http://www.voxeu.org/index.php?q=node/1729

[2] Paul Krugman,"A leadership vacuum," NYTimes 3 October 2008.
http://www.iht.com/articles/2008/10/03/opinion/edkrugman.php

[3] Joseph Francois, "Three Card Monty on the streets of New York, or "If this crisis is so different, why is it so familiar?" The Random Economist, 2 October 2008.
http://www.intereconomics.com/blogs/jff/2008/10/three-card-monty-on-streets-of-new-york.html

[4] Reuters, "Dutch media split over Fortis nationalization," 4 October 2008.
http://www.reuters.com/article/gc06/idUSTRE49314H20081004

[5] RTE News, "German bank on verge of collapse," 5 October 2008.
http://www.rte.ie/news/2008/1005/economy.html

[6] AFP, "Europe fights financial storm as bank deal collapses," 5 October 2008.
http://afp.google.com/article/ALeqM5hcWdSreh2tNafF5YVZbb2Te-Eivg

[7] Reuters, "EU rescue fund rejected as U.S. bailout advances," 3 October 2008.
http://www.reuters.com/article/bankingFinancial/idUSL252209520081003

[8] Daniel Gross and Stefano Micossi, Crisis Management Tools for the Euro Area, RGE Monitor, 2 Ocrtober 2008. http://www.rgemonitor.com/globalmacro-monitor/253833/crisis_management_tools_for_the_euro_area

[9] Craig Whitlock and Edward Cody, "Europe Beginning to Realize Its Lenders Share in the Blame," Washington Post, 1 October 2008. http://www.washingtonpost.com/wp-dyn/content/article/2008/10/01/AR2008100103406.html

Three Card Monty on the streets of New York, or "If this crisis is so different, why is it so familiar?"

In a recent New York Times editorial/blog, Paul Krugman argues that for the U.S. as a whole, there may be little net cost from the sub-prime bailout. [1] In the end, the cost to the U.S. taxpayer will depend on the people in charge acting responsibly and competently. We will witness massive transfers from the middle class taxpayer to Wall Street, but might not see comparable net costs to the U.S. There is a wide range of opinions and worries floating on the web about how competent and trustworthy the actors involved will really be. [2] At the same time, there is another player in the room, and he will lose massive sums of money. Indeed, in one way, we are looking at big losses for this other player no matter what happens in Washington. To explain what I mean, it helps to review history.

In the late 1970s and early 1980s, the Members of the OECD embarked on largescale deregulation of international investment flows. In Japan, the combination of high savings and foreign investment restrictions had led to an accumulated stock of domestic savings earning low returns. When the floodgates were opened, Japanese institutional investors poured into the United States. In a paper written at the time, a Japanese academic offered the following contemporary perspective:

"Since the basic change in Japan's law on foreign exchange controls in December 1980 toward deregulation Japanese banks, securities companies and institutional investors especially life insurance companies were gradually freed form rigid regulations on their overseas activities, and their management horizons and business activities were expanded on a world-wide scale. One of the new developments in Japan's foreign direct investment in the last few years is a sharp increase in investment in real estate business abroad, especially in the United States... Since around 1984 they are increasingly investing in real estate properties in the United States."[3]

Indeed, Japanese investment in real estate in the 1980s in the U.S. skyrocketed. An estimated $300 billion was poured into "high-profile properties like Rockefeller Center in New York and the Pebble Beach Golf Club in California."[4] Yet more was poured into U.S.-based financial institutions and instruments. As the subsequent Savings and Loan crisis rolled across the U.S. economic landscape, their holdings in commercial real estate alone lost roughly half their value. This coincided with a steep fall in the value of the dollar. The Japanese liquidated their positions at a fraction of original costs. Making a crude guesstimate, and assuming a 50% loss on their commercial property investments, they lost $150 billion by 1990 or roughly $230 billion in 2008 dollars. In other words, Japanese investors may have carried more than half the cost of the S&L crisis. The U.S. tax payer also paid a bit less than half, while on net for the U.S. much of this was just a net domestic transfer. From that point, of course, the Japanese went through a further real estate collapse of their own (Business Week estimated in 1998 that households may have suffered $250 billion in losses in Japan as real estate prices fell 70% from 1992 levels [5]).

