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Monthly Archives: September 2011

Daniel Pipes some days ago posted the question: “Is Turkey Going Rogue,” linking to my August analysis of Turkey’s economic woes. A Turkish reader took issue with my dour outlook for the Ottoman, er, Turkish economy, which suggests that Tayyip Erdogan’s outsized ego is in line for some serious deflation along with Turkish consumption. At Daniel’s behest I replied. Below I reproduce the exchange on Daniel’s site.

Sep. 28, 2011 update: A reader, Selami Zorlu, took issue with the economic analysis in the above article. As I depended there on the work of David P. Goldman, I turned to Mr. Goldman to reply, which he did. The exchange follows.


Selami Zorlu’s critique

Today i read your article titled “Is Turkey going rogue” iin the National Post. You are offering very stong and accurate insight into a variety of issues. But you got a couple of arguments wrong in the process.

I am an economist and banker. I would sum up my main area of expertise/responsibility as “Turkish debt”. As much as I dislike the AKP and its ideas, what they did (or tried to do) in the economy was exactly the opposite of what you suggest in your article. I am 37 and for the first time in my life I witnessed the notion of a Turkish state budget in the black under these guys.

Your assertion that “the party’s patronage machine borrowed massive amounts of short-term debt to finance a consumption bubble” is wrong, to say the least. Do you mean they borrowed money and rationed to the public so they can spend? :) I’m kidding. But the reality is that Turkish foreign debt has in fact shrank, again under these guys, when looked at in terms of who did the borrowing. The Turkish public debt is largely owed to the Turkish public, and the portion that constitutes foreign debt makes up the minority of Turkey’s foreign debt. It is indeed the private sector that borrowed heavily in the past 8 years or so due to the fact that USD borrowing was extremely cheap. Banks in turn lent that money in the domestic markets as cheaper credit, which fuelled the boom you mention in your article. The AKP has been trying hard to curb that growth as they are very aware of the dangers.

On the other hand, the infamous Current Account Deficit (CAD) is a matter of intellectual debate. If you’d said “balance of payments” is unsustinable then it’d be a different debate. But to suggest CAD is unsustainable is in my humble opinion a paradox in itself. Because the maths is simple: if you couldn’t finance it you wouldn’t accumulate more CAD. It is because it is financeable that the Turks (and others) have been able to widen their CAD. I would draw your attention to the following items in the BOP calculation: FDI, portfolio investments and the “others” item, which was massive in Turkey’s Q32011 figures. Bottomline, Turkey can finance its Balance of Payments (and in turn the CAD deficit) and will sustain it as long as its private sector can keep borrowing. If there’s a problem along the line, it will be a credit problem, not a country event (i.e. private sector defaulting on loans granted by foreign public sector). I would strongly recommend you to see the Australian case in the CAD literature.

All in all, I believe your article was a good one in terms of drawing attention to the dangers posed by the current Turkish confidence mixed with lack of depth and intellect. It is indeed dangerous.


David Goldman’s reply:

Selami Zorlu may be complacent about Turkey’s economic situation, but markets are already forecasting a severe setback for the Turkish economy. Turkey’s lira fell by a quarter between its November 2010 peak and Sept. 22, the worst performer among all the major currencies. Its stock market, meanwhile, has fallen in dollar terms by 40%, far more than the 25% decline in the MSCI Emerging Market Index, the worst performance among all the index components.

 

 

1. It is patently false to argue that the AKP is “trying hard to curb” domestic credit growth. On the contrary, the regime aggressively promoted consumer lending. The banks closest to the AKP, that is, the four Islamic Banks (or “participation banks”) have increased their consumer loans at a much faster rate than the conventional banks. In the year through September 16, consumer loans by the Islamic banks rose by 53%, according to the Central Bank’s data base. Commercial banks’ consumer lending grew by 36%. The Islamic banks have lent TRY 5 billion to consumers, about a quarter as much as the commercial banks. As Sharia-compliant banks, the participation banks are aligned with the Islamist AKP. One of them, Bank Asya, is controlled by the Fethullah Gülen movement.

2. The closer we look at Turkey’s enormous current account deficit (at 11% of GDP during the second quarter of 2011), the more malignant it appears. It is one thing for a developing country to run a trade deficit in order to import capital goods that contribute to future productivity. But Turkey’s imports are a pure consumer bubble.

