Archive for the ‘Euro crisis’ Category

“Anyone expecting Germany to fill America’s shoes will be disappointed”


An excellent article in the Economist rejects the view that Germany will become the leader in liberal international globalism after Trump takes office, “To visit Berlin is to be confronted at every turn by reminders of the evils that Germans do. Memorials to the Holocaust and other wartime atrocities dot the city. In Kreuzberg, a scruffy-but-hip neighbourhood, posters and leaflets denounce milder German iniquities, from urban gentrification to the Transatlantic Trade and Investment Partnership (TTIP), a hated trade deal between the European Union and America that the election of Donald Trump may have killed for good. Outside Germany, though, Mr Trump’s victory has left disaffected liberals gasping for German benevolence. Brexit, the refugee crisis and the rise of drawbridge-up populists across Europe had already punctured the West’s self-confidence. Now, after an election campaign in which Mr Trump trashed immigrants, vowed to rewrite trade deals and threatened to withdraw America’s security guarantee, the West’s indispensable nation appears to have dispensed with itself. Desperate for a candidate to accept the mantle of leader of the free world, some alighted on Angela Merkel, Germany’s chancellor”.

The writer points out that “It is easy to see why. Unflappable and patient, dedicated to the freedom she had thrust upon her as a young East German physicist in 1989, Mrs Merkel is a beacon to those who fear the flickering of the liberal flame. She likes markets, trade and good governance. Her commitment to helping refugees fleeing strife in Syria contrasts with the anti-migrant turn elsewhere in Europe. Mr Trump’s victory should extinguish any speculation that Mrs Merkel will not seek a fourth term as chancellor next year in Germany’s federal election; expect an announcement soon. Yet anyone expecting Germany to fill America’s shoes will be disappointed. Consider Mrs Merkel’s approach to crisis management, from the euro to Ukraine to refugees. Each played out differently, but Mrs Merkel’s prevarication was consistent: humming and hawing over bail-outs for indebted governments; taking Vladimir Putin at his word before realising he was a liar; reacting to the refugee surge rather than trying to prevent it. For those seeking stability, Mrs Merkel’s taste for hesitation may be a feature, not a bug, but it hardly makes for bold leadership”.

He correctly notes “Nor does German assertiveness inside Europe run smoothly. Seventy years after the second world war, protestors in Greece and Spain who resent Germany’s strict approach to fiscal stewardship still resort to Nazi tropes. The occasional attempt to form “anti-austerity” (read: anti-German) axes inside the EU elicits terror in Berlin. The world’s progressives may have loved it, but some in Berlin were uneasy at the chiding tone of Mrs Merkel’s letter of congratulation to Mr Trump, which pledged co-operation on the basis of a commitment to liberal values. “We are protected by our terrible history,” says Joschka Fischer, a former foreign minister. “You cannot say, ‘Make Germany Great Again’.” More importantly, Pax Americana has always required American bite. Germany, with a defence budget one-fifteenth that of the United States, no nuclear deterrent and an instinct for pacifism, has neither the ability nor the aspiration to act as the world’s liberal hegemon. This is a country that went through agonies over whether to arm Iraqi Kurds battling Islamic State. Inside Europe, let alone elsewhere, only France and Britain have the ability to project power, and that suits Germans fine. Put bluntly, if Mr Putin’s tanks roll into the Baltics it will not be the Bundeswehr that takes the lead in rolling them back”.

Rightly he points out that “Mrs Merkel’s ambitions are altogether smaller. First among them is to hold together the fracturing EU, via a blend of prayer and policy. Germany is pinning its hopes on France, its eternal partner inside the EU, electing a sane president next year—ideally Alain Juppé, the centre-right front-runner. Franco-German comity should help EU governments find common ground on defence co-operation, the focus of their efforts over the next few months. (Mr Trump’s questionable commitment to NATO should provide another spur.) Should the politics prove propitious, Germany may one day be open to more ambitious schemes, such as greater integration of the euro zone. But grand visions of EU institutional change, let alone a German-led reshaping of the world order, are off the menu in Berlin. The priority is stopping the rot. Meanwhile Mrs Merkel, her political capital depleted by the refugee crisis, must hold the line at home. Owing in part to the rise of the anti-immigration Alternative for Germany (AfD) party, the coalition that emerges from next year’s election will probably command a Bundestag majority far smaller than the one Mrs Merkel’s centrist grand coalition enjoys today. That will limit the chancellor’s room for manoeuvre, at home and in Europe. The political fragmentation is also disinterring old questions about Germany’s geopolitical allegiance. The Westbindung (Western integration), a staple of German foreign policy since Adenauer, is fraying as extremist parties on the left and right cosy up to Russia”.

He concludes “And what about Mr Trump? For now, Germany retains a touching faith in America’s institutions to rein in the president-elect’s worst impulses. But from his vicious campaign to the chaotic management of his transition, there is every sign that Mr Trump will prove to be another of the erratic politicians, like Silvio Berlusconi and Nicolas Sarkozy, who have tested Mrs Merkel’s patience. Russia is a particular worry. If Mr Trump abandons Ukraine and allows America’s sanctions to wither, Mrs Merkel’s task of maintaining European unity will become almost impossible. Germany’s stake in the global liberal order is immense. Its export-led economic model relies on robust international trade; its political identity is inexorably linked to a strong EU; its westward orientation assumes a friendly and engaged America. All of these things may now be in jeopardy, and Germany would suffer more than most from their demise. But do not look to Mrs Merkel to save them, for she cannot do so alone”.




“Democratic constitutional order in Poland has broken down”


Poland’s constitutional crisis is discussed, “After simmering for nine months, the tension between Poland’s ruling Law and Justice (PiS) party and the country’s highest court, the Constitutional Tribunal, is coming to a boil. The PiS government is attempting an unconstitutional takeover of the tribunal—ignoring its rulings, trying to pack it with new judges, and, most recently, threatening the head judge with prosecution. At stake are the survival of constitutional democracy and the rule of law in Poland. On July 27, the European Commission, which has been pressing the PiS to change course for months, called on the government to remedy the situation within three months or risk facing disciplinary proceedings that could lead to sanctions. Jaroslaw Kaczynski, chair of the PiS and puppet master behind Prime Minister Beata Szydło’s government, responded that he was “amused” by Brussels’ warning. In the weeks since then, the PiS has pressed on with its attacks”.

The report continues “The PiS is determined to defeat the Constitutional Tribunal because it is a major impediment to Kaczynski’s plan to introduce a populist electoral autocracy in Poland along the lines of Viktor Orban’s in Hungary. When Orban became prime minister, in 2010, he had a parliamentary majority large enough to legally rewrite Hungary’s constitution to help cement his grip on power. But in Poland, where the procedures for amending the constitution are more demanding, the PiS does not have that option, and many of its initiatives—including laws designed to control the media, limit civil liberties, politicize the civil service, and attack judicial independence—risk being declared unconstitutional. As a result, the government is engaged in a blatantly illegal effort to subjugate the Constitutional Tribunal. So far, the judges have held firm, ruling unconstitutional the very laws that the government has passed to attack them, such as its December 2015 law that sought to cripple the court by changing the rules governing its operations. But the PiS is growing more crude and aggressive, and its recent threat to prosecute the Tribunal’s top judge suggests that it may take more forceful action to crush judicial independence before too long. European leaders, meanwhile, are beset by crises—from Brexit to the refugees to continued economic weakness in the eurozone—and many may be tempted to avoid conflict with Warsaw. Yet the EU has no excuse for inaction. In the case of Hungary, EU leaders may have been caught unawares by Orban’s assaults on democracy. But Kaczynski and his PiS colleagues are hardly subtle about their intentions. Allowing them to stamp out constitutional democracy in one of Europe’s largest and most strategically important member states would mean the end of the EU’s “union of values” and would further damage its battered reputation”.

The writer goes on to add “The roots of the current constitutional crisis lie, ironically, with the centrist Civic Platform (PO) party, which governed Poland from 2007 to 2015. In its last month in office, the outgoing government appointed three judges to the Constitutional Tribunal to replace three who were retiring. That was perfectly legal. But the PO sought to further stack the deck by appointing replacements for two additional judges set to retire in December 2015, after the new PiS government would take office. The PiS-affiliated president, Andrzej Duda, refused to swear in any of the five judges, even after the Constitutional Tribunal ruled that only two had been nominated illegally. Instead, Duda swore in a slate of five different judges named by the new PiS-led parliament. The tribunal refused to hear cases together with the illegitimate replacement judges and a standoff with the government ensued. Since then, the PiS has passed laws designed to curtail the tribunal’s authority and make it subservient to the current parliamentary majority. The tribunal has judged the new laws unconstitutional, but the government has in turn refused to recognise those judgments. Quite simply, the democratic constitutional order in Poland has broken down”.

He notes that “In January of this year, the EU intervened. For the first time ever, the European Commission announced that it would be assessing the threat to the rule of law in Poland by activating the so-called Rule of Law Framework, which had been established in March 2014 in response to the erosion of the rule of law in Hungary and the EU’s failure to confront it. Before then, the EU’s main disciplinary tool—Article Seven of the Treaty on European Union—was viewed by many as an impractical nuclear option: it allowed the EU to suspend voting rights and impose other sanctions on a member state, but only after other governments agreed unanimously that the state in question was in “serious and persistent breach” of the EU’s fundamental values. The Rule of Law Framework was conceived as a precursor to Article Seven—a means to gradually ramp up pressure on a member government. On June 1, 2016, after months of failed negotiations, the commission finally issued a formal Rule of Law Opinion expressing concerns over the appointment of new judges, the laws passed by the government concerning the functioning of the Constitutional Tribunal, the government’s non-implementation of the tribunal’s rulings, and the effectiveness of constitutional review in the country more generally. International pressure on the Polish government, including from the Obama administration, continued to mount in the run-up to the July NATO summit in Warsaw. On the eve of the summit, the Polish parliament rushed through a new law on the Constitutional Tribunal, which it claimed responded to EU and international criticism. But the European Commission made it clear that it saw these reforms as wholly inadequate, with First Vice-President Frans Timmermans declaring that “the main issues which threaten the rule of law in Poland that have not been resolved.” On July 27, the commission launched the next step in the Rule of Law Mechanism—issuing a Rule of Law Recommendation to Poland, which asked the PiS government to publish and implement recent Constitutional Tribunal rulings and assure that any further legal reforms would respect the tribunal’s judgments. The Commission warned that if Poland failed to act on these recommendations within three months, it might trigger Article Seven”.

Crucially he writes that “The EU’s failure to stand up to Orban in Hungary, however, does not inspire confidence about how it will act in Poland. But the situations in the two countries differ enough that Brussels may be able to do more this time. First, whereas Orban’s Fidesz party was able to entrench its hold on power through legal constitutional amendments, PiS is blatantly violating the Polish constitution and crushing the high court that is trying to defend it. This makes it much harder for European leaders to sit back in silence. Second, Kaczynski’s PiS has fewer friends in Brussels—and throughout Europe—than does Orban’s Fidesz. Fidesz is a member of the center-right European People’s Party (EPP) group in the European Parliament, and most EPP leaders have backed it throughout the deterioration of democracy in Hungary. The EPP has been willing to defend Orban out of partisan loyalty and because his party delivers the votes they need to dominate law-making in the parliament. The PiS, which belongs to the much smaller European Conservatives and Reformists (ECR) group, is in a considerably weaker position. This weakness was on display recently, when members of the European Parliament (MEPs) voted overwhelmingly (513 to 142 with 30 abstentions) for a resolution calling on the Polish government to respect democratic principles and the rule of law. The PiS’ political position is further damaged by the prospect of Brexit, since the largest party in the ECR, and one of the PiS’ staunchest defenders, is the British Conservative Party”.

Interestingly he writes that “But the Polish government still has an ace up its sleeve in Orban, who has explicitly pledged to block Article Seven sanctions against Poland. And therein lies a profound flaw in the EU’s approach to defending the rule of law and other democratic values. The threat looming behind the Rule of Law Framework is Article Seven, but the sanctions stage of Article Seven can only be triggered after there is unanimity among member governments. So long as the EU tolerates one autocrat—Orban—he can protect others of his ilk. The Polish government can count on the protection of Orban—as well as perhaps the leaders of the other Visegrad countries (Czech Republic and Slovakia)—and knows that ultimately Article Seven sanctions are unlikely to be imposed. But that is no reason not to trigger an Article Seven vote anyway. It is time for Europe’s leaders to stand up and be counted”.

He ends “Even a vote that fails to secure the unanimity needed for sanctions could be a galvanizing event, helping Europe’s democratic leaders remember what they and their union stand for. In the wake of such a vote, the EPP might finally eject and denounce Fidesz, a party that has not only undermined pluralist democracy but has eagerly stoked xenophobia. Talk among members of the European Parliament of cutting off EU funding to countries that flout European values is increasing, and even the failure of a vote against the Polish government might finally push leaders to get serious about using the power of the purse to deny autocrats the EU funds they use to prop up their regimes”.

“Pensioners have preserved their privileges”


A piece in Foreign Affairs discusses the need to cut pensions in Europe, “Since the outbreak of the European debt crisis, Greek retirees have become a scapegoat for the continent’s financial and political woes. International creditors were infuriated by the lavish Greek pension system, which allowed public employees to retire as early as the age of 50, and demanded radical overhauls in exchange for bailout funds. They got what they asked for; today, pensions in Greece are 50 percent lower than in 2010. As a result, about 45 percent of Greek pensioners receive monthly checks below the official poverty threshold. Yet the harshness displayed toward Greek retirees is unusual by European standards. The continent’s decision-making process is so heavily tilted in favour of the elderly that pensioners have preserved their privileges even in the face of stagnating growth, crumbling public finances, and skyrocketing youth unemployment. But as the young are pushed to the margins of society, Europe’s gerontocracy is becoming not only financially unsustainable but morally unbearable. Striking a balance between the conflicting interests of the old and the young is therefore necessary to ward off explosive intergenerational tensions”.

The piece goes on to note “Pensioners are a nearly unstoppable force in European politics. With a demographic weight of 130 million people—roughly a quarter of the EU population—they can alter the outcome of any election. But their influence is not just a function of their numbers. Retirees are also one of the most politically active groups in Europe. The Brexit referendum is a case in point. Although the vote was about the future of the United Kingdom, only 36 percent of Britons aged 18 to 24 showed up to the ballot box, as opposed to 83 percent of those over 65. Young people are overwhelmingly pro-European, and if more of them had voted, Britain would not be a departing member of the European Union. (Some millennials are now accusing their parents, not their peers, of having deprived them of a bright future.) All over Europe, political outcomes show a similar bias toward the preferences of the old. In 2014, German Chancellor Angela Merkel rewarded her seniors with several pension giveaways for having supported her third reelection. British Prime Minister David Cameron promised during his reelection campaign to protect the entitlements of retirees, who, in his own words, “made this [the United Kingdom] the great country it is today.” Italian Prime Minister Matteo Renzi is currently toying with a similar retreat on pension reform, and French President François Hollande has barely attempted to tackle a pension deficit that is set to reach $23 billion in 2020″.

He correctly adds that “Seniors have also been spared from the effects of the financial crisis. In the United Kingdom, for instance, the austerity measures adopted by Cameron’s first cabinet reduced the income of the average household by about $750, while cutting the earnings of the average two-pensioner family by just $36. Even the reforms adopted between 2010 and 2014 mostly affected the entitlements of future pensioners. Italy raised the retirement age, Spain linked future entitlements to life expectancy, and France increased contributions paid by firms and workers. All shielded the pensions of those already retired. This is a familiar pattern for Europe: when unrealistic retirement promises conflict with the reality of an aging continent, politicians shift the burden onto the next generation”.

He posits that “In addition to political power, pensioners control a disproportionate amount of wealth. European governments spend, on average, 15 percent of their GDP on pensions, but only seven percent on education and family policies. The income of the median European retiree is as high as that of the median active worker, and in some countries is even higher. Finally, pensioners are less likely than the rest of the population to be at risk of poverty or social exclusion. This wasn’t always the case: in the 1960s, Britons aged 65 to 70 were in the bottom 25 percent of the country’s income distribution; now they are in the top 40 percent”.

The article contends that ” The intergenerational fault lines exposed by Brexit testify to growing disaffection with this system. Organizations such as the Foundation for the Rights of Future Generations and the Intergenerational Foundation proliferate across the continent. Europe’s pay-as-you-go pension schemes are based on a promise between generations: today’s workers fund their parents’ pensions, while expecting their offspring to fund their own in turn. The system is vulnerable: it prospers only as long as each generation of workers expects to be at least as well off as the generation of pensioners it pays for. But this is no longer the case, and the temptation to stop contributing to a broken financial scheme is mounting. If enough people start questioning the system, it could implode. To avoid this outcome, European governments should strike a balance between three often incompatible principles: financial sustainability, intergenerational solidarity, and intergenerational fairness. Call it a retirement trilemma.  The principle of financial stability calls for a radical revision of the privileges enjoyed by current pensioners. Benefits should be reduced, and the retirement age should be raised to levels consistent with ongoing increases in life expectancy. This would align Europe’s pension systems with the recommendations of the European Commission and International Monetary Fund, and would be an important step toward sustainability. As the Greek crisis demonstrated, slashing pensions and postponing retirement may replace financial problems with a social catastrophe. That’s why, according to the principle of intergenerational solidarity, governments should allow for some degree of flexibility. Pensions should not just be proportional to lifetime contributions but should also be adequate to guarantee a decent lifestyle. In order to make the system financially sustainable, governments could levy a solidarity tax on the highest incomes and redistribute the proceeds among the poorest pensioners. Likewise, since even the most skilled workers usually lack the skills to keep up with disruptive technological change, workers hurt by automation should be allowed to retire early if necessary. But in exchange for being removed from a tough job market, they should give something back”.

He goes on to argue that “This is linked to the third principle, intergenerational fairness. At a time of stagnating growth and shrinking work forces, idle retirement is something advanced economies can no longer afford. Old people, especially those who retire early, should therefore actively contribute to the well-being of their societies. As long as pensioners are in good health, their benefits should become conditional on work in public institutions. This work should involve the skills acquired throughout retirees’ careers: retired teachers could volunteer in schools; retired doctors could volunteer in hospitals. Lord Richard, the former head of the British Benefits Agency, was criticized for suggesting something similar in 2012, but these active retirement policies would relieve distressed public finances, increase the self-esteem of the old, and make the pension system more acceptable to the young”.

He ends “Finally, in order for any of these reforms to be possible, it will be necessary to dilute the political power of the older generation. Proposed measures include lowering the voting age to 16, setting the minimum candidacy age at 18, and capping candidacy age at 65. To increase the low turnout rates of young voters, governments should invest in voter education programs through schools and media campaigns. And referenda on nation-defining issues like leaving the European Union should require a supermajority—especially in countries where the elderly represent the majority of the electorate. Europe needs some fresh thinking to address the economic and political costs associated with its aging population. Governments should opt for solutions that promote cooperation between generations and avoid short-sighted electoral temptations. Only then can they solve the retirement trilemma”.

The end of the BRICS, the US remains


An important article discusses the end of the BRICS as a threat to the United States, “When analysts and scholars compose their first drafts of the history of the Obama administration’s foreign policy, a chapter will surely address what were once dubbed “rising powers,” a group that included Brazil, Russia, India, China, South Africa, and others. But the optimism of 2008 — when the so-called “BRICS” were ascendant, ready to reshape global economics and politics — has turned to doubt. The impeachment trial of Brazilian President Dilma Rousseff and a Russian doping scandal that only a Soviet could be proud of are just the latest unmistakable signs that a surge of newly powerful nations collectively remaking the world stage is hardly a sure thing. A few years ago, a mortal rupture in Europe would have invited crowing over “the demise of the West and the rise of the Rest.” Now, the picture is more complicated: Europe is in disarray, as are several of the might-have-been beneficiaries of the continent’s turmoil. And as the United States looks ahead to a new administration come January, its approach to shifting global power relations will be ripe for a rethink. Amounting to neither a freshly minted set of trusty democratic allies nor a cohesive counterweight to the Western order, newly powerful nations are proving to be less predictable, more fragmented, and ultimately more reinforcing of U.S. power than even Washington’s own intelligence establishment predicted a decade ago”.

The piece add, “In the latter years of the George W. Bush administration and the early part of the Obama years, rising or so-called “emerging” powers seemed to captivate the foreign-policy establishment. Foundations and think tanks proffered rising powers projects, conferences, and white papers. Some were bullish. Analysts, including Princeton’s Anne-Marie Slaughter and John Ikenberry, predicted the rise of a group of new democracies — with Brazil, India, and South Africa topping the list — that would grow into natural allies for the United States. Everyone from John McCain to Madeleine Albright (who promoted the idea nearly a decade before others cottoned on to it) advocated uniting democracies in a global alliance premised on shared values and joint action. On the flip side, other academics and analysts anticipated that the rise of new powers could only herald an American decline. In 2010, University of Wisconsin-Madison professor Alfred L. McCoy predicted “imperial collapse” and “painful daily reminders of what such a loss of power means for Americans in every walk of life.” A detailed study prepared by officials from rising powers and published by Oxford University Press in 2012 explicated the “synergies and complementarities” that had “already catapulted the BRICS into a leadership position” globally. As Autonomous University of Madrid professor Susanne Gratius wrote in 2008: “In recent years a number of emerging nations have been challenging the position of dominance of the old powers, which are dropping down the international pecking order.” The downcast lot predicted that the decline in relative importance of the United States would be matched only by that of Europe, inaugurating what historian Timothy Garton Ash termed “Europessimism,” a creeping sense that the continent was being edged out by the fast-rising states of China, India, Brazil, and Russia”.

Importantly the piece goes on to mention that “The one thing the two sides agreed on was that the shifts wrought by rising powers would be tectonic. In “Mapping the Global Future,” an influential analysis published by the U.S. National Intelligence Council (NIC) in 2004, intelligence experts predicted that the “‘arriviste’ powers—China, India, and perhaps others such as Brazil and Indonesia—have the potential to render obsolete the old categories of East and West, North and South, aligned and nonaligned, developed and developing.” The report made headlines like “2020 Vision: A CIA report predicts that American global dominance could end in 15 years.” Not so fast, as it turned out. Many of the premises undergirding these predictions evaporated in the ensuing decade. The genesis of global focus on rising powers was a 2001 analysis by Goldman Sachs’s Jim O’Neill that forecast faster, more consistent growth rates among emerging economies that would position them to gradually dominate the world stage, eventually leaving only the United States and Japan among the traditional industrial powers still ranking among the top six global economies. The bank focused on Brazil, Russia, India, and China — a group that O’Neill dubbed the “BRICs” and, later, the “BRICS,” after South Africa’s induction. While Goldman’s analysis was full of caveats, policy wonks focused on the breathless expectation of sustained, rapid growth by emerging economies. Goldman’s anointment of the BRICs as the emerging markets “most likely to succeed” prompted a flurry of prognosticators to formulate their own acronym accolades: MIST (Mexico, Indonesia, South Korea, and Turkey — which O’Neill designated as next in line after the BRICs) and SANE (South Africa, Algeria, Nigeria, and Egypt — supposedly the African continent’s leading up-and-comers). Britain’s Telegraph went so far as to publish a full lexicon of the emerging-market alphabet city”.

Pointedly he argues “Fifteen years later, several of those BRICS (not to mention MIST or SANE) are crumbling, done in by self-dealing, asset bubbles, stock market swoons, commodities fluctuations, and finite supplies of low-wage workers. In a warning published in January, the World Bank predicted negative growth in Brazil and Russia, just over 1 percent growth in South Africa, steady growth of 7.8 percent in India, and a shortfall from expectations in China topping out at 6.7 percent. As the Financial Times put it: “What had once been the brightest spark in the global economy has now become its big headache.” Late last year, Goldman finally shuttered its BRICS investment fund, which had lost 88 percent of its value since its 2010 peak. The problems aren’t merely economic. Politically, several of the BRICS have proved similarly unstable. The rise of emerging powers was premised on the notion that they were domestically stable, ready and able to consistently project global influence. While some analysts spotlighted corruption, institutional weakness, and political dysfunction as risks, such concerns were often relegated to the footnotes. As the 2020 NIC project put it in its report: “Only an abrupt reversal of the process of globalization or a major upheaval in these countries would prevent their rise.” Yet in South Africa, Brazil, and Russia, corruption and governance failures have proved catastrophic. Whether you think Rousseff is being rightfully targeted or unfairly scapegoated — and no matter what you make of charges that her interim successor is trading favors for the votes to impeach her — none of it augurs well for Brazilian governance. In South Africa, President Jacob Zuma narrowly withstood an impeachment campaign and now clings to office as a lame duck in what is effectively a one-party democracy. While Russia and China continue to project firm centralized authority, their intensifying crackdowns on dissidents, lawyers, and influential cultural figures bespeak regimes nervous that corruption and economic slowdowns could turn their populations restive”.

The author posits that “Back when rising powers were in style, theorists diverged on what to expect from their foreign policies. Some expected the leading democracies to align with Washington, whereas others foresaw a solid political bloc of BRICS holding Western influence in check. Neither vision came true. In their approach to international human rights and humanitarian intervention, rising democracies have been influenced by their post-colonial identities far more than their modern political bedfellows, emphasizing respect for sovereignty over the moral imperative of civilian protection or conflict prevention. Brazil and India abstained on the 2011 U.N. Security Council resolution authorizing the use of force against Libya’s Muammar al-Qaddafi, anxious about the prospect that intervention could lead to regime change. Those two countries and South Africa have taken a reticent approach to handling the civil war in Syria, straddling the middle, but with a tilt more toward Russia and China than the United States and Europe. But while dreams of a powerful “alliance of democracies” have been dashed, the nightmare scenario of a solid BRICS wall has also failed to manifest. While the BRICS do meet periodically as a group, diverse growth rates, population sizes, carbon emissions levels, wealth, and other indicators dictate diverging interests on issues including the global economy and trade, climate change, nuclear proliferation, and conflicts in the Middle East. BRICS countries have come together to form their own development bank, a rebuke to the Western-dominated International Monetary Fund and World Bank system. But the two most powerful and stable nations in the bloc, India and China, are increasingly at odds over terrorism, Beijing’s regional ambitions in the South China Sea and beyond, and New Delhi’s strategy of hedging through strengthened relations with the United States and Japan”.

The writer mentions that “First, the United States’ status as what Madeleine Albright once called the “indispensable nation” remains intact. The United States is far from omnipotent and has bumped up hard against the limits of its diplomatic influence and military capabilities in places like Iraq and Afghanistan. But when it comes to catalyzing global action and providing the decisive voice in whether, and to what degree, a global conflict — Libya, Syria, the Islamic State, Ukraine, climate change, Ebola, take your pick — will be addressed at a global level, no other country’s say comes close to Washington’s. With the exception of Russia (where President Vladimir Putin seems motivated by dual desires to check the United States and perpetuate his own personal power), no other rising power has sought to call the shots nor assumed an obligation to lead outside its region. Second, Europe still matters. The implicit logic of the rising powers was that they would leave the continent a relic of a bygone era of power relations. Despite its economic stagnation, political malaise, refugee crisis, and rising right wing, Europe remains, by far, the United States’ most stable and reliable major ally. While Brexit has dealt a major blow to the European Union, it is likely to further strengthen U.S. relations with Berlin, Paris, and any other European capital that may stand in for London as Washington’s go-to conduit within the union. Just as many Brits belatedly seem to be awakening to just how important the EU is, so Washington may emerge from the crisis with a heightened sense of appreciation for the bloc. Whether on Iran, Ukraine, the Islamic State, or virtually any other issue, European support is the necessary — if no longer sufficient — precondition for U.S. action to enjoy legitimacy”.

He contends that “A third conclusion derived from the uneven rise of new powers is that China’s rise has rendered the United States more, not less, globally important. Rather than becoming the has-been many predicted, the United States, due to China’s surging influence, has become a far more important ally to countries throughout Asia and beyond. As China’s regional neighbors seek to fortify themselves against the behemoth next door, their relationships with the United States have both broadened and deepened. The U.S. pivot to Asia is now being driven as much by local demand for an American presence in the region as it is by Washington’s fear of being edged out. Recent discussions about arms sales and even the possibility of a renewed U.S. military presence in Vietnam are only the latest manifestations of thickening ties between the United States and numerous allies in the region, including South Korea, Japan, the Philippines, Malaysia, and Indonesia”.

He ends “After 9/11, and once the long-term damage to the United States’ global standing began to recover from the 2003 Iraq War, foreign-policy thinkers started opining about what would come after what Charles Krauthammer once dubbed the country’s “unipolar moment” following the end of the Cold War. Richard Haass of the Council on Foreign Relations projected a nonpolar era, with power widely dispersed. New America’s Sherle Schwenninger and others forecast a multipolar world. The prognostication-defying fate of the BRICS over the last decade, not to mention last week’s Brexit shocker, may point to a more unsettling prospect: an ambipolar world — ambivalent, ambiguous, ambient — where power is diffuse and national fortunes rise and fall to a rhythm too complex for any theory to adequately reflect. So rather than betting heavily on specific winners and losers, the United States should diversify its diplomatic capital, recognizing that predicting the path of the world’s rising powers is an uncertain business at best.