So today, in 2008, we are looking at $700 billion set aside in reserves (so far) to clean up the U.S. exposure to sub-prime backed securities. More may be needed up front, but much will also be recovered over time as markets recover. Also, as Paul Krugman has stressed [1], much of these costs are essentially a domestic transfer. We are looking at a big debt for equity swap, where the shortfall is picked up by the U.S. taxpayer but a number of U.S. investors are saved in the process. To the extent we are saving U.S. shareholders and investors, these are "just" massive internal transfers. Unless this gets messier, and more expensive.

However..... rewind back to the 1980s, when Japanese institutional investors were badly burned by the U.S. real estate meltdown, and may have lost $250 billion or more in today's terms (with a worse hit adjusting for the ongoing exchange rate hit at the time). Today, we are looking at a sub-prime mess where half of the "stinky mortgages" (a phrase I steal from the sub-prime primer [6]) are held in the U.S., and the other half are overseas. Indeed, while the Chinese and Japanese may be holding massive amounts of U.S. Federal debt obligations, Europeans may own $250 billion in sub-prime junk, Japan may hold $200 billion, and China may hold $260 billion. Taiwan and Korea may hold another $50 billion. I say "may" because one problem here is continued lack of transperency, which has obviously contributed to the ongoign financial market jitters. ("Might it not be the case that we understood too little about the risks banks had taken on?"[7]) It is not clear what the foreign exposure actually is, and the estimates quoted here from 2007 may be low.[8]

So, the U.S. is apparently ready to bail out U.S. holders of sub-prime securities. This is only half the problem. To a large extent, the U.S. bailout involves internal transfers. At the same time however, we may want to use U.S. taxpayer costs as a money metric of the cost imposed on foreign investors, who will not be bailed out by the U.S. Congress and face very very real losses. Basically, much and perhaps most of the net financial cost of this crisis will fall on foreign investors. We are looking at the unwinding of an unintended real estate scam, where foreign investors lose several hundred billion dollars inside the U.S. financial system. In New York, Three Card Monty [9] is illegal. The city does, however, offer much more elaborate ways to see your money disappear.

References


[1] Paul Krugman, "Where Will the Money Come From?," NYTimes, September 30, 2008, 9:04 am.

http://krugman.blogs.nytimes.com/2008/09/30/where-will-the-money-come-from/

[2] Matt Stoler, "As the Senate Votes," Wed Oct 01, 2008 at 19:57

http://www.openleft.com/showDiary.do?diaryId=8743

[3] Ryutaro Komiya, "Japan's Foreign Direct Investment: Facts and Theoretical Considerations," University of Tokyo, October 1987.

http://www.e.u-tokyo.ac.jp/cirje/research/dp/87/f13/dp.pdf

[4] Terry Pristin, "COMMERCIAL REAL ESTATE; Echoes of the 80's: Japanese Return to U.S. Market," NYTimes January 26, 2005.

http://query.nytimes.com/gst/fullpage.html?res=950DE4D61F38F935A15752C0A9639C8B63&n=Top/Reference/Times%20Topics/Subjects/F/Foreign%20Investments

[5] Business Week, "JAPAN'S REAL CRISIS: Until its hidden debt mess is cleared up, no recovery is possible," 1998.

http://www.businessweek.com/1998/20/topstory.htm

[6] "Subprime Primer:How SubPrime Really Works," BigPicture, Friday, February 15, 2008 | 11:15 AM

http://bigpicture.typepad.com/comments/2008/02/how-subprime-re.html

[7] J.F. Francois, "Firewalls and Firestorms," The Random Economist blog, Sunday, October 28, 2007.

http://www.intereconomics.com/blogs/jff/2007/10/firewalls-and-firestorms.html

[8] Martin Hutchinson, "Where are the subprime bodies buried?" Money Morning, Tuesday, August 21st, 2007.

http://www.moneymorning.com/2007/08/21/subprime_bodies/

[9] Glenn Hester, "Three Card Monte from a Police Officer’s Perspective," threecardmonty.com.

http://www.threecardmonte.com/police_three_card_monte.html

We must all hang together, or most assuredly we shall all hang separately

Europe and Russia are in a codependent relationship. West European powers in Brussels are playing the role of a codependent spouse, denying injuries to the children and believing that somehow they can manipulate things toward a positive outcome while ignoring outright attacks on Members of the EU family. Russia plays the role of the abusive partner in this very real drama.