As we observe the chart below, the surge in Turkey’s imports was concentrated on consumer durables. Imports of capital goods remain well below the pre-crisis peak. Capital goods imports barely changed from their 2003 level, while consumer goods imports rose by more than half. Turkey ran up a current account deficit equivalent to nearly half its total import volume, while reducing imports of capital goods that would have added to future productive capacity. The Erdogan regime, that is, presided over a classic bubble in imported consumer goods.

Unit Value of Turkish Imports of Capital Goods and Consumer Durables (Index 2003 = 100)

 

 

Source: Central Bank of Turkey

The country’s overall debt levels remain low compared to the weaker European countries, but the growth rate is alarming. To correct it will require a severe retrenchment of domestic consumption.

As Prof. Murat Üçer of Koc University wrote in the Fall newsletter of the Center for Economics and Foreign Policy Studies (EDAM),

A serious and probably quite painful ‘adjustment’ is inevitable in the short-term, in order to bring current account deficit to more ‘normal’ levels….This can’t happen with a weaker currency alone; growth will also have to slow visibly. Second, an excessive CAD level points to a structural weakness in the economy. It simply attests to our inability as a nation, to put forth enough of a presence in the global supply chain of goods and services. Put differently, it implies that our average dollar-based income – per capita as well as per worker, which runs around $10,000 and $30,000, respectively — is simply too high, compared to our average productivity levels. By this interpretation, the current account deficit represents nothing but a structural deficit in our skills and institutions.

Turkey simply is not the economic powerhouse it likes to think it is, and the humbling of Turkey’s economic prospects presages a similar humiliation in its global standing.


 

If Franz Kafka covered the Pentagon for the Washington Post, he couldn’t have done better than yesterday’s backgrounder by Greg Miller and Karen DeYoung, titled, “Adm. Mullen’s words on Pakistan come under scrutiny.” Unnamed Obama administration officials told the newspaper that “Adm. Mike Mullen’s assertion last week that an anti-American insurgent group in Afghanistan is a ‘veritable arm’ of Pakistan’s spy service was overstated and contributed to overheated reactions in Pakistan and misperceptions in Washington.” But the officials didn’t want to be quoted publicly so as not to be seen challenging the outgoing chairman of the Joint Chiefs.

A serving officer tells the truth in public about Pakistani spooks plotting with jihadi fanatics to attack a U.S. embassy and murder Americans? And the State Department types lurk in the shadows complaining that he’s exaggerating? It must be that the Kingdom’s coming, or the Year of Jubilo. The fact that the striped pants set doesn’t have the temerity to refute, or let alone rein in, the estimable Admiral Mullen after he exposed Pakistani collaboration tells a great deal about the mood of the American people.

Judging from the questions thrown at me on radio talk shows during the past week, Americans have no patience for putative allies who conspire behind our backs to murder American personnel. They want to know: Why do we put up with this sort of murderous betrayal from Islamabad?

Why, for that matter, have we let Iran get away with the murder-by-proxy of American soldiers in Iraq? The answer in both cases is that our commitment to stability in the region compels us to pretend that inherently unstable, murderous, and dangerous regimes are pillars of public order who must be appeased and protected. That is the fundamental flaw in American foreign policy, and it infected the Bush Freedom Agenda from the beginning.

Why didn’t we deal with the murderous mullahs of Tehran years ago when it became evident that they intended to acquire nuclear weapons? With characteristic candor, Mike Mullen explained why in a March 6, 2009, interview with Charlie Rose: “What I worry about in terms of an attack on Iran is, in addition to the immediate effect, the effect of the attack, it’s the unintended consequences. It’s the further destabilization in the region. It’s how they would respond. We have lots of Americans who live in that region who are under the threat envelope right now [because of the] capability that Iran has across the Gulf. So, I worry about their responses and I worry about it escalating in ways that we couldn’t predict.”

I complained at the time, “A rough translation of Mullen’s remarks into civilian political language is that the quixotic notion of building democracy in the Middle East led the United States into an Iranian trap.” Iran could (and still can) act as a spoiler in Iraq and make shambles of our trillion-dollar investment in Iraqi democracy. The Bush administration held back from hitting Iran because, as Mike Mullen explained, our nation-building exercise made American warriors into targets and hostages.

