INTRODUCTION

Much like across the rest of Europe, the vote by the British people to leave the European Union was not expected by the countries of south-eastern Europe. Amongst the newest members of the EU, they had all striven to become members of an organization that, along with NATO, had come to define European politics. This amplified the shock that the United Kingdom, a leading European state that had backed the enlargement of both organizations, had now decided to turn its back on the EU. Geographically, Bulgaria, Croatia, Romania and Slovenia are part of a wider region in which geopolitics and history did not facilitate or encourage regional cooperation until quite recently. Before fulfilling their post-Cold-War strategic priorities – EU and NATO membership – the four countries had supported regional cooperation formats or initiatives only when they were sure the respective format would promote their accession agendas to the EU rather than delay them. Geographically, some of them are parts of other regions – the Danube (Bulgaria, Croatia and Romania), the Black Sea (Bulgaria and Romania) and the Mediterranean (Croatia and Slovenia). Despite this, and while not constituting a formalized format, the four countries covered here as south-eastern Europe have common interests that form the backdrop for understanding their approach to the UK’s renegotiation, and especially their common concerns about the outcome of the June 2016 referendum. They share common interests over the future terms of relations between the EU and the UK, as well as with regard to the future of the EU without the UK. Not belonging to the heavyweights in the EU, all four countries are interested in pursuing a common European position in the negotiations with the UK and did not join with those opposed to entrusting the negotiations to the European Commission.

Because of the UK’s strong strategic role with regard to security matters, bilateral relations between the four countries of south-eastern Europe and the UK have been much more important in terms of support for EU and NATO enlargement than in terms of economic and trade cooperation.

INTRODUCTION

As with the rest of the European Union, the United Kingdom’s decision to seek a renegotiated EU relationship and a referendum was greeted with a mix of irritation and concern in the central European states of Austria, the Czech Republic, Hungary and Slovakia. The renegotiation, the campaign, the result and the uncertainty and speculation that followed presented these four medium-sized EU member states with a variety of challenges and opportunities.

Despite their geographical proximity, these four states vary in both their levels of integration in the EU, their cooperation with one another and their relations with the UK. Austria, which was neutral during the Cold War but closely aligned with the West, and especially Germany, joined the EU in 1995 in the first enlargement after the Cold War. In 1999 it became one of the founding members of the Eurozone. The Czech Republic, Hungary and Slovakia joined in 2004, with six other countries – an enlargement that Britain had backed strongly, and is often seen as having gained from in terms of positive relations with the newer member states. In addition to Poland these three states form the Visegrad Group, working together to further their ideas for European integration. Slovakia joined the Eurozone in 2009, while Hungary and the Czech Republic retain their own currencies. While all four countries are members of the Schengen area, unease at the arrival of immigrants has been a common issue for them, helping boost Euroscepticism in all four. At the same time, citizens of the four states, but especially in the Czech Republic, Hungary and Slovakia, have taken advantage of the EU’s freedom of movement. The future of their citizens resident in the UK quickly became one of the defining issues in the period covered here.

Membership of the EU has given all four countries an enhanced ability to shape European and international relations. As medium-sized EU members, the renegotiation and the challenge of dealing with Brexit has seen all four try to shape the position of a union of 444 million people. This was especially so for Slovakia, whose six-month presidency began only a few days after the Brexit vote.

Brexit is full of surprises. The result was a surprise even for the Leavers. For me and many others, it was a sad surprise. No longer was the European Union an irreversible project. It was established to create irreversible economic and political bonds for the sake of an ever-lasting peace. The Union embodied values, and the most important of all was: peace. The EU was and is much more than an economic added value. The Union is not an aim in itself. It is a peace project. Brexit has national sovereignty as a goal in itself. If the EU falls apart, peace is not guaranteed. It is a sad thing that the Brexit debate is mainly about trade and the City of London. Much more is at stake.

It was a happy surprise that support for EU membership amongst the citizens of the remaining 27 member states increased dramatically after Brexit. For a large majority of them, Brexit was not a template. It would add instability to an already unstable world. The EU had become part of our DNA, even if we lack enthusiasm for it. For young people, a return to the old world of borders and national currencies seems unworldly. If any Britons thought that Brexit would be the beginning of the end of the EU, the start of the unravelling process, this was not the case. It was the first in a long series of miscalculations on the part of some in Britain.