Consequences of Brexit


Long term consequences of Brexit is examined, “The unexpected decision by British voters to leave the European Union in Thursday’s historic referendum is tumbling dominoes around the world, with dire implications for everything from Britain’s political future to Europe’s fragile unity to the retirement plans of older Americans. And with all the uncertainty over just how the crumbling United Kingdom will extricate itself from a 43-year marriage with Brussels, the global contagion looks set to continue for at least two years. The fallout from the referendum — which the “Leave” campaign won by a 52-percent-to-48-percent margin thanks to a surprisingly robust turnout in eurosceptic parts of England — has implications for the U.S. presidential race, the global economy, and the balance of power among the United States, Europe, and Russia”.

The author rightly points out, “In the United States, Donald Trump’s campaign largely mirrors that of the “Leave” proponents, with an emphasis on nativist concerns and working-class angst — and the shocking U.K. result is already acting as a wake-up call to Democrats in the United States. The economic ripples from the vote have battered the British pound and the euro and poleaxed stock markets from Frankfurt to New York. Oil prices are reeling, thanks to fears the exit will usher in a prolonged recession. And key elements of U.S. foreign policy, such as closer trade relationships with the European Union, as well as a unified, trans-Atlantic response to Russian aggression, have now all been thrown by the wayside. “This is the beginning of the end of the United Kingdom,” said Richard Haass, the president of the Council on Foreign Relations. British Prime Minister David Cameron, who called the referendum thinking that he could defuse popular anger at Brussels, settle a long-running intra-party feud over Europe, and bolster the Tories’ electoral chances, said Friday that he would step down in the wake of the vote”.

The piece notes “Cameron’s ultimately fatal misjudgment could be good news for Trump, confirming that working-class unhappiness at what they see as a rigged economy and a broken immigration system can fuel a ballot-box revolution. Before Thursday’s vote, polls, betting shops, and talking heads all confidently predicted that British voters would choose to stay in the EU — not unlike nationwide polls confidently predicting that Trump will be demolished in November by Democratic front-runner Hillary Clinton. “We better get a whole lot better about thinking about the unthinkable,” Heather Conley, the director of the Europe program at the Center for Strategic and International Studies, said when asked about the possibility of a Trump presidency in the aftermath of the Brexit vote”.

Correctly the writer adds “For Democrats, there are other worrying parallels. The proponents of the “Leave” campaign openly derided expert opinion and indisputable facts about Britain’s economic relationship to Brussels; “Leave” campaigners infamously repeated much-debunked claims about how much money the U.K. sends to Europe, for example, but voters proved impervious to facts. In the United States, Democrats have become increasingly frustrated that Trump’s propensity to exaggerate, falsify, and lie has little or no impact on his appeal to certain parts of the electorate. Demographically, British voters who opted to leave the EU were older and whiter than those who voted to remain; “Little England” voters in the shires of the Midlands and other parts of England outside London voted overwhelmingly to ditch Brussels. That kind of electorate is similar to the older, whiter U.S. voters enthralled by Trump’s nostalgic calls to “Make America Great Again.” Trump himself, on a lightning visit to one of his golf courses in Scotland, cheered the results of the referendum Friday, even though Scottish voters overwhelmingly sought to stay inside the EU”.

The piece mentions “The decision to leave the EU, said Jake Sullivan, Clinton’s senior policy advisor, will hurt American working families. Trump’s cheering the pound’s collapse as good for business merely shows his own self-interest, Sullivan said. But the same forces that propelled the U.K. to leave the EU — the brutalisation of the working class by globalisation; immigration and the migrant crisis; and growing anti-elite sentiment have also propelled Trump to the GOP nomination. Asked whether the Brexit vote might foreshadow a Trump victory, Clinton’s advisers argued on Friday that a U.S. presidential election is very different from a U.K. referendum on EU membership, and that the instability caused by the Brexit will cause voters to seek what Sullivan called Clinton’s “steady hand.” The Clinton campaign’s argument going into November is that the vote will offer a choice between stability and chaos — and that voters will naturally prefer the former and pull the lever for Hillary”.

The writer correctly points out that voters in the US are not certain to vote for Clinton just because of Brexit. He notes under the “economic” heading, “The pound’s bloodletting was matched by a plunging euro, thanks to fears that the Brexit vote will set off a cascade of similar secession moves and further weaken the already reeling economic union. That will make everything that Britain imports — from food to fuel — more expensive than it was Thursday morning. By midday Friday, both currencies had made up some of their losses, though they remained in the red even after British officials pledged to intervene in currency markets. Japanese Prime Minister Shinzo Abe also urged the Group of 7 industrialized countries to take “whatever steps necessary” to stabilize the key international currencies. Around the world, global stock indices got hammered. In London, the blue-chip FTSE 100 fell 3 percent; other British indices fell twice that. The Dow fell off a cliff in the morning, down 500 points, and remained there in midday trading. The German DAX dropped almost 7 percent, Japan’s Nikkei fell almost 8, and Shanghai shed more than 1 percent”.

One of the few upsides, the writer points out is that “One of the key objectives of the administration of President Barack Obama, an ambitious trade pact with what was a 28-nation economic bloc, is now up in the air. And that goes double for any U.S.-U.K. trade deal. In April, during a visit to London, Obama said the U.K. would move to the “back of the queue” in any trade deal if the Brexit occurred”.

He makes the valid point that, “Even with an eventual trade deal, Britain’s economic prospects look bleaker. Scotland won’t likely remain part of the British economy, for starters: Scottish nationalist leaders said Friday that they will call another referendum on Scottish independence in the wake of the EU vote, since Scots overwhelmingly wanted to remain in the 28-nation body. Northern Ireland, which also voted to remain, has hinted at a similar move. Even some in the city of London itself, the bastion of the “Remain” vote inside England, are toying with the idea of seceding from the U.K. And there are knock-on effects for plenty of countries in the EU. About 1 million Poles live and work in the U.K., for example, and it’s not clear if they’ll need to return home and try to find new jobs if the British decision ultimately ends free movement of European citizens across borders. Hundreds of thousands of other EU citizens, from Lithuanians to Spaniards, also live and work in the U.K. and may have to pack up as well”.

On the point of EU and Russia foreign policy implications he posits, “For all the wailing and gnashing of teeth from Lambeth to Leith, plenty of people were openly celebrating Britain’s farewell to Europe: authoritarians of all stripes. Sergey Sobyanin, the mayor of Moscow, said that “without Great Britain in the EU, no one will so zealously defend the sanctions against us.” Others, like the Kremlin’s small-business ombudsman Boris Titov, enthused over the “Leave” victory. “It seems it has happened — UK out!!!” he wrote on Facebook. Michael McFaul, the former U.S. ambassador to Russia, underscored how the vote weakens the European Union, especially as it tries to come to grips with an expansionist Russia. “Putin benefits from a weaker Europe. UK vote makes EU weaker. It’s just that simple,” McFaul wrote on Twitter. For Washington, the U.K. has long offered a like-minded state inside the European Union that could help advance its own foreign policy goals. Even after Thursday’s vote, U.S. politicians vowed that the special ties forged between Britain and the United States in World War II will continue. Speaking in Ireland on Friday, Vice President Joe Biden conceded that the United States hoped for a different outcome, but he said that the “special relationship” between London and Washington would continue”.

He ends “Conley, of the Center for Strategic and International Studies, said Washington’s gaze will now increasingly shift to the real center of power inside Europe, Germany, to the growing detriment of Britain’s global role. “When it comes to matters of Europe, we have looked to Berlin with increasing frequency,” she said. “When the president wants something, he calls Berlin.”

“European leaders are likely to favour as amicable a settlement as possible”


A piece notes that after Brexit, the talks, despite minor tensions will be resolved cordially in the interests of all, “There has been no single official response by the European Union to the U.K.’s decision last week to vote in favour of leaving the bloc. Instead, we’ve seen a flurry of mixed and competing messages – a sort of good cop-bad cop routine, with European Commission President Jean-Claude Juncker pounding on the table and German Chancellor Angela Merkel asking Britain to take a few deep breaths and think. Toughest of all have been leaders of the EU’s institutions. Negotiations for exit must start immediately, argued Juncker, alongside European Parliament President Martin Schulz – Europe can’t be held hostage to an equivocating Britain. Seeing a chance to make a power grab, high-profile European parliamentarians – such as former Belgian Prime Minister Guy Verhofstadt – have, too, demanded a speedy departure and pressed for a seat at the Brexit negotiating table alongside representatives from the 27 EU member states”.

The author mentions that “By contrast, the member states themselves, and their leaders in particular, have been much more guarded. Belgian and Italian officials argued for speeding up divorce proceedings at a meeting of national diplomats last weekend, but they were in a minority. Most agreed to proceed with caution. Merkel, in particular, has warned against any anti-British backlash. Europe’s pragmatic national leaders are likely to prevail over the EU true believers in Brussels. All may have been irritated over the years at the U.K.’s prickly relationship with the EU, and its departure from the union will force all remaining member states to think long and hard about how they can renew their cooperation. But none of that’s a reason to expect an ugly divorce. A popular view in Brussels, and in some national capitals, is that ever since the U.K. joined the Common Market in 1973 it has vetoed ambitious projects of continental integration, leaving the EU weaker and more divided. The U.K.’s exit is, for these Machiavellian federalists, a golden opportunity to take the EU in a different direction, to advance their project of “ever closer union,” involving deeper fiscal union and the launching of new pan-European institutions like a European army. But to take advantage of this chance, they believe, they must move quickly – hence the hostility to Britain’s dallying”.

The writer makes the point, “There is also the fear that the referendum result may not stick, and so negotiations on Brexit must start before the U.K. has a chance to change its mind. Options for backing out are already being floated by some from the “Remain” camp. And a cold-feet reversal wouldn’t be as radical as it appears. After all, the EU has ignored referendums in the past: The Irish were asked to vote again after rejecting the Lisbon Treaty in 2008 and the French and Dutch voted against the constitutional treaty in 2005, only to see it reappear virtually unchanged in the form of the Lisbon Treaty a few years later. Most recently, Greeks overwhelmingly rejected a bailout deal in 2015, but their prime minister signed off on a worse one shortly afterward. But this attitude falls on deaf ears in many national capitals, and member states will have the final say on how to deal with the U.K. Among national leaders, the prevailing belief is that the block must proceed with caution when formulating its response to the U.K. referendum. This stems from the realization that the U.K.’s vote is not an isolated event, but connected with wider European politics”.

Crucially he makes the point that “Experienced politicians, such as Merkel, view the political meltdown taking place in the U.K. with great concern. The fallout from the Brexit vote has revealed the fragility of the British government’s authority and how weak mainstream political parties in the U.K. have become. For Merkel, who has made the center-ground in German politics her own, or for embattled leaders like Matteo Renzi in Italy and François Hollande in France, events in Britain are a sobering reminder of their own domestic political struggles. Renzi recently lost mayoral elections in Rome and Turin to the anti-establishment Five Star Movement, and his political future looks more uncertain than ever. Hollande leads a Socialist Party that has lost much of its support among working-class French voters, just like the British Labour Party has. The French political establishment will take the success of the U.K. Independence Party in the EU referendum as a warning about the chances of Marine Le Pen’s National Front in next year’s presidential elections”.

He concludes “In some ways, other EU member states are in more of a bind than the U.K. Since the U.K. does not use the single currency, its vote to leave the EU is complicated but achievable. For eurozone countries, exit is almost unimaginable. Faced as they are with deep domestic discontent, governments in the eurozone share many of the U.K.’s problems but have fewer options available to deal with them. And the already fragile and stagnant eurozone is hardly in a fit state to withstand the economic shock of Brexit. Shares of Southern European banks, for instance, took a dramatic hit after the Brexit result was announced and many eyes are on Portugal and Italy”.

Correctly he ends “For these reasons, the good cops are likely to win out: When negotiations around Brexit do begin, they are likely to be orderly and reasonable. There will be no excessive generosity, given that the remaining EU member states want to discourage their populations from arguing for a similar in/out referendum. But a hostile set of negotiations driven by a desire to punish the U.K. are also very unlikely. After all, voters in France, Germany, Italy, and elsewhere across Europe are angry with their own politicians, whom they consider remote and self-serving. They are far less preoccupied with punishing the U.K., a sentiment that belongs to disappointed Eurocrats more than it does to European citizens. What these citizens are concerned about is the dire economic performance of their economies, one which acrimonious negotiations with the U.K. would not help. Concerned about the impact of Brexit on the eurozone, European leaders are likely to favour as amicable a settlement as possible, where the economic interests of all concerned are accommodated”.

He finishes “As befits a bloc made up of national governments whose politicians are acutely aware of the fragility of their own authority, the response to the U.K.’s decision to leave the EU has so far been muted. The nastier and more jubilant responses have come from those parts of the EU that are more isolated from the realities of national politics – from the European Commission and the European Parliament. The sense of opportunity felt by Euro-federalists does not extend much beyond the Brussels bubble, and it is certainly not shared by governments in national capitals. There, the feeling is more one of a generalised political crisis that needs to be managed carefully if it is not to engulf the EU as a whole. The EU’s future rests upon its national governments being able to contain growing voter dissatisfaction with mainstream political establishments. This is the greatest challenge for the EU, and one that means European leaders will continue to tread very carefully over the next few weeks”.

The EU: Cameron’s downfall


Having seen the numerous missteps made by Cameron that led to the exit of the UK from the EU an important article discuss the downfall of Cameron, “They used to call it Greek tragedy when the fates wrought their revenge on human folly and weakness. But maybe a better term in the case of the folly and weakness of the modern Tory party is European tragedy. For, as a broken David Cameron announced his resignation on Friday morning, one question must have been battering his exhausted brain more than any other. How was it that a modern-minded liberal Conservative leader who long ago told his party to “stop banging on about Europe” if it wanted to get back into power after three successive defeats – and who then delivered two terms in government – has himself been brought down by that same party over that same European question? Cameron himself played the role of tragic hero as he notified the nation of his intention to step down before the autumn. “There can be no doubt about the result,” he said. “The British people have voted to leave the European Union and their will must be respected.” But he added that the tortuous negotiations ahead with the EU would require “strong determined and committed leadership” that he felt he could no longer provide. “The country requires fresh leadership to take it in this direction.” And there seemed scant consolation in his laconic summary of what he would rather be remembered for”.

The report makes the point that “All of that is likely to be forgotten in the European tumult. The warnings from history could not have been clearer. Party divisions over Europe had been the undoing of both Cameron’s predecessors as Conservative prime minister. Margaret Thatcher’s fall in 1990 was triggered by her increasingly anti-European rhetoric and stance. John Major’s long slide to defeat in 1997 was powered by his inability to prevent poisonous divisions over the Maastricht treaty on European integration. Right from the start of his own rise to the top, Cameron knew the dangers. Yet the faultlines in Cameron’s own approach to Europe were always there too. The young Cameron was never one of those Tories who ate, drank and slept Europe; but nor was he an heir to the pro-European generation of liberal Tories such as Michael Heseltine and Kenneth Clarke. Instead, fatally as it has now transpired, he was always a “Eurosceptic – but not as Eurosceptic as you are”, as he put it to his first political boss, the former chancellor Norman Lamont”.

The piece continues “Cameron’s lifelong soft Euroscepticism meant he had no answer to the hardliners on Europe once the issue had become turbocharged by austerity and immigration. Cameron’s differences with the more committed Eurosceptic wing of his party have always been over emphasis and tone, not substance. He has had no alternative vision of Europe to offer, in the face of the party’s Europhobes. Although he was always in favour of remaining, he failed to make the case for UK membership until almost the last minute. If Cameron’s default position had always been “Eurosceptic – but determined to make Europe work”, things might have been different. But it was the opposite. “I’m much more Eurosceptic than you imagine,” he once told Labour’s Denis MacShane. When he was first running for parliament in the Oxfordshire constituency of Witney, which he won in 2001, Cameron characteristically tried to have the best of both Tory worlds on the issue. He should be thought of as a Eurosceptic, he told the centre-right libertarian Sean Gabb, “on the basis that I oppose the single currency and any further transfer of sovereignty from the UK to the EU”. But, Cameron added, he was not in favour of withdrawal and accepted the supremacy of EU law in some cases”.

Interestingly the article point out that ““Let me get this straight,” he repeated in a Guardian article in May 2003 about the EU constitution plan, which Tony Blair supported but on which the Labour party was reluctant to allow a referendum, “I am no Euro obsessive”. Readers could not accuse him of “excessive Daily Mail reading, too much time spent alone with Bill Cash or anything else”. But, he added, “the Euro-maniac Blair” would have to concede a referendum on “the wretched thing”. “He’s Eurosceptic, no shadow of doubt,” the Tory pro-European grandee Sir Nicholas Soames told Lord Ashcroft and Isabel Oakeshott for their anti-Cameron biography Call Me Dave. “He’s immensely irritated by it and frustrated by it in every way. But he’s not a Get Out man.” But nor was he ever explicitly enough a Stay In man. In 2005, as he began campaigning to succeed Michael Howard as the liberal and modernising alternative to what Theresa May famously called “nasty party” Toryism, Cameron promised that, under him, the Tories would pull out of the European People’s party alliance in the European parliament. He did it because he wanted to siphon votes from his rivals David Davis and Liam Fox by burnishing his own Eurosceptic credentials”.

It adds that “It is doubtful if that promise was decisive in Cameron’s victory as party leader. But it is certain that the decision drove a wedge between the Tories and their Christian Democratic, centre-right fellow parties in Europe. In particular it poisoned relations and trust with Angela Merkel, who was to be the key figure in European politics in the years ahead. Not for the first time, and certainly not for the last, Cameron put tactics before strategy in his handling of Europe. So, when Cameron made his famous remarks to the Tory conference in 2006, his first speech as leader to the party, the warnings were more tactical than strategic. “Instead of talking about the things that most people care about, we talked about what we cared about most,” he reminded his party as he assessed the Tories’ third successive electoral defeat at Blair’s hands. “While parents worried about childcare, getting the kids to school, balancing work and family life, we were banging on about Europe.” Many saw these words, especially in retrospect, as an attempt to shift the way the party approached Europe. But the words were an attack on the consequences of the party’s approach, not on the approach itself. Cameron was being consistent with his own soft Euroscepticism, not innovative in the way that might have equipped him to fight his corner more effectively when the referendum came in 2016. Back in 2007, when Europe was gearing up for what became the Lisbon treaty on EU reforms, Cameron was again consistent in his own terms. First he pledged “a cast-iron guarantee” from the Tories to hold a referendum on the treaty. Two years later, with the general election now approaching, Cameron declared the guarantee was no longer relevant, since the treaty was now law and could not be reopened. He had managed both to fire up the hardliners and to outrage them”.

The piece continues “Yet Cameron did not make a virtue of his change of policy on the treaty by embracing it – even though it embodied many of the less centralising approaches to Europe that he had advocated. Throughout this time, his adviser Steve Hilton was pressing for Cameron to prepare the ground for exit from Europe. In practice, however, Cameron neither prepared for exit nor for engagement. Instead the juggling act continued. The 2010 election, which was in most respects a triumph for Cameron, ensured ever more frantic juggling. Going into coalition with the pro-European Liberal Democrats meant the referendum on UK membership of the EU that many Conservatives continued to advocate was put in the deep freeze. The coalition’s official policy was that there would be no in/out referendum and that only Cameron and Nick Clegg could settle European policy between them. This was a purgatorial outcome for the hard Eurosceptics. Not only had Cameron made a coalition with the Liberal Dems, whom they despised; he had also sold the pass on Europe, again. The hard right’s revenge came in October 2011 when the MP David Nuttall’s motion for a referendum triggered the largest Tory postwar revolt on Europe, with 81 Eurosceptics voting against the government. Two months later, Cameron tried to assuage his rebels by vetoing a eurozone rescue plan at an EU summit in Brussels. The clashes left Cameron isolated on both fronts. The Tory rebels, in Lord Finkelstein’s words, never took yes for an answer. Meanwhile Merkel and many of the other heads of government were outraged at Cameron’s defiance”.

Pointedly the article mentions Cameron’s lack of backbone in standing up to the unhinged Tories, “Although Cameron still tended at this time to treat the EU issue as a party management problem, the eurozone crisis and migration pressures were beginning to transform the issue into something much larger, much angrier and less manageable. The rise of Ukip – with whose policies a significant minority of Tory MPs agreed – pushed ever more Tories into the referendum camp. In June 2012, Cameron finally cracked and said a referendum might be necessary. From that moment the issue became when, not whether, Cameron would pledge a referendum as Tory policy at the next election. When a worried Clegg challenged him in 2012, Cameron’s response was that of a tactical politician. “I have to do this. It is a party management issue. I am under a lot of pressure on this. I need to recalibrate,” he told Clegg, according to David Laws’s account of the coalition. “He’s so busy wondering how to get through the next few weeks that he could endanger Britain’s international position for the next few decades. It’s all very very risky,” Clegg told Laws in 2012, wholly accurately as things were to turn out. When Clegg put this to Cameron later in 2012, Cameron’s reply was eloquent and to the point: “You may be right. But what else can I do? My backbenchers are unbelievably Eurosceptic and Ukip are breathing down my neck.” After a long buildup, Cameron finally made his referendum pledge in 2013 in a speech at the Bloomberg offices in central London”.

The piece mentions that “The speech put the promise in the context of an unusually eloquent argument by Cameron for Britain to remain in the EU. Perhaps if he had gone into the 2015 election emphasising that Britain must stay, he would have been in a stronger position to stem the slide of ministers and backbenchers into the leave campaign in 2016. But Cameron didn’t do that. Once again, he let the issue go off the boil. Meanwhile, though, the pressure from immigration and the fear of Ukip transformed the political climate. Cameron only began to make the case to remain in the weeks running up to this week’s vote. By then the damage had been done”.

It concludes “Although Cameron had been expecting another hung parliament in 2015, he emerged from the general election unencumbered by coalition. As a result, the referendum pledge made at Bloomberg and set in stone in the Tory manifesto had to be banked. Throughout late 2015 and early 2016, Cameron bargained for concessions from EU partners whose minds were far more focused on the continued economic crisis, immigration from Syria and elsewhere, and terrorism. The deal Cameron unveiled at the end of the Brussels summit on 19 February might have been a strong enough package to sell to an electorate that wanted to back a popular prime minister – as Harold Wilson’s equivalent deal was when Britain voted to stay in Europe in 1975. But times had changed. Cameron may have promised to fight “heart and soul” for Britain to stay in, but immigration, an impatient electorate and the absolute determination of the anti-European press and hard-sceptic MPs ensured that 2016 would be completely different. In the end, Cameron has been faced with forces and dynamics in British life that he has proved powerless to control. Indignation about immigration, disrespect for politicians, a reluctance to be frightened by warnings, press distortions and Labour’s weakness in delivering its vote all did their bit to fuel a general mood of popular payback against the political and economic establishment, as well as the EU. The remain campaign threw everything but the kitchen sink at their leave opponents, but the assaults only seemed to strengthen the mood of defiance. Even the killing of Jo Cox did nothing more than cause a temporary lull in the leave mood. Three years ago, in a comment on Cameron’s referendum pledge in the Bloomberg speech, Tony Blair likened it to a comedy western of the 1970s. “It reminds me a bit of the Mel Brooks comedy Blazing Saddles where the sheriff says at one point as he holds a gun to his own head: ‘If you don’t do what I want I’ll blow my brains out,’” Blair warned. This week, Cameron has done just that”.


“National sovereignty will trump European solidarity”


An important piece asks if the EU can survive.

It opens “The European Union is locked in a perpetual state of crisis management. It has had to head off the collapse of the eurozone, deal with waves of undocumented migrants, and now come to terms with a renewed terrorist threat, underscored by the recent attacks in Brussels. On top of all this, the EU confronts the real possibility of a British exit, or Brexit, which depends on the outcome of a public referendum in the United Kingdom in June. The European idea, which has helped to inspire the continent’s integration since World War II, may be the next casualty. Over the past seven decades, European political leaders have seized on crises to propel European integration forward, advancing toward the goal of “ever-closer union” that is codified in the 1957 Treaty of Rome. But they have not been able to do so with the latest challenges, which have revealed practical tensions and unresolved contradictions in the European project. They have exposed European integration to be an elite-driven endeavour lacking adequate democratic legitimacy, and the EU itself as an awkward and unsustainable halfway house between intergovernmentalism and supranationalism—that is, between a loose cooperative arrangement in which states retain full independence and a federal union in which they transfer those national authorities to a superior central body. Europe’s chaotic response to recent events suggests that when push comes to shove, national sovereignty will trump European solidarity”.

It notes “The so-called European idea is a cosmopolitan vision of a united Europe. Its antecedents go back centuries, but it emerged in full force following World War II, which had discredited nationalism and the nation-state throughout most of Europe. Early expressions of the European idea could be found in 1949 in the Council of Europe and in 1951 with the creation of the European Coal and Steel Community (ECSC). The onset of the Cold War—as well as vigorous U.S. support for European unity—gave the efforts an important geopolitical boost. Even among elites, however, there has never been a single idea of Europe. That seemed not to matter as long as the general trajectory—however incremental and uneven—was toward ever-closer union, inspired in part by Jean Monnet, the French political economist and diplomat. His vision of an increasingly federal, even supranational, Europe included horizontal ties among member states and vertical relationships of authority that subordinated European states and citizens to Europe-wide institutions. To that end, from 1945 onward, European leaders have repeatedly exploited crises to advance integration. In May 1950, for example, Monnet used the specter of German economic and political resurgence and the deepening Cold War to persuade French Foreign Minister Robert Schuman to announce the European Coal and Steel Community”.

It makes the point that “The Treaty of Rome, which aimed to integrate Europe economically, was also born of crisis. During the early 1950s, several western European countries struggled mightily to create a European Defence Community that would unite their military might. Despite strong U.S. pressure, the EDC initiative failed catastrophically in 1954. Monnet responded by founding an “Action Committee for the United States of Europe,” which sought an indirect approach to overcoming European sovereignty. European leaders went along, focusing not on defence integration but on the less controversial economic goal of creating the European Economic Community (EEC)”.

It adds that “In 1989, when the sudden opening of the Berlin Wall raised the inevitability of German reunification, German Chancellor Helmut Kohl and French President François Mitterrand took decisive steps to bind Germany into Europe. The resulting 1992 Maastricht Treaty, which formally created the European Union, began the countdown to a common currency and central bank among the (now) 19 countries of the eurozone. The eurozone meltdown and the more recent migration crisis have exposed the EU as deeply flawed. After years of flailing, eurozone countries have restored some stability to the currency bloc, including by creating a banking union. But European leaders have yet to address the fundamental contradiction between the existence of a monetary union, on the one hand, and the retention by member states of national fiscal policy authority—an arrangement that poses enormous limits on the bloc’s ability to respond to financial and economic problems”.

It goes on to note “The federalist version of the European idea was premised on the notion that cooperation among states would breed a common European identity alongside, and ultimately supplanting, national loyalties. But this prospect is still distant in a heterogeneous bloc of 28 nations with diverse histories, values, and experiences. Although past crises have led Europeans to join forces against external threats, today they blame one another for creating—or at least abetting—them. When German Chancellor Angela Merkel threw out the welcome mat for Syrian refugees last summer, she invoked the humanitarian ideals of the EU. But she quickly provoked resistance from eastern European neighbours, who do not share Germany’s sense of historical responsibility or western Europe’s (admittedly mixed) experiences with large populations of overseas immigrants. She also faced resistance from sovereignty-minded EU members—not least the United Kingdom—to the idea of a mandatory “quota formula” for apportioning the refugee burden”.

The writer adds, “As if the eurozone collapse and migrant surge were not enough, the real possibility of Brexit poses another serious threat to the survival of the union. The United Kingdom has always been ambivalent about its relationship to the continent. It was late to the party—joining the EEC only in 1973—and has always been more comfortable with the EU’s free market than its political solidarity. But the country now appears seriously disillusioned. Twenty-five years ago, Prime Minister John Major declared that he wanted the United Kingdom “at the heart of Europe.” Today, no Conservative leader wants to be there. The Conservative Party is evenly divided between those, such as London Mayor Boris Johnson, who want it out of Europe entirely and those, such as Prime Minister David Cameron, who want the country to be safe on Europe’s margins. When he promised his countrymen a referendum on the question in 2013, Cameron was confident that the “remain” camp would win. The neck-and-neck polls suggest he may have miscalculated. In an effort to salvage British membership, Cameron has secured a package of concessions from his EU partners. They include excluding the United Kingdom from any commitment to “ever-closer union,” extracting an EU pledge to cut regulatory red tape, and giving the United Kingdom a voice in eurozone policies that might affect the pound sterling”.