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Freudian Slips in Nightmare Alley

September 26th, 2011 - 2:16 pm

My PJ Media colleague Ed Driscoll has already picked up Obama’s “Jew, I mean a janitor” gaffe on CNBC. For those who just got back from vacation on another planet, what Obama said to the Congressional Black Caucus was:

If asking a billionaire to pay the same tax rate as a Jew, uh, as a janitor makes me a warrior for the working class, I wear that with a badge of honor. I have no problem with that.

It’s already hit a number of the conservative discussion boards, but except for a passing mention at a Los Angeles Times blog, this utterly outrageous slip made into not one mainstream media news outlet. Ed is right: if this had been Bush, we would have not heard the end of it.

The remarkable thing is that Obama was reading from a prepared text and made the slip nonetheless. The shrinks would have a good deal to say about this. Cracks may be appearing in Obama’s unflappable, freeze-dried facade. In some ways that is a scary prospect.

Two years ago I published a piece of political satire entitled “Obama in Nightmare Alley,” or rather tried to publish it; in the decade I have written the “Spengler” column at Asia Times Online, it was the one occasion on which a piece was spiked. So I posted it at the First Things blog instead. Martin Peretz at New Republic had argued that Obama might be suffering from Narcissistic Personality Disorder: “What I suspect is that the president is probably a clinical narcissist. This is not necessarily a bad condition if one maintains for oneself what the psychiatrists call an “optimal margin of illusion,” that is, the margin of hope that allows you to work. But what if his narcissism blinds him to the issues and problems in the world and the inveterate foes of the nation that are not susceptible to his charms?”

It happens that in the DSM-IV categorization of such illnesses, Narcissistic Personality Disorder and Anti-Social Personality Disorder (what used to be called sociopathy) are closely related. Sociopaths lie effortlessly and without fear. In some respects Obama shows the coldness and mendacity of a sociopath (he certainly lied convincingly to Jewish supporters during the summer of 2008).

This is satire, I hasten to add, not diagnosis: let the shrinks figure out our president as best they might. But there is something creepy about Barack Obama that to this observer brings to mind the carney mentalist played by Tyrone Power, Jr. in the 1947 noir creaker Nightmare Alley. Power’s sociopath ends up as the carnival Geek. Obama has spent his life (as the brilliant Angelo Codevilia puts it) as “the Chosen One,” the vehicle of an establishment for whom Obama came as a gift from Central Casting. But the personality traits that made Obama such an attractive figure upon whom to project wishful thinking may not serve him well under duress. The President, in short, bears careful watching.

 

…talking about How Civilizations Die.

See The Source.

Prof. Reuven Brenner of McGill University is one of the two or three smartest economists I know, and a deep thinker about big issues of history and the success and failure of societies. His review of my book How Civilizations Die (And Why Islam is Dying, Too) appears this morning in Forbes Online. It’s a serious appreciation, not uniformly positive (Brenner is not comfortable with my insistence on the central role of religion), but all in all, a great honor to have this sort of public dialogue with a scholar of Brenner’s stature.

Update: Brenner’s criticism hangs on his rejection of the link between faith and fertility. But this is an odd objection, because it is in fact the least controversial assertion in my book. During the past five years a great deal of new research by the professional demographers has affirmed that faith is the decisive factor in fertility after the transition from traditional society. The liberal secularists have thrown in the towel on this point in the person of Eric Kaufmann, whose book Will the Religious Inherit the Earth concedes that secularism is dying for lack of fertility. There are a number of studies by the Max Planck Demographics Institute in Germany that nail the case. The relevant material is cited in my book (and some of it is cited by Kaufmann).

Brenner is a brilliant economist, but he doesn’t know the recent demographic literature; instead of addressing facts which are no longer controversial, he spent the second half of his review offering an alternative theory which, in fact, is moot, because we know that the decisive issue is faith.

I don’t see the value of a debate over issues that are well resolved by research.

Why Won’t Liberals Listen to Reason?

September 21st, 2011 - 4:27 pm

The left believes that a clever elite can fix all the world’s problems; conservatives accept that human error can lead to disastrous outcomes. Liberals fancy themselves rational in contrast to conservatives’ dour acknowledgment of tradition and tragedy. Why, then, is the left so impossibly, stubbornly, counter-factually dense when it comes to the state of Israel (among other matters)?