Another surprise was the unity of the remaining 27 member states during the first phase of the Brexit negotiations. Britain is negotiating with a bloc that speaks with one voice. It means that we have an answer to Henry Kissinger’s question “Who do I call if I want to speak to Europe?”. You can now call Brussels! By contrast, Britain speaks with many voices and is not so united anymore. It is obvious that in the talks on the future EU– UK relationship the EU has to work hard to remain united, but we are used to compromise. The EU is based on compromise.

On his first foreign trip after being elected German president in early 2017, Frank-Walter Steinmeier chose to visit the European Parliament to make a strong plea for European integration. In the speech he characterized Brexit, and in particular the conduct of the Leave campaign, as “irresponsible” (Steinmeier 2017). This notion of irresponsibility, of political brinkmanship for short-sighted political gain, best describes the impression of the German political elite towards the Brexit vote and former UK prime minister David Cameron’s decision to seek a renegotiated UK–EU relationship. This was reflected in Chancellor Merkel’s controversial statement in May 2017, when she argued that, after the election of Donald Trump and the Brexit vote, the “times when we could completely depend on others are, to a certain extent, over” (Henley 2017).

The story of British–German relations in the wake of the Brexit vote is therefore more than just about difficult negotiations at the European level. It is also a story about a misjudged relationship, when misconceptions on both sides led – and continue to lead – to miscalculations and, ultimately, disappointments and a distancing in relations. This is particularly damaging at a time when a functioning bilateral relationship could have been crucial to shaping both Europe and the wider world. These misconceptions go both ways. On the UK side, from the outset of the renegotiation Germany was perceived as the prime ally among the EU27, and one that would go a long way to secure British membership in the EU as a balance to France, and to keep a close economic partner in the Union. During and after the Brexit referendum, leading proponents of Brexit argued that, because of the close economic ties, the German government would take a soft stance on Brexit negotiations in order to protect its economic interests. In both cases, however, for the German government, the political interest in safeguarding the European Union trumped any other considerations, resulting in a hard and clear stance on the renegotiation and in the lead-up to the commencement of formal exit negotiations with the United Kingdom.

The name Paul Moritz Warburg is synonymous with the founding of the Federal Reserve System. Warburg’s impact on American banking is a parallel to his family’s impact on European banking. The epic story of the Warburg family of European bankers can be traced back to the early 1500s when Simon von Cassel settled in the German Westphalia town of Warburg (originally founded by Charlemagne in 778 and was then known as Warburgum) and began the family’s quest for money and financial power. Although the Warburgs excelled in many other occupations throughout Europe, it was this lineage that produced some of the most successful bankers in the world. Blessed with sharp minds and good business sense, the generations of the Warburg clan gained seemingly boundless money and power.

In the eighteenth century the family splintered into two groups. Some went to Altona, Denmark and others to Hamburg, Germany. Despite being relegated to Jewish ghettos and, by law, referred to as “moneylenders” and not bankers, in 1774 a Warburg established the merchant-banking firm of S. G. Warburg. It soon became W. S. Warburg as the family grew and sons and grandsons began to contribute to the family business. In 1807 the Altona Warburgs sold to the Hamburg Warburgs of M. M. Warburg & Co., founded by Moses and Gerson Warburg in 1798.

When Napoleon invaded Germany, Hamburg was captured by the French army in 1804, as was Moses’s brother Gerson. Napoleon himself held Gerson hostage and demanded a ransom from the entire Hamburg Jewish community for his release. However, Gerson’s own brother Moses wouldn’t pay it. Only after prodigious pressure from their community did Moses finally put up the money, which was still a sum much lower than what was expected of him. Despite this lack of loyalty, the two brothers signed a partnership in 1810, and expanded M. M. Warburg together.

The end of the Napoleonic war marked the beginning of economic rebuilding for Germany. When the French withdrew in 1814, Moses and Gerson saw the need for replenishment of the country’s stock of silver currency to boost the German economy.

Benjamin Strong, Jr made few speeches and did not appear in public to wax theoretically on the ways of economics and high finance. He was J. P. Morgan’s workhorse, and he built his reputation and his fortune on the back of the House of Morgan.