Naturally he writes that “Brexit would be an economic and political catastrophe for everyone. The ensuing divorce would be messy, as an embittered EU strikes hard bargains on access to the continental market. Many multinationals could flee London, undermining its position as a leading financial center. The United Kingdom would need to negotiate its own bilateral trade deals with the United States and other trading partners. Its international influence, as well as its special relationship with the United States, would wane. Brexit would inevitably hasten the dissolution of the United Kingdom itself, as Scotland would surely proceed with another referendum on independence. As for the EU, it would lose its second-largest economy, including one-fifth of its GDP, and much of its diplomatic and military heft in the world”.

It ends “Still, the EU will survive, albeit in an altered form. The EU will likely have to cede some of its authority back to member states. The rise of populist forces has accelerated the renationalisation of European politics. As a growing number of EU countries assert their sovereign prerogatives, the result will be a Europe of variable geometry. As some EU states make border controls permanent, a “mini-Schengen” could arise among a core group of western European states. The eurozone could lose Greece—and potentially other states, if their governments conclude that they need a central bank and a currency of their own to control their economic destiny. And one of Europe’s proudest achievements, the EU human rights framework, could come under challenge from populist and nativist forces in many EU countries. The renationalisation of Europe would not be a pretty picture. While a return to war among its members seems inconceivable, a looser EU will be a weaker EU. It would be even less capable of handling the migrant crisis or robustly resisting Russian aggression, to say nothing of shouldering its share of the burden of maintaining global order”.

“Extend a crisis that began in 2010 into the 2050s”


A short but important article notes a German-Greek deal on the euro, “Hours after Europe and Greece appeared far apart on the latest bailout payment to Athens, German Finance Minister Wolfgang Schäuble late Monday signaled a readiness to make some kind of deal on Greek debt. His acquiescence came after a meeting of European finance ministers in Brussels. It remains to be seen what Schäuble’s admission means, and details are short ahead of a May 24 deadline to deliver Greek Prime Minister Alexis Tsipras the money he needs to make a $4 billion debt payment in July. Germany has ruled out a haircut for Greece, which would have allowed Athens to pay back less than what it owes its European creditors. However, Berlin is apparently willing to explore some nontraditional options that would give Greece leeway”.

It goes on to note “This includes extending maturities on loans to Greece, limiting annual repayments, and capping interest rates on money lent to Athens. According to a report by the Wall Street Journal, under a European Union proposal, Greece won’t have to pay back what it owes for more than 37 years. Interest on this money would be capped at 2 percent until 2050. The latest bailout totals 86 billion euros, or $98 billion. “Today was about opening the debate, exploring options, and giving political guidance to the technical people,” said Dutch Finance Minister Jeroen Dijsselbloem, chair of the Eurogroup of finance ministers, after the Brussels meeting ended”.

The piece mentions “This essentially pushes the crisis off the shoulders of Tsipras, German Chancellor Angela Merkel, French President François Hollande, and other European leaders — and onto their grandchildren. It allows Europe to give Greece sharp debt relief without actually having to cut the amount of money Athens owes. It would also extend a crisis that began in 2010 into the 2050s. It’s not clear whether this will be enough to pacify the International Monetary Fund. Its chief, Christine Lagarde, has repeatedly said that the emergency lending bank would not participate in the continuing bailout without forgiveness of Greek debt. It’s also yet to be determined if Greece can institute the spending cuts and tax and pension reforms it promised in exchange for the latest bailout. Tsipras pushed through some of the reforms on Sunday amid violent protests on Athens’s streets. But Greece will not reach the agreed-to surplus of 3.5 percent of GDP within two years. The IMF and the EU both want Tsipras to find an additional $4.6 billion in cuts, something the prime minister says is impossible”.

It ends “In other words, Schäuble’s concession is another stopgap in the debt crisis that began in 2010. But it was enough to boost confidence in Greece’s future. On Tuesday, as Greek lawmakers began consideration on another round of austerity, the Greek stock market almost erased losses on the year. Yields on Greek bonds dropped to their lowest 2016 levels, at 7.47 percent”.

Cameron gets his deal


A report in the Washington Post notes that David Cameron has come up with a deal on the future of the UK’s relationship with the EU, “Having persuaded 27 fellow European leaders to do a deal to save Britain’s E.U. membership, Prime Minister David Cameron faced an insurrection at home on Saturday as his government emerged divided over whether to back a Brexit”.

The article goes on to mention that “In a rare Saturday morning cabinet meeting — the first since the Falklands War in 1982 — Cameron attempted to rally his senior ministers to the cause of keeping the United Kingdom a part of the European Union when the country votes in June. The meeting came just hours after the prime minister inked a deal in Brussels with his E.U. counterparts that he said would dramatically improve British relations with the bloc. The agreement featured concessions in various areas, including currency protections and immigration, and it only came together after two days of round-the-clock talks. But with a referendum campaign now underway in Britain, there were major defections from the government’s senior ranks, reflecting bitter divisions in the prime minister’s Conservative Party over the country’s membership in the E.U. Polls show that voters as a whole are almost evenly split”.

The piece notes that the referendum to decide on the place of the UK in the EU will take place on 23 June, “giving both sides four months to try to convince a majority of voters. Cameron had first promised the referendum in 2013, bowing to a strong current of Euroscepticism that has run through British politics for decades and is unequaled anywhere else on the continent. A British departure would be a first for the bloc, and it could imperil the union’s future by empowering anti-E.U. forces across the continent. The stakes are high for Britain, as well. “We are approaching one of the biggest decisions this country will face in our lifetimes,” Cameron said Saturday. The prime minister announced that a majority of his cabinet was recommending that the British public vote to stay in, and he argued that a departure — popularly known as Brexit — would damage Britain by depriving the country of vital partners”.

The scale of the divisions within the Tories is well know but the piece adds “only minutes after the prime minister spoke, a half-dozen cabinet ministers announced they would defy Cameron and side with out. Cameron had bucked British political convention by allowing his ministers to choose either side of the E.U. debate, rather than demanding loyalty. Saturday’s defections were not a surprise; six have been sharply critical of the E.U. in the past. But their stance reflects just how politically divisive the referendum is likely to be, cutting across party lines. Among the defectors — dubbed #TheSecessionistSix on Twitter — is Justice Secretary Michael Gove, an influential Tory and one of Cameron’s closest friends”.

It goes on to mention “In a lengthy statement released Saturday afternoon, Gove said that he was anguished at the idea of opposing the prime minister, whom he credited with launching his political career. But he said he could not ignore his belief that the United Kingdom would be “freer, fairer and better off outside the E.U.” The union, Gove wrote, is a relic of the 1950s and 1960s that “is now hopelessly out of date.” It is also, he argued, fundamentally anti-democratic”.

Gove is taking a gamble. If the referendum choice is to remain in the EU then his chances of becoming, or at least influencing the future direction, and leader, of the Tories is greatly diminished.

Interestingly the piece notes “Other top government officials opted for “in,” including finance minister George Osborne and Home Secretary Theresa May. May, a hardliner with Euroskeptic tendencies who was at one time considered a possible Brexit supporter, released a statement Saturday announcing she was for “in.” She said the decision was “for reasons of security, protection against crime and terrorism, trade with Europe, and access to markets around the world.”

The report goes on to note that “London Mayor Boris Johnson, a leading Conservative who covets Cameron’s job, has also toyed with supporting the “out” campaign. He did not immediately show his hand Saturday, and the BBC reported he was unlikely to announce his decision until Sunday at the earliest. Johnson would give the “out” movement the sort of charismatic and broadly popular leader it currently lacks. Compared with the Conservatives, the center-left Labour Party is less divided over the issue, with most of the party’s elected officials supporting E.U. membership. Labour leader Jeremy Corbyn described Cameron’s E.U. renegotiation Saturday as “tinkering.” But he nonetheless said his party would campaign to stay in the E.U. because “it brings investment, jobs and protection for British workers and consumers.” The political leanings of Britain’s newspapers were on vivid display Saturday morning, with right-wing papers dismissing Cameron’s Brussels deal and left-leaning ones praising it”.


The piece ends “Analysts suggested that Cameron had won a better deal than many expected but generally played down the effect of European concessions. The prime minister won a British exemption from Europe’s goal of “ever-closer union,” a national veto on E.U. laws, protections for countries that do not use the euro and “an emergency brake” to limit benefits paid to immigrants from within the E.U. Cameron trumpeted the latter concession as a chance to limit net migration to Britain, which is at an all-time high. But experts have cast doubt on the claims, pointing out that most workers do not come to Britain for government benefits”.




Brazil’s myriad problems


A report in the Economist discusses the mounting economic problems of Brazil, “THE longest recession in a century; the biggest bribery scandal in history; the most unpopular leader in living memory. These are not the sort of records Brazil was hoping to set in 2016, the year in which Rio de Janeiro hosts South America’s first-ever Olympic games. When the games were awarded to Brazil in 2009 Luiz Inácio Lula da Silva, then president and in his pomp, pointed proudly to the ease with which a booming Brazil had weathered the global financial crisis. Now Lula’s handpicked successor, Dilma Rousseff, who began her second term in January 2015, presides over an unprecedented roster of calamities”.

The author mentions that “By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems”.

The report adds “Ms Rousseff’s political woes are as crippling as her economic ones. Thirty-two sitting members of Congress, mostly from the coalition led by her left-wing Workers’ Party (PT), are under investigation for accepting billions of dollars in bribes in exchange for padded contracts with the state-controlled oil-and-gas company, Petrobras. On December 15th the police raided several offices of the Party of the Brazilian Democratic Movement (PMDB), a partner in Ms Rousseff’s coalition led by the vice-president, Michel Temer”.

Worryingly for the future stability of the country it mentions “Brazil’s electoral tribunal is investigating whether to annul Ms Rousseff’s re-election in 2014 over dodgy campaign donations. In December members of Congress began debating her impeachment. The proceedings were launched by the speaker of the lower house, Eduardo Cunha (who though part of the PMDB considers himself in opposition) on the grounds that Ms Rousseff tampered with public accounts to hide the true size of the budgetary hole. Some see the impeachment as a way to divert attention from Mr Cunha’s own problems; Brazil’s chief prosecutor wants him stripped of his privileged position so that his role in the Petrobras affair can be investigated more freely. Mr Cunha denies any wrongdoing”.

The piece argues that both external and internal factors have come together, “Now prices of Brazilian commodities such as oil, iron ore and soya have slumped: a Brazilian commodities index compiled by Credit Suisse, a bank, has fallen by 41% since its peak in 2011. The commodities bust has hit economies around the world, but Brazil has fared particularly badly, with its structural weaknesses—poor productivity and unaffordable, misdirected public spending—exacerbating the damage. Regardless of what she may or may not have done with respect to the impeachment charge, Ms Rousseff’s cardinal sin is her failure to have confronted these problems in her previous term, when she had some political room for manoeuvre. Instead, that term was marked by loose fiscal and monetary policies, incessant microeconomic meddling and fickle policymaking that bloated the budget, stoked inflation and sapped confidence. Poor though her record has been, some of these problems have deeper roots in what is in some ways a great achievement: the federal constitution of 1988, which enshrined the transition from military to democratic rule. This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending”.

Pointedly it writes “Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older”.

The scale of the problem is seen when the author notes “Analysts at Barclays, a bank, expect debt to reach 93% of GDP by 2019; among big emerging markets only Ukraine and Hungary are more indebted. The figure may still seem on the safe side compared with 197% in Greece or 246% in Japan. But those are rich countries; Brazil is not. As a proportion of its wealth Brazil’s public debt is higher than that of Japan and nearly twice that of Greece. Unable to increase taxes, Ms Rousseff’s government may prefer something even more troubling to investors and consumers alike: inflation. Faced with the inflationary pressure that has come with the devalued real, the Central Bank has held its nerve, increasing its benchmark rate by three percentage points since October 2014 and keeping it at 14.25% since July in the face of the recession. But despite this juicy rate the real continues to depreciate”.

The article calls for harsh cuts, a policy that seems to not have worked, or at least worked at the expense of all other measures, “These efforts are meeting with some success: in December pro-government rallies drew more people than anti-government ones for the first time all year. It looks unlikely that the impeachment will indeed move to the Senate (which would trigger a further six months of turmoil). But this hardly provides a political climate conducive to belt-tightening, let alone to the amendment of the constitution which Mr Barbosa has said is needed to deal with the ratchet effect on benefits. Fiscal adjustment is anathema to the government workers and union members who are Ms Rousseff’s core supporters. Like the country’s economic problems, its political ones, while specific to today’s particular scandals and manoeuvring, can be traced to the transition of the 1980s. History reveals a consistent tendency towards negotiated consensus at Brazil’s political watersheds; it can be seen in the war- and regicide-free independence declared in 1822, the military coup of 1964, which was mild compared with the blood-soaked affairs in Chile and Argentina, and the transition that created the new constitution. One aspect of this often admirable trait is a resistance to purging. The mid-1980s saw a lot of institutions—the federal police, the public prosecutor’s office, the judiciary, assorted regulators—overhauled or created afresh. But many of the old regime kept their jobs in the civil service and elsewhere. The transition was thus bound to be a generational affair”.

It adds “In 2013 the average judge was 45 years old, meaning he entered university in a democratic Brazil. Civil servants are getting younger and better qualified, says Gleisson Rubin, who heads the National School of Public Administration. More than a quarter now boast a postgraduate degree, up from a tenth in 2002. Sérgio Moro, the crusading 43-year-old federal judge who oversees the Petrobras investigations, and Deltan Dallagnol, the case’s 35-year-old lead prosecutor, are the most famous faces of this new generation. Unfortunately, this rejuvenation does not extend to the institution most in need of it: Congress. Its younger faces typically have family ties to the old guard”.

On the scandals at Petrobras the writer notes “One of the causes of the mensalão scandal was corruption that provided Lula’s government with a way to get the votes it needed from the disparate small parties. The petrolão (“big oily”, as the Petrobras affair is widely known) apparently shared a similar aim. Such ruses may have helped PT governments pass some good laws, such as an extension of the successful Bolsa Família (family fund) cash-transfer programme. But the party was not able to do all that it had said it would; potentially helpful reforms in which it was less invested fell by the wayside. Raphael Di Cunto of Pinheiro Neto, a big law firm in São Paulo, points to many antiquated statutes in need of an update, such as the Mussolini-inspired labour code (from 1943) and laws governing foreign investments (1962) and capital markets (1974). A Congress in which dysfunction feeds corruption which feeds further dysfunction is not one likely to take the hard decisions that the economy needs”.

It ends “The strength of Brazil’s institutions suggests something shy of the failed populist experiments of some South American neighbours. And the fact that voters in Argentina and Venezuela rebuffed that populism in the past few months has not escaped the notice of Brazil’s politicians. But every month of dithering and every new petrolão revelation chips away at Brazil’s prospects. The 2010s are already certain to be another lost decade; GDP per person won’t rebound for years to come. It will be a long time before a president can match the pride with which Lula showed off his Olympic trophy. But if Brazil’s politicians get their act together, the 2020s could be cheerier. Alas, if they do not, things will get a great deal worse”.

Cameron’s incompetent negotiation


A report in the Economist discusses the ongoing talks between the UK and the EU, “LIKE blows from a fearsome heavyweight, the crises keep raining down upon Europe’s battered brow. Refugees, terrorism, Syria, Russia, Greece and Britain’s threat to quit the European Union: collectively they have left the EU punch-drunk and gasping for breath. But one of these problems is different from the others”.

The author makes the valid point that “The migration crisis was a product of epic forces outside Europe’s borders; the Greek row stemmed from a mismatch between democracy and the rules of euro membership. But Britain’s “renegotiation” of its EU membership, ahead of an in/out referendum to be held (probably) next year, looks like a self-inflicted wound. Why should semi-detached Britain seek yet more special treatment? Europeans are exasperated. Foreign friends, from Hong Kong to America, are baffled. All are worried. How did it come to this? For months negotiations proceeded quietly as David Cameron, Britain’s prime minister, took his concerns to other EU leaders and Eurocrats in Brussels oversaw technical talks. British diplomacy was conducted “very skilfully”, says one. Even the French were starting to believe that Britain was seeking not to wreck the project, but to secure its place within it”.

The piece adds that “Hopes were high that a deal could be struck at an EU summit later this month. But soon after Mr Cameron detailed his proposals in a letter to Donald Tusk, the president of the European Council, the wheels came off. Having previously hinted that he was open to discussion on his fourth “basket” of reforms, on migration, Mr Cameron suddenly reverted to an old demand. The EU treaties must be changed, he insisted, to allow Britain to impose a four-year delay before paying in-work benefits to migrant workers. The gambit flopped. On December 3rd Angela Merkel, Germany’s chancellor, told Mr Cameron that he could not expect rapid acquiescence to such a contentious request. Optimists now hope for a deal in February”.

Correctly the piece notes “Some of Mr Cameron’s other requests are reasonable; some are strange but achievable. But on welfare Mr Cameron is trafficking in trivia. By most accounts his proposals would do next to nothing to reduce EU migration: frustratingly, Britain’s labour market is simply too open and successful. Worse, he has picked a fight that may prove unwinnable. Every other government opposes changes that would violate the cherished principle of non-discrimination. Brussels’s finest legal minds will spend the next two months trying to square the circle. But whatever solution emerges will be a long way from the “fundamental, far-reaching” EU reform that Mr Cameron once promised. The problem is “very intractable”, frets a British official who is involved in the talks”.

The report goes on to mention that “What will Mr Cameron do? He is said to believe that his powers of persuasion can override the objections of pettifogging bureaucrats, including his own. He might be right; politics often trumps law when the EU is in crisis. But his form is not good. Many fear a repeat of previous diplomatic misadventures, such as Mr Cameron’s “veto” of an EU fiscal treaty in 2011, which left Britain looking exposed and inept, or his attempt to block the 2014 appointment of Jean-Claude Juncker as president of the European Commission, which he persisted with long after it became clear that he would lose the vote. For most Europeans the prime minister’s recent antics are of a piece with an approach to negotiation they have never understood. “Just who is advising him?” asks one exasperated German”.

The piece goes on to mention “When Mr Cameron began his quixotic quest for EU reform, many predicted he would need a scrap to demonstrate to British voters that his renegotiation was not empty. Perhaps he will emerge in February bloody but unbowed, wielding a “concession” on benefits that he can sell at home. But for the moment he looks boxed in. It is little wonder that fears of Brexit are growing. One concerned British official now puts the chances at 30-40%. Still, Britain’s partners will not allow irritation to cloud their judgment that the EU remains stronger with Britain inside than out. Its liberal preferences are shared by many and its defence clout valued by most. This week Mr Tusk urged compromise with Britain, warning that the issue was “destabilising” Europe. There is also a question of balance, says Anand Menon, a British academic: the Germans do not want to be left with the French; the French do not want to be left with the Germans; and no one else wants to be left with the French and the Germans”.

He concludes “Such calculations may have fuelled complacency in London. Some in No 10 murmur that the EU’s endless crises might help their case: best to give the troublesome Brits what they want and move on. But that is a stretch, as well as dispiritingly small-minded. Mrs Merkel and others certainly seek a speedy resolution to the problem, if only to get back to some proper work. They want Mr Cameron to hold his referendum as early as possible. But when the EU’s signature projects, from the euro to Schengen, are tottering, they are hardly minded to let an irascible Britain weaken the union’s foundations yet further. Britain, they might add, is not the only country with domestic politics. Even friendly countries, such as Denmark and the Netherlands, fear that obliging Mr Cameron would boost their own Eurosceptics. Negotiators in Brussels were so worried that other governments would use the talks to seek Britain-style carve-outs that they issued pre-emptive warnings that none should try”.

It ends “Somewhere in a parallel universe exists an alternative renegotiation that Britain would be well placed to lead, focused on the EU’s persistent economic torpor and its weak, fragmented foreign policy. Instead, the EU must grapple with Mr Cameron’s parochial concerns while confronting some of the toughest challenges it has ever faced. Vexing this may be; heavyweight it is not”.

France fights Germany?


A piece argues that France is “at war” with Germany, “Nobody has ever described former French President Nicolas Sarkozy as a graceful loser. “I’m not saying, ‘After me, chaos,’” he told Le Figaro, referring to his eventual defeat by François Hollande, although that is, of course, exactly what he meant. Sarkozy all but taunted the French public, warning that they would sorely miss the fiscal discipline, vigilant defense, and respectable centrism he saw as the hallmarks of his presidency. And, belatedly, it does seem he had a point. Chaos is precisely what France has reaped in recent days. A murderous series of terror attacks has been followed by a nationwide manhunt, and warnings of further massacres to come. Facing a crisis of this sort, most other nations’ natural instinct would be to recoil. The French, by contrast, have indulged their instinct for repaying an indignity. Hollande has already initiated a series of airstrikes on the Islamic State capital in Syria.”

Of far more relevance the author notes that “The French government has also signaled that, on matters both economic and political, it will no longer be content with taking a backseat to Germany in the European Union. France has declared the Islamic State an outright enemy; more quietly, it has started treating German Chancellor Angela Merkel as a new type of adversary”.

The report goes on to make the point that “It might seem ironic that France has responded to its national crisis by setting its national aspirations even higher. But it’s entirely in keeping with France’s national character, and its traditional role in Europe. And it might turn out to be precisely what puts an end to the continent’s own extended moment of crisis. France’s new slogan of resistance, mocked up in cartoons and painted on city walls, is an old one: Fluctuat Nec Mergitur, the motto of Paris itself, inscribed on the city’s coat of arms. (Translation: tossed but not sunk, like a ship on the water.) Old habits die hard, and the sheer outrage of the attacks has reminded even Hollande of how unnatural and belittling German control over French budgeting has come to feel. “The security pact takes precedence over the stability pact,” as he announced at a joint session of parliament, vowing to spend whatever French security requires — however far in excess of European Union deficit caps”.

Of course it remains to be seen whether this nationalist surge will survive or whether it will fade with time and the French will continue to be good Europeans/Germans when Merkel starts noting the rise in the French deficit.

The piece goes on to note “France’s nationalistic insurgency is just the beginning. But with the right pair of eyes, it wasn’t hard to detect in advance. The country’s public, and its political class, have chafed for a long while at Europe’s reigning ideology of Merkelism, an approach to budgetary penny-pinching somewhat like Sarkozy’s but considerably more drastic, and infinitely more German in its commitment to following common rules. Merkel’s approach to keeping the eurozone intact was viewed by many Europeans as everything from bunk economics to moral bankruptcy, and its dead yet grasping hand was invasive enough to stir up memories of the deceptively distant Nazi occupation”.

He goes on to draw a connection between French treatment at the hands of terrorists with the euro crisis, which is quite a stretch. He seems to think that recent French actions against terrorists, given what happened in Paris, will translate into a “war” with Germany over the future of the EU itself. Yet, it is safe to say that French commitment to the EU is still firm, though less firm than it was, and that when time has passed and memories fade there will be little that will separate the two nations again i.e. Germany will tell France what to do and France will obey all the while being called a “key ally” of Germany.

He goes on to argue “Neither victory for the French nor defeat for Europe’s enemies, in other words, will emanate from the managed technocracy of the European Union. It must not have been lost on Parisians, or anyone, that even the national government in Brussels, where the institutions of the EU reside, confessed it could not “control” the “situation” in Molenbeek — that capital’s run-down neighbourhood linked to a string of terrorist plots, the Paris assaults the last. That shamefaced admission was an unforgiving analog of everything cumbersome, aloof, distant, ineffective, and weirdly dehumanized about the EU under German leadership, concerned as it is more about monetary and financial togetherness than unity of purpose on more fundamental political questions”.

He carries on this theme given what could only charitably be called evidence, “France recognizes that the nature of the threat Europe’s nations now face is broader than just Islamic terrorism. From Greece at the outset to Portugal now, “German austerity” has become the all-but-irreconcilable difference pitting nationalists on the right and left against continental elites obliged to follow in Angela Merkel’s footsteps. “What we are seeing,” thundered UKIP chief Nigel Farage late last month, “is an increasingly authoritarian European Union that crushes democratic rights and then actually crows about it. Every single time there is a crisis, it is national democracy that loses.” But the EU’s British critics are marginal, taking offshore potshots from the institution’s sidelines. A turn in France toward popular force, and against bankers’ restraint, however, would be a decisive blow to Merkel’s reign in Europe. No other nation in Europe is consequential enough to have anchored the EU as an equal partner with Germany, and no other can hold its lesser members together with an alternate worldview as firmly established as Germany’s own”.

Interestingly he does write that “Merkel is losing the support of allies including (another irony) the finance minister of Bavaria, one Markus Soeder, who has abruptly proclaimed that “Paris changes everything.” Balkan razor wire and German anxieties have already chipped away at Berlin’s hegemony in Europe on questions of migration; but only French élan can fill the breach and provide a confident alternative to Merkel’s vision. French politicians well to Sarkozy’s right are already preparing to do just that. Backed by another bump in the polls, National Front chief Marine Le Pen has demanded France break with the EU’s quota system for migrant admissions and impose an immediate halt. Le Pen has recognized that the backlash to Merkelism is as politically potent as the reaction to Bourbon despotism had once been in an earlier age. (She seems not to have entirely recognized, however, that France may struggle to capture the heart of Europe if it sours too much on the message of universal liberty, equality, and fraternity.) In all likelihood, the recent decades France has spent on the backbench of Europe will be seen as a classic historical blip. Radical or reactionary, French political opinion has characteristically spoken with prideful particularity to matters of universal European — and human — concern. And wherever its place on the spectrum, the French character has often bristled against the pinching modesty of accountants’ values. A few centuries ago, contempt was aimed at Britain’s nation of shopkeepers. This century, it is Germany’s turn”.

“Mockery of the EU’s innovative community”


Kathleen McNamara writes about the future of the EU after the “Greek deal“, she opens “European Union is an unparalleled historical experiment in governance. There is no other example in modern times of such an intensive effort to establish a peaceful, prosperous political community beyond the nation-state. Forged out of the ashes of two devastating world wars and a great depression, the union of nation-states has been increasingly bound together through markets, laws, and institutions. Although the trust and optimism that must underpin such a community has waxed and waned over the years, the poisonous atmosphere that has arisen in the wake of the Greek debt negotiations is remarkable, particularly as it comes on the heels of several decades of such extraordinary success”.

She argues that the EU is not collapsing but then makes the point that “the perception that Germany made a brute power play to force Greece to accept devastating bailout terms in exchange for euro membership has unleashed a backlash against that country and deepened cleavages between northern and southern Europe. In the process, the Greek negotiations have unwound the willingness of many EU citizens to join their political fates together, a commitment that constituted the heart and soul of the European project. The result may be a less cohesive Europe, one that is unwilling to act in the world as a single unit and thus less able to address the continent’s key challenges: economic stagnation and unemployment, the influx of political refugees, climate change, and political instability outside its borders. More broadly, the Greek debt crisis has demonstrated once and for all the fragility of a polity that does not rest on robust institutions and norms of legitimate democratic governance”.

She notes that “The European project has long moved forward along two separate but reinforcing tracks. The first is what scholars call “intergovernmentalism.” Over the years, a series of high-level negotiations have resulted in a half-dozen complex treaties that set the blueprint for the EU as a political actor, from the 1958 Treaty of Rome (which established the European Economic Community) to the 1992 Maastricht Treaty (which created the euro) to the 2009 Treaty of Lisbon (which upgraded the EU’s foreign policy presence). The treaties have extended the EU’s policy capacities, reorganized its institutions and actors, and enlarged the union to encompass 28 states beyond the initial core of six”.

Importantly she writes that “the second track has been one of low-level, incremental institutional development. Here, what scholars term “functionalism” has Europeanised everyday life through rules and programs that have gradually transformed what was previously national governance into EU governance. In this track, governments are not the primary actors; instead, so-called eurocrats, in partnership with national bureaucracies and societal groups, have generated the specific rules and programs to carry out the overall objectives of the treaties, creating a web of institutions and practices across Europe. From traffic laws to food safety, from healthcare rights to Internet privacy, the EU increasingly and intrusively shapes public and pri­vate life in its 28 member states and beyond. The democratic legitimacy of functionalism rests on the notion of technocratic expertise and the neutrality of law, which in its ideal form treats all Europeans the same”.

In must be stated that in some countries many of these rule would not have been brought in or even implemented without the EU. This is to the credit of the EU. However, this does not answer the fact that many of these regulations go beyond the mandate of the EU and override the democratic process in the sovereign member states which she implies has not been met. The harmonisation of the EU has not been successful, the euro which was meant to tie Germany down has only created a stronger Germany. The same currency and rules that were meant to unite “Europeans” has only made their differences more stark.

She goes on to make the point that “as the EU has taken on even more ambitious projects, such as the single currency, it has become clear that the two tracks offer too shaky a foundation for the European project. The eurozone crisis has highlighted the limits of both intergovernmentalism and functionalism as ways of governing, and it showcases the incomplete political development of the union. The EU holds the promise of profound transformation for its members. The successful transitions to democracy undertaken by member countries such as Spain (and the entire eastern flank of the EU) are intimately associated with the EU’s governance and remain both incentive and identity for the European project. The states besides Greece that suffered debt crises after the financial meltdown—Ireland, Italy, Portugal, and Spain—have been able to move forward within the broader EU framework, albeit at the cost of domestic suffering. But divisions over what to do in the Greek case seem to have presented too big a challenge for the EU to handle through its traditional means”.