Liberal rationality is a pose. Knowledge is existential — that is, we tend to ignore facts that apply to a world in which we will not exist at all. I saw that before the 2008 banking crash, when I tried to warn the industry that a crash was inevitable. Most of them said, in effect, “If what you’re saying is true, then I shouldn’t have a job, so I won’t think about it.” Not long afterwards, most of them didn’t.

The left (and the European left in particular) doesn’t like certain facts because they are dying — literally. The triumph of the secular welfare state in Europe is associated with a catastrophic population decline. Three-fifths of southern Europeans will be elderly pensioners by mid-century. Of course, they’re going to go bankrupt. And Muslim society is fragile, and much of the Muslim world has entered a tailspin from which it won’t recover. The left clings to the magical idea that if only Israel would roll over and die, and validate the illusions of the Muslims, that somehow this horrific future might be avoided.

This is about as rational as the cargo cults of New Guinea after World War II. The sociologist Eric Kaufmann is an enlightened liberal, because he observes that liberalism is a self-liquidating proposition: “The weakest link in the secular account of human nature is that it fails to account for people’s powerful desire to seek immortality for themselves and their loved ones,” he wrote in a recent book titled Shall the Religious Inherit the Earth? Secular liberals don’t have children while people of faith do.

The existential irrationality of the liberals came to mind yesterday as I listened to Alan Dershowitz, Shelby Steele, and other distinguished friends of Israel on a Hudson Institute conference call. Hudson and Touro College are hosting a conference titled “The Perils of Global Intolerance: The United Nations and Durban III,” on Thursday, Sept. 22, across the street from the United Nations. Speakers will also include Ron Lauder, John Bolton, Elie Wiesel, Wafa Sultan, Ruth Wisse, and other dignitaries. It’s an important event, and deserves wide attention. (Note: Watch the proceedings live on PJTV, September 22.)

It seems so obvious when Profs. Dershowitz and Steele explain. The Palestine Authority won’t recognize Israel as a Jewish state. Period. And as the Wall Street Journal pointed out Sept. 18:

 ”We are going to complain that as Palestinians we have been under occupation for 63 years,” Mr. Abbas said the other day. That’s another way of saying that the “occupation,” in Mr. Abbas’s view, began with the creation of the state of Israel in 1948, and not with Israel’s takeover of the West Bank and Gaza after a war that threatened Israel’s existence in 1967.

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They Really, Really Hate Judaism

September 19th, 2011 - 12:34 pm

Now Egypt has banned the export of palm fronds, whose ritual use is central to the observance of the Jewish Feast of Sukkoth (Tabernacles). Most American Jews ignore this holiday, one of the three pilgrimage festivals (along with Passover and Shavuot) for which all the men of ancient Israel came to Jerusalem. For observant Jews, though, Sukkoth recreates the liturgy of the Temple and embodies our hope for its restoration. According to press accounts, the Egyptian Agriculture Ministry gave no reason for the ban. Israel is sourcing palm fronds elsewhere.

The reason for Egypt’s ban is obvious: the Islamists who are taking Egypt over by stages hate Judaism–not just the Jewish State, and not just the Jewish people, but the religion itself.  By extension, they hate Christianity.

As I explain in my new book How Civilizations Die (and Why Islam Is Dying, Too), Islam asserts the Election of the Arabs in opposition to the Election of Israel. The Jewish religion itself is an affront to Islam, except, of course, when the Arabs can chant, “The Jews are our dogs,” permitting them to practice Judaism under conditions of humiliation and oppression. This silly, petty, pointless act of religious hatred speaks volumes about the character of the new Egyptian regime and the devolution of Egyptian society.

Erdogan Has Good Reason To Be Crazy

September 18th, 2011 - 3:40 pm

Turkish Prime Minister Tayyip Erdogan brings to mind the story about the housewife who calls her husband during rush hour. “Be careful driving home on the Beltway, dear,” she advises. “The news says that there’s a maniac driving in the wrong direction.” “What do you mean, ‘a maniac’?,” he replies. “Everybody’s driving in the wrong direction!”