Adeline Torrey Schenck married a railroader and small-farmer named Benjamin Strong, and together they had four sons and a daughter. Her forceful personality befitted Adeline, the daughter of a prominent Presbyterian writer, theologian and minister, and her four sons continued the tradition of prominence in their respective fields. The oldest was a Princeton graduate who earned a PhD from Columbia University and became a professor of neurology at the College of Physicians and Surgeons. Her second son became the vice president of the American Radiator Company and partner in the engineering firm of Meyer, Strong and Jones. Her youngest boy went on to a highly successful career in medicine and psychiatry after earning degrees from Princeton and the College of Physicians and Surgeons.

Adeline’s third son Benjamin, Jr, was left no choice but to forego college because of a lack of financial stability in the family at the time of his high school graduation. Yet, he went on to become the governor of the New York branch of the Federal Reserve and one of the most powerful and influential men in the Unites States.

In 1891, at the age of 18, Benjamin Strong, Jr left the family home in Montclair, New York, to seek his fortune in finance. After being quickly fired from his first job for of all things, poor penmanship, he entered the financial firm of Jessup, Patton & Co., which became John Patton & Co., and then Cuyler, Morgan & Co. He started as a clerk, and by 1900 Strong was representing international investors in real estate and securities ventures. Basically, he was a stock and real estate speculator.

He left Cuyler, Morgan, & Co. at 26, to join the Atlantic Trust Company, which in 1903, became the Metropolitan Trust Company. He married Margaret LeBoutillier, started a family, and soon settled in the prominent New York City suburb of Englewood, New Jersey.

Cameron’s Brexit gamble made waves in Warsaw. The United Kingdom has been Poland’s long-time ally in the European Union and NATO, and Warsaw did not want to see London leave the EU.

The UK supported the eastern enlargement that paved the way for Polish membership of the EU in 2004. Warsaw and London have also taken a firm stance towards an increasingly assertive Moscow and pushed for sanctions after Russia invaded Crimea. Both countries also worked hand in hand in favour of further liberalization of the single market. Every relationship has its ups and downs, however, and so does the Polish–British partnership. The UK was one of the three EU member states (next to Sweden and Ireland) that opened its labour market for Poles and other central Europeans immediately after enlargement. The sharp inflow of EU migrants from central Europe contributed to an anti-migration narrative in the UK. Poland, under then prime minister Donald Tusk (the current European Council president) and his successor Ewa Kopacz, held it against the British government that it at times portrayed central Europeans in the UK as benefits scroungers.

But these tensions did not stand in the way of a pragmatic collaboration between Warsaw and London. From the earliest period covered in this book, many in Poland felt that Brexit would put this cooperation at risk. For Warsaw, the UK’s departure from the EU would shift the balance of power towards Germany and France. The exit of the largest non-Euro member would also make the non-Euro group less influential and bring increased pressure on Warsaw to adopt the euro. Poland is legally committed to joining the Eurozone, but its public has opposed the accession. Warsaw is in no rush therefore to adopt the common currency.

CHANGE OF GUARD IN POLAND: BAD NEWS FOR THE EU ENTHUSIASTS BUT GOOD NEWS FOR CAMERON

Warsaw wanted to help David Cameron keep the United Kingdom in the European Union but was reluctant to support reforms that would undermine its standing in the EU. Under Tusk and Kopacz, Warsaw relied on a partnership with the EU’s supranational institutions in its European policy.

The United Kingdom’s decision to leave the European Union will reshape the EU and, in particular, the EU’s institutions. The European Parliament will lose 73 British members. The Commission will have one Commissioner fewer and will have to deal with the more than 1,000 British nationals it employs. The Council of the EU will see a change in its balance of votes – and consequently in its voting patterns. The Economic and Social Committee and the Committee of the Regions will lose their British members, and the future of thousands of Britons working in the wider EU policy-making community has become uncertain.

Britain’s decision is near-universally seen as a negative one for the EU, although opinion is also united in thinking it will likely be much worse for the UK. There was little the EU institutions could do to avoid this scenario, however: the UK was the main actor and the room of manoeuvre for EU institutions was limited. How, then, did the European Commission, the European Parliament and the Council act and react during this process triggered by one of the EU’s member states?

From the moment the then UK prime minister, David Cameron, informed his counterparts of his intention to hold an in/out referendum and to renegotiate the UK–EU relationship up until the day he lost the referendum, the EU institutions played, at best, the role of a supporting actor. But, once the fate of the UK’s membership had been sealed by the vote, the EU institutions took centre stage in order to strengthen the unity of the 27 remaining member states. The UK progressively and rather quickly became de facto a “third country” for the EU. This was aided by the sense of distance that had been created during the referendum campaign, which the EU institutions felt was fought on misinformation and with only a half-hearted endorsement of EU membership by many key British political actors.