This is one reading of the particular situation of the Greek crisis. Another is that the Germans wished to make a deal so punitive that the Greeks would be forced to leave the euro and thus the EU. If this is true it would make a mockery of not just the concept of solidarity but also the notion of “ever closer union” which is the endless mantra of the EU with little thought as to its political, economic and democratic implications.

She goes on to make the point “The events of the past few weeks have made a mockery of the EU’s innovative community. The one-off, intergovernmental negotiations over the terms of financing have produced a highly politicised debate over whether the rich northern European states should help out the “profligate” southern ones. Eurozone negotiations on such issues as redistribution and the collectivisation of debt form a striking contrast to the way such policymaking occurs in a national setting. In the United States, for example, when one region or state is suffering, there is a collective social safety net that will automatically, without debate, provide a shield from the harshest effects of the crisis, whether in the form of food stamps, Social Security, Medicaid, or other entitlement programs. Debt is mutualised in the U.S. Treasury bills. The EU has no equivalent EU-wide Eurobond”.

The point is noted that “the historical development of the EU, with high-level intergovernmental negotiations on the one hand and low-level incremental functionalism on the other, has not produced the mechanisms to support a political community seeking to navigate through hard times. The dream of a post-national, cosmopolitan political community, once arguably the goal of the EU, is now at stake. It has been seriously damaged by the perfect storm of a devastating transatlantic financial crisis, an inadequately designed eurozone, a clientelistic Greek political economy, a Germany unwilling to bend to keep the eurozone together, and a France unable to play its historic role balancing Germany. The events of the past month have turned the EU away from its role as a political entity with a shared collective purpose and back into its role as a straightforwardly intergovernmental negotiating body, with fears of moral hazard and financial contagion trumping European ideals”.

She ends “Everyday Europe—the layering of laws and institutions that profoundly shape the life of EU citizens and those beyond—will persist. The deep roots of the EU have reshaped Europe’s terrain irrevocably. But the events of the past few weeks have made a mockery of the EU’s innovative community. For a time, it seemed that an almost unimaginable Kantian “zone of perpetual peace” had been established in Europe, as national power politics gave way to the spirit of collective governance. No longer. For the millions that have lived under a free, stable, prosperous, and ever-expanding Europe, the divisions exposed during the Greek crisis represent a devastating turn of events. The question is whether the EU’s political community can once again reinvent itself to deal with the demands it faces”.

Merkel’s ideological view


A report from Foreign Affairs notes the recent missteps by Angel Merkel, “Rarely does German Chancellor Angela Merkel’s political instinct fail her as badly as it did this month. During a televised youth forum, she told a 13-year-old Palestinian refugee named Reem Sahwil, who had just shared that she and her family faced possible deportation after their permanent residency application had stalled for the last four years, that the young girl was “a nice person” but that “politics is hard” and “some [migrants] will have to go home.” When Reem burst into tears, Merkel looked distraught and gave her a gentle but terse stroke on the back. Soon after, angry comments flooded in on Twitter under the hashtag Merkelstreichelt (Merkel strokes). Posting later about Berlin’s role in the Greek bailout deal, the writer Evgeny Morozov tweeted, “This week has been fantastic for German public diplomacy. All that was missing was Merkel making refugee children cry.” Merkel’s reputation for pragmatism, which helped her become Europe’s most powerful politician, thus backfired when she was confronted with the social reality of her policies: here was a girl who got hurt despite playing by the rules. The contrast seemed to strike at the heart of Berlin’s message that its system works”.

It could be argued that ignoring reality is at the very heart of not just Merkel but the entire EU. Pretending to be a major world power when it is really France and the UK co-ordinating, sometimes. Not only that but the myth of the EU foreign policy is seen with the EU “foreign minister” and the belief that some sort of co-ordinated position can be agreed. The major example is the euro. The EU, principally German refuse to see that the currency does not work and to make it work would mean ignoring democracy on a scale so large as to make the whole EU project collapse under the weight of its own contradictions.

The article goes on to mention that “The bad press comes at a sensitive time. Merkel’s position toward the Greek bailout deal has drummed up criticism in Europe and farther afield for being not just overly demanding but also unrealistic. As the various sides negotiate the agreement’s terms in the coming weeks, German politicians would do well to reevaluate the flawed assumptions on which they have built their policies: when it comes to the European project, much of Germany’s perceived pragmatism is a myth. Merkel’s initial urge to empathize with the Palestinian girl evoked an image that her center-right Christian Democratic Union party has worked hard to advance: that of the chancellor as mutti, or “mom.” But it is hard to come across as a benevolent if stern caregiver when one is leader of a nation that, despite being Europe’s wealthiest country, wants to discourage the arrival of refugees fleeing conflict in Africa and the Middle East. Reem also highlighted flawed assumptions behind German immigration policy—that poor immigrants and refugees from Africa and the Middle East threaten to overburden the German state. Reem’s accentless German and polite manners told a different kind of immigration story from the one Merkel has tried to sell to the German public”.

He writes that “Merkel’s approach to Greece has added to the irony. Despite the German argument that playing by the established rules is both fair and wise, a growing international consensus contends that the third bailout, a package of 86 billion euros ($93 billion) in exchange for more austerity, is no deal but punishment that will drive an already impoverished country to collapse. Some call it blackmail. Many consider it a triumph of narrow self-interest under the auspices of European unity”.

Pointedly he makes the valid point that “Germans have promoted the deal by claiming that their own economic revival a decade ago was the result of former Chancellor Gerhard Schröder’s tough labor reforms and that Greece must follow a similar strategy in order to rebound. But that wasn’t the whole story. In fact, the creation of the euro in 1999 provided a major boost to Germany by giving its export machine a competitive advantage in the eurozone at the expense of other EU members. Ignoring the unfairness of the euro system, many Germans still believe in the pitch that helped launch the new currency a quarter century ago—that free market competition and integration benefits everyone. That, of course, is not true. The euro has ruined Greece and benefited Germany most. And although there’s no denying that Greek banks borrowed huge amounts of money because of their own corruption and shortsightedness, German and French banks encouraged them to take loans that they normally wouldn’t have approved. Since then, Greece’s bailouts have gone mainly to rescuing those institutions: more than three-quarters of Greece’s bailout of 240 billion euros ($272 billion) has gone to the financial sector. Meanwhile, failed austerity has shrunk the Greek economy 25 percent in just five years”.

He correctly argues that “Now the German idée fixe of opposing any suggestion that the EU would become a transfer union of funds flowing from north to south threatens the union itself. At a minimum, it may induce another crisis next year. Nevertheless, Merkel’s refusal to entertain the kind of debt write-down that many economists believe is needed to forestall collapse has found support in Austria, Belgium, Finland, Latvia, Lithuania, the Netherlands, and Slovakia. On the other side of the European fault line, France, Italy, Spain, and others are clinging to the hope that the European project can still be rescued through more integration in the form of a fiscal and political union. But France and Italy are skirting their own economic crises, and Spain is just steering away from the brink”.

He ends “But the policies of the Lutheran north are anything but pragmatic. In the long term, the collapse of European integration—a failed Greece and southern poverty—would threaten northern stability and future prosperity. Instead, the north—and Germany first of all—would do well to remember the real motive for enacting a European common coal and steel market 60 years ago: forming a political union to ensure another European war would be impossible. Securing the future of that project would be the truly pragmatic decision. In order for Germans to judge what kind of Europe they really want to live in, however, they must begin by dispelling their myths”.


Irish support for Athens?


A piece from Foreign Affairs argues that Ireland should support Greek debt relief. This is at a time when the country has formally exited the troika “bailout” and is among the fastest growing economies in the EU.

The piece opens “After three long weeks of closure, Greece’s banks are beginning to open their doors to an expectant public. Following tense bailout negotiations, Greece received a seven billion euro ($7.6 billion) bridging loan to pay down 6.8 billion euros ($7.4 million) of the debt it owed last week to its official creditors. Essentially, it’s a new loan to pay off the old one. Or more accurately, it’s paying off the old loan plus interest. But the end of the deadlock has at least returned some normalcy to Greece. Checks can now be cashed. Limited transfers are again possible. Withdrawals are no longer limited to 60 euros ($66) per person per day, although capital controls remain in place, and will for some time. For now, the maximum withdrawal is 420 euros ($460) per day, and money cannot yet leave the country without approval from the finance ministry. This comes at the cost of more fiscal discipline for the Greeks, even though on the whole the country has already endured a level of austerity seen only during times of war or depression”.

He writes correctly that “In all this, Ireland, a small and open economy that completed its own bailout program only two years ago, has stood shoulder to shoulder with the creditor nations of Europe in denying Greece any debt forgiveness. That is shameful. Ireland is now recording some of the fastest growth rates in the eurozone. But during its own crisis, it, like Greece, eventually lobbied heavily for debt relief. In late 2010, Ireland received an 85 billion euro ($94 billion) loan package in exchange for austerity, recapitalising and restructuring the banking system, and passing structural reforms. At that time, it did not ask for debt relief, and none was offered. But two years later, in June 2012, Irish Prime Minister Enda Kenny began to push for it. He announced that he had made a promise together with European leaders to “break the toxic link between bank debt and sovereign debt” through a debt restructuring that would involve a combination of decreasing the interest rates charged and lengthening the loan repayment periods on some of the debt, perhaps indefinitely, as well as compensating the Irish state for the cost of recapitalizing Ireland’s banks”.

He writes, somewhat controversially that “in early 2013, Ireland got debt relief in the form of extremely long-term bonds, which replaces the punishing high interest rate “promissory notes” that the Irish government issued in 2010 to prevent the insolvency of its two largest banks. To this day, Ireland maintains a commitment, at least on paper, to a debt restructure that will return to taxpayers the money they pumped into the banks, even though privately, many fear such an arrangement will never take place, at least not this year”.

To call this “debt relief” shows the kind of alternate reality that the EU “leaders” are living in. For their to be any real notion of solidarity there must be debt relief not just for Ireland but Greece, Spain and Italy. Therefore to say that simply extending the length of the bonds (which will mean the Irish taxpayer paying even more money to the EU) qualifies as debt relief is laughable.

He then argues that “If Ireland’s economic openness is one factor that allowed Ireland to recover more quickly than Greece, there is another, more important reason: Greece has suffered more than double the amount of austerity imposed on Ireland. Although Ireland will be intensively monitored by the troika of international lenders (the European Commission, the International Monetary Fund, and the European Central Bank) until at least 2018, it has at least escaped the troika’s direct control. And Ireland has done well since. Unemployment is falling below double digits, asset prices are recovering, and investment is rising again as international investors, hungry for yields in a low inflation, low interest rate environment, gobble up assets. It’s all very 2006: It is impossible to get a restaurant reservation these days and traffic jams are back in style. Even though more than 20 percent of all banks’ loans are nonperforming, they no longer have a question mark over their survival”.

Shamefully this overlooks the sickening social cost of the austerity that has been demanded by the EU of Ireland. Poverty rates, homelessness, drug and alchocol abuse, suicides have all risen since and to then glibly say that all is well because traffic jams are back smacks of a disregard for people over the economic machine, irrespective of the social and moral costs.

He goes on to make the point that Greek banks do have a question over their survival, “Greece’s debt is around 180 percent of its GDP. (For comparison, Ireland’s was 123 percent of its GDP in 2014.) For a sense of scale, Greece owes more than 90 billion euros ($99 billion) to Germany alone. It owes around 70 billion euros ($77 billion) to France, and slightly over 61 billion euros ($67 billion) to Italy. The key reason Greece owes so much to its official creditors is that nine of every ten euros loaned to Greece in 2010 went to pay back private debt that should have been restructured at that time”.

He does note that “Greece faces a medium-term financing problem. As the state reduces in size, more and more austerity is required to balance the books. The result is the kind of downward spiral central banks were created to help stop. But Greece doesn’t have the U.S. Federal Reserve of the 1940s and 1950s, which stabilized the economy by taking an activist approach to monetary policy. It has the European Central Bank, a currency board with aspirations, but little substance. The difference in outcomes in Ireland and Greece is also thanks to structural differences in their economies. The proportion of the economy made up of internationally tradable versus non-tradable goods and services in Ireland is much higher than Greece’s. That means that Irish people can earn euros from the rest of the world, not just from each other. To a much greater extent, Greek people only earn euros from each other. So, when a large shock comes along, Ireland is better equipped to weather it than Greece. If Ireland’s economic openness is one factor that allowed Ireland to recover more quickly than Greece, there is another, more important reason: Greece has suffered more than double the amount of austerity imposed on Ireland”.

He concludes “Right now, the Greek experience has shown the world that the institutions of the European project are not yet up to the task of crisis management. In extremis, it seems, leaders would rather openly discuss kicking a country out of the currency union than provide some sort of relief for its debts. In that case, the EU is not a currency union but a series of bilateral currency pegs. And, as such, a Greek exit in the next five years could still come to pass”.

Searching for the next Greece


Daniel Altman tries to discuss who might leave the eurozone, apart from Greece, “With Greece enjoying a temporary lull in its apparently permanent crisis, we can take a moment to look around its neighbourhood at other candidates for trouble. There are several — and the euro’s future looks far from bright. Greece ran into trouble mainly because it should never have been in the eurozone in the first place. Its governments couldn’t balance their budgets, and its economic cycle was far out of sync with those of the eurozone’s leading lights. When Germany grew, Greece shrank, and vice versa. Using the same monetary policy in both countries made no sense at all”.

Altman notes that “the first in line are Portugal, whose government bonds are rated as junk by Standard & Poor’s, and Italy, which receives the lowest investment-grade rating of BBB-. Each country’s government is carrying a debt bigger than its GDP, something the IMF doesn’t expect to change any time in the next five years. Spain, whose debt-to-GDP ratio is below 70 percent but may rise in the coming years, is rated BBB”.

However, Italian debt is odd as most of it is held within the country rather than from outside creditors. Therefore, from this point of view there is less wrong with Italy than Greece. Italy’s main problem is that it has an almost medieval economic system with little ability to change quickly in addition to a corruption problem. Matteo Renzi is attempting to solve some of these problems with legislation that would give Italy more stable governments which would in then then be able to press for the most badly needed reforms. So while Italy has problems there is the possibility of progress, under certain circumstances.

Altman goes on to note that “Not far behind are Ireland, whose debt burden of 86 percent of GDP is supposed to decline rapidly now that economic growth has resumed, and France, at 89 percent, where growth rates may struggle to crack 2 percent in the coming years. Both of them receive reasonable grades from Standard & Poor’s — AA for France and A+ for Ireland, with AAA being the safest of all”.

Yet Altman’s anaylsis should be taken with a warning. Reports from Ireland show that “Ireland’s economy grew by more than 6 per cent in the first three months of the year compared with the same period in 2014, new figures reveal. Data released this morning in Dublin by the Central Statistics Office shows that gross domestic product (GDP) in the first quarter of 2015 accelerated by 6.5 per cent year-on-year while gross national product (GNP) advanced by 7.3 per cent”.

He goes on to argue “it’s important to take these ratings with a grain of salt. After all, Standard & Poor’s gave Greece’s debt a grade of A- until December 2009, when the fiscal writing was already on the wall. Partly because of the rating, Greece had no trouble borrowing at reasonable interest rates as late as November of that year, just as Portugal can today. Yet at the end of 2009, all of the countries above except France were once again being called by their pejorative acronym: the PIIGS. Going forward, the primary risks for these countries are dips in government revenue (mostly likely stemming from disappointing economic growth) and the buildup of other fiscal obligations. Either one could force a decision like the one that faced Greece: to pay or not to pay”.

Importantly he notes “Of course, collecting revenue is one thing; what a government chooses to do with it is another. During those heady high-revenue years from 2005 through 2007, Ireland paid down almost 30 percent of its debt, but Spain shrank its liabilities by only about 13 percent. Yet Portugal took the brass ring for most profligate fiscal policy, with its debt load rising sharply every year — despite a growing economy and rising tax revenue — for a total increase of 36 percent. If any of these events reflects long-term tendencies, then Portugal is one to watch. Another risk for these countries is the possibility that their economic cycles will fall out of sync with the rest of the eurozone or, more pertinently, with Germany. The PIIGS and France rely much more on tourism, for instance, than Germany; as a result, trends in their exports may depend on demand from wealthy households in China, Japan, South Korea, and the United States more than on industrial activity in the eurozone”.

Crucially he writes “the rates of economic growth in these five countries were most similar to Germany’s during the worst years of the global financial crisis. Then, in the past few years, all five fell behind Germany. As Germany recovered more quickly, driving the ECB toward a more hawkish stance on inflation, the other countries were left without the monetary support they needed to escape recession. And most recently, Irish growth has exceeded German growth by more than 2 percentage points; Ireland may eventually need higher interest rates to avoid overheating, but the ECB is unlikely to provide them anytime soon”.

He goes onto make the point that “When the next recession hits the eurozone, the laggards will again come under threat. And there’s no reason to believe that some of them will be any more capable of snapping back. Italy, Portugal, and Spain have enormous baby-boom generations a decade or two from retirement, whereas France has a more stable population profile and Ireland has young reinforcements on the way. For the first three countries, the costs of pensions and medical care will loom large for at least the next two economic cycles”.

He ends “These costs will imply hard choices like the one that caused Greece to falter. Its government ended up in the worst of both worlds, making deep cuts to the very jobs, benefits, and services that it chose to fund in lieu of repaying its debts. Given the staggering cost Greece has already paid to stay in the euro, the next country engulfed by crisis might choose a third option: leave the eurozone sooner rather than later”.

Grexit and Chinese collapse, the worst senario


Daniel Altman writes about the worst case scenario, both Greece and China collapsing,

He opens. “Let me start by saying that I have no idea what the worst-case scenario looks like, as indeed no one does. Because of unexpected events — black swans, unknown unknowns, or, to use the term of the moment, Knightian uncertainty — it’s impossible to know just how bad things could get in the global economy. But a few dominoes could fall that might make things very uncomfortable in the markets, and it’s worth considering what the world would look like then. The most obvious risks are in the eurozone and China. If Greece defaults and eventually has to abandon the euro, the currency’s sheen of invulnerability will disappear. The impossible will have become possible, and investors will be forced to consider the fact that other countries — Portugal may be next in line — might someday exit the eurozone as well”.

He goes on to argue “Uncertainty about the underlying value of the euro will increase dramatically. There will be no way to know what the euro or euro-denominated securities ought to be worth if the makeup of the eurozone itself is unpredictable. Central banks built up euros as a counterweight to dollars in their reserves for years; that trend, already in reverse, could turn into a swan dive. Onetime hopes of making the euro the primary currency for financing global trade have already evaporated, as the renminbi moved into second place behind the dollar two years ago. All other things equal, though, Greece’s exit will make the euro more valuable. Countries with weaker fiscal positions and demand for securities only serve to dilute the strength of Germany, France, and the other euro stalwarts. But the appreciation of the euro could hurt exports from those same countries, eroding the scant economic growth they’ve been able to achieve — and they’re much more important to the global economy than Greece”.

He adds that “Now throw in the bursting stock-market bubble in China. Companies there have used high stock prices to pay off debt through new public offerings. But investors have borrowed hundreds of billions to finance their portfolios, pushing prices still higher. If the markets crash — and even a loosening of rules on margin trading hasn’t been able to stop their recent slide — free-spending companies will have garnered an undeserved measure of solidity at the expense of millions of Chinese households. Billions in private saving will have financed a raft of pointless projects, destroying wealth and distorting incentives at the same time. The global implications will be equally bad. Many financial institutions have undoubtedly bet against the Chinese markets, but those that held onto Chinese securities will be forced to pull back the riskier assets in their portfolios. Any contagion of Greece’s problems in other less-creditworthy countries will be magnified”.

Altman goes on to write that “Perhaps more importantly, Chinese demand for imports will also decline — not just because of the disappearance of wealth, but also because the dip in the markets will depress the value of the renminbi. Along with Australia, Hong Kong, and Mongolia, a dozen countries in sub-Saharan Africa send at least a quarter of their exports to China. So do Chile, both Koreas, Oman, and Turkmenistan. For quite a few of these countries, a drop in exports will pose a difficult challenge. Some, like Gambia and Mauritania, have incurred heavy public debts that require tax revenue for interest payments. Others, like Burkina Faso and Sudan, need inflows of hard currency to build up their reserves and cover their inflated money supplies, as indicated by the most recent figures from the World Bank. Fiscal and/or currency crises in these countries could further destabilize regions already struggling with cross-border conflicts and the threat of extremist groups”.

He ends the piece “If growth in the United States begins to falter at the same time — and historical data suggest that it might — the worldwide rout will be complete. The American, European, and Chinese economies will be in retreat, toppling many smaller ones along the way. The United States and China would likely rebound within a couple of years, but the damage to livelihoods and lives will already have been done. There wouldn’t be the same kinds of dislocations in the financial markets as last time, since institutions’ balance sheets are somewhat stronger now. But in the United States alone, a couple of years in recession could preempt the creation of several million new jobs. So how likely is this scenario? This week, analysts gave Greece up to a 50 percent chance of leaving the eurozone. The Shanghai Composite has already plunged by 20 percent since June 12. Academic and government economists see little chance of an American recession now or in 2016, but the probability is still higher than it has been in the past couple of years”.

The unravelling of the EU


Dr Stephen Walt writes about the future of the EU, “It took a historic deal with Iran to drive news from the European Union off the top of the past few days’ news feeds. In any other week, the continued saga of the eurozone and the latest deal with Greece would have received even more attention than it did. The news from Vienna was dramatic, but what happens in Europe over the next few years will be a lot more important than the ultimate outcome of the nuclear deal with Iran, as significant as that achievement is”.

Walt notes that “As an economic unit, the EU has a combined GNP larger than that of the United States, considerable wealth, advanced industries, and significant military potential. The United States is formally allied with most of its members and has long benefited from cooperation with its fellow democracies there. Europe’s future course is therefore of considerable interest to the United States”.

Walt goes on to make the point that “it is hard to be optimistic about the EU’s prospects today, especially its stated goal of an “ever closer union.” Despite its past achievements, the EU now suffers from growing tensions and several self-inflicted wounds. The EU is likely to experience repeated crises and internal divisions, and one cannot rule out a gradual and irreversible decline in its cohesion and influence. Because a prosperous and tranquil Europe is in America’s interest, this is not good news for the United States”.

Walt argues that the EU faces five problems, the first of which is overexpansion, “The EU today is a victim of its past success. What began as a limited arrangement among six countries to coordinate coal and steel production has become an elaborate supranational organization of 28 members governed by a bewildering array of institutions and subsidiary agencies and hamstrung by the need to reach consensus before taking important decisions. At the same time, its members are still independent nation-states with their own governments and their own complicated internal political arrangements. America’s complex federal system is a model of simplicity by comparison. Moreover, as the EU has expanded, its membership has become increasingly heterogeneous. Germany’s GDP is more than 300 times larger than Malta’s, and Luxembourg’s per capita income is nearly seven times higher than Latvia’s and five times higher than Greece’s. The geographic size, population, and economic resources of the member states are vastly different, and their respective cultures and national histories have become less similar as the EU has grown. Not surprisingly, expansion has made the EU more cumbersome, more divided, and less popular. In 2014, more than 70 percent of EU citizens surveyed believed their voices do not count in EU decision-making, and nearly two-thirds declared that the EU does not understand the needs of its citizens”.

More than any supporter of the EU is willing to recognise Walt writes that the end of the USSR “removed one of the main motivations for European unity. The EU is often seen as a purely economic and political project, but security concerns were a key part of its rationale from the start. That rationale faded as NATO grew stronger, and it disappeared when the Warsaw Pact collapsed. The absence of an external danger encouraged European leaders to focus more on selfish national concerns and to see the EU as a way to limit and constrain German dominance”.

Naturally Walt discusses the euro crisis, “It is now clear that the decision to create the euro was an enormous blunder, as skeptics warned at the time. It was done for political rather than economic reasons: to renew momentum for unity, to bind a reunified Germany more tightly inside European institutions, and to put Europe on a more equal footing with the United States. But as the euro’s critics emphasized early on, the EU lacked the political and institutional mechanisms needed to make a currency union work. Instead, the euro’s proponents simply assumed the common-currency members would never let themselves get into serious financial trouble, and if this happened anyway (as, of course, it did), they further assumed that it would be easy to create the institutions that the eurozone lacked”.

Pointedly he notes that “Even worse, the crisis has sown deeper divisions within the continent, with debtors and creditors exhibiting a level of resentment and hostility not seen for many years. Instead of demonstrating a powerful commitment to European unity, EU member states now try to get what they want by threatening to blow up the entire enterprise. Greece used the threat of Grexit to try to win concessions from its creditors, and France used much the same threat to force Germany to soften its demands (however slightly)”.

Interestingly Walt notes the problems that the EU thought it had “abolished“, a mythical Kantian peace that is collapsing “The EU now faces serious turmoil on its periphery, with direct consequences for Europe itself. State failures in Libya, Syria, Yemen, and sub-Saharan Africa have produced a flood of refugees seeking to get in, while the emergence of al Qaeda, the Islamic State, and other extremist movements has had worrisome repercussions among some of Europe’s Muslim populations. The danger of homegrown or lone-wolf terrorism is often exaggerated, but it is not zero. And some Europeans now want to roll back the open internal borders that were a key achievement of the 1986 Single European Act. Meanwhile, the conflict in Ukraine raises new concerns about the security of the EU’s eastern frontier. The EU has been unable to agree on new measures to address any of these challenges, however, further underscoring its dysfunctional decision-making process”.

Walt ends arguing that the EU has failed to end nationalism, “The EU’s final challenge is the stubborn hold that nationalism exerts on the populations of the individual member states. The elites who launched the original European project hoped it would transcend existing national loyalties, but nationalism remains alive and well throughout the continent. Britain may vote to leave the EU next year (though I believe this is unlikely), Scottish nationalism may lead it to exit the United Kingdom, and nationalist sentiments continue to simmer in Catalonia and elsewhere. Economic stagnation, high youth unemployment, and concerns about immigration have also fueled a resurgence of Euroskeptic nationalist parties that reject the core principles on which the EU is built”.

Walt ends noting the three possible outcomes, “one can imagine three possible futures for the European Union. First, Europe’s leaders could find creative new ways to overcome the challenges identified above. In theory, bold and determined leadership could build the institutions to support the euro, assimilate immigrant populations more effectively, and adopt reforms to produce stronger economic growth. Unfortunately, this optimistic scenario for a reinvigorated EU is unlikely. There are no European leaders today with the vision and stature of an Adenauer, de Gaulle, or Thatcher, and it would take years for serious reforms to work their way through the EU’s elaborate consensus-based governing machinery. Instead of an “ever closer union,” therefore, the EU is more likely to simply muddle through. It will keep applying Band-Aids to contain the euro crisis and will hope that trade deals with the United States and China will provide an economic boost. In this scenario — which I regard as the most likely — the EU will stay in business, but robust growth will remain elusive, support for the union will decline, and Europe’s global influence will continue to wane. But there is a third possibility: The EU experiment could start to unravel. A Greek exit from the eurozone would set a dangerous precedent, nationalist resentments could deepen, leaders with more authoritarian inclinations could come to power (as has already occurred in Hungary), and Greece could dissolve into widespread social unrest (or worse). Some European states might even look to Moscow for help (though they are unlikely to get much). If disintegration begins, the only question will be: How far and how fast will it go? Make no mistake, the latter two possibilities — either “muddling through” or a gradual unraveling — would be bad news for the United States. Slow economic growth in Europe means slower growth in the United States, and a weaker Europe will be less useful as the United States tries to deal with a rising China and a turbulent Middle East. Trouble in Europe will also distract U.S. leaders from other regions and issues that demand attention”.

“It exposes the European project as a power grab by unelected elites”


An article examines the “ugly heart” of the EU project and unmasks the EU for what it is, “it looked as if the Grexit crisis that had occupied the world’s attention for weeks was finally heading into the final stretch. Under pressure to comply with creditor demands, on Thursday Greece tabled a proposal that contained harsher austerity measures than the proposal that the Greek people had overwhelmingly rejected by referendum just one week prior. Prime Minister Alexis Tsipras then quickly garnered parliamentary approval for his proposal, to avoid the country’s economic collapse, returning to the negotiating table”.

The result as we are now aware was total Greek surrender, “It was total and complete capitulation — the white flag, if you will. Surely, it seemed by Friday morning, an agreement was close at hand. But once Greece was at the table, something strange happened. The creditors upped the ante, looking for Greece to sign up to even more draconian and harsh terms. After hours of bickering, the negotiations ended with no conclusion and yet another ultimatum backed by Germany and its allies in the Netherlands, Austria, and the former eastern Bloc: either Greece accept the Eurogroup’s latest, more austere proposal for a bailout, ratify this series of reforms through Parliament by Wednesday or leave the eurozone “temporarily.” The demands included spending cuts, accelerated privatization, resolution of non-performing loans in the Greek banking system, and many other measures, all to be accomplished under the watchful eye of the Troika to ensure compliance”.