Now that Turkey has threatened Europe with a “freeze in relations” if Cyprus (as planned) assumes the presidency of the European Union in 2012, it must seem to Erdogan that everyone is driving in the wrong direction. Earlier this month Turkey declared “null and void” the United Nations’ Palmer Commission report, which supported Israel’s right to enforce a blockade against Gaza. That was a minor gaffe, because United Nations dicta have the authority of revelation to the liberal media, except, of course, when they support Israel. It’s one thing for Turkey to freeze relations with Israel — we take it for granted these days that everybody hates Israel — but the Europeans? Everybody likes the Europeans, who have replaced their defense ministries with an answering machine that says, “We surrender.” And over Cyprus? Even Russia, Turkey’s key trading partner and the host for millions of Turkish guest workers, is aghast at Erdogan’s tantrum. Russia has strong ties to Cyprus.

The New York Times’ Thomas Friedman blames Israel for not apologizing to the Turks. But one doesn’t want to apologize to Erdogan. You don’t want to talk to him. Don’t make eye contact. We New Yorkers learn that on the subway. It seems mad to take on Washington, Brussels, Moscow, as well as Jerusalem, all in the same week. What is driving the Turkish prime minister round the twist?

The Arab world is in free fall. Leave aside Syria, whose regime continues to massacre its own people, and miserable Yemen, and post-civil war Libya. Egypt is dying. Erdogan’s “triumphal” appearance in Egypt served as a welcome distraction to Egyptians — welcome, because what they think about most of the time is disheartening. What’s on the mind of the Egyptian people these days? According to the Arab-language local media, it’s finding enough calories to get through the day.

Egypt imports half its caloric consumption, the price of its staple wheat remains at an all-time high, and most Egyptians can’t afford to buy it. The government subsidizes bread, but according to the Egyptian news site Youm7 (“The Seventh Day”), the country now faces “an escalating crisis in subsidized flour.” Packages of subsidized flour are not reaching the intended recipients, in part because the Solidarity Ministry hasn’t provided the promised shipments to stores, and in part because subsidized flour and bread are diverted to the black market. A small loaf of government-issue bread costs 5 piasters, or less than one U.S. cent, but it can’t be found in many areas, as the Solidarity Ministry, provincial government, and bakers trade accusations of responsibility for supply problems. Poor Egyptians get ration cards, but flour often is not available to card-holders. Rice, a substitute for wheat, also is in short supply, and the price has risen recently to 5.5 Egyptian pounds per kilo from 3.75 pounds.

Most Egyptians barely eat enough to keep body and soul together, and many are hungry. That is about to get much, much worse: The country is short about $20 billion a year. The central bank reports that the country’s current account deficit in the fiscal year ended July 1 swung from a $3.4 billion surplus in the fiscal year ended July 2010 to a deficit of $9.2 billion in the fiscal year ended July 2011. Almost all of the shift into red ink occurred since February, suggesting an annualized deficit of around $20 billion. Egypt’s reserves fell about $11 billion since the uprising began in February. Who’s going to cough up that kind of money? Not Turkey, whose own balance-of-payment deficit stands at 11% of GDP and whose currency is collapsing, as shown in the chart below:

Chart forTRY/USD (TRYUSD=X)

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Endgame for Egypt

September 13th, 2011 - 3:21 pm

Robert Musil’s Der Mann Ohne Eigenschaften (“The Man Without Qualities”), one of the great novels of the past century, is a portrait of the Austrian elite early in 1914. The readers know that their silly world will come to a terrible end a few months later with the outbreak of war, but the protagonists do not. Musil published a first volume and spent the rest of his life trying to write a second, without success, for it is the sort of story that has no end except for the abyss.

Arab politics today has a Musil-like quality of unreality, for the conclusion will be the collapse of the Egyptian state. The misnamed “Arab Spring,” really a convulsion of a dying society, began with food shortages. Egypt imports half its caloric consumption, 45% of its people are illiterate, its university graduates are unemployable, its $10 billion a year tourism industry is shuttered for the duration, and its foreign exchange reserves are gradually disappearing. In August, the central bank’s reported reserves fell below what the bank calls the “danger level” of six months’ import coverage, or $25 billion, from $36 billion in February, although I suspect that even this number is bloated by $5 to $10 billion of Algerian and Saudi loans and trade credits. Despite reports in the press that food price inflation in Egypt has slowed, Arab-language Egyptian media report that the prices of some staples, like rice and sugar, have risen by 50% or more since March. The military government is distributing bread and propane (the main cooking fuel).