This chapter retraces the process that transformed a complicated but mutually beneficial relationship into a lose–lose situation, characterized by a rapidly growing estrangement between both sides.

In these days of YouTube “New World Order” videos and illuminati chasers, a book on the Federal Reserve could be misconstrued as yet another conspiracy theory to add to the pile of blogs and web sites that choke our mainframes. This is not one of those books, and I am not one of those historians. You will find no satanic rituals, pentagrams, or lizard people from outer space here. You will find the Federal Reserve, money, politics, power, and the men who controlled them all.

I love the United States of America. I think a democratic form of capitalism is the best economic system for any nation. I like, in theory, what Wall Street provides the average American investor, as well as the corporate structure. I invest in the stock market, I own real estate, and I am even a private lender. The idea of an opportunity to better an individual’s economic condition is one of the American ideologies that make this nation such a great place. However, this system can be and is abused on too many occasions, and that concept was the inspiration for my research.

I am against cupidity and the reckless nature in which those who are possessed by it slash and burn as a means to dictatorial or oligarchical ends. I am against the total lack of transparency and the destructive forces of corporate consolidation and monopolization that kills the spirit of free enterprise in this country. The scourge of deregulation since the Reagan years that has given Wall Street banking institutions a free pass to cannibalize their own market through derivative investment, synthetic portfolios, and notional commodity fixtures is an insult to average American investors and exemplifies the weakness and the culpability of the government, which was organized to protect them.

This book is about power. Those who possess it and those who channel it to the reservoirs of consolidated gain. This process has been going on since the pharaohs of ancient Egypt. However, in this country, around the turn of the twentieth century, a politician, an economist, and a few Wall Street bankers overthrew the entire monetary system of the United States of America and produced an entity that for the benefit of the select few who built it, would wield more economic power than any other of its kind.

INTRODUCTION

For Estonia, Latvia and Lithuania, domestic and international policies are informed disproportionately by questions of the existential threat of neighbouring and openly irredentist Russia. The responses of the three Baltic states to the United Kingdom’s renegotiation, referendum and vote to leave have followed this logic. Indeed, the UK was a major power in each of the two strategic tracks that all three countries had used to make their removal from the Western security umbrella as unlikely as possible, namely NATO membership and rapid and deep integration into all European Union initiatives.

We argue that the similar existential threats shared by the three, and resultantly similar strategic approaches, have been mirrored in their fairly common responses to Britain in the period covered here. Above all, the three states were keen not only to maintain the UK’s security contribution across the Baltics but also to safeguard the integrity and unity of the EU. Strategically, Estonia, Latvia and Lithuania have – with success, thus far – aimed to ensure that the two issues are kept as separate as possible, most pertinently by keeping military commitments out of EU–UK negotiations.

Baltic reaction to the UK’s renegotiation, referendum and vote to leave has not been solely in security terms, however. The second major concern has been the future of the free movement of goods, capital and labour, particularly the latter, because of the large communities of citizens from the three Baltic states living in the UK. The reaction of the three states has also been partially informed by their nature as eastern, pro-free-market and small member states, particularly so after the referendum, as they turned their gaze towards the possible political dynamics of the post-Brexit EU. Overall, the potentially destabilizing security implications of Brexit for the EU and NATO meant that, as Article 50 was triggered, the three Baltic countries all sought a speedy, amicable and legalistic resolution of negotiations between the two parties that minimizes disruption to the status quo ante Brexit.

ESTONIA

When, in October 2015, the Estonian prime minister, Taavi Roivas, met with David Cameron he made it clear that “Estonia and the UK have a similar understanding of the changed security situation – we are very close allies in both NATO and the European Union”.

If Alexander Hamilton, Richard Nixon and Al Capone had a love child, he would be Senator Nelson W. Aldrich. The London Times called him, “the general manager of the United States”. Writer for The Cosmopolitan, David Graham Philips, described him as, “the organizer of treason”. The New York Times called him, “… pretty close to being the most powerful man in the United States” and “a disgusting hypocrite”. And author Ron Chernow described him as “the Czar of the Republican party and the maestro of the smoked-filled room”. Probably guilty of all these dubious distinctions, Nelson Aldrich’s political power, banking and economic erudition, spectrum of friends that included the most powerful men in the world, and predilection for corruption made him the perfect political representative for the enclave of financial demigods who christened the US Federal Reserve System.