Crucially he makes the point that “the ultimatum Greece now faces also demonstrates the disregard of the euro system for any right to national sovereignty Greece may have as a member of the monetary union. It exposes the European project as a power grab by unelected elites at the European Commission and at the European Central Bank. For the first time ever, the whole world is realizing that not only does the European Union require a gradual fading away of national sovereignty as economic harmonisation advances, it also involves an abrupt, violent, and complete loss of national sovereignty on the occasion that a country’s economy stumbles and requires assistance. The Greek government is desperately trying to secure language in the final draft of an agreement with its creditors that its Parliament can stomach. But then it has the unenviable task of bringing whatever it secures back for a vote”.

Of course many have been saying this for years, that the EU was always just a project for the large countries to control the “small”. Those who support the EU argue that it brought peace to the European continent but this overlooks the USSR on the doorstep of the continent and the horrific acts that took place in the Second World War. Not only that but the whole EU was begun in order to control, or tie down, Germany. The irony is that all it has ever done is to make Germany stronger. The whole euro was a French idea on condition of German unification when it was meant to weaken Germany. What it has done is only make Germany stronger, for now.

The writer goes on to note that “What will Greece do? I believe a unity or even a technocratic government would be hard-pressed to sign up to the deal currently on the table, let alone Syriza, a left-wing coalition. The present government has already lost members due to the first austerity proposal that it pushed through Parliament after the referendum. Of course, the potential of being excluded from the eurozone should focus minds. After all, according to the BBC, the Greek government has not helped its banking system and economy prepare for Grexit in any way. Now, the idea of a “temporary” Grexit — floated by Germany, and provisionally included an early version of the ultimatum — as a potential out seems reckless: a Greece that temporarily exits the euro, then flourishes, would hardly want to re-enter, and a Greece that fails would not be permitted to rejoin. Thus, either way, the “temporary” Grexit would likely become permanent. Meanwhile, the power politics continue: The Associated Press reported late Sunday that Tsipras is seeking a path to securing ECB aid for his country’s embattled banks as early as Monday; creditors, meanwhile, have demurred, saying they want to see Parliament pass austerity measures first before help is forthcoming”.

He ends “After seven years of difficult economic adjustments, economic nationalists in Britain, in France, and even in Germany will seize upon these events and rightly call out the EU as a project by European elites with dubious long-term economic benefits for ordinary people. They will call for a break up of the European Union and a return to national governments with full national economic and monetary sovereignty. And eventually they will probably get what they want. The movement aimed at having Britain exit the EU — so-called Brexit — is just the beginning. With Greece, we are witnessing history in the making. This fiasco has put the disintegration of the European project in play”.

IMF refuses to participate


A article in the New York Times reports that the IMF has told the EU that the recently “agreed” deal with Greece will not work, “It reads like a dry, 1,184-word memorandum about fiscal projections. But the International Monetary Fund’s memo on Greek debt sustainability, explaining why the I.M.F. cannot participate in a new bailout program unless other European countries agree to huge debt relief for Greece, has provided the “Emperor Has No Clothes” moment of the Greek crisis, one that may finally force eurozone members to either move closer to fiscal union or break up”.

The report notes that “The I.M.F. memo amounts to an admission that the eurozone cannot work in its current form. It lays out three options for achieving Greek debt sustainability, all of which are tantamount to a fiscal union, an arrangement through which wealthier countries would make payments to support the Greek economy. Not coincidentally, this is the solution many economists have been telling European officials is the only way to save the euro — and which northern European countries have been resisting because it is so costly. The three options laid out by the I.M.F. would have different operations, but they share an important feature: They involve other European countries giving Greece money without expecting to get it back. These transfers would be additional to the approximately 86 billion euros in new loans contemplated in Monday’s deal. “Wait a minute,” you might say. “The I.M.F. isn’t calling for a fiscal union; it’s calling for debt relief.” But once a debt relief program becomes big enough, this becomes a distinction without a difference; they’re both about other eurozone countries giving Greece money”.

The author mentions that the first option is “one of the debt relief options proposed by the I.M.F. is “explicit annual transfers to the Greek budget,” that is, direct payments from other governments to Greece, which it could use to make its debt payments. This, obviously, is a fiscal union. A second option is extending the grace period, during which Greece would be relieved of the obligation to make interest or principal payments on its debt to European countries, through the year 2053. That’s not a typo. Under this plan, Greece would make no more debt payments until Justin Bieber is 59 years old. This is a fiscal union by another name, since those lengthy and favorable credit terms would save the Greeks money at the expense of Greece’s creditors, most of which now are other European governments or the I.M.F. The third option floated by the I.M.F., a cancellation of a portion of Greece’s debts, has been fiercely resisted by the German government, even though this is the option that least obviously constitutes a continuing fiscal union”.

However in her infinite wisdom Merkel has ruled out any debt forgiveness and at the same time demanded Greece pay all of its debts, despite the insanity of what it has to pay and the lack of economic sense in what Merkel proposes. This has led many to conclude that Merkel, far from being incompentent or financially illiterate desires to force Greece out of the Eurozone.

The piece goes on to mention that “Unfortunately, however, this is not Greece’s first bailout rodeo. Previous bailouts have had to be revised and enlarged, and as the I.M.F. notes in the section of its memo about “considerable downside risk,” that could happen again. The plans for Greece to regain solvency rely on fast economic growth and sharp rises in labor productivity that outperform the rest of Europe — something that cannot be guaranteed. They also rely on the country’s running a large primary surplus for an extended period — that is, collecting much more in taxes than it spends on government services, which typically does not prove popular with the voting public. In other words, Europeans would have good reason to fear that a debt haircut given to Greece today would not be the last”.

The article concludes “The memo makes clear what the real cost to Europe of continued eurozone membership for Greece is: If European governments want to keep Greece in, they’re going to have to put up a lot of money in one non-loan form or another, money they will give Greece that they never get back. Of course, the main alternative to a deal is a Greek exit from the euro, which would also be costly to European holders of existing Greek debt, who could expect to be repaid in devalued drachmas, if at all. That is a reason for European governments to be willing to pay the price prescribed by the I.M.F. to make a Greek deal work”.

“Beijing is scrambling to control the chaos”


A report notes the ongoing collapse of the Chinese stock market and how whatever safety net is too late to save it, “China’s stock-market bubble has burst, and Beijing is scrambling to control the chaos. It’s better to stop bubbles from forming in the first place, but Beijing failed to act — perhaps because the rising markets were a rare bright spot in a period of relative economic malaise. Now, with millions of fortunes already destroyed, continuing to do nothing might be the best approach. But that hasn’t stopped the government from diving in. The crash in Chinese share prices is a symptom of a market that is serving new strata of society as it develops, just like the American bourses during the dotcom boom”.

He makes the point that it was supply and demand rather than the fundamentals of the companies that were driving up prices, “even though the last bubble and crash occurred less than a decade ago. In 2008, the Shanghai market plunged spectacularly after increasing its value five times over in the previous two years. Once the global financial crisis subsided, however, it didn’t take long for investors to pour their money back in. And in recent months, they bet that prices in the Shanghai marketand others — would continue to climb indefinitely, borrowing billions to trade on the margin. One problem is that these are not the same investors as in 2008. For the past several years, China has been the world’s primary growth market for online trading accounts. Tens of millions of people have bought stocks for the first time and discovered the wonders of margin trading. Many are members of China’s burgeoning middle class, but that doesn’t mean they’re sophisticated investors; the majority may not even have finished high school. Now, with the markets down roughly 30 percent, their heavily leveraged positions have started to crumble”.

Pointedly he writes that “The government is understandably concerned, as more than three trillion dollars in wealth on paper, which didn’t even exist last spring, has already disappeared. But it’s not taking the right steps to salvage the situation — nor does it necessarily have to take any steps at all. So far, Beijing has placed a moratorium on initial public offerings, apparently in the belief that doing so will discourage churn (and thus more selling) in the markets. In reality, the move just protects existing investors — and the bloated companies they own — at the expense of businesses raising money to expand their operations. The Chinese government is also putting together a stabilization fund, including contributions from 21 brokerage firms, to prop up blue-chip shares”.

Interestingly he argues that “it’s not even obvious that the markets are still substantially overvalued, so none of these measures may even be necessary. On the Shanghai market, price-to-earning ratios have come down from a peak in the forties (for the median share) to the upper teens, which is somewhat elevated but not crazy for an emerging economy in East Asia. In Shenzhen, the ratio was around 45 at the time of this writing. But given the higher concentration of manufacturers on the southerly exchange, this higher figure could signify lower earnings for exporters — possibly a temporary phenomenon — as well as inflated prices. If shares are nearing prices that reflect the underlying values of the companies, rather than frothy demand for stocks, then doing something may be more dangerous than doing nothing. Beijing is setting a risky precedent by acting as a backstop not just for financial stability but also for the market capitalization of publicly traded companies. In the future, with no incentive for caution, investors may adopt even riskier behavior than the kind that has landed them in their current multi-trillion-dollar hole“.

This was seen spectularly in the Eurozone, Ireland and the UK had huge liabilities and yet where brought into the public balance sheet. The real lesson was Iceland who refused to prop up the banks and let them go bust only protecting the money of people over investors. The result was enormous pain for Icelanders in the short term but long term benefits.

“The eurozone is now held together by little except fear”


The superb Daniel Altman examines the economics of the recently agreed deal between the EU and Greece, “Greece’s latest bailout proposal, now accepted by the Greek parliament, and currently being scrutinised at length by eurozone finance ministers, make sense? It’s pretty much the same deal that was soundly rejected by Greek voters less than a week ago. The voters clearly knew something that the government didn’t — this is a lousy plan for the Greek economy, and a government stacked with economists surely could have come up with something better. In order to receive more money from the European Union and an extended payment schedule (or even, — gasp — debt relief) from the International Monetary Fund, Greece once again has agreed to a laundry list of new policies, some of them implying yet more sacrifices in the short term. In talks this weekend, the eurozone’s finance ministers have asked for more as a show of good faith. To borrow a metaphor from a story told in ancient Greek, there are many stations of the cross on this road — yet salvation may seem just as distant at the end. Even if Greece promises to submit to this new ordeal, the growth and debt relief it really needs may not arrive in time”.

He adds that  there are some “general points of the proposals and what they’re likely to do for Greek’s economy and its fiscal position”.

Altman writes  concerning the primary budget surpluses until 2018, “The Greek government would commit to spending less than it collects from taxpayers and lenders in each year: 1 percent of gross domestic product in 2015, then 2 percent, 3 percent, and 3.5 percent in 2016, 2017, and 2018 respectively. With modest growth, even that 3.5 percent surplus would amount to about 10 billion euros. But for its latest bailout, Greece is requesting 53 billion euros in new loans spread over three years. Essentially, the bailout lenders are providing the surpluses; they’re giving money to the Greek government conditional on the promise that the government will not spend all of it. This is obviously ridiculous; it’s like a test to see if a child can resist eating a cookie placed in front of him. It’s also economically toxic. Greece should only run budget surpluses if its economy is growing at a healthy pace, and there’s no guarantee that it will be growing in the next couple of years — especially given the rest of the points on the list”.

Altman goes on to discuss tax reform noting that “Greece has a complex tax system that has helped to create a large shadow economy. The proposal includes a bevy of changes designed to streamline the system and raise more revenue. From an economic perspective, anything that makes paying taxes easier — and avoiding them more difficult — will raise revenue somewhat while potentially freeing up taxpayers’ time for more productive activities. So making the system simpler and more transparent, for example by instituting an almost-uniform value-added tax rate, may raise revenue without harming economic growth. But the proposal also includes a number of tax increases, not just to the value-added tax, but also the tax on corporate profits and the tonnage tax on shipping. The value-added tax, at 23 percent for most goods and services, will be one of the highest in the European Union”.

On the issue of pensions he goes on to mention that “Greece’s public pension system, like its public debt, is unsustainable. The retirement age has already risen twice since the crisis began, from 57 to 66. The new proposal would increase it to 67 and inflict more cuts on benefits while attempting to collect more contributions from working Greeks. Raising the retirement age could increase economic output if it boosts the total number of employed people. But if keeping older Greeks in their jobs longer just makes it harder for younger Greeks to find work, then the effect could be the opposite.”

Altman goes on to write about privatisation, “Airports, seaports, and several other assets would be sold to private investors under the proposal. These sales could raise several billion euros, but that would only be enough to take a few chips out of Greece’s enormous public debt. The significance of these sales would rest more on the potential of private owners to encourage greater economic activity through more dynamic management of these assets and further investment in their development. Of course, this is no sure thing”.

Pointedly he notes that “The eurozone’s finance ministers are discussing Greece’s proposal late into the night on Saturday, with some, including the group’s leader, having expressed skepticism already — despite the fact that the proposal is so similar to the one put forward earlier by the creditors themselves. Then, if they are satisfied, there will be more talks, perhaps on debt relief as well. But these delays are for political posturing and little else; the reality remains that the proposal, whoever wrote it, is far from optimal in economic terms”.

He ends the piece, “Yet Greece will have to keep suffering under austerity and repaying its creditors for several years before these and other pro-growth policies have their full effect. Too many points in the proposal imply short-term pain for long-term gain; the most important step toward the control of Greece’s debt is a return to rapid growth as soon as possible. Ideally, the timing of the reforms would put the least costly policies first and make the most costly policies contingent on growth rates in the future. The last thing Greece needs is another bundle of policies whose immediate effect will be to deepen its depression”.

He concludes, “Greece’s submission to the conditions that Germany demanded, merely to start negotiations about further funding to refinance its unsustainable debts, may stave off the prospect of imminent bank collapse and Greece’s exit from the eurozone. But far from solving the Greek problem, doubling down on the creditors’ disastrous strategy of the past five years will only further depress the economy, increase the unbearable debt burden, and trample on democracy. Even Deutsche Bank, one of the German banks bailed out by European taxpayers’ forced loans to the Greek government in 2010, says Greece is now tantamount to a vassal state”.

He ends making the vital point, “But this is much bigger than Greece. It is clearer than ever that Europe’s dysfunctional monetary union has a German problem, too. As creditor in chief in a monetary union bereft of common political institutions, Germany is proving to be a calamitous hegemon. Paris may have tempered Berlin’s petulant threat to force Greece out of the euro, but German Chancellor Angela Merkel undoubtedly calls the shots. The deal that Greek Prime Minister Alexis Tsipras capitulated to mirrored German demands, not the proposals he drafted with French help last week. By pointing out the futility of resistance if Greece wished to remain in the euro, Paris has, in a sense, acted as Berlin’s agent in securing Athens’s acquiescence”.

He finishes “That’s the point of brutalizing Greece: to deter anyone else from getting out of line. Why vote for parties that challenge the Berlin Consensus if they will be beaten into submission, too? Created to bring Europeans closer together, the eurozone is now held together by little except fear”.

Altman correctly notes that this is not the end of the crisis, “many Greeks believe any deal is worth doing to keep Greece in the euro. But as depression bites and the reality of German-imposed technocratic rule sinks in, the political backlash will surely grow. So the prospect of default and Grexit are hardly gone. Greeks ought to use their extended stay in debtors’ prison to better plan their escape. To default safely within the eurozone, Greece needs to secure its banks. On prudential grounds, of course, Athens ought to force them to keep their holdings of bonds guaranteed by the Greek government to a minimum and recapitalize them with assets more tangible than tax credits on future profits. That way the ECB cannot shut them down again. The eurozone as a whole remains an economic basket case and a democratic disgrace. It is trapped in a nightmarish limbo where politics precludes the creation of common institutions that would cage German power and put the ECB in its place, while fear prevents its victims from leaving. So much for the European dream”.


“They seem to want to push to kick Greece out of the common currency”


After 15 hours of talks the Greek government seems to have accepted defeat and accepted the demands of the eurozone for more austerity, “Greece has offered an almost unconditional surrender on its bailout, but Germany might not accept anything less than a Carthaginian peace. In other words, a deal that not only forces Athens to submit, but also humiliates it in the process. This latest melodrama, playing out in Brussels as European finance ministers meet to discuss whether or not to approve a new Greek bailout, appears so nonsensical that it can be hard to believe these people are deciding the future of Europe. Although you wouldn’t know it from the headlines, the truth is that Greece and Europe have been close to a deal for awhile now. Both sides agreed about how much austerity Athens should do, but disagreed about how Athens should do it—at least until last Thursday. That’s when Greece came up with an offer that was not only nearly identical to Europe’s, but also to the one its people had just rejected in a referendum. French President François Hollande, whose government helped put the proposal together, called it a “serious” and “credible” one. At the very least, it seemed like the basis for new negotiations”.

The writer adds, “But maybe not. The problem is that Greece’s economy is in so much worse shape now than it was even a few weeks ago that the tax hikes and spending cuts, which would have produced a 1 percent budget surplus before, won’t anymore. That’s what happens , after all, when the European Central Bank pulls enough of the plug on your banks that they have to close their doors for now to avoid having to close their doors for good. Businesses can’t get the credit they need to, well, stay in business, and will then default on the banks that are about to go out of business themselves. The entire economy, in other words, shuts down. And that’s why Europe estimates that Greece would actually need an 82 billion euro bailout—with 25 billion of that going to its banks—instead of the 53.5 billion euros Athens is asking for. So Greece would have to do more austerity than Europe wanted before to get more money than Europe was offering before”.

Crucially he writes that “If, that is, Europe is even offering Greece any money anymore. It might not be. The simple story is that Germany and the other hardline countries don’t trust Greece’s anti-austerity Syriza party to actually implement, well, austerity. And so rather than coughing up another 60 or 70 or 80 billion euros, they seem to want to push to kick Greece out of the common currency instead. That, at least, was the plan that leaked on Saturday. And now it’s part of the actual plan on Sunday. Indeed, it’s tentatively been included in the European finance ministers’ latest joint statement. This isn’t just what Germany is considering. It’s what Germany is trying to get the rest of Europe to go along with. Under the plan, the only way Germany would let Greece stay in the euro now is if it sells 50 billion euros of “very valuable Greek assets,” allows international observers to monitor its bailout, and puts automatic spending cuts in place in case it misses its deficit targets. Otherwise, Germany wants Greece to take at least a five year “timeout” from the euro, during which time its debts could be restructured and it could receive humanitarian aid. The entire proposal was less than a page long”.

The sheer lunacy of the economic project of Germany is noted when he writes that “In case there was any doubt, this is an offer Greece can’t accept. Sure, selling assets would lower Greece’s debt today, but it would make the rest of Greece’s debt harder to pay back tomorrow—which, according to the International Monetary Fund, is already unpayable. It’s the kind of thing you ask for if you want Athens to say no. But does that mean Germany really wants to get rid of Greece or is this just a ploy to get more concessions out of Greece? Yes. The problem is it’s hard to know what Chancellor Angela Merkel really wants. Up till now, she’s been willing to do whatever the least is to keep Greece in the euro, but her finance minister Wolfgang Schäuble has been pushing her to give them the boot. That’s let them play a pretty effective good-cop, bad-cop to get the most out of Athens, but this time that’s turned into bad-cop, worse-cop”.

He ends “If Greece does leave the euro, though, it will only be temporary in the sense that all life is temporary. Bringing back the drachma would either be such a boon to Greece’s economy that it’d never want to go back to the euro, or be such a disaster that Europe would never want to invite it back. But in either case, Greece and Europe’s trial separation would turn into a divorce. That might actually be better for Greece now that it’s already gone through a lot of the pain of ditching the euro—like a financial crisis—but it could be a catastrophe for Europe. It wouldn’t just show that countries can leave the euro, but maybe that countries have to leave the euro to recover. So the next time an anti-austerity party wins power, it might decide to do the same, at which point the euro zone would be more like a northern euro zone, if that. Especially if France decides that this makes the euro not worth saving anymore”.

Tsipras surrenders to Merkel


David Francis writes that Greece has effectively buckled and given way to the demands of the EU and accepted more austerity, “Greek Prime Minister Alexis Tsipras agreed to institute sweeping spending cuts, pension reforms, and new taxes on Thursday, a capitulation that could pave the way for significant debt relief for his near-bankrupt country — and potentially keep Greece in the European monetary union. But opposition in Berlin and Athens could sink the proposal before it has a chance to swim. After a series of emergency meetings in Brussels, Tsipras agreed to reforms that had been rejected by Greek voters — and strongly opposed by the Greek leader himself — in last Sunday’s referendum on whether to bow to European austerity demands. Now, Greece’s creditors —  the International Monetary Fund, the European Central Bank, and the European Commission — have until Sunday to accept the package. If they don’t, a Grexit, or Greece getting kicked out of the eurozone, could occur”.

He goes on to note that “Tsipras’s acceptance of European demands could put to end a five-year crisis that has rocked world markets, poisoned relations between Athens and its European partners, and raised fundamental questions about the financial pillars on which the euro was built”.

This point is more myth than reality. The acceptance by Tsipras means nothing. Even if German MPs back the deal, which is still not certain, the flaws of the euro have not been addressed. There is still taxing powers in the various member states. Until these powers are transferred to Brussels the euro crisis will not end. Such a move however would end any pretense of democracy within the EU and probably lead to the breakup of the whole EU project. To say that this latest sticking plaster will solve the euro crisis seems naïve and laughable.

He continues, “while Tsipras’s concessions clear a major hurdle to a deal, Athens is far from out of the danger zone. Greece’s creditors have to agree to the deal, which has to be approved by European lawmakers across the continent. That could be a tough sell, particularly in Germany, where Chancellor Angela Merkel has consistently taken a hardline with Athens and insisted that it would have to make painful changes to its financial and social welfare systems before Berlin would consider signing off on even a limited bailout”.

Ironically the deal which the Greek electorate rejected and that has been accepted by Tsipras is still not enough for Germany, “Many lawmakers from German Chancellor Angela Merkel’s conservative Christian Democratic Union party are prepared to kick Greece out, and a majority of her people are opposed to Greece being pardoned after five years of financial games with the European Union, according to Daniela Schwarzer, the director of the German Marshall Fund’s Europe Program in Berlin. She said they would prefer to give Greece humanitarian aid as its transitions back to its own currency, most likely the drachma it abandoned when it joined the Eurozone”.

All this shows is the German obsession with rules even when all evidence shows that the euro is not working. At the same time it does nothing to solve the German image in Greece while only making the rest of the continent resent Germany for the terms that they made Tsipras agree to without any trace of political cover allowed.

On the question of a cut in the amount of money Greece owes, Merkel, as flexible as ever when speaking “to reporters in Sarajevo, she said a haircut is “out of the question for me and that hasn’t changed between yesterday and today.” There are also widespread concerns across the continent about Tsipras’s ability to institute the changes he is now promising. His people resoundingly rejected European austerity just four days ago. Over the last five years, the Greek government has also shown itself incapable of following in the footsteps of other cash-strapped eurozone members, like Ireland and Portugal, countries that paid back emergency bailout funds provided by Brussels. The state of play is just as tricky within Greece itself, where lawmakers in Athens have scheduled a vote on the deal on Friday”.

The domestic implications are noted when “Members of Tsipras’s far-left Syriza party are already calling on their colleagues to reject it because the package crosses two “red lines” Greek officials said they would not accept — raising the retirement age along with new taxes on Greece’s business and its wealthy”.

He adds that “One Syriza lawmaker also told Reuters that any package that contained pension reforms, spending cuts, or new taxes would not be acceptable. Greek reforms might get a warmer reception in other European capitals. France, Spain, and Italy, are credited with helping shepherd Greek negotiators to a deal most of Europe could accept. The latter two countries face their own financial difficulties. If Greece is left out, there are fears Spain could be next. Under the terms of the reform package Greece submitted just before the midnight deadline, Athens offered to cut public spending by 13 billion euros, or $14.3 billion. It also agreed to change rules allowing early retirement and increase taxes. Athens has also asked for a third bailout of 53.3 billion euros, or $59 billion. The IMF estimates it would need roughly 50 billion euros, or $55 billion, to cover what it owes and to keep the government solvent”.

In the US perspective he notes “John Kirby, a U.S. State Department spokesman, told reporters in Washington Thursday that the United States wants Greek debt to be sustainable. President Barack Obama and Lew have also made a series of phone calls to European leaders in recent weeks, stressing the urgency of resolving the crisis. On Wednesday, Federal Reserve officials said they were keeping interest rates low because of concerns about the Greek crisis, as well as China’s tanking stock market. Obama insists the American economy is insulated from potential fallout from the Grexit, although no one knows what will happen if Greece leaves because such a move has never happened before. Global markets appeared optimistic a deal would be struck. Both American and European stock indices traded higher Thursday”.

He ends “For now, Greece will live to see another day in the euro. And Brussels joins Bretton Woods, New Hampshire, site of the 1944 post-World War II conference where negotiators agreed on how to regulate international finance, and Maastricht, the Dutch city where Europeans agreed to adopt a single currency in 1992, as a location where Europeans met to shape their modern economy. There’s one key difference, however: Negotiators in Brussels might have also saved it”.

Geopolitics of Grexit


With yet another deadline looming for the Greek government to submit, and the EU to accept, another “bailout” package a piece discusses the geopolitics of a potential Greek exit from the EU, “The doomsday scenario goes like this: An angry, desperate Greece, alienated from Europe and with nowhere to turn, looks around for help. It glances eastward, and sees the open arms of none other than Russian President Vladimir Putin. Moscow offers its assistance — for a price: Greece and Russia form a relationship. Greece either leaves the European Union and NATO, or sticks around to play the spoiler, foiling their efforts to build the unanimity they need to move forward with policies, against Putin or his allies. At the same time, Greece’s relationship with Turkey falls apart, introducing a new element of instability on Europe’s eastern frontier. Then – amidst all these pressures – the country collapses, releasing a wave of asylum seekers previously contained within its borders, leaving them free to romp throughout Europe”.

The author writes that “it’s an argument that many are peddling these days. Former NATO commander James Stavridis argued recently in Foreign Policy that “an angry, disaffected, and battered nation” could have the will and the guts to wreak havoc on both EU and the Atlantic alliance by sabotaging joint decisions – like sanctions against Russia, the Iran nuclear talks, and the Transatlantic Trade and Investment Partnership (TTIP), the bête noire of Europe’s radical left. For its part, The Economist raised the specter of Greece leaving NATO, despite the fact that the country plays host to several alliance facilities. And a recent roundtable conducted by Carnegie Europe (in which, full disclosure, I participated) found that many prominent experts, when asked the question “would Grexit be a geopolitical disaster?” answer “yes.” Prime Minister Alexis Tsipras’ phone call with Putin, soon after the resounding “no” at Sunday’s referendum, only added to such fears. Memories of Greece backing Slobodan Milošević in the 1990s, or the abrasive anti-Western rhetoric of Prime Minister Andreas Papandreou in the 1980s have re-emerged”.

Thankfully the author argues that “In the months of negotiations, deadlock, and stalemate that led up to this past weekend’s dramatic referendum vote, somewhere along the way Greece took on new significance, transforming from a peripheral member of the West that accounts for a mere 3 percent of the eurozone’s GDP to a pivotal country. As a recent Financial Times op-ed breathlessly put it, “[t]his is a country that bridges north and south, and east and west, like no other. It forms NATO’s southern tip. And the relationships it enjoys with Russia, Iran, China and others are unique within the alliance. Even if keeping Athens securely inside the European political and security order were to come at a high price, it is one that is likely to be worth paying.” On the pages of the Wall Street Journal, Robert D. Kaplan echoed a similar sentiment: “If Greece does leave the eurozone, whatever the country’s sins, it is demonstrably in Europe’s and America’s interest to nurse it back to health to keep, for example, Russian warships away from Greek ports.” How did Greece come to be seen as holding the fate of Europe — if not the West as a whole — in its Hellenic hands? Part of the explanation lies with Tsipras, who, understandably, embraced this narrative of Grecian importance, seeking to use it as a tactic to leverage geopolitical fears in the pursuit of concessions from European creditors”.

Crucially the author argues that “those sounding the doomsday scenario alarm should think twice. For one, Tsipras and his government have, by and large, continued with the foreign policy they inherited, threading a fine line between multilateral commitments and perceived national interest. Unlike the classical Greek populists of Andreas Papandreou’s 1970-1980 vintage, they are not calling for an exit from the EU and NATO. Russia enjoys near universal popularity in Athens, but it is a marriage of convenience rather than a love affair. And, while the spillover of economic troubles remains a concern, diplomatic relations with neighbours – notably Turkey — are, overall, on a positive trajectory. And, even if Athens wanted to foment trouble – and there are few signs that it does — it has little power to actually do so”.