Egypt turned down a proposed loan from the International Monetary Fund earlier this year because the military government could not accept the conditionality attached to IMF money. The Gulf States and the West may keep Egypt on life support, which would leave a large proportion of Egyptians in a limbo of extreme destitution. The fiscal collapse of Southern Europe (and severe problems elsewhere) makes this an inopportune time to come to the West with a begging bowl. As for the Gulf States: they are not even meeting their commitments to the Palestine Authority, and can’t be expected to carry a $15 to $20 billion annual financing requirement for Egypt.

It does not compute. Western economists can concoct all the economic recovery plans in the world, but a country that can’t teach half its people to read, and can’t produce employable university graduates, and can’t feed itself, is going to go down the drain. Nasser, Sadat and Mubarak kept Egypt under control by keeping most of its people poor, ignorant, and on the farm, and by warehousing its youth in state-run diploma mills. After sixty years of such abuse, Egypt simply can’t get there from here.

The result, I predict, will be a humanitarian catastrophe that makes Somalia look like a picnic. It’s not surprising that the Egyptian mob might attack the Israeli embassy. The Egyptian street has nothing to do but rise up against perceived oppressors, because nothing good awaits them; and the desperation that will follow the collapse of the Arab “Spring” threatens every Middle Eastern regime, such that the rulers have to try to get out in front of the rage. But what will they actually do? The Egyptian military is hanging onto power by its fingernails. If it attacks Israel, it will lose, and generals will be hanged from lamp posts. The Syrian military is too busy killing protesters to attack Israel, or to assist Hezbollah in a confrontation with Israel.

What we are likely to witness during the next two years will be repellent, even horrifying — but not necessarily dangerous.

Good-bye, Europe

September 12th, 2011 - 4:41 pm

News reports that Germany will allow Greece to default mark the beginning of the end for Europe as a political concept. As a cultural concept Europe had reached its best-used-by-date in 1914. The Cold War extended its political life, and now it is failing for general lack of interest. In twenty years, half of the citizens of southern Europe will be at retirement age, which guarantees national bankruptcy. The proportion of elderly dependents in the population will exceed 60% by 2050.

They might as well get it over with and go bankrupt now. Demographics, to be sure, are not the proximate cause of today’s crisis. The Club Med countries gamed the Euro system to borrow cheaply and fund a corrupt welfare state. Nonetheless, incompetence in the short term calls attention to problems in the long term, and Europe’s insoluble demographic problems loom large in the background.

Although Germany’s political establishment maintains a reflexive loyalty to the European concept, the Germans do not want to pay taxes to support their feckless southern neighbors. Germany’s export future lies in the east, not the south (or even the west), and the economic impact of a Euro crack-up on Germany probably is limited. Chancellor Angela Merkel has many virtues, but she misread the mood of her fellow citizens badly, and they have repaid her by trouncing her Christian Democratic Union in six state elections in a row.

The Greeks, like the Italians, seem to have taken the view that they might as well be bankrupted for a sheep as for a lamb, paralyzing their governments with strikes and protests against the austerity measures that might delay national bankruptcy. In Greece, even the tax collectors are on strike. So much of the country lives on political handouts that it is impossible to form a national consensus for austerity. The Germans have lost patience. When a corporation or individual can’t manage, a bankruptcy judge takes over. When a country can’t manage, it takes the coward’s way out, namely devaluation, a random destruction of wealth with arbitrary redistribution of gains and losses among debtors and creditors. A return to the drachma and lira, and perhaps the peseta, is the likeliest outcome.

America can look upon Europe’s misery with equanimity, if not Schadenfreude. The benefits of an integrated European economy have long since been transcended by the emergence of a global market; China and even Russia figure more importantly for German exports than Italy or Spain. The Eastern Europeans, where we have a residual security concern, will remain in the Northern European orbit, given their hard-wired economic links to Germany. Long term, Eastern Europe will diminish as an American concern along with its population, which has the lowest fertility of any part of the West.

The Europeans don’t like us. Most of them think that US foreign policy in some way provoked 9/11, according to a 2007 poll. But that is no reason to rejoice in their misery. They are another civilization in decline. There but for the grace of God go we, and we should look to our own drift towards European-style welfare statism with redoubled concern as Europe fades away.