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Sunday 17 June 2012

Stuxnetting the Eurozone's Trust

Mistrust and Misrule

Markets and investors have long been possessed of a peculiar and unsubstantiatable notion, that the problems of the Eurozone are solvable as soon as people come to their senses and start engaging with financial reality rather than political theatre.  This is an amusing conceit bound up with the idea that the Euro project is too big to fail, but one that ignores the problem that cultures aren’t malleable, no matter how much politicians like to pretend they are.

The European single currency is a massive centrifuge which needs to keep whirling around at speed to keep itself together.  Unfortunately it’s got its own equivalent of the Stuxnet worm: incompatible cultures and attitudes to risk.  Infected with a lack of trust, the centrifuge is out of control and it’s only going to stop throwing off pieces when it’s finally shut down or the fundamental disease of mistrust is properly addressed. 

Worming It's Way

Stuxnet was one of the most cunning, and targeted, pieces of software yet released into the global communications infrastructure we call the internet.  It was aimed, deliberately it seems, at the software controllers operating the centrifuges of the Iranian nuclear enrichment program.

Naturally those people resolutely opposed to Iranian nuclear ambitions will regard this as a triumph, but it also serves as a warning.  The sophistication of Stuxnet lies in its targeting.  A worm like this, focused on a specific set of device controllers, has the potential to do untold economic and environmental damage.  The EU has a similar problem, but has yet to identify the worm, let alone find a cure for it.

Corrupting the Eurozone

The Iranian nuclear centrifuges may seem an odd metaphor for the Eurozone, but the whole project has the feeling of a vast, spinning mechanism that’s kept together under the weight of its own circular motion.  The problems of Greece, Spain, Italy and Portugal threaten the integrity of the mechanism, but the worm at the heart of the idea is that different people, from vastly different cultures, can ever be brought together under a single financial scheme.  As a report by Transparency International, Money, Politics, Power: Corruption Risks in Europe, records:
“A number of countries in southern Europe – Greece, Italy, Portugal and Spain – are shown to have serious deficits in public sector accountability and deep-rooted problems of inefficiency, malpractice and corruption, which are neither sufficiently controlled nor sanctioned.”
Now there’s a coincidence … 

At the same time countries such as Finland, Denmark and Sweden are rated amongst the least corrupt in the world, and finding these disparate attitudes as bed-fellows is odd, to say the least.  However, at least we can rely on the European institution itself to deliver some kind of control over these problems.  Here’s the latest report from the EU’s auditors:
“In the Court’s opinion, because of the significance of the matters described in the basis for adverse opinion on the legality and regularity of payments underlying the accounts paragraph, the payments underlying the accounts for the year ended 31 December 2010 are materially affected by error.”
Eighteenth Time Lucky?

To put that in plain English: the auditors aren’t quite sure what the European Union has done with €4.5 billion  ($5.8 billion) worth of taxpayers money.  This is the seventeenth year in a row that “material errors” have been found with the union’s accounts.  Of course, the EU itself regards this as a triumph:
“For the fourth year in a row, the EU's annual accounts have received a clean bill of health from its external auditors. As for EU spending, the overall error rate is once again below 4%. This means that the vast majority (at least 96%) of total payments made in 2010 were free from quantifiable error.”
At the heart of the Eurozone’s problems is the unwillingness to admit that differences in attitudes to trust are real and abiding.  It’s not just that the Euro is a one-size-fits-all straightjacket that ignores these problems, it’s that the problems have been known about and tacitly accepted ever since the whole vast machinery was first engaged.  Many of the institutional flaws of the Eurozone are actually the outcome of the unwillingness to admit these issues – and, let’s face it, when many of the politicians and civil servants of the union are drawn from these self-same countries this shouldn’t be a surprise.

Blame the Spanish

The problem is that lack of trust is corrosive, and spreads, much like Stuxnet.  On one hand you have endemic mistrust of government institutions in Southern European countries, such that the default assumption is that all political institutions are corrupt – including the leaders of the EU and the IMF.  On the other, you have the gradual erosion of trust in the EU itself by Northern European citizens, who see it as less robust and trustworthy than their own governments.

Unfortunately, solving this problem is not easy, or simple.  For evidence of the problem that this causes we need look no further than Italy which combines two countries in one: the corruption riddled, Mafia infected south and the sophisticated northern provinces.  This is a demarcation which has lasted for centuries, and has successfully survived the creation of the modern Italian state.  In fact the reasons for the problems of Southern Italy probably reach back into history, and into the reign of the Spanish Bourbons:
“Not only did the Spaniards exploit distrust for the purpose of domination, but they taught some of their subjects to do so too and to pass it on to others. The Bourbon Spanish domination, which replaced the Habsburgs in 1724 and, except for a brief interval, lasted until the Italian unification in 1861, continued to pursue the policy of divide et impera and took particular care to foster the hatred between Neapolitans and Sicilians: so much so that, as the Tocqueville dialogue shows, ‘in the minds of Sicilians the Bourbon and the Neapolitan domination became the same thing’”

What grew up to replace normal economic mechanisms of trust was the Mafia.  Without proper systems of law enforcement or justice then an alternative mechanism developed; and such systems endure because they work.  When people can’t trust the state they will find other ways, and replacing these requires a concentrated investment of time and effort.

Institutionally Inept

If this demarcation of cultural behaviors has withstood over a century of Italian unification what kind of problems would you expect to arise in a loose union of countries bridging everything from the puritanically honest Finns through the dementedly rigid Germans to the Mafia ridden south of Italy and the constitutionally tax averse Greeks?  This is an unstable coalition to start with, held together by the vast spinning centrifuge of European largesse, currently funded by Germany.  When you throw the nasty virus of global recession into the middle of this what you get is wholesale breakdown, and we should expect to see bits and pieces of the machinery flying off in different directions, causing damage and disaster as they go.

It’s easy to sit on the outside and demand that the Greek predilection for tax avoidance or the cosy Spanish conspiracy that has politicians (badly) running financial institutions or the Irish politico-property hegemony be curbed and cured.  However, these issues are the symptoms of the diseases, not the actual underlying problems – these run much deeper, and are traceable back into historical issues: issues of colonization and the breakdown of trust in the face of old economic crises (see: History's Financial Shadow). 

Building Trust, Changing Cultures

For the EU to suddenly turn around after a decade of failing to deal with its own known financial issues and act all surprised that corruption is a problem across many of these states and demand that they stop behaving like, say, Greeks, and start behaving like, say, Germans isn’t just unrealistic but plain stupid.  Yet nowhere in any of the frantic short-term shoring-up of the Eurozone can you find any attempt to address the institutional shortcomings at the heart of the bureaucracy that runs the union.

Lack of trust is the Eurozone’s Stuxnet.  The difference between Europe and Iran is that the worm was implicit in the machinery to start with; it just required a global financial crisis to trigger it.  Of course, no one ever expects those, but they come along all the same.  Saving the Eurozone is no longer just a matter of money, it’s a question of trust: the question is, is there anyone left that the voters are willing to place their confidence in?

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