The writer goes on to note Greco-Russian relations, “At this point Greece has no opportunity to roll back the EU’s sanctions against Russia for its role in the fighting in eastern Ukraine. The Syriza-led government went along with the rest of the Union both in January, when it was inaugurated, and in June when the EU Councilextended sanctions until the end of January 2016. While it surely wants to see the restrictions lifted (ending sanctions would help boost its agricultural exports, attract Russian investment, and reduce its gas bill) Athens is highly unlikely to wield a unilateral veto next time the issue arises in Brussels. If, come next December, Tsipras and his foreign minister Nikos Kotzias decide to play tough, they will do so in alliance with other member states such as Italy or Hungary, who are keen to return to “business as usual” with Putin, with German Chancellor Angela Merkel acting, yet again, as the arbiter between Europe’s Russia “hawks” and “doves.” Meanwhile, the disagreements between Moscow and Ankara as regards the projected Turkish Stream pipeline have quashed hopes for billions of Russian dollars pouring into Greece. Links with the Kremlin are no shortcut to an economic rebound, whatever the rhetoric”.

She makes the interesting point that “There also is no indication that Greece is prepared to rock the boat on other external dossiers such as Iran or TTIP. Some prominent Syriza members have vowed the parliament in Athens would refuse to ratify the trade pact with the U.S. but Prime Minister Tsipras has not spoken out against it. Picking a fight over the prospective Iran deal makes no sense. On the contrary, a normalization of ties with the Islamic Republic, which would keep crude oil prices down, is surely good news for a country dependent on energy imports that is struggling to balance the books”.

The piece ends, “Greece’s capacity to make trouble, as it did during the heyday of its competition with Turkey or the war in the former Yugoslavia, is today, quite limited. Athens has neither plans nor capacity to singlehandedly overturn key Western policies, whether in Southeast Europe or the Eastern Mediterranean. If the crisis, and the possibility of a Grexit have created a geopolitical problem, it is in Greece’s diminishing capacity to serve as a example to neighbors and a driver of positive change. It was once the model of an impoverished country under authoritarian rule that had made it to the club of rich and free nations with the help of European institutions. Through trade and investment Athens helped advance the Western liberal order, even at times when its diplomacy was confrontational. Today’s Greece in crisis will not become a rogue state — but it will be one deeply absorbed in its own depression and its own affairs, with little to offer to its allies and neighbours.

“Harder and harder to see how Greece stays in”


A piece from Foreign Policy discusses the options for Greece after the referendum, “What does “Oxi” mean? Well, literally, it means “no” in Greek — the position that over 60 percent of Greeks took in Sunday’s referendum on Greece’s status in Europe. But what this particular full-throated “no” means in practice is hard to say. Clearly, there is some talking to be done. Greece has dumped its contentious Finance Minister, Yanis Varoufakis. Prime Minister Alexis Tsipras has said he is ready to return to the negotiating table. German leaders, unhappy with the referendum, have said they do not see any basis for new bailout negotiations, but that Greece could present proposals if it wished”.

The writer notes that “On the eve of the Greek referendum, The Economist had a striking piece detailing what starts to happen when access to banks and credit is severed. It isn’t pretty. So, ignore the bluster and focus on the banks. When and how will they reopen? Here are three possibilities: 1) The eurozone powers and the European Central Bank (ECB) offer up agenerous program that persuades everyone that Greek banks are completely backstopped. Banks welcome customers back in. 2) The eurozone powers and ECB provide a finite amount of assistance to backstop the Greek Banks, perhaps 5 or 10 billion euros of Emergency Liquidity Assistance, with promises to revisit the issue soon. Banks would reopen with this assurance. 3) There is no new money from Europe. The Greeks are on their own. Banks have nothing to pay out”.

The author goes on to make the point that “The first possibility would be the equivalent of deposit insurance in the United States. It would calm fears and, if credible, persuade the Greeks to take their money out from under their mattresses and put it back in the banks. Crisis averted. But it amounts to a blank check, would pose enormous legal and political difficulties in Europe (for a start, it would look like a complete capitulation to Tsipras), and is almost certain not to happen. The second possibility is a textbook recipe for a bank run. If you tell people that banks will be open this week, but who knows about next, people will grab their money while they can. The money will quickly be drained from the banks and nothing will have been accomplished, other than a transfer from the rest of Europe to Greek depositors. The third possibility would mean further asphyxiation of the Greek economy. That cannot last for long. Pretty soon, the Greek government would need to pay workers and pensions and other domestic obligations. Without enough euros to do this, it could resort to printing IOUs. In effect, this would be the introduction of an alternative currency. That would be the first step toward a Greek exit from the euro”.

He ends “The resounding Greek “Oxi!” means that summitry may continue, but time is running short and it’s getting harder and harder to see how Greece stays in”.

Greece rejects austerity


David Francis writes about the Greek referendum that took place on Sunday which resulted in a rejection of the EU deal, “Ignoring the demands of their European partners, and heeding the call of their prime minister, Alexis Tsipras, Greek voters rejected austerity demands Sunday, a vote that could bring the nation out of the eurozone and could signal the beginning of the end of modern Europe. Early returns show 61 percent of Greek voters said “no” to the question asking whether they would accept spending cuts Europe says are necessary to continue a five-year, $270 billion bailout package. Last week, Greece missed a $1.7 billion payment to the International Monetary Fund. The IMF, the European Central Bank, and the European Commission had extended Greece a financial lifeline as it teeters on the precipice of bankruptcy. Athens is now in default to the IMF, and owes the European Central Bank a payment of 6.7 billion euros, or $7.5 billion, in two weeks”.

He goes to note that “The “no” vote gives Tsipras his desired result. He believes it bolsters his negotiating position with European leaders. But in the lead-up to the Greek referendum, it appeared as if Europe was readying for the possibility of Greece leaving the economic union it joined in 2001. German Chancellor Angela Merkel has acknowledged that allowing Greece to adopt the euro was a mistake. Tsipras vowed to abandon his post if Greeks voted to accept European financial reforms”.

The writer notes that “Now, the future of the European Union is in doubt. Greece could leave the euro, which would devastate its own economy and have far-reaching implications for Europe and global markets. Europeans could blink, and cave to Greek demands. “The dominating logic was that integration is a one-way street. There’s no opt-out option,” Olaf Boehnke, head of the European Council on Foreign Relations Berlin office, told Foreign Policy. He said this is no longer the case”.

Of course the moment the eurocrisis began the future of the whole EU was cast into doubt. Merkel has continually said that the EU means the euro and thus by trying to two together she has sealed the fate of both. The logic of integration is not necessarily a “one way street” many countries have opt outs but there is certainly a general trend. If the EU were less centralising there might be a chance it could survive in some radically altered form. However, if the only view is integration then it will collapse.

The writer notes that “Without help, Greek banks are likely to fold. It’s not clear whether they willreopen for business Monday after being shut down last weekend amidstfears of a bank run. The Greek stock market has also been closed. The endgame started last weekend, when the European Central Bank cut off an emergency line of credit to Greek banks after officials there acknowledged they would go into default to the IMF. Daily cash withdrawals are now limited to 60 euros, or about $67. Greek pensioners stormed banks Wednesday to collect a maximum of 120 euros, or $134. ATMs across the Mediterranean nation are now empty. Late Sunday, the Greek central bank asked its European counterpart for emergency liquidity assistance”.

He goes on to make the point “Tsipras asked for a last-second bailout late last Monday evening, the night before the deadline to pay back the IMF. European officials, led by Germany, rejected his request. The referendum is the culmination of a five-year struggle to keep Greece a member of the European monetary union. It began in 2010, when the Greek government admitted it had cooked its books to make it appear as if it was meeting minimum European budget requirements. At the start of the crisis, the Grexit — Greece leaving the eurozone — was unthinkable. It would have crippled the world economy, already on life support after the 2008 collapse of Lehman Brothers. Both European and American banks held hundreds of billions of dollars in Greek debt. Declaring those bonds worthless would have further decimated these financial institutions which, at the time, were still struggling to overcome the rapid decline of the American housing market”.

Pointedly he notes that “Similar financial crises loom in Spain, Italy, and Portugal, countries that also lied about the state of their finances to hide structural economic deficiencies. And even though Great Britain isn’t a member of the European monetary club, it is also considering leaving the European Union. Next year, Britain will hold its own referendum on whether to abandon its European partners. The Greek crisis “has overshadowed what we wanted to be a clear starting gun to the European reform,” a British diplomat told Foreign Policyrecently. “We want to be a competitive and open economy and a valued partner to the United States.” The standoff has severe geopolitical implications. Russian officials havehinted they would be willing to lend Greece a financial lifeline, something that could disrupt European unity on financial sanctions for Russian President Vladimir Putin’s actions in Ukraine. China has also been mentioned as a possible Greek saviour“.


“Tsipras caved to many European demands”


David Francis writes that “The Greek government is now in default to the International Monetary Fund, and the stark reality of the financial upheaval Athens is facing appears to have Prime Minister Alexis Tsipras in a panic. Tsipras executed an about-face Wednesday, agreeing to spending cuts he previously rejected. But Europe isn’t having it. Pensioners stormed Greek banks, which are closed to the rest of the public, to collect a maximum of 120 euros, or $134. More and more ATMs in Greece are empty. And as concerns reached a fever pitch, Tsipras tried to reassure Greeks that their bank deposits were safe. “I provide my personal guarantee that I will do whatever is possible to make these difficulties temporary,” the prime minister said in a televised address Wednesday evening”.

He goes on to argue “even a casual observer of the five-year crisis knows this isn’t the case. As part of a $270 billion bailout package, the European Central Bank had given Greek financial institutions emergency lines of credit when they were short on cash. With the expiration of the bailout Wednesday morning, that lifeline no longer exists. It’s why Greek banks are closed until Monday, at least, and withdrawals from accounts are limited to 60 euros, or about $67, per day. Perhaps sensing the growing unease within his population, Tsipras caved to many European demands late Tuesday. In a letter to his creditors — the European Central Bank, the IMF, and the European Commission — he acquiesced to many previously rejected austerity demands, including pension reforms. In exchange, he wants a guarantee that Europe will help Athens pay its bills for the next two years. Officials from Syriza, Tsipras’s party, hinted an agreement would cancel Sunday’s referendum for the Greek people to decide”

Interestingly the writer reports that “Olaf Boehnke, head of the Berlin office of the European Council on Foreign Relations, told Foreign Policy on Wednesday these comments reflect the sentiment within the German government. Simply put, Berlin wants Greece out of the Eurozone. “People are really fed up with them. They’re trying to provoke the establishment as much as possible,” Boehnke said”.

The problem with this view is that, as Merkel has said the euro is the EU. Thus, a member that leaves the euro and thus the EU would end the fiction that the EU will last through this crisis. If Greece does leave the euro and thus the EU then the “markets” will turn to Spain or Italy or Ireland. The integrity of the whole project will be seen for what it is, a sham. Thus while the Germans may be tired of Greece they also know that if Greece leaves the EU someone else will be next.

The report ends “It now appears Merkel and Schaeuble might not get the “no” vote outcome they want from Sunday’s upcoming Greek referendum. A poll by ProRata found that support for rejecting the bailout is shrinking. Before Greece closed its banks, 57 percent of Greeks wanted to reject European austerity. Now, that percentage has dropped to 46″.

“Long-term causes that will only have long-term solutions”


A piece from Foreign Policy argues that the “bailouts” Greece has received from the troika are unhelpful.

It opens “The Greek bailouts have been incredibly stupid. There, I’ve said it. Let’s put aside the debate over whether rescuing Greece was a bad idea in the first place; a complete collapse of its economy might well have led to social unrest and even conflict. But how the Europeans and their cohorts at the International Monetary Fund (IMF) bailed out Greece was amazingly, insufferably stupid”.

He goes on to explain “The world has seen plenty of bailouts in the past, some that worked and others that didn’t. Argentina’s by the IMF in 2000 and 2001 didn’t work, because the peso was so overvalued that there was no way to make the country’s debts sustainable. Ireland’s bailout by the European Union in 2010 succeeded, in the sense that the country paid its way out of the program on schedule three years later, though its economy was still on a fragile footing. But Greece is neither Argentina nor Ireland. As a percentage of the economy, its public debt is much higher than Argentina’s was. Its business environment is nowhere near as dynamic as Ireland’s in the views of the World Bank and the World Economic Forum. And Greece’s shadow economy — the portion that doesn’t pay taxes — may be the biggest of the three”.

Yet even this misses serious errors. Ireland may be technically out of the IMF programme but the debt is still vast, indeed so vast that if things worsen in the Eurozone as the are expected to, another “bailout” is probably necessary.

He goes on “None of these problems has a short-term solution, and yet that is exactly the template that both of Greece’s bailouts have taken. Greece is still in crisis talks with its creditors because the payments it has been expected to make and the reforms it has been expected to implement have corresponded to unreasonable short-term expectations. Put simply, the problems in Greece have long-term causes that will only have long-term solutions. A public debt as big as Greece’s — currently more than 170 percent of its GDP — does not go away overnight, even with the harshest austerity measures. It will only erode during an extended period of robust economic growth as well as restrained spending. Austerity might make it possible for Greece to meet its payment obligations in the short term, but what’s the point if the economy is crippled in the long term? Greece’s climate for business won’t turn into a world-beater in just a few years, either”.

He makes the point that “Improving protections for investors, curtailing corruption, strengthening property rights, and — crucially — enhancing the enforceability of contracts are all on Athens’s to-do list, but the cultural and legislative changes they require will take time. Indeed, it would be a mistake to rush hastily written laws on such fundamental matters through the Greek parliament, especially without building widespread public understanding and support”.

He argues that “it’s foolish to believe that Greece will turn into a nation of chastened and loyal taxpayers in just a few short years. Tax avoidance and evasion have a variety of deep social roots; they can be affected by factors as diverse as religiosity, class divisions, individual psychology, and perceptions of fairness. Though some incentives can increase compliance with the tax system in the short term, the commitment to pay taxes has more to do with a feeling of stakeholdership and justice — something Greece, with its fractured politics and current disillusion, will need time to manifest”.

He concludes “the bailout backers set their criteria based on what they thought Greece should do, rather than what Greece was capable of doing. They were also preoccupied with ensuring Athens would work hard for each tranche of bailout funds, rather than ensuring Greece’s process of reform would be as smooth as possible. Given these disjoints, it’s no surprise that Greece may need a third bailout to avoid defaulting on its debts. A series of short-term cures will never solve a long-term problem. But officials in Frankfurt, Brussels, and Berlin never showed enough interest in the overarching challenges in Greece’s economy. Their goal all along has been to maintain the integrity of the eurozone, despite its flaws, as well as their own infallibility. Ironically, they might have been closer to their goal had they thought less about themselves and more about the Greeks”.

The myth of German foreign policy


Following on from reports about the debt in Germany and long term economic problems an article from Foreign Affairs argues that Germany is not as powerful as it seems, “This June, the G-7 will meet in an opulent castle near Germany’s highest mountain, the Zugspitze. It was initially built, according to the host’s website, for an “egocentric zealot” who sought to convert Jews to Christianity. Schloss Elmau has since become a spa and cultural center, but the lofty location seems somehow like an appropriate reflection of the inflated discussion in recent years about Germany’s role in the world. Many observers have rushed to proclaim Germany’s rise to prominence. U.S. academic Walter Russell Mead recently ranked Germany as the second most powerful member of the G-7. A survey by the British magazine Monocle determined that Germany’s “soft power” rivals that of the United States. Most recently, Germany’s own renewable energy transition has prompted columnist Tom Friedman to praise the country as the world’s first “green superpower.” It is indeed a good time to be a Germanophile. The country remains Europe’s largest market and now exports as many goods as the United States. Berlin has played the key role in managing Europe’s financial crisis as well as its security crisis with Russia. Germany’s national soccer team is also the reigning world champion (no small matter to most countries outside of North America). Chancellor Angela Merkel is regarded as the top-performing democratic leader in the world”.

He correctly writes that “Germany’s recent success has led to unrealistic expectations about its power. Its strong economic ties with Russia and China have done little to hinder those countries’ authoritarian turns and military assertiveness. Its energy transition toward renewables (Energiewende) has remained popular at home, but by itself, it has not fundamentally transformed international energy markets or convinced other countries to abandon nuclear power. Nor can Germany truly shape, let alone protect, open markets for its goods without the backbone of U.S. military power”.

The article adds “Germany has excelled for decades at developing its soft power. It is known for its luxury automobiles, chemical products, and high-tech machinery. But its “softer” exports—such as its approach to education, energy, finance, law, and scientific research—have won it fans as well. Funding for cultural, academic, and technical exchanges boosts its popularity and also complements German commercial interests”.

He adds implausibly, “The country’s influence is strongest within Europe, but even there it may find itself powerless to prevent Greece or the United Kingdom from leaving the EU. Germany has thus largely succeeded in boosting its international image as a benign and competent country, but it is difficult to see how its soft power has led to actual outcomes. For one, all of this exchange has not necessarily increased interest in the country’s language or culture—over the past 15 years (since 2000), there has been a 25 percent drop in the number of German-language learners worldwide”.

Whatever about the weaknesses of soft power on the international stage or the myth of a German foreign policy or leadership, on EU matters if Germany wishes to keep both Greece and the UK inside the EU badly enough then it will do want is needed. If these countries leave the EU it will be largely, though obviously not entirely, the fault of Germany.

On more serious matters he argues “the government’s most recent foreign policy doctrine states the relatively grand aim of adapting the existing global order to the interests of new Gestaltungsmächte (shaping powers). Dialogue with these regional powers will eventually convince them of European values, to “crave a sense of Ordnung [orderliness],” and lead to a convergence of interests. Yet the strategy says little about how to persuade, let alone force the participation of, actors with limited interest in a Western-led order. Neither Russia nor China seems particularly keen to uphold the carefully built institutions and norms established after World War II, especially when those norms conflict with their regional interests. Middle Eastern states are fixated on their own internal conflicts and maintaining a regional balance of power. In these contexts, international institutions must be continually shaped to meet new realities”.

Not surprisingly he makes the point that “Explanations for German foreign policy vary. A cynical view would suggest that German leaders are captive to the country’s business lobby, which will lead it to simply bow to the preferences of important export markets. The country’s self-perception as “Europe’s chief facilitator” also means that it tries to be perceived as not dominating the EU’s 28 member states (but ask a Greek about Germany’s success in that regard). Germany naturally protects its business interests and prefers “leading from the middle,” but its caution in responding to crises reflects a leadership that is simply unprepared to take the risks needed to address them. Given the difficulties of prioritising crises in a chaotic international environment and the limitations of traditional German foreign policy, it is little wonder that the leadership defaults to a reactive posture”.

Tellingly he argues, “Speeches by others in the German cabinet, however, have focused more on simply living up to “what others expect of us” rather than setting out the country’s priorities. Merkel has characteristically let others do the talking and, even after a decade in office, has not offered a wide-ranging foreign policy speech. Although Merkel may have taken on the role as the West’s interlocutor with Russian President Vladimir Putin, she is likely waiting to see if the public will accept much more. She may have to wait a while. A majority of the German public for the first time favors an “independent approach” from the United States. Yet besides spending more on foreign aid, most prefer to “continue to exercise restraint” in dealing with international crises, and there is a deep ambivalence about the use of military force or sanctions. Although it is true that Germany remains constrained by its past, its recent success may have also instilled in it a sense of complacency. For example, Germany is often singled out for its meager defence spending. Although Finance Minister Wolfgang Schäuble recently announced a six percent increase in defense spending over the next five years, much of this will replace aging equipment and infrastructure, and overall spending will remain small relative to the country’s size. More frustrating to American observers, however, is the government’s reluctance to openly discuss security challenges and commit to planning for future contingencies. This is odd given that Germany provided the third-largest contingent of troops in Afghanistan and well over 200,000 soldiers to international peacekeeping missions since 1993″.

He concludes “In the short term, the best Germany can do is follow the advice of its own president, who challenged his countrymen last year to “do more to guarantee the security that others have provided it for decades.” For the G7 summit, Berlin has set an ambitious agenda, with security and energy policy at the top of the list owing to Russia’s annexation of Crimea and use of oil as a political tool. It will have to show how summitry and proclamations can be translated into action. In the longer term, Germany must recognise that it can no longer simply remain a convening power and rely on the initiative of other “shaping powers,” the European Union, or the United States. It will have to better articulate and publicly defend its foreign interests. Meekly reflecting on its limitations is an excuse to avoid responsibility and take concrete steps when international rules are ignored. If Germany wants to forge a stronger Europe and a peaceful world order, it needs to ignore the hype about its power and think more courageously about how to use it”.




“Latest chapter of Greece’s long-running saga”


An article from the Economist discusses the Greek euro crisis, “AS PHONEY wars often do, the four-month stand-off between Greece and its creditors may come to a sudden and dramatic end. On the evening of June 1st, Angela Merkel, François Hollande and Jean-Claude Juncker (leaders, respectively of Germany, France and the European Commission) were unexpectedly joined in Berlin by Mario Draghi and Christine Lagarde, the heads of the European Central Bank and the International Monetary Fund. Mr Juncker, Mr Draghi and Ms Lagarde lead the three institutions that monitor Greece’s bail-out; Mrs Merkel and Mr Hollande run the two largest countries in the euro zone. The five talked over the Greek mess until the wee hours. But the midnight oil seems not to have been burned for naught; it now appears that the creditors have agreed on the terms they are to offer Greece”.

It adds “Speculation has mounted in recent weeks that Greece’s creditors, frustrated with the glacial pace of negotiations, might present Greece with a “take-it-or-leave-it” list of reforms and fiscal proposals. If the Greek government, led by Alexis Tsipras, were to assent to the terms, the €7.2 billion ($8 billion) that has not yet been disbursed from Greece’s bail-out fund could finally be released. The ECB might also allow Greece to issue more short-term debt. Greece’s leaders, running desperately short of cash would have little choice but to accept the offer. The alternative would be a debt default, as big repayments become due. That, in turn, could trigger capital controls and a departure from the euro. Yet Greece’s creditors have been unable to agree just what to ask of the Greeks. The IMF has demanded tough labour and pension reforms—red lines for Mr Tsipras—while the other interested parties were more willing to compromise in these areas”.

The author goes on to make the point that “But at a meeting of G7 finance ministers in Dresden last week, the key players vowed to resolve their disagreements. Overnight, at least, they seem to have done so. Few details of the proposal have emerged. Sources speak of possible compromise on the labour reforms the creditors have been seeking. It will be harder to find wriggle room on pension cuts, given how much of the Greek budget payments to pensioners gobble up. Greece will be permitted to run a lower primary budget surplus (before interest payments) than its current arrangements allow: one source mentions a figure of “below 1%” of GDP this year, rising to 3.5% by 2018. That is not exactly the anti-austerity ticket on which Syriza stood for election. But it will ease the fiscal squeeze a bit. The creditors might also—and here the details are fuzzy—agree to a second extension of Greece’s bail-out, for several months. That would keep Greece eligible for emergency liquidity support from the ECB. It would also provide more time to work out the details of a third bail-out in September or October, worth between €30 billion and €50 billion, which Greece needs because it remains priced out of capital markets. Another component of the deal could see part of a bank-recapitalisation fund redirected to the bail-out kitty”.

The report goes on to note that “Tsipras, whose attempt to invite himself to the Berlin meeting was rebuffed, is doing his best to pre-empt such a development. First, he published a fiery op-ed in Le Monde accusing his opponents of trampling on democracy; second, he drew up his own list of reforms, which he says was sent to the gathered creditors last night. Meanwhile his ministers, including relatively mild-mannered sorts like Yannis Dragasakis, the deputy prime minister, have been loudly proclaiming that Greece will not accept “ultimatums” from the euro zone. Creditors say the demands may not be presented in that form”.

The article ends “If the prime minister accepts the creditors’ proposals, he may struggle to hold his left-wing Syriza party together. Hardline backbenchers, always sceptical of the government’s approach, have been making their discontent plain this week, urging Mr Tsipras to walk away if he cannot obtain a good deal. His government may feel obliged to put the terms of a new deal to a referendum, or perhaps to call fresh elections, something which Greek MPs are openly discussing at present”.

The report concludes hopefully, that “there are many hurdles to overcome before that can happen. The creditors must paper over their differences. Some national parliaments, often forgotten in this story, must be satisfied. And Greece must continue to meet the relentless progression of obligations to bondholders, civil servants and pensioners. Though this latest chapter of Greece’s long-running saga appears to be ending not a moment too soon, the shift from stasis to action carries the risk of Greece crashing off the rails towards default. Until the deal is truly done teeth will be on edge around the euro area and beyond”.

German inequality


An article from Foreign Policy argues that Germany has a problem with inequality.

It begins “The signs of Germany’s economic might are hard to miss. There are the swanky new high-rise hotels cropping up on Berlin’s main shopping mile and luxury condominium complexes spreading across the government quarter. In the southwest, Germany’s engineering heartland, auto parts factories are humming and newfound confidence is brimming. In a little over a decade, the country has transformed from Europe’s “sick man,” as the Economist once famously called it, to the continent’s economic engine. The export industry is already the second largest in the world and outperformed expectations in February, bolstered by a weak euro. Notoriously tightfisted Germans are starting to open their wallets — consumer confidence has hit a 13-year high. Greece and Italy are struggling under the weight of their debt burdens, but Europe’s wunderkind notched a record current account surplus in February”.

Yet the power of Germany should not be overestimated. Others have written about the weaknesses of German growth and the high debt levels due to irresponsible lending by banks. Thus, far from being bullet proof and above all other economies that make up the EU, Germany has serious problems. Some of these are unique to Germany but others, like massive debt are seen continent wide It is therefore outreagous that Germany should be telling other nations how to behave.

The piece adds “In February, the Berlin-based Paritätische Gesamtverband, a leading welfare association, reported that poverty is at its highest level in Germany since reunification 25 years ago. Some 12.5 million of Germany’s 80 million are now classified as poor; they earn less than 60 percent of the median household income (for a single household, about 900 euros a month). Seniors and single parents are the most likely to slip through the cracks. But an especially troubling trend, say the study’s authors, is the growth in the number of working poor. According to the Federal Statistical Office, a little over 3 million German workers now fall below the poverty line. The Paritätische says the increase stems from years of chipping away at important labor protections”.

The piece goes on to note “The roots of that trend go back more than a decade. If asked why their country has withstood the economic crisis that has plagued much of Europe, most Germans will point to Agenda 2010, a package of reforms former Chancellor Gerhard Schröder enacted in 2003 to tackle stubbornly high unemployment and jump-start the economy. Agenda 2010 introduced a new class of flexible, part-time employment. Any job is better than no job, was the idea. The legislation largely deregulated temporary work, freeing up employers to hire and fire part-time workers by putting them on more equal footing with full-time workers. It also ushered in the mini-job, a form of part-time employment that pays 450 euros a month tax-free”.

The writer goes on to add, “The linchpin of Schröder’s reforms was called Hartz IV, which pulled together various public benefits into one streamlined unemployment program and limited welfare payments. Those out of a job for more than 18 months — later reduced to 12 months, with exceptions for older workers — were rolled over into the general welfare program, which pays out a basic living standard — now 399 euros a month — and living allowances. Employment agencies were tasked with making the job search the top priority; they would help but also prod welfare recipients to find a job, increasing the pressure to accept temporary or part-time employment offers. The idea behind Agenda 2010 was to give the unemployed and poor a chance to work, paving a path toward steady full-time employment. The reality, say many economists and labour unions, looks very different”.

It continues, “The temporary work sector has boomed. Germany’s Federal Employment Agency says the number of temporary jobs has doubled over the past 10 years. The agency notes that half of the temporary work contracts end after less than three months, and the wages earned are well below what full-time employees earn in the same companies. Mini-jobs, meanwhile, have turned into multi-jobs. Workers often string together various part-time positions to make ends meet. Labor statistics show the number of workers who registered a mini-job as an extra source of income exploded by 120 percent between 2003 and 2012”.

The piece adds “That lack of mobility means inequality is increasing. A 2013 study by the Macroeconomic Policy Institute in Düsseldorf reported that the Gini coefficient, a measure often used to rate income inequality, rose by nearly 13 percent from 1991 to 2010. Martin Ehlert of the Berlin Social Science Center says the shift away from low-skilled manufacturing jobs in Germany’s industrial zones was long buffered by the government’s more-generous welfare system. But the labor reforms have changed that”.

He goes on to argue “Ehlert notes that poverty and inequality in Germany are relative. The middle class here has remained stable, labour rights have remained strong for the core workforce, and the welfare system is still generous by international standards. Single households receive an unemployment allowance of 399 euros, rent and heating subsidies, and, of course, unlimited access to the statutory health insurance system. But the growing chasm between rich and poor, and the lack of economic mobility, undercuts what many Germans hold dear. The vaunted Prussian work ethic goes hand in hand with the idea of fairness: Hard work earns you a salary and a chance to lead a decent life. If the urgent appeals and warnings ring true, Germany is turning into a country of haves and have-nots”.