Imagine if Russian interests (whether government or mafia based) shut down the computer systems of the UK or U.S. government, and all the banks and financial firms in London or New York, cutting them off from the financial world.  Imagine further that the cyber attacks were extended to the emergency services, aiming to cripple the police and ambulance services.  At the same time, imagine that Russia blockaded a major pipeline supplying oil to Germany, and imposed a boycott on agricultural exports from France.  And imagine if the car of a Swedish Ambassador was attacked by supporters of President Putin. Indeed, all this is happening to EU and NATO Members at the moment.  Only the names have been changed.  Except the Swedish ambassador. That really did happen. The other victims are new Members of the European Union.  They are Poles, Estonians, and Lithuanians. The EU is being tested on the foreign policy front.  It is being tested and it is failing miserably.  This proves the case for a stronger European executive (president, foreign minister, etc) for, to quote Benjamin Franklin “We must all hang together, or most assuredly we shall all hang separately.” Maybe the Eurocrats in Brussels also need a refresher in history. Quite simply, Russia wants to neuter the East Europeans again.  Germany has -- one hopes unwittingly -- again been a party to this process, with its complicity in Russia’s effort to isolate them politically and economically. Witness evolving German energy policy in the region. As West Europeans seem to have a short historical memory, I will provide a quick historical recap here.

To understand Russia’s diplomatic trouble with Central and Eastern Europe, one has to look at it through the lens of history -- the history of Russia's past imperial adventures in the Baltics.  The closest parallel I can think of is Japan’s continued problems with China, Taiwan, Korea, and much of Southeast Asia.  Japan was a brutal imperial power, slaughtering hundreds of thousand of civilians as it aimed to subjugate populations and build an East Asian empire.  Yet it still has not faced up to its role as an aggressor.  It teaches in schools that it was a victim in World War II, it still denies well-documented war crimes, and suffers from repeated gaffes by political leaders with a penchant to cause riots in Seoul and Beijing.  Similarly, Russia’s view of its own 20th Century history is at odds with the memories of many countries that Russia stepped on during the 20th Century as it chased imperial ambitions. Russia was both victim and aggressor in World War II. Yet it only remembers half of this experience. Judging by Japan’s experience, Russia’s problems with the European Union may run for decades unless its view of its own history is revised. Russia is acting like post-Imperial Japan, quick to remember its role as victim but with no sense of guilt about its own aggression.

The European preliminaries that led to World War II included the Soviet Russian absorption of the Baltic States, with the complicity of Nazi Germany.  Indeed Nazi Germany and Soviet Russia started as allies.  On the basis of a non-aggression pact (the Molotov-Ribbentrop Pact), they divided up Central and Eastern Europe into spheres of influence, and the East Europeans emerged from the hellish consequences of this German-Russian gamesmanship only in the 1990s.  This mirrored an earlier absorption of Poland by the Austro-Hungarian, German, and Russian Empires in the 18th Century.  In the 20th Century repeat of this carving up of Central Europe, both Germany and Russia were brutal imperial masters.  After the war, Germany took responsibility for its actions, and has served admirably at the center of the European Experiment (the EC/EU) since.  Russia, on the other hand, still resents losing territory it had seized when it worked in concert with Nazi Germany to divide Europe.  After the war Soviet Russia was allowed to keep the parts of Poland it occupied in 1939, annexing them to the Soviet Union. (They are now part of Ukraine, Belarus, and Lithuania). Indeed Stalin moved all borders West at the end of the war.  This historical episode colors the conflicting views on current Russian claims that they should be viewed as liberators by Estonia.  The Estonians (and the Baltics in general) remember that independence was first lost when the Soviet Russians made a deal with the Nazis and then invaded. Similarly, Poland remembers that it was the Russians who massacred tens of thousands of Poles in the Katyn forest.  (Gorbachev finally admitted to the massacre only in 1989.) The Russian Army also halted its advance on Warsaw to allow the Wehrmacht time to finish killing off the Polish Home Army (55,000 Polish defenders died during the delay) so that they could install a Communist government – waiting 66 days for before they moved back into Warsaw – an occupation that really only ended in the 1990s. The Poles also remember that they were left behind the Iron Curtain when the war ended.

