AUSTRIA, A SMALL COUNTRY, WITH A BIG HISTORY.

Steven Beller’s   “Concise History of Austria” , which is one of the  Cambridge series of  concise histories of several countries, ranging from Bolivia to Portugal.
Steven Beller is an Austrian writer, who lives in the United States. 
He shows how Austria’s history and identity is inextricably tied up with the history of the Hapsburg Imperial house, which aspired at one time to establish a universal monarchy of the known world. 
In this sense, Austrian history is the history of an ideal, as much as of a country.
The Austrian Empire, which lasted for hundreds of years, was a multinational one , containing almost as many distinct nationalities as are now in the European Union.
It aspired at times to treat all these nationalities equally, and one of its proposed constitutions proclaimed all nationalities equal and all citizens to be equal before the law.  But that goal was never attained.
 The German speaking Austrians, and the Magyar speaking Hungarians, were the dominant groups in the respective sections of the Empire. The Empire finally broke up in the aftermath of the First World War, because other nationalities, notably the Czechs and Poles, wanted their own states.
After the War, Austria became a small country, but with a capital built for an empire. It presided over part of the German speaking remnant of the Habsburg dominions, the rest being   left in Czechoslovakia, Italy, Romania and Poland. 

Many Austrians aspired to be part of a Greater Germany , but some, notably Catholic  inspired politicians, wanted to preserve their new state’s independence,  because it  was  easier in that context to give expression to Catholic political values and because the Nazis pushed an aggressively anti clerical agenda.
Steven Beller explores the development of anti Semitism in Austria.

Hitler was an Austrian. Although Austria itself  only came under Nazi rule in 1938, Beller claims that there were a disproportionate number of Austrians employed in the genocide of the Jews.

Prior to the First World War, Jews had made up 10% of Vienna’s population,but  a much larger proportion of those prominent in business and   cultural affairs. This generated jealousy. They were seen as big beneficiaries of liberal modernising economics, and were resented on that basis.
This is a very well written and interesting history.

A LONG FORGOTTON WAR.....ITALY AND THE HAPSBURG EMPIRE

When one thinks of the First World War, the image that springs to mind is that of thousands of  soldiers being mown down by machine guns and heavy artillery in the mud of Northern France.
Little is written in English nowadays about the slaughter on the eastern front between Germany, Austria Hungary and Russia, or about the war in the Balkans ,when  the Serb army was crushed by the Central Powers.
Another dimension of the war that gets little attention is struggle between Italy and Hapsburg Austria .
This is the subject of an excellent book I have just read, entitled   ”The White War, life and death on the Italian Front ,  1915 to 1919“  by Mark Thompson.
Thompson shows that this was a thoroughly avoidable war.
 Italy and Hapsburg Austria had actually been allies up to just before the outbreak of the war between then in 1915.  But the Italian nationalist intelligentsia had long wanted to expand their territory to what they  regarded as Italy’s  “natural” frontiers on the Alps, regardless of the fact that many of the people  living south of the Alps did not consider themselves to be Italian. They also believed the Adriatic sea should be under effective Italian control, as it had been in Venetian and Roman times.
In 1915, in order to keep Italy neutral, Hapsburg Austria offered Italy territory in South Tyrol and elsewhere.
But the Italians were not satisfied. In return for Italy joining the allied side instead, the Allies guaranteed that Italy would get all South Tyrol, Trieste, and a big slice of  coastal territory in what is now Slovenia and Croatia. Italian speakers were a minority in these areas.
Unfortunately for Italy, it was ill prepared for war. It suffered huge casualties,  attacking well defended Hapsburg positions on high ground all along the frontier. Wave after wave of conscripted and often illiterate Italian soldiers were sent to certain death in Hapsburg machine gunfire. 

To the surprise of the Italian nationalists, the Hapsburgs army, although coming from a variety of ethnic groups, fought cohesively. The leading Hapsburg genera , Boroevic, was a Croat. Bosnian Muslims were among the fiercest fighters for the Hapsburg cause.
Although the Italians were comprehensively defeated in 1917 at Caporetto, and had to fall back far into their own territory, the eventual Allied victory did bring major gains to Italy.  But many of there had to be given up to Yugoslavia after the Second World War.
Mark Thompson tells this tragic human story very well. He illustrates the erroneous judgements, and extreme sacrifices, territorial nationalism can impose on those who fall under its spell.

SHORT TERM EUROPEAN DEBT RELIEF WILL LACK CREDIBILITY, UNLESS IT IS ACCOMPANIED BY A LONG TERM PLAN TO REGAIN COMPETITIVENESS.

(updated version) The euro is playing the starring role this week in a global loss of confidence in bonds issued by Governments, although the average Government deficit and debt situation of euro area countries is actually is no worse than that in the United States, the United Kingdom, and Japan. The euro area is the target because it is easier for speculators to pick off euro area countries one by one. But this is not the root problem. Even if the euro was somehow broken up, the underlying problem of the credibility of sovereign debt would still be there.

 The real problem of almost all developed countries, except Germany, is that we have used Government and/or private borrowing, to smother the symptoms of a deeper loss of earning capacity.

The sovereign debt crisis is a symptom. The disease is a profound loss of competitiveness.

Since about 2000, the developed world, except Germany, has lost ground in the competition to produce goods and services at prices the rest of the world is willing to pay.   China, India, Brazil and others are now competing for markets that the developed world previously monopolised. They are doing this with technologies developed in the West, but at costs much less than those applying in the West.

This loss of markets over the last ten years should have meant a relative fall in relative living standards over the same period. But almost all developed countries avoided this, and kept their standards up by borrowing more, either directly as households, or indirectly through their Governments.  In Ireland during the boom the number employed in the traded sector actually fell, while the number employed in services ballooned. This was all too easy because the countries, like China, who were winning markets, lent their profits back to us at cheap interest rates.