He notes that “Unions have launched campaigns to protest the 10th anniversary of the official introduction of Hartz IV. Verdi members in Berlin protested outside a welfare center last month, handing out fliers to job-seekers and urging them to organize against the government’s welfare program. And inequality is a touchstone issue for voters and politicians. Studies conducted by the Allensbach Institute, a market research group, revealed that more than 60 percent of Germans believe inequality is growing. And in a televised debate between Chancellor Angela Merkel and challenger Peer Steinbrück before the 2013 elections, Steinbrück’s strongest jabs linked Merkel’s government to the ballooning low-wage sector, unrivaled in Europe”.

The author goes on to end “Today, a nationwide rate of 8.50 euros per hour is supposed to address low-income families’ problems, especially in fields that have been particularly deregulated. But some analysts are worried the minimum wage will lead employers to lay off workers in order to keep up with higher labor costs and avoid bureaucracy. Others have said it could lead to a boom in the underground economy, as employers simply pay employees under the table instead of raise wages. That may be why Andrea Nahles, the Social Democrat labor minister, unveiled a new job scheme in January intended to help about 750,000 unemployed people find work. With EU funding, Nahles promised 26 new programs directed at youth, immigrants, and the long-term unemployed. Christine Schmelzle, the hairdresser and single mom, says she hopes she will be able to cobble together a living on her own, once her child is in kindergarten. Until then, though, she sees little chance of forgoing the state’s help and the long lines at the welfare center”.


“Unclear exactly when Greece would run out of cash”


A  piece discusses the Greek euro problem.

It begins “Greece is one step closer to running out of money, after a meeting of European finance ministers Friday closed without a deal or any indication that a compromise over a needed influx of bailout money was likely before the end of the month. The impasse is bringing Athens closer to default and the possible need to leave the Eurozone. Instead of an agreement that would unlock the next $7.8 billion in bailout money, both sides restated their cases at a meeting in Riga, Latvia, on Friday. Eurozone leaders reiterated that Greece needs to implement an array of fiscal reforms and budget cuts in order for the hundred-billion-dollar rescue spigot to stay open. Greek Finance Minister Yanis Varoufakis, meanwhile, said that failing to solve the crisis wouldn’t be good for Greece — or the rest of the countries in the currency union”.

It notes that “Dijsselbloem dismissed the idea that Greece might get some smaller slice of bailout funds in exchange for a shortened list of concessions. And he also put a stake in the Greek government’s hopes that a deal would be forthcoming by the end of the month, saying that eurozone finance ministers would not consider the issue again until May 11. Though it’s unclear exactly when Greece would run out of cash, the lack of a deal in April means that the Greek government will have to go to even more desperate lengths to make upcoming debt payments and may even have to resort to IOUs to pay pensioners and public sector workers. Varoufakis tried to paint the meeting in a positive light, saying that there had been “convergence” over the past few weeks and expressing confidence that a deal would come together quickly”.

It adds that “In an attempt to scrape together enough cash to pay public sector workers at the end of the month — and maybe even have enough left over to make the next $830 million debt payment to the IMF on May 12 — Greek Prime Minister Alexis Tsipras ordered local governments to move their money to the central bank on Monday. It’s unclear how much more barrel-scraping Greece can do”.

The piece ends “As Greece stumbles toward default and a possible forced exit from the euro bloc, speculation has turned to what that might mean for the rest of the world. While German officials have signaled for months that a goodbye for Greece might not be that bad of a thing, U.S. officials are a little more worried. A White House economic advisor warned Tuesday that a “Grexit” wouldn’t just be bad for Europe, but could shake the global economy’s fragile recovery. “A Greek exit would not just be bad for the Greek economy, it would be taking a very large and unnecessary risk with the global economy just when a lot of things are starting to go right,” Jason Furman, chairman of the White House Council of Economic Advisers, told Reuters“.

Need to play hardball


As the euro crisis rolls on a piece discusses the need for Greece to play hardball with Germany.

The author opens “The newly elected Greek government’s demands for debt relief and policy freedom from its eurozone creditors are both just and necessary. But Syriza doesn’t seem to have thought through how to achieve its objectives. Athens has tactics, policies, positions, poses, postures, arguments, claims, hopes, fears, and words aplenty — but seemingly no well-considered plan. With perhaps only weeks until it runs out of cash, Alexis Tsipras’s administration needs to get a grip and focus on how to get what it wants. Athens has scraped together the 460 million euros due to the IMF on April 9. But with other big bond payments due over the next three months, as well as wages, pensions, and other expenses to cover, the prospect of default will soon return. A chorus of commentators argue that Greece has no choice but to comply with its creditors’ demands and count on eurozone authorities’ (supposed) wisdom and goodwill to pull it through. But that isn’t true. Athens can obtain debt relief while remaining in the euro — but only if it plays its cards right”.

He adds “While eurozone authorities’ position is weaker than it seems, they certainly have a coherent strategy. This consists of conceding as little ground as possible, making clear that their commitment to keep Greece in the euro is conditional on it complying with their demands, and curbing Greece’s access to cash — thereby forcing Athens to capitulate. Thus eurozone authorities insist that Greece must pay its debts in full, while hinting that the terms of those debts may be eased a little if Athens implements a list of reforms. Berlin and Brussels have allowed the new government to draft its own list, while insisting that the effects of those reforms must be equivalent to those of the ones imposed on its predecessor. While Athens kicks, screams, and struggles to comply, eurozone authorities tighten the noose. Since the formation of a Syriza-led government in January, the European Central Bank (ECB) in Frankfurt has cut off Greek banks’ access to the unlimited cheap liquidity that other eurozone banks enjoy and instead drip-feeds them pricier exceptional liquidity. Eurogroup president Jeroen Dijsselbloem has suggested that Greece may need to impose capital controls, encouraging withdrawals from Greek banks and hence deepening those banks’ dependence on the ECB. Frankfurt has also refused to allow Greek banks to buy more Greek Treasury bills, limiting the government’s funding options”.

Interestingly he writes that “In 2012, eurozone authorities promised Greece debt relief once it achieved a primary surplus, which it did last year. Now, they are demanding further reforms, too. Greece undeniably needs root-and-branch economic and political reforms, but eurozone authorities’ insistence on instant action now is more about forcing Syriza to break its election promises than rescuing the Greek economy. For the past five years eurozone authorities have allowed previous Greek administrations to neglect reform so long as they implemented austerity measures”.

He suggests that “Greece should ignore the defeatists who wrongly say it must comply with creditors’ demands because Athens has no leverage and the alternative would be worse. Capitulation is not a solution to Greece’s plight: It merely stores up bigger problems for the future, because the economy cannot recover without debt relief and unending suffering is not politically sustainable. Even if the costs of challenging eurozone authorities prove to be large in the short term, they are dwarfed by the enduring misery of debt bondage. Second, Athens should prepare plans for a parallel currency, so that if eurozone authorities cut off its access to cash, it can default while remaining in the euro. It could issue tradable IOUs that could be used to pay past, present, and future taxes, and thus would be valuable for other domestic payments. This isn’t as crazy as it might sound: In 2009 the state of California issued IOUs without quitting the dollar. The knowledge that the Greeks have a backup plan to create a parallel currency would make eurozone authorities think twice before trying to push them over the edge”.

He continues, “Tsipras’s government needs to learn to speak with one voice — and instead of public grandstanding, negotiate calmly and firmly in private. It should stop making wild threats, such as the far-right defense minister’s threat to unleash a wave of illegal immigrants and Islamic State combatants on Europe. Ministers shouldn’t talk at cross purposes. Everyone should remain measured, focused, and private. To be fair, Tsipras seems to have tried that at his meeting with Merkel in Berlin on March 23, from which he emerged empty-handed. But that is because he didn’t have the leverage of a backup plan. Fourth, the Greeks should try to find ways to achieve debt relief without harming European taxpayers too much. One idea would be to suggest that they be compensated by a levy on the French and German banks that were, in effect, bailed out by their loans to Greece”.

Correctly he notes “The costs of a “Grexit” to the rest of the eurozone, though, would be substantial. The immediate ones are financial: default on all of Greece’s obligations to eurozone authorities, as well as the Bank of Greece’s Target2 liabilities. The enduring ones are economic: Confirming that countries can leave the euro would add an uncertainty premium to every struggling southern European country, stifling investment and making the eurozone even more fragile. In a post-QE world, it would make it more likely that the ECB would need to trigger its outright monetary transactions (OMT) program — exposing that ECB chief Mario Draghi’s declaration that he would do “whatever it takes” to hold the euro together isn’t as robust as it seems. Grexit would also cause political contagion. If Greece were soon growing again outside the euro — as even European Commission officials privately suggest it would — other countries could decide to leave, too”.

He ends “Many governments are unhappy with both the substance and the nature of the German-led response to the crisis. France and Italy would have much to gain from a debt conference that crafted a grand bargain for a less disciplinarian and more fiscally flexible and democratic eurozone. Many other governments are unsettled by Germany’s bullying of Greece: They know that what Berlin does to Athens, it could also do to them. (That said, if Tsipras can get a narrow deal, he should go for it.)

Greece’s plight, while terrible, is not tragic in the ancient Athenian sense: Its fate is still in its own hands. With a skillful strategy, it can still all end in smiles, not tears.

Greece, running out of cash, again


Greece failed in a bid on Wednesday to secure a quick cash payment from the euro zone rescue fund to help stave off potential bankruptcy next month, raising pressure on Athens to deliver a convincing reform program within days. Athens had appealed for the European Financial Stability Facility to return 1.2 billion euros ($1.32 billion) it said it had overpaid when it transferred bonds intended for bank recapitalization back to the Luxembourg-based fund this month. But senior Euro zone officials agreed in a telephone conference on Wednesday that Greece was not legally entitled to the money, although they said they would consider how to deal with the issue in the future. The decision by the Eurogroup Working Group was a setback for leftist Prime Minister Alexis Tsipras, who is struggling to secure fresh funds to keep his government afloat while he presents a comprehensive reform plan and argues for debt relief. A source familiar with Greece’s financial position told Reuters on Tuesday Athens would run out of money on April 20 without new cash. EU paymaster Germany, to which Tsipras made a fence-mending visit this week after weeks of acrimony between Athens and Berlin, was among the countries that opposed handing back the 1.2 billion euros”.

A third Greek bailout?


Greece could need a third bailout deal when its current program expires in June because markets may still not be prepared to lend to its government, even with a euro-area credit line, European Commission Vice President Valdis Dombrovskis said. Prime Minister Alexis Tsipras, elected in January, said Friday his government won’t need another bailout. Greece has received pledges of 240 billion euros ($269 billion) in aid from its two rescue packages, and Tsipras’s government must meet creditor demands to tap remaining funds. Speculation over whether Greece would need a third bailout has been swirling for a year or more — German Finance Minister Wolfgang Schaeuble said in August 2013 that a new aid program would be needed to help Greece meet its debt obligations — and estimates of the country’s needs have ranged from 12 billion to 50 billion euros”.

Energy union vs Putin


Keith Johnson writes that inside of using tanks and bombs to fight Russia, the EU is using its bureaucrats.

Johnson begins that “The people arguably doing the most to clip Russian president Vladimir Putin’s wings and neuter Russia’s ability to effectively wield its energy weapon are a bevy of largely bland and anonymous European bureaucrats. While the European Union has never become a traditional, hard-power geopolitical player, it has deployed what gear it has in its limited toolkit to sometimes devastating effect in the current standoff with Russia. And thanks to the creation this week of a new European “Energy Union” — an effort to genuinely unify the energy policies of the 28 EU countries —  the gray-suited army looks poised to man the front lines of Europe’s resistance for years to come”.

He goes on to make the point that “In the “next few weeks,” Energy Union boss Maros Sefcovic said Wednesday, European Union antitrust officials will reopen a massive, and potentially historic, case against Gazprom, the big Russian energy firm. And Russia’s $13.6 billion plan to buy Hungarian support for its energy agenda by underwriting the construction of new nuclear power plants? Under investigation by EU competition officials, who could nix the deal entirely. “The EU doesn’t send gunboats, it sends regulators,” said Andreas Goldthau, an energy expert at Harvard University’s Belfer Center. “And it’s proven pretty effective in doing that, probably much more effective than the hawkish policy proposals that come out of Washington and elsewhere.” Wile top U.S. officials, from President Barack Obama to Secretary of State John Kerry, have touted the role that Western sanctions have played in reining in Moscow, in reality much of the heavy lifting has been done in recent years through a series of legal moves that have circumscribed Russia’s freedom of action. Brussels has only limited powers, mostly confined to competition policy and regulation”

Johnson notes that this “energy union” which the peoples of the European continent have not been consulted on and have no say on emerged he writes in 2003, “when Europe took the first big steps to liberalise the energy market. One big step, which is paying dividends today, was to ensure that Gazprom’s long-term gas supply contracts with European countries were free of restrictive clauses that would prevent the buyers from reselling the gas elsewhere. Thanks to that EU move, countries such as Poland and Slovakia can resell Russian gas they don’t need to beleaguered countries like Ukraine that do need it. Those so-called “reverse flows” have been important in helping insulate Ukraine from Russian gas pressure over the past year. But the big culmination came in 2011, when a mind-numbingly arcane bundle of five new competition rules came into effect. The so-called “Third Energy Package” is today the epicenter of Europe’s ability to lay down the law — and make maverick companies play by the rules”.

The result of this is that “the key elements in the Third Energy Package took direct aim at the business model used by national firms in the past and Gazprom today by mandating a separation between firms selling natural gas and those that transport it, in order to prevent abusive monopolies. Big gas producers, in other words, can’t also be the big gas pipeline operators — they have to share with other producers to inject competition into the market”.

Johnson mentions that “despite plenty of Russian grumbling when the Third Energy Package came into effect, current and former U.S. and European government officials all say that Russia and Gazprom simply failed to understand the practical implications of the new EU regulations on Russia’s traditional approach to the energy business. That helps explain Russia’s petulant cancellation of the South Stream pipeline in December, three years after the rules that made it a non-starter came into effect. Because South Stream’s pipes were meant to land in Bulgaria, an EU member state, the project had to comply with EU rules. Yet until a few months ago, Russia labored under the belief that EU law did not apply, perhaps because Russia first touted the project years before the new laws came into effect”.

He ends “To be sure, plenty of other things have come together to erode Russia’s energy weapon. The boom in U.S. natural gas production meant gas supplies once earmarked for the United States made their way to Europe; that put Gazprom under pressure to renegotiate onerous contracts with consumers. The financial crisis and economic slump whacked Europe’s demand for natural gas, which further eroded Gazprom’s leverage. And U.S. and Western sanctions, by targeting Russian energy firms, have hamstrung their ability to raise funds in capital markets and actually pay for big, ambitious energy infrastructure projects in the first place. But Brussels remains able and willing to curb Russian energy adventurism by lobbing legal briefs and directives rather than artillery shells. And despite the progress Europe has made in recent years, that legal approach will likely only become more important in years to come”.

He concludes “In laying out its blueprint for a new Energy Union this week, Brussels made clear that it does not consider Russia a strategic energy partner, despite the fact that Moscow supplies about one-third of its natural gas. What’s more, Europe put special emphasis on the need to deploy the rule of law to protect the most vulnerable EU members, those in southeastern Europe. And it underscored that seemingly boring regulatory matters, such as public transparency about the financial terms in supply contracts, can play a pivotal role in parrying Putin’s intentions”.

Johnson makes little of no mention of where the EU will get its energy and when this will all come into effect. At the same time he ignores the ongoing euro crisis and the endless sticking plasters being used to keep a failed project afloat for as long as possible.

“Greece’s financial rescue by four months”


Euro zone finance ministers agreed in principle on Friday to extend heavily indebted Greece’s financial rescue by four months, averting a potential cash crunch in March that could have forced the country out of the currency area. The deal, to be ratified once Greece’s creditors are satisfied with a list of reforms it will submit next week, ended weeks of uncertainty since the election of a radical leftist-led government in Athens pledged to reverse austerity measures. “Tonight was a first step in this process of rebuilding trust,” Jeroen Dijsselbloem, chairman of the 19-nation Eurogroup, told a news conference. “We have established common ground again to reach agreement on this statement.” The agreement, clinched after the third ministerial meeting in two weeks of acrimonious public exchanges, offers a breathing space for the new Greek government to try to negotiate longer-term debt relief with its official creditors. But it also forced radical young Prime Minister Alexis Tsipras into a major political climbdown since he had vowed to scrap the bailout, end cooperation with the so-called “troika” of international lenders and roll back austerity”.

Germany needs to leave the euro


A piece  by Patrick Chovanec argues that Germany needs to leave the Eurozone.

It opens “Last year, Germany racked up a record trade surplus of 217 billion euros ($246 billion), second only to China in global export dominance. To some, this made Germany a bright spot in an otherwise anemic eurozone economy — a “growth driver,” as the German finance minister, Wolfgang Schäuble, puts it. In fact, Germany’s chronic trade surpluses lie at the heart of Europe’s problems; far from boosting the global economy, they are dragging it down. The best way to end this perverse situation is for Germany to leave the eurozone. Germans usually respond to such charges with a kind of hurt confusion. We run trade surpluses, they patiently explain, because we are simply much more competitive than most of our trading partners. Can you blame us, they ask, if the world prefers to buy superior German goods (and has nothing we want in return)? So goes the argument: The rest of the world just needs to up its game, get its house in order, and become a bit more like Germany”.

He goes on to make the valid argument that “Contrary to popular mythology, however, there’s absolutely no reason why being “competitive” should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out that the optimal basis for trade is comparative, not absolute, advantage. In other words, even if a country is better at everything, it should export what it is best at, and import what it is less better at. Having an across-the-board advantage does not imply that it makes good economic sense to produce everything yourself, much less to sell more than you want in return”.

Here is yet another example of the supposedly rational market doing what is “best”. Germany, instead of doing what is rational (economically at least) and buying the products of others, seeks its own interest like a classical realist and embarks on a kind of self-sufficiency gone to extremes. Germany is happy to trade with the world, as long as it has no need to buy the products of other countries.

The writer adds, “Trade surpluses take place when a country chooses to spend less than it produces — when it has excess savings, beyond its domestic need for credit. It lends that excess savings abroad, financing another country’s ability to spend more than it produces and, by running a trade deficit, purchase the lender’s excess production. It’s true that a highly productive country might have the wherewithal to conjure up excess savings, while a less productive country might be inclined to borrow rather than scape up the savings it needs. But fundamentally, trade imbalances arise not from competitive advantage but from choices about how much to save, and where that savings should be deployed — at home or abroad”.

He goes on to argue that imbalances do make sense, “In the 19th century, Britain’s Industrial Revolution enabled it to reap vast earnings from expanded output, some of which it invested in the United States. The money lent to a rapidly growing American economy generated higher returns than it would have back home, while creating a market for British-made goods. The potential productivity gains made it a win-win: it made sense for the Americans to borrow, and for the British to lend. But the case also highlights something that’s easy to forget: running a trade surplus means financing someone else’s trade deficit.The eurozone crisis is often called a debt crisis. But, in fact, Europe as a whole did not have an external debt problem, but an internal one: German surpluses and mounting debt in Europe’s periphery were two sides of the same coin. Germans saved (a lot) and the single currency induced them — rather than save less or invest it at home — to lend it to their eurozone trading partners, who used the money to buy German goods”.

He mentions that “each country would pursue its own monetary policy, relying on exchange rate adjustments to shift the locus of demand from those who could not afford it to those who could. Under a single currency, though, this could not happen. Instead, Europe’s debtors were forced to slash demand, through a combination of fiscal austerity and debt deleveraging. Their trade deficits with Germany fell dramatically — but by buying less, not selling more. All of the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) saw their total trade with Germany shrink — in the case of Greece and Ireland, by more than one-third. So, to the extent Europe rebalanced, it did so at the cost of growth”.

He makes the simple point that “The eurozone was caught in a trap. Its countries needed to move in two separate directions, but under a single currency, they could only move in lockstep. A Europe that lived within its means meant a Germany that continued to save more than it spent, rather than driving much-needed demand. Thus came monetary easing — and a weaker euro — which merely redirected Europe’s internal imbalances outward”.

Now it is clearer than ever that the euro was a political project masked in economics and convenience. The people of the European continent were told they could move from Madrid to Brussels to Rome to Lisbon all in a single currency. Yet, the construction was so obviously flawed the EU elites were either incompentent, or wilfully malevolent. It is possible they were the former but probable they were the latter. They expected growth to keep going and an eventual currency union (and thus political union) to take place slowly, right under the eyes of the people of Europe.

He goes on to argue that “The best solution — and perhaps thus the least likely to be adopted — is for Germany to leave the euro, and let a reintroduced deutschmark appreciate. Here, the experience of the 1986 Plaza Accord offers some encouragement. While a stronger yen made barely a dent in Japan’s structural trade surplus, German behaviour proved far more responsive to the incentives embodied in a stronger mark. In the past year, German politicians have proven far more willing to try boosting demand by raising the minimum wage, cutting the retirement age, and increasing pensions — moves that may work, but risk harming productivity, which is ultimately the source of Germany’s capacity to consume. Perversely, those same politicians refuse to cut taxes or boost public spending, which in 2014 resulted in Germany posting its first balanced federal budget since 1969, a year earlier than planned”.

He ends “To most Germans, any suggestion that they should relax this fiscal discipline smacks of Greek-style profligacy, but there’s another way to think about it. The excess savings are already there; the only question is where to lend it. Borrowing it domestically to drive a genuine European recovery might be preferable to (once again) throwing it at foreigners to buy things they really can’t afford”.


“It can obtain a fairer deal for the Greek people”


A piece in Foreign Policy notes that Greece is right morally and economically. He writes that Greece has more leverage than many assume.

It opens “Ever since the initial bargain in the 1950s between post-Nazi West Germany and its wartime victims, European integration has been built on compromise. So there is huge pressure on Greece’s new Syriza government to be “good Europeans” and compromise on their demands for debt justice from their European partners — also known as creditors. But sometimes compromise is the wrong course of action. Sometimes you need to take a stand”.

He makes the excellent point that “no advanced economies in living memory have been as catastrophically mismanaged as the eurozone has been in recent years, as I document at length in my book, European Spring. Seven years into the crisis, the eurozone economy is doing much worse than the United States, worse than Japan during its lost decade in the 1990s and worse even than Europe in the 1930s: GDP is still 2 percent lower than seven years ago and the unemployment rate is in double digits. The policy stance set by Angela Merkel’s government in Berlin, implemented by the European Commission in Brussels, and sometimes tempered — but more often enforced — by the European Central Bank (ECB) in Frankfurt, remains disastrous. Continuing with current policies — austerity and wage cuts, forbearance for banks, no debt restructuring or adjustment to Germany’s mercantilism — is leading Europe into the ditch; the launch of quantitative easing is unlikely to change that. So settling for a “compromise” that shifts Merkel’s line by a millimeter would be a mistake; it must be challenged and dismantled”.

It is something of a misnomer to compare the US to the Eurozone as one has a central bank the other, the ECB, is only this in name. Yet, the EU and the ECB led by Germany have made things irreparably worse with long term consequences that could be severe, both for democracy on the continent and the EU generally.

Nevertheless he adds “For the first time in years, there is hope that the dead hand of Merkelism can be unclasped, not just fear of the consequences and nationalist loathing. More immediately, Greece can save itself. Left in the clutches of its EU creditors, it is not destined for the sunlit uplands of recovery, but for the enduring misery of debt bondage. So the four-point plan put forward by its dashing new finance minister, Yanis Varoufakis, is eminently sensible. This involves running a smaller primary surplus — that is a budget surplus, excluding interest payments — of 1.5 percent of GDP a year, instead of 3 percent this year and 4.5 percent thereafter. Some of the spare funds would be used to alleviate Greece’s humanitarian emergency. The crushing debts of more than 175 percent of GDP would be relieved by swapping the loans from eurozone governments for less burdensome obligations with payments tied to Greece’s GDP growth. Last but not least, Syriza wants to genuinely reform the economy, with the help of the Organization for Economic Cooperation and Development (OECD), notably by tackling the corrupt, clientelist political system, cracking down on tax evasion, and breaking the power of the oligarchs who have a stranglehold over the Greek economy”.

Pointedly he writes “Had the Varoufakis plan been put forward by an investment banker, it would have been perceived as perfectly reasonable. Yet in the parallel universe inhabited by Germany’s Finance Minister Wolfgang Schäuble, such demands are seen as “irresponsible”: Greece must be bled dry to service its foreign creditors in the name of European solidarity”.

He continues “The belief that Greece has little leverage in its negotiations with eurozone authorities is false. If no agreement is reached and Greece is illegally forced out of the euro by Berlin and Frankfurt, it would doubtless default on all its debts to both eurozone governments and the ECB, as well as the Bank of Greece’s Target 2 liabilities. Speculation would soon start about which country might be next to exit the euro — Portugal? — and the single currency would suddenly look eminently revocable”.

He ends the article noting “Do Berlin and Frankfurt really want to push Athens over the brink? I doubt it. Especially since, freed of its external debt and an overvalued exchange rate, Greece would doubtless be growing again once the immediate chaos subsided. After all, even an economy as badly managed as Argentina started growing again only a year after the government defaulted and junked its dollar peg in 2002. Of course, eurozone authorities may miscalculate, or allow their emotions to trump economic logic. And since Athens does not want to leave the euro, it also has a fallback option, as Willem Buiter, chief economist of Citigroup, and John Cochrane of the University of Chicago have pointed out. The Greek government could meet its domestic obligations, such as pension payments, by issuing tradeable IOUs that could also be used to make tax payments — in effect, creating a parallel currency. This virtual money could also be used for other purposes: for instance, to recapitalize ailing banks. That would enable the Greek government to default on its EU creditors relatively painlessly, while remaining within the euro”.

He concludes “The eurozone establishment and much of the media think Greece is foolish to stand up to Germany. But what would be truly foolish is giving in. That would leave only the neo-Nazis of Golden Dawn in the anti-Merkelism camp, which might portend ill political omens. So long as the Greek government is willing to stand firm — as a vast majority of Greeks and many Europeans are urging it to — it can obtain a fairer deal for the Greek people and, with luck, the Eurozone”.


End of the House of Borbon?


A misguided article posits the theory that the end of the Spanish monarchy is in sight.

It begins, “It seems highly plausible that the reign of Spain’s Felipe VI, who came to the throne last June, will be a blameless one. What also seems increasingly likely, however, is that it will be brief. Long before his father, Juan Carlos I, announced on June 2, 2014, his decision to abdicate, the royal family had fallen from grace in the eyes of most Spaniards. Once a source of unity in post-fascism Spain, the monarchy has now joined the mire of discredit in which the rest of the country’s political institutions find themselves. Today, the throne is in a crisis from which it may not be able to recover — and young King Felipe may be the one to pay the price”.

There are historical similarities to this case. Victor Emmanuel III of Italy did the same in a time of crisis and abdicated in favour of his son, Umberto II at the end of the war. However, it was too late and the monarchy was abolished just weeks later. Yet this anology is not accurate. Victor Emmanuel left it too late and thus doomed his son, and his House to abolition. Juan Carlos took a regrettable action but it may well have saved the House of Borbon. King Philip has cut spending and cut his own salary. He has taken action to reconnect with the Spanish people.

The writer adds “The throne’s fate hinges on the outcome of Spanish elections, scheduled to be held before the end of the year, either in November or December. Just as in Greece, where voters racked by years of stagnation and austerity policies placed a far-left party in power in recent elections, Spain, too, is poised for a dramatic leftward shift. The country’s economic crisis is entering a seventh year. The two major parties — the center-left Socialists (PSOE) and the center-right Popular Party (PP) — which have alternated in power since the end of the fascist era are, for the first time, facing a genuine challenge. A ragtag party started by leftist university lecturers only a year ago, called Podemos (“We Can”), is riding the surge of indignation to the top of the polls. A Podemos victory would be more than a challenge to austerity policies: If elected, Podemos is promising to stage a referendum on whether Spain — a monarchy since the country was unified in 1492, with the exception of two brief republics and a few decades under fascism — should have a king no more”.

Yet, Podemos has the support of people not because of its republicanism but because of its economic policies. The danger for Podemos is that they overplay their hand and focus on extraneous matters rather than important issues like the Spanish unemployment levels or dealing with Germany. The party, still young and full of anti-establishment vigour could be turned around and made to see sense. The monarchy is the only thing that is keeping modern Spain together.

He continues praising the new king, “Felipe, 47, is an earnest and well-prepared sovereign who speaks English, French, and Catalan and has a master’s degree in international relations from Georgetown. In his coronation speech, Felipe pledged a “new era for the monarchy” and, alongside his media-savvy wife, Queen Letizia, he has attempted to reshape the crown for a 21st-century Spain. One of his early official engagements as king, for instance, was holding a first-ever royal meeting in heavily Catholic Spain with representatives of the country’s gay and lesbian community. Felipe has also shown a particular sensitivity for the distinct nature of Catalonia as the region’s leaders continue their struggle to hold a binding referendum on independence, and he has drawn up an in-house code of transparency that will see the palace accounts fully opened to external scrutiny for the first time, through a government-led audit”.