So what should Europe do?  In theory, the EU represents a deliberate, collective break from a past colored by centuries of European civil war.  To be an effective brake on repeated history, it needs to stand together to fight collective tendencies to repeat history.  This means the EU15 (and Germany in particular) need to overcome their collective penchant to engage in appeasement, selling out Central and Eastern Europeans to outside bullies.  The cyber attack is state sanctioned (if not sponsored) terrorism.  If these were UK banks that were being targeted, or French or German trade sanctions, Brussels would be up in arms.  If all EU citizens have equal rights, a higher profile protection of its Eastern Members is called for. Russia needs help fighting its own historical deamons. The EU is acting as an enabler. Turning off electronic bank transfers across the Russian border might catch Russia’s attention. Withdrawing all European Union ambassadors, collectively, for consultation, also seems appropriate.  Holding joint summits seems inappropriate to me. It is like giving your abusive spouse more money for his next round of binge drinking. If this continues, eventually it will be German and British Banks, Austrian and Italian energy, and demands of a more military and territorial nature.

---

Further reading
(1) NATO experts investigate 'well-organised' cyber attacks on Estonia.
(2) the Molotov-Ribbentrop Pact
(3) Tough love vs. Enabling of an Abusive Family Member
(4) Moscow had a hand in Estonia riots, cyber-attacks: experts
(5) Druzhba: The not-so-friendly Russian oil pipeline
(6) Estonia calls for EU help on Russia embassy siege
(7) EU protests over Russian attacks on ambassadors
(8) ‘E-stonia’ Accuses Russia of Computer Attacks
(9) Russian response in meat row "insufficient", EU says.
(10)Enabling and Codependency.

When is a constitution actually a phonebook?

The rotating 6-month EU presidency will be going to Germany with the start of the New Year. One of the stated goals of the German government (and specifically the German Chancellor Angela Merkel) is to revive the European Union constitution. This follows a contentious and failed effort to get European voters to approve the constitution two years ago. The draft text aims to consolidate and streamline the operations of governing a club of 27 sovereign states. Germany wants to save as much of the original text as possibly. Yet this same text failed when both Dutch and French voters rejected the treaty in May and June 2005. If anything, the mood of skepticism among Europeans has deepened since then. Something has to be done, but a re-run of 2004-5 is not a good idea.

To appreciate the importance of the issues at stake, it helps to look at history. The entire European Project grew out of the violence of European history, especially the first half of the 20th Century. That period saw the current stable of EU Members deeply enmeshed, yet again, in what amounted to a protracted European civil war. This was not the first century of Europe-wide war, of course, but it was the first to truly harness the wonders of modern industrial technology as part of the game. In living memory, entire European cities were firebombed and turned to rubble, whole European ethnic groups were forced into slave labor or death camps built on Henry Ford's assembly line innovations, European colonial empires were completely squandered, and European civilian populations were deliberately targeted by all sides. Europe's scientific infrastructure was all but destroyed, with a generation of Continental intellectuals (and entrepeneurs) either voluntarily fleeing to America or forced to serve behind the Iron Curtain. (All of these practices, realized with more primitive technologies, have of course been part of European warfare throughout its history. Instead of fascism vs. communism vs. socialism vs. republicanism, in earlier centuries much of this instead involved battle between competing Christian fundamentalist camps.) The modest goal of the European Community (now the EU) has been to finally stop this destructive competition between and within nation states by deepening political and economic ties across the continent. Current political debate is over the inanities of EU economic policies, and the labor market impact of enlargement. But this is really a sideshow. One could argue that such debates are actually an intended outcome of the European Project. It is far better that German, French, British, and Polish politicians and pundits argue vociferously, violently even, over the central bank, agricultural policy, and migration while squandering billions of euros on farm subsidies and regional support payments, than it is having them rattling sabers and squandering billions on tanks and warships instead. Indeed, for this reason, it really is important that Europe does sort out its voting rules, streamline its decision making process, and give its citizens a sense of ownership in the Project.

If the European Project is so important, why is it so unpopular? To start, one should lay the proposed EU constitution next to the U.S. Constitution with its Amendments. The U.S. Constitution, in modern typeset, is about 20 (double-spaced, big print) pages long, with another 15 pages of Amendments. The proposed EU constitution is 485 (single spaced, small print) pages long. In other words, it is the size of the phonebook for a typical mid-sized city (and over 25 times longer then the U.S. counterpart). You can read through the U.S. Constitution with your morning coffee and croissant, and have an intelligent conversation about it afterwards. You cannot do this with the EU constitution. The U.S. Constitution is shorter because it focuses, primarily, on how government will be structured, and on how member states can amend that structure in the future within the framework of the Constitution itself. The structures of government are considered sufficient to then establish law within the framework it defines. In contrast, the EU constitution is full of charters, protocols, exemptions, and existing elements of EU law. It is so long it requires a table of contents. An EU constitution that simply spelled out the rules for finance and decision making, with an article that "all existing elements of EU law as defined by its Members under treaty are subsumed into the body of this constitution unless modified here or by the governing structures defined herein" and a defined procedure for amendments could also have been about 20 pages long. Daily papers could have then run versions as a Sunday supplement, and Europeans could have read it over breakfast and carried on an intelligent conversation about it afterwards. In such a fantasy world, they probably would have even voted for it. If you were to give Americans their actual Constitution, combined with the volumes of (often crazy and special-interest driven) text that make up the body of U.S. Federal law, and asked them to vote for it as a single document, they would have rejected it as well. If the goal is to give European citizens a choice in defining their basic framework for collective self-government, then the task is to define a compact document that defines how rules are made, and not what all the rules actually are or might be.