In essence, the cause of today’s debt problems  is that developed countries awarded themselves a living standard they had not earned. That could not go on forever. Now we must tackle the disease as well as its symptoms.

Any short term fix for the euro area finances must be accompanied by a long term plan to rebuild up our capacity to produce goods and services that the rest of the world will want to buy on a greater scale than they are doing today.

 Europe must abandon its culture of entitlement.

For example, there must be reform of educational systems.  Third level education in Europe must be changed from being an undemanding and free rite of passage for young people , into an innovative and flexible system to help people of all ages, who have lost their jobs,  to readapt themselves for a world which has changed utterly.

Getting our costs down will also require an end to restrictive practices, and padded  costs,  in the Government sector, in schools, in the labour market, and in the professions.  However indirectly, all these reduce Europe’s ability to reduce its export prices enough to win back markets abroad. This is particularly necessary in countries like Italy and Greece, but also in Ireland.

It will all mean postponing increases in living standards, paying more tax, and getting less benefits from the Government. Germany did this in the 1990s when it dealt with the huge cost of reunification. Since 1990, living standards in Germany increased by only 20%, whereas they increased by over 100% in Ireland.  Germany kept its costs down, shared the burden of adjustment by short time working rather than unemployment, and focussed on exports.

Some will argue that what worked for Germany will not work for Europe as a whole. They will say that if the rest of Europe adopts  an austerity and export model, there will be no market for the exports because of the austerity. Their preference would be for Germany to start inflating its economy, so as to buy the exports of the rest of Europe.

 That will not work for a number of reasons. If Germany did inflate its demand, the imports would come from the rest of the world, not from the rest of Europe (unless, of course,  the rest of Europe becomes competitive). Furthermore, Germany has an ageing population and needs to save now to support its future retirees.

This is also a problem with proposals for the issue of Eurobonds to meet the funding needs of euro area countries, like Ireland, who are too weak to borrow commercially on their  own account. Until the rest of Europe becomes competitive, these bonds will essentially be issued against the credit of Germany.  Given its ageing problem, even German credit has limits.

The ECB can give out more credit as a way of getting through our present short term difficulties. That is what it is doing by buying bonds of countries like Ireland, Italy and Spain. It could also extend a credit line to the European Stability Fund to allow it to buy bonds too.  To the extent that such activity increases money supply faster than present or future economic activity justifies, it builds up future inflation.  

 And who does inflation hit hardest? Elderly people with fixed incomes, and those with savings.

 And what European country has the biggest number of people who will soon be in that category? Germany.

 Germany increased the money supply to pay for the cost of the First World War, and that led to the inflation of the 1920’s, which wiped out the German middle class. That is part of German folk memory and explains why Germany insisted that the ECBs mandate be concerned solely with keeping inflation in check.

What is needed now for Europe, as a whole, is a convincing overall plan, a plan that links short term relief for those with financial difficulties, with long term plans to permanently lift productive capacity.  Only in that way can Germany be convinced that  short term relief now will not lead to more inflation later.

It is not reasonable to expect Chancellor Merkel to produce such a plan on her own.  Every euro area Government must contribute. We have all got to start thinking as Europeans, and devise a plan that is based on realism and modesty in what we ask of our neighbours, and strict honesty in  what we  ask of ourselves.  None of us can solve our problems on the back of someone else’s sacrifice.

BRINKMANSHIP IN WASHINGTON, WEAK PARTIES AND STRONG LOBBY GROUPS

The news that the leaders of the two parties in the US Congress have  finally reached a deal on raising the borrowing limit for the Federal Government will be a relief to many.
It was beginning to look as if the political divisions in the country had become so deep that the US political system itself had become paralysed.   If that were to happen, the entire world would suffer.
Party discipline is very weak in the US for a number of reasons. 

Each member of Congress must raise huge sums for his/her personal campaigns. So members pay as much attention to potential donors as they do to their national party. Political action committees, tied to particular causes,  that  raise funds for candidates  can have as much influence on  how House members  vote as their  national party has.

District boundaries are manipulated to create safe seats for one party or the other.  This means that the contest in the primary for the  party nomination is often more important that the General Election. So members tend to spend a lot of effort courting the extremes of their own party rather than middle ground voters
Because party “headquarters” thus has little or no influence over who is selected as a party candidate for the House ,the penalty to a House member for voting against the national interest is low, while that of voting against the interests of his/her constituents or big donors is very high indeed. 
Party discipline was not always as weak as it now is, but” reforms” introduced in the 1970s have made the system more “democratic”, but less manageable.
Part of the compromise agreed between Democrats and Republicans will mean automatic cuts in Defence and healthcare for the elderly if Congress is unable to agree on alternative cuts.
In the medium term, this means that US military capacity will reduce, and will be more focussed on America’s own immediate interests.
Europe will have take more responsibility  for its own defence, and work out what  threats it wants  to equip itself to deal with on its own, and what threats it will  simply have to ignore. Adventures, like the bombing of Libya, will require a bit more thought. The defence provisions of the EU Treaties may acquire a higher profile, and NATO may become less important.
The cuts in healthcare entitlements hopefully force reductions in the costs of health services, which are much greater in the US than they are in Europe.  Vested interests in medicine and law have driven American health costs up to a completely unsustainable level.
But by coming so close to the brink of default, Congress has created uncertainty about the reliability of US securities. This may lead to higher interest rates in the United States.  That could have a knock on effect on borrowers in Europe because the interest rates on US  Federal bonds set the floor for interest rates.