The writer attempts to smear King Philip by association with his sister, “Even prior to the sudden rise of Podemos, the monarchy seemed headed for a breaking point. Central to the monarchy’s crisis are the troubles of Felipe’s elder sister, Cristina de Borbón, who has been embroiled in a major corruption scandal for the past three years and in December was ordered to stand trial for tax fraud. The king has kept his sibling at arm’s length, not once offering a word of public support. He even went so far as to banish her from his coronation day. But Cristina, who is currently sixth in line to the throne, is stubbornly refusing to fade quietly from the limelight. Her lawyers pestered the courts with spurious attempts to prevent her from being tried alongside her husband, Iñaki Urdangarin, the duke of Palma de Mallorca. Even now that all appeal options have run out, she is steadfastly ignoring a consensus among politicians and commentators of all stripes that she should at least renounce her right of succession. At this point, however, the final verdict and possible sentencing in Cristina’s trial will matter little. The damage has been done, and an institution which, since the end of fascism in Spain, has stood out as a rare source of solidarity and gravitas in Spain’s rambunctious political scene, is showing signs of rot”.

This is a short term view. The trail of Infanta Cristina should not blind Spaniards to the both the usefulness and need for the monarchy. The scandals of King Juan Carlos will soon be forgotten in light of the work he did to save Spanish democracy during the 1981 attempted coup.

He continues “Felipe is well aware of the problems his less principled family members present to his reign. In his second keynote speech as king, on Christmas Eve, he looked straight into the camera and intoned grimly, “We must not hesitate to cut corruption at its roots.” But it may be too late. At the same time that the embattled king found himself facing historically low approval ratings, the leaders of both of Spain’s traditionally dominant parties, the PP and the PSOE, were embroiled in their own respective corruption scandals. The PP was exposed when its former treasurer, now in jail, leaked ledgers in February 2013 showing an established regime of kickbacks and illegal financing implicating many of the party’s top brass, while the Socialists were mortified by the emergence in August that same year of a decades-old system of subsidy syphoning in the party’s fiefdom of Andalusia”.

The writer again places emphasis on Podemos and its popularity. Yet, the election is months away and much can happen between now and then, including Merkel seeing sense and attempting to defuse the crisis by assisting Spain before the election.

He charts the rise of Podemos “In the May 2014 European elections, a five-month-old Podemos took a startling 8 percent of the vote, while the PP and PSOE failed to garner 50 percent between them. (For the past 25 years, Spain’s dominant political parties had always accounted for over 70 percent of the vote in all national elections.) Under public pressure, a frail and exhausted Juan Carlos announced his decision to abdicate a week later. Even retirement has not spared the old king from scrutiny: Since he stepped down — and thus lost his full immunity from lawsuits and prosecutions — Spain’s Supreme Court has agreed to hear a paternity suit filed against the king by a Belgian woman born in 1966 who claims to be his daughter”.  

Interestingly he writes “A poll last June showed most Spaniards support the idea of a referendum on the crown, though the poll also suggested that Felipe might just survive the eventual decision. Asked late last year whether a Podemos government would call a referendum on the future of the Spanish monarchy, party leader Pablo Iglesias measured his reply with characteristic guile: ‘I wouldn’t ask a question about monarchy or republic, but rather whether in a normal democracy the head of state should be chosen on the basis of his blood or at the ballot box.’ Since its impressive showing in last year’s European elections, Podemos has continued its steady rise”.

He ends “Felipe VI’s best-case scenario may be a Socialist-led leftist government that shields the monarchy from the indignant masses while taking steps to root out corruption and ease the pain of social inequality. The king has shown his willingness to take action, even if this means freezing out members of his own family. But by this point, even the most dramatic royal gesture may not be enough to hold off the day of reckoning. The state may simply be too rotten to bear the stamp of a fine young king”.

“Germany’s selfish and destructive agenda”


An article describes the backlash that has been seen with the election of Syrzia in Greece.

The author begins “‘Yes We Can’ may be a stale slogan in Obama’s America, but in crisis-hit Spain it is the rallying cry of a year-old radical-left party that is taking the country by storm. In a show of strength, more than 100,000 supporters of Podemos (the party’s name means “We Can” in Spanish) filled the streets of Madrid on Jan. 31 to protest against austerity, crushing debts, and the country’s corrupt political system — and demand change. The demonstrators don’t represent a fringe group, either. Podemos is leading in the polls, ahead of both the mainstream center-left and center-right parties in elections that will be held by the end of the year”.

He adds “The election of a radical-left Syriza-led government in Greece on Jan. 25 has electrified European politics. After years of being told that there is no alternative to bowing to German demands for crushing austerity and wage cuts, the plucky Greeks have dared to stand up to Angela Merkel’s government in Berlin — and other Europeans have stood up and noticed. While the immediate focus is on the showdown between the new Greek government and eurozone authorities over demands for debt relief — and the (unlikely) possibility that Greece could end up ejected from the currency union — Athenian defiance is already having wider political repercussions”.

He goes on to note that “Long accustomed to treating Greece as an unruly but ultimately submissive colony, horrified German policymakers and their eurozone minions can scarcely believe that it is in outright insurrection. (Just look at the body language of Jeroen Dijsselbloem, the bespectacled Dutch finance minister and head of the Eurogroup of his eurozone counterparts, at a press conference with his new Greek counterpart, Yanis Varoufakis, in this video clip.) Debtor-country governments that have obediently complied with the German diktat — notably Spain, Portugal, and Ireland — suddenly feel very exposed politically. Governments that have mounted a mild challenge to Merkel (think France and Italy) are in a delicate position: They spy an opportunity to advance their own agenda, while fearing that they may be outflanked by those with a more radical one. And not without reason; anti-establishment parties of various stripes have the wind in their sails”.

He makes the valid point “Whenever voters throw out a government, as they have done in nearly every election since the crisis began in 2008, officials from Berlin, Brussels, and Frankfurt — whom they did not elect and cannot hold to account — loudly insist that the incoming administration must stick to the failed policies of the outgoing one”.

Rightly he notes that “Since voting for establishment parties of the center-left or center-right makes little difference, it’s hardly surprising that voters are seeking a genuine alternative. And for the moment this exists only on the extremes. Sometimes, as in Greece and Spain, the insurgents are on the radical left. In Ireland, which is not due to vote until next year, Sinn Féin, a left-wing party that was formerly the political wing of the Irish Republican Army, has a narrow lead in the polls. In other cases, the upstarts are on the far right. In France, Marine Le Pen’s racist National Front is out in front, winning by-elections and pulling ahead in polls for the 2017 presidential election. In Italy, where reformist Prime Minister Matteo Renzi remains popular, all three main opposition parties — the far-right Northern League, the anti-establishment Five Star Movement, and former Prime Minister Silvio Berlusconi’s center-right Forza Italia — are now anti-euro”.

He goes on to make the point that “More broadly, it is neither feasible nor fair for debtors to bear the full costs of the financial crisis. For every reckless borrower there is a reckless lender. In the eurozone’s case, those were primarily German and French banks, which lent vast sums to southern Europe, both directly and via local banks. While the bailouts of Greece, Ireland, Portugal, and Spain are portrayed as gestures of EU solidarity, they were in fact covert bailouts of those foreign banks that would otherwise have suffered huge losses on their reckless lending. Southern Europe’s huge debt burden — primarily private in Spain, mostly public in Greece — is stifling the economy and is unpayable in full”.

He concludes arguing “Nor is it politically sustainable for the eurozone to be run, in effect, by a German hegemon that acts in its narrow interests as a creditor rather than in the broader interests of the monetary union as a whole. If countries are to share a currency, they must do so as equals, with EU institutions representing the common interest, rather than acting as instruments for creditors to impose their will on debtors. Denying people basic democratic choices over how much governments can tax and spend is bound to lead to a backlash — especially when EU fiscal rules are economically harmful. “No taxation without representation” is the stuff of revolutions”.

He ends the article “None of this is radical or extreme, let alone anti-European. Outside the eurozone, many sensible people of all stripes would agree with it. The tragedy of the eurozone is that the policy establishment in Brussels and national elites are destroying political support for the European project by advancing Germany’s selfish and destructive agenda as a creditor. With luck, they will change course before it is too late. After all, while Syriza and Podemos want to make the eurozone fairer, the far right wants to destroy the EU altogether. Europe urgently needs mainstream alternatives to Merkelism — or it risks a President Le Pen”.


Greece, the eurozone and German bankers


An excellent article reports on the problems in German bankers.

It starts, “Why did Germany try so hard to stop the European Central Bank from giving the eurozone a trillion-euro boost? Why did Germany decree fiscal austerity for Greece instead? And why, despite Greece’s travails and alleged duplicity, does Germany insist that Greece stay in the eurozone? These actions may have seemed irrational and contradictory, but the same people benefited in every case. First, consider Germany’s recent economic history. In 1990, the reunification of the East and West added an enormous, low-wage population of Germans to the labour supply. Though integrating them into the West’s business environment took time, these millions of new laborers in the workforce instantly made German exports more competitive. Then, with the launch of the euro in 1999, Germany diluted its currency — among the strongest in the world — by mingling it with those of less stable economies from across the European Union. Again, the effect was a huge boost to German exports”.

He adds “Indeed, in the first decade, incomes for Germans from top to bottom on the economic ladder rose by about 7 to 8 percent in real terms. But with the advent of the euro, things started to change. Incomes at the top kept rising, with gains for the top 10 percent of earners continuing apace for the next decade as shareholders reaped record profits. At the bottom, however, there was a sharp dip that eventually left incomes exactly where they started at the beginning of the 1990s”.

Of course, as is often the case, the poorest are hit most, “The effect on inequality was startling. By itself, the integration of East and West should have reduced German inequality substantially. In a country where labor retained some bargaining power, the export boom might have been expected to encourage this convergence as well. Yet Germans at the top of the income distribution saw such an upturn in their fortunes that inequality actually rose. With incomes continuing to diverge, Germany’s wealth inequality was the worst in the eurozone and almost on a par with that of the United States, which was no mean feat”.

He argues that QE was opposed by bankers and others in the ECB, “Instead, they decided that countries in need of an economic lifeline — like Greece — should keep making massive cuts in public services while servicing debts on terms set by wealthier nations such as Germany. For most economists, this was an impractical prescription that would only make the patient suffer more. So why did the Germans insist on it? The bankers in Berlin realised that inflation eroded the value of savings, of which their wealthy countrymen had quite a lot, and also made German investments less attractive to foreigners. As long as Germany continued to grow, they had no use for inflation. In fact, growth with low inflation — and thus little upward pressure on wages — was a perfect formula, especially for owners of capital. Indebted and unemployed Germans might have benefited from a weaker euro and more inflation, just like the Greeks, but they clearly weren’t the bankers’ top priority”.

Thankfully he notes that “Greece is calling Germany’s bluff. A few years ago, the Germans wanted Greece to stay in the eurozone enough to bail them out of their fiscal deficits, but the cost was penury for the Greeks. Back then, Germany seemed to have all the bargaining power. But Greece’s new leftist government has apparently realized that the real bargaining power lies in Athens, because Germany will now do anything to hold the eurozone together. Germans have read plenty of articles alleging that Athens never should have been allowed to join the eurozone in the first place. But the bankers in Berlin know that each weak country that leaves the eurozone now is likely to push up the value of the euro”.

He concludes “Today, this cluster of threats is unacceptable to Germany. As its growth rate slowed, so did its bankers’ priorities and, as a consequence, the balance of power in the eurozone. The Greeks figured this out, and other countries are cottoning on. But it was a good run for wealthy Germans while it lasted”.

Germany plays hardball


The European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding on Wednesday, shifting the burden onto Athens’ central bank to finance its lenders and isolating Greece unless it strikes a new reform deal. The move, which means the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks, was a response to what many in Frankfurt see as the Greek government’s abandoning of its aid-for-reform program. The decision came just hours after Greece’s new finance minister Yanis Varoufakis emerged from a meeting with ECB President Mario Draghi to claim that the ECB would do “whatever it takes” to support member states such as Greece. In stark contrast, the ECB move, which required the support of a majority of central bank chiefs across the euro zone, shows widespread dismay with the new Greek government’s plans not only in Frankfurt but across the 19-country bloc. The ECB announced its decision, which will take effect from Feb. 11, after those governors met in Frankfurt on Wednesday”.

Greece vs Germany


The lead story from the Economist discusses the victory of Syriza. It starts “IT WAS in Greece that the infernal euro crisis began just over five years ago. So it is classically fitting that Greece should now be where the denouement may be played out—thanks to the big election win on January 25th for the far-left populist Syriza party led by Alexis Tsipras (see article). By demanding a big cut in Greece’s debt and promising a public-spending spree, Mr Tsipras has thrown down the greatest challenge so far to Europe’s single currency—and thus to Angela Merkel, Germany’s chancellor, who has set the austere path for the continent”.

The writer adds “everybody, including Mr Tsipras, insists they want Greece to stay in the euro, there is now a clear threat of Grexit. In 2011-12 Mrs Merkel wavered, but then decided to support the Greeks to keep them in the single currency. She did not want Germany to be blamed for another European disaster, and both northern creditors and southern debtors were nervous about the consequences of a chaotic Greek exit for Europe’s banks and their economies. This time the odds have changed. Grexit would look more like the Greeks’ fault, Europe’s economy is stronger and 80% of Greece’s debt is in the hands of other governments or official bodies. Above all the politics are different. The Finns and the Dutch, like the Germans, want Greece to stick to promises it made when they twice bailed it out. And in southern Europe centrist governments fear that a successful Greek blackmail would push voters towards their own populist opposition parties, like Spain’s Podemos (see article)”.

The writer goes on to mention that “It could all get very messy. But there are broadly three possible outcomes: the good, the disastrous, and a compromise to kick the can down the road. The history of the euro has always been to defer the pain, but now the battle is about politics not economics—and compromise may be much harder”.

He adds “Tantalisingly, there is a good solution to be grabbed for both Greece and Europe. Mr Tsipras has got two big things right, and one completely wrong. He is right that Europe’s austerity has been excessive. Mrs Merkel’s policies have been throttling the continent’s economy and have ushered in deflation. The belated launch of quantitative easing (QE) by the European Central Bank admits as much. Mr Tsipras is also right that Greece’s debt, which has risen from 109% to a colossal 175% of GDP over the past six years despite tax rises and spending cuts, is unpayable. Greece should be put into a forgiveness programme just like a bankrupt African country. But Mr Tsipras is wrong to abandon reform at home. His plans to rehire 12,000 public-sector workers, abandon privatisation and introduce a big rise in the minimum wage would all undo Greece’s hard-won gains in competitiveness”.

The point the author notes about the rehiring of government workers is broadly correct as are the points about selective privatisation, yet he argues that the solution is to “get Mr Tsipras to junk his crazy socialism and to stick to structural reforms in exchange for debt forgiveness—either by pushing the maturity of Greek debt out even further or, better still, by reducing its face value. Mr Tsipras could vent his leftist urges by breaking up Greece’s cosy protected oligopolies and tackling corruption. The combination of macroeconomic easing with microeconomic structural reform might even provide a model for other countries, like Italy and even France”.

The notion that the plans of Tsipras is “crazy socialism” bears no relation to the context of what has happened to Greece and the Greek people after what has been meted out to the Greek people. Yet as has been argued here before the scale of debt forgiveness needed for Greece could very well be beyond what the Germans would be willing to give.

The report goes on to mention “So the most likely answer is a temporary fudge—but it is one that is unlikely to last long. If Mr Tsipras gets no debt relief, then he will lose all credibility with Greek voters. But even if he wins only marginal improvements in Greece’s position, other countries are bound to resist. Any changes in the bail-out terms will have to be voted on in some national parliaments, including Finland’s. If they passed, voters in countries like Spain and Portugal would demand an end to their own austerity. Worse still, populists from the right and left in France and Italy, who are not just against austerity but against their countries’ membership of the euro, would be strengthened. And there are technical problems with any fudge. The ECB is adamant that it cannot provide emergency liquidity to Greece’s banks or buy up its bonds unless Mr Tsipras’s government is in an agreed programme with creditors, so any impasse is likely to trigger a run on Greek banks. By stretching out maturities, some of this could be avoided—but that may be too little for Mr Tsipras and too much for Mrs Merkel”.

He ends “Greek voters may be living in a fool’s paradise if they think Mr Tsipras can deliver what he says, but the Germans too have to look at the consequences of their obstinacy. Five years after the onset of the euro crisis, southern euro-zone countries remain stuck with near-zero growth and blisteringly high unemployment. Deflation is setting in, so debt burdens rise despite fiscal austerity. When policies are delivering such bad outcomes, a revolt by Greek voters was both predictable and understandable”.

He concludes “If Mrs Merkel continues to oppose all efforts to kick-start growth and banish deflation in the euro zone, she will condemn Europe to a lost decade even more debilitating than Japan’s in the 1990s. That would surely trigger a bigger populist backlash than Greece’s, right across Europe. It is hard to see how the single currency could survive in such circumstances. And the biggest loser if it did not would be Germany itself”.

Carney attacks Merkel


The Bank of England governor, Mark Carney, has launched a strong attack on austerity in the eurozone as he warned that he single-currency area was caught in a debt trap that could cost it a second lost decade. Speaking in Dublin, Carney said the eurozone needed to ease its hardline budgetary policies and make rapid progress towards a fiscal union that would transfer resources from rich to poor countries. “It is difficult to avoid the conclusion that, if the eurozone were a country, fiscal policy would be substantially more supportive,” the governor said. “However, it is tighter than in the UK, even though Europe still lacks other effective risk-sharing mechanisms and is relatively inflexible.” Carney’s remarks come just three days after the election of the Syriza-led government in Greece presented a direct challenge to the austerity policies championed in the eurozone by Germany’s Angela Merkel”.

A deal with Tsipras?


A report from Foreign Policy seems to posit the theory that the deal could be reached between Greece and its creditors after the election of the new government.

It opens “Left-wing European politicians have in the last five years faced an uncomfortable question: Why, in the midst of an economic crisis that has seen the rich get rich and the poor get poorer, have leftists failed to gain elected executive office? But with Alexis Tsipras’s electoral win in Greece this past weekend, all that has changed, and the continent’s left now has tangible power in hand and a seat at the bargaining table with Europe’s most feared creditors. Tsipras — whose Syriza party won 149 seats in parliament, falling just two short of an outright majority — has now partnered with a right-wing populist group, the Independent Greeks, to form a government”.

He continues, “Nonetheless, the two parties agree where it matters most: the need to oppose the imposition of austerity-minded budget policies on Greece, whose social safety net has been devastated as its creditors force it to slash its spending as a way of balancing its budget. The International Monetary Fund has admitted to underestimating the damage measures like cuts in health and education spending would impose on the Greek economy, and Tsipras’s electoral triumph, the first such victory by a staunchly leftist politician in the post-crisis years, represents the culmination of a backlash against dismal unemployment figures and what can only be described as a social crisis in public health, drug use, and homelessness”.

The fact that the IMF underestimated the scale of the damage the cuts to Greece should be cause enough to relent on what has been done to Greece. Anyone who seeks to keep the Greek people on this track is either heartless or is so wedded to what has patently not worked, should be ignored.

The writer fairly notes that “To be sure, the Greek economy collapsed in the first place as a result of astounding budgetary profligacy and corruption, and it is that era of excess — underwritten by frequently predatory Western banks — that Greece is now paying off”.

Yet, this overlooks the fact that the Greeks fed the German export boom and created jobs by using the credit from the artificially low interest rates set by the ECB, to help Germany, to buy German products. To then say that the Greeks are to blame is laughable.

The writer goes on to note “Tsipras campaigned on a vague platform of debt reduction and a renegotiation of the terms of Greece’s bailout, but on Monday European politicians rushed to say that they will staunchly oppose any serious write-down in Greece’s outstanding debt, which stands at about 175 percent of its GDP”.

Naturally the Germans are wedded, unbendingly to the old view, “‘In our view, it is important that the new government take measures so that the economic recovery continues,’ German Chancellor Angela Merkel’s spokesman, Steffen Seibert, said Monday. ‘A part of that is Greece holding to its prior commitments and that the new government be tied in to the reform’s achievements.’ Jeroen Dijsselbloem, the head of the eurozone’s group of finance ministers, was even more blunt. ‘There is very little support for a write-off in Europe,’ he told reporters”.

Interestingly he notes “even as Tsipras’s future negotiating partners stake out hard-line positions, there is little evidence that Europe is barreling head-first toward another economic crisis. In fact, the outlines of a deal between the two partners are already readily apparent. The only real question is whether Tsipras can sell it to his coalition. Greece’s creditors have already provided the country with some relief in the form of repayment extensions, interest rate reductions, and a decision to return any profits from the loans to Athens. The average maturity of Greek debt — or when the bill comes due — now stands at 16.5 years. That figure compares favorably to other exposed European economies, including Italy, Portugal, and Ireland. Extending maturity would give Greece more time to pay up”.

He continues “Germany and other creditors could easily extend such concessions further. Tsipras campaigned mostly on a platform of debt reduction, and these proposals would allow him to make a reasonable case of having achieved that goal, though in reality they focus on the cost to Greece of financing its debt. According to calculations carried out by the Bruegel think tank, further reducing interest rates on current loans, a move it says wouldn’t hurt lenders’ bottom lines, would save Greece 6.4 billion euros, or 3.4 percent of its 2015 GDP. Extending when the loans come due by another 10 years would save Greece 4.5 percent of 2015 GDP. Extending the due date for loans provided by the European Financial Stability Facility by 10 years would save 17 percent of 2015 GDP. Implemented together, these options would save Greece 31.7 billion euros, or 17 percent of 2015 GDP”.

There is some questions however if this will be enough. Such is the state of Greece debt that whole tranches of debt will need to be written off. For the Germans this would appear to be a “red line”. Yet, there a few other measures that can bring life and dignity back to the Greek people and its economy.

He ends “Still, one can envision a scenario that’s politically acceptable to European leaders, most notably Merkel, that sees borrowing costs slightly reduced and in which a stimulus package for the Greek economy is cobbled together to help restore the Greek social safety net. Unsaid in all of this is that the Greek economy has quietly rebounded. Its economy is growing, and the government is running a budget surplus. That does little to do away with its mountain of debt, but it does reduce the impetus for a Greek exit from the eurozone. The left-wing political project in Europe, then, faces several key tests in the coming weeks. Tsipras’s allies in Spain, the political party Podemos, will be closely watching to see whether Syriza is able to extract financial concessions from Berlin. And if all Tsipras can deliver is marginal concessions on the neoliberal economics that have defined the last half-decade in Greece, his supporters are bound to come away disappointed, and Tsipras may face a crisis inside his own government”.

The Germans have to decide, how badly they want the euro, and the EU for that matter. Do they want it enough to give Greece enough of a writedown so it can stay in the EU, or are they so inflexible that they are willing to see Greece, then Ireland and then probably Spain or Italy leave the euro and thus the spectacular collapse of the EU as a whole.

“Tsipras says his country will not default”


New Greek PM Alexis Tsipras says his country will not default on its debts. Addressing his first cabinet meeting since Sunday’s victory, Mr Tsipras said he would negotiate with creditors over the €240bn (£179bn; $270bn) bailout. “We won’t get into a mutually destructive clash but we will not continue a policy of subjection,” said the left-wing Syriza party leader. Greek bank stocks lost more than a quarter of their value on Wednesday as prices fell for a third day. Piraeus Bank lost nearly 29%, Alpha Bank 26%, and National Bank and Eurobank around 25%, AFP reported. Germany’s vice-chancellor said it was unfair of Greece to expect other states to pick up its bills”.

A win for Greece, a loss for Germany?


The Greek election results have concluded with a resounding victory for the anti-austerity leftist Syriza party.

A report from the New York Times notes that “Greece rejected the harsh economics of austerity on Sunday and sent a warning to the rest of Europe as the left-wing Syriza party won a decisive victory in national elections, positioning its tough-talking leader, Alexis Tsipras, to become the next prime minister. With almost 98 percent of the vote counted, Syriza had 36 percent, almost nine points more than the governing center-right New Democracy party of Prime Minister Antonis Samaras, who conceded defeat. The only uncertainty was whether Syriza would muster a parliamentary majority on its own or have to form a coalition. Appearing before a throng of supporters outside Athens University late Sunday, Mr. Tsipras, 40, declared that the era of austerity was over and promised to revive the economy. He also said his government would not allow Greece’s creditors to strangle the country”.

The piece adds that “Syriza’s victory is a milestone for Europe. Continuing economic weakness has stirred a populist backlash from France to Spain to Italy, with more voters growing fed up with policies that require sacrifice to meet the demands of creditors but that have not delivered more jobs and prosperity. Syriza is poised to become the first anti-austerity party to take power in a eurozone country and to shatter the two-party establishment that has dominated Greek politics for four decades”.

It goes on to mention that “Youthful and seemingly imperturbable, Mr. Tsipras has worked to soften his image as an anti-European Union radical, joking that his opponents had accused him of everything but stealing other men’s wives. On the campaign trail, he has promised to clean up Greece’s corrupt political system, overhaul the country’s public administration and reduce the tax burden on the middle class while cracking down on tax evasion by the country’s oligarchical business class. But his biggest promise — and the one that has stirred deep anxiety in Brussels and Berlin as well as in financial markets — has been a pledge to force Greece’s creditors to renegotiate the terms of its financial bailout, worth 240 billion euros, or about $267.5 billion. Squeezed by policies intended to stabilize the government’s finances, Greece has endured a historic collapse since 2009; economic output has shrunk by 25 percent, and the unemployment rate hovers near 26 percent. While setting up an imminent showdown with creditors, led by Chancellor Angela Merkel of Germany, Mr. Tsipras has argued that easing the bailout terms would allow more government spending. That, he said, would stimulate economic growth and employment as well as help the Greeks who are most in need”.

What this expected victory means for the euro and the ever unbending Germans remains to be seen. Tsipras wants to keep Greece in the euro but Merkel demands it “honour” its debts. The report adds “Tsipras’s confrontational stance on renegotiating the bailout could create a game of chicken with Greece’s creditors. Mr. Tsipras has insisted that he will not adhere to the bailout’s austerity conditions; Greece’s creditors insist that they will not disburse funds unless he does. Mr. Tsipras has pledged immediate action, including restoring electricity to poor families who were unable to pay their bills. He has promised to raise the minimum monthly wage to €751 from €586 for all workers, restore collective bargaining agreements, prohibit mass layoffs and create 300,000 jobs”.

The piece is somewhat unfair in calling his style “confrontational”. Following the German line has gotten Greece nowhere and rather can carry on suffering the Greeks have taken the brave step of confronting Merkel. The same thing occurred recently when France and Italy both breeched their economic targets but rather than confront the biggest economies in Europe Germany has sought to reach agreement. If all three joined together then German would be backed into a corner and would have little choice but to change policy.

The piece ends showing just how narrowly Germans view the inherent in the problem, “For Syriza, the immediate question was whether the party would win the 151 seats needed for a majority in Parliament. Projections suggested a close final result. If he falls short, Mr. Tsipras might align with the Independent Greeks, a center-right fringe party that opposes austerity measures and might push for a harder line in any debt negotiations. Early returns also showed the neo-fascist Golden Dawn party in third place with roughly 6 percent of the total vote, even with some of its leaders campaigning from prison, awaiting trial on charges of being in a criminal gang. While Greece sees itself as being punished by creditors’ demands, Germany and a host of European officials have argued that Greece and other troubled nations in the eurozone must clean up the high debts and deficits at the root of Europe’s crisis. They say Athens has failed to make enough progress on structural reforms seen as necessary to stabilize the economy, and they are pressing Greece to raise billions of euros through more budgetary cutbacks and taxes”.

A related piece notes how the election shows how divided Greece really is, “beneath the arguments over austerity is a deeper conflict of democratic wills, between the verdict of voters in Greece, who are desperate for some relief, and those in Germany, Finland and the Netherlands, who do not want their taxes used to underwrite a blank check for countries that get into financial trouble”.

It adds “In a first test of how the European Union will deal with the political earthquake in Athens, finance ministers of the eurozone, the 19-nation bloc that uses Europe’s common currency, gathered in Brussels late on Monday for a previously scheduled meeting. They made no concrete decisions on Greece but pledged to begin negotiations with the new government in Athens, whose dominant party, Syriza, made a softening of terms imposed by creditors a central part of its election campaign”.

It mentions that “Merkel has been unswerving in demanding from European neighbors steps that will cut public spending and introduce budgetary discipline. In Berlin’s view, injecting more cash into Europe’s economy without first securing tighter budgets risks allowing debtor nations to avoid or postpone financial steps they will eventually have to make. This stern approach enjoys wide support among German voters, even those who vote for her rivals. The center-left Social Democratic party, with which the center-right Ms. Merkel governs in a “grand coalition,” for example, has shown no inclination to cut its political allies governing in Italy or France any slack in meeting European Union budget limits or missing other targets”.