Born in 1841, Nelson Wilmarth Aldrich grew up in East Killingly, Rhode Island. He attended the local elementary school and went on to East Greenwich Academy for a year. Aldrich family lore tells of a time when Nelson was nine years old and his mother gave him money to buy lunch and go to the circus. He went to the circus, but skipped lunch and used that money to buy a copy of The Tinker’s Son, or I’ll Be Somebody Yet, a kind of self-help book, but not one for a nine year old.

He was fascinated with the preachers in his East Killingly church. He noted the influence that oration commanded over people. A young Aldrich “… felt an uncontrollable yearning to become at some time a public speaker, to wield myself this wonderful power.” His Calvinist upbringing was no doubt a part of his license for control and privilege. John Calvin preached that every man’s goodness or evil is predestined, and the more successful he is – the more God has favoured him. The poor are obviously sinners, doomed to hell and the rich are obviously deemed by God to be good, as their status and class in life on earth attest.

Since the charter for the Second Bank of the United States expired in 1836, the country had been without a central banking organization. With the Civil War of the 1860s, the Long Depression of the late 1800s and two silver panics, the country was arguably in need of an economic upgrade. Although central banking was still seen as an unconstitutional taboo at this point, American citizens and most of their representatives in the Senate and Congress succumbed to a gradual and controlled redirection towards a central banking system early into the new century, carefully steered by Wall Street bankers.

The idea for a central bank began early in the turn of the century. What would become of those ideas would be the Federal Reserve System, which was not federal in the least and barely a reserve. It was (and still is) a union of private banks that abandoned any scant gold reserve requirements they had originally set for themselves. Some historians, economists, sociologists, bankers and businessmen see the Federal Reserve as representative of the demise of free enterprise and the competition of businesses in the American marketplace. When the Federal Reserve was born, President Woodrow Wilson said about it, and the rise of immense corporations, “The old time of individual competition is probably gone by. It may come back; I don’t know; it will not come back within our time, I dare say.”

Banking was not always like that. Before the Federal Reserve’s existence, Clearing House Loan Certificates were the things that kept the country afloat during a panic. They were highly touted by bankers as an effective means of thwarting economic disaster in times of crisis. The loan certificates lightened the load of a plummeting money supply, “like the emptying of barrels of oil from a storm distressed ship”. During a panic, people hoard their money and bank reserves empty out rapidly. So the banks were issued, by the New York Clearing House Board of Directors, these certificates in lieu of actual money.

Bob Ivry is a senior editor of enterprise news for Bloomberg News, in New York City. Bob and I met through a mutual friend at Bloomberg when she found out about my interest in writing a book about the Federal Reserve. Bob and I corresponded and found that our interests were more aligned than we thought a journalist’s and a historian’s would be. After a couple of meetings and great conversation, Bob agreed to an interview for this book. The reason I was so interested in his story was the fact that Bob’s partner at the time, Mark Pittman was the only person to ever sue the Federal Reserve Board, and after his death in 2009, Bob took his place.

After a series of “crappy” jobs, which Bob believes gave him more insight into the real world than some journalists who get more traditional work right out of journalism school, Bob started out reading the news at KPFA radio in San Francisco. He was the sports guy for the San Francisco Bay Guardian, worked at the San Francisco Examiner, and made his way to the east coast as the movie reviewer for the New Jersey Record. After his first year there, 9/11 happened. Bob asked to do a story on the security of a nearby nuclear power plant, and the editor gave him the go ahead to work on it with a lead investigative reporter. The running joke in their offices was that this reporter was less than thrilled to share such an impactful story “with the fucking movie reviewer”. Bob’s foray into the field of investigative reporting brought him, in 2006, to the real estate team of Bloomberg News – when the banking collapse of Wall Street started to reveal itself, and Bob, furthering his education at Bloomberg, became a part of history.

The interview began with Bob refuting the most common misconception about the Fed; that it is part of the government. It is, as Ivry put it, “of the banks”. This is a particularly important distinction for journalists and members of the public who are trying to obtain information regarding currency, monetary and banking matters.

Chronology