More striking to me than the relative complexity of the documents (and the relative number of forests that must be felled to print each of them) is the text of the preambles. To appreciate the marketing challenge faced by the European constitution, simply compare the preambles. The U.S. Constitution starts out

"We the People of the United States..."

The proposed EU constitution starts out

"His Majesty The King Of The Belgians, The President Of The Czech Republic, Her Majesty The Queen Of Denmark, The President Of The Federal Republic Of Germany, The President Of The Republic Of Estonia, The President Of The Hellenic Republic, His Majesty The King Of Spain, The President Of The French Republic, The President Of Ireland, The President Of The Italian Republic, The President Of The Republic Of Cyprus, The President Of The Republic Of Latvia, The President Of The Republic Of Lithuania, His Royal Highness The Grand Duke Of Luxembourg, The President Of The Republic Of Hungary, The President Of Malta, Her Majesty The Queen Of The Netherlands, The Federal President Of The Republic Of Austria, The President Of The Republic Of Poland, The President Of The Portuguese Republic, The President Of The Republic Of Slovenia, The President Of The Slovak Republic, The President Of The Republic Of Finland, The Government Of The Kingdom Of Sweden, Her Majesty The Queen Of The United Kingdom Of Great Britain And Northern Ireland..."

These opening lines say an awful lot. In modern terms, the European document has a packaging problem. In the first case, the constitution is presented to us an expression of self-government by the citizens involved. In the other, the constitution is presented as a document of compromise among the monarchs and presidents involved, imposed from above by central authority. No wonder Europeans feel detached from the European Project. Europeans are not told that they have in effect built the draft constitution. They are told that monarchs and presidents did. The goals in the (rather long) preamble may be noble, but they are presented as the goals of the rulers, not the ruled. The tone of the proposed constitution preserves a distance to be kept between Europeans and Brussels. One almost gets the feeling average citizens cannot be trusted to organize themselves and make collective decisions themselves. They must instead go through layers of the Member States' power structures to reach Brussels.

At this point, most card carrying anti-American European readers will be fuming. The situations are different, they will say. A solution grown from European ideas is needed, they will say. The American constitutional experience is irrelevant, they will say. This is a shame. Ironically, the U.S. constitutional experiment has, in many ways, simply been an earlier run of the current European conundrum. An expanding set (initially of 13 sovereign member states) struggled to define common commercial and foreign policy under a set of rules (the Articles of Confederation) that worked even worse than the current governmental structure of the European Union. Its replacement, the current Constitution, is clearly a document born out of the ideas of Europe's Age of Enlightenment. It embodies an interpretation of Montesquieu's writings on the separation of powers (a concept that itself goes back to Aristotle), while also reflecting the writings of Harrington, Locke, and others from this era. It even draws on the experience of the pre-imperial Roman Republic (and Polybius' spin on mixed government). While the U.S. constitution pioneered the definition of a modern federal system of government, a number of EU Member States and associates (Germany, Austria, Belgium, Switzerland) have followed suit. In defining its Enlightenment-based constitutional system, the U.S. has struggled through its own Civil War, its own efforts to establish a central bank and common currency, the problem of balancing large and small state interests in the legislature (the Connecticut compromise), and subsidiarity (aka state's rights as embodied in the 10th Amendment).

Europe needs to sort out its management structure, and needs to give its citizens a sense of collective ownership. The European Project is important. Constitutions around the globe have been inspired by European thought. It would pay for Europeans to draw on their own intellectual history -- and its application around the globe -- in defining an elegant, streamlined (and more tree-friendly) solution that its citizens can read, understand and debate, and ultimately adopt as their own. A phone book is not the solution.

© JFF & Intereconomics, LLC 2006