Turkey, the Indispensable Negotiation Partner

 September 30, 2011

Over the last two weeks, Turkish diplomacy went all out to capitalise on the country’s increasing international clout. President Abdullah Gul has made a 4-day visit to Germany, Turkey’s main European partner, whereas premier Erdogan has made a highly publicised visit to Egypt and has recently met with President Obama in New York to discuss the situation in Syria.

Turkey’s sustained economic growth and the pro-Islamic geopolitical agenda it adopted a few years ago have transformed the country into an indispensable partner for the West. Turkish diplomacy and influence could become instrumental in helping the EU, for instance, deal with the upheavals in the Maghreb and help stabilise the region. The US, too, needs Turkish assistance in dealing with the crisis in Syria and in resolving the Palestinian question. Finally, Russia might find it opportune in future to use Turkey’s help in dealing with the political upheavals in countries like Turkmenistan, Kyrgyzstan or others in Central Asia.

Even if Turkey’s increased international standing, as well as its status as a major regional power in Asia and within the Islamic world, are by now indisputable, a cooler approach to the Palestinian issue might make its efforts more effective than it has been the case so far. Pushing Israel too hard on the Palestinian question is – as the latest events prove – counterproductive. The Turkish diplomacy has to find a way to help Palestinians by working closely with EU diplomats and the US administration in order to persuade the Israelis to soften their resistance to international efforts of helping Palestinians achieve statehood. As cooperation on the issue brings more rewards than confrontation, threats to accompany Gaza-bound humanitarian convoys with Turkish warships could only aggravate matters and increase tensions in the Middle East. Such a display of hard power could only play in the hands of Israel’s military and undo the successes achieved by the Turkish diplomacy’s soft means over the last decade.

Most analysts, especially from Europe, believe that Turkey is in fact a responsible stakeholder in the Middle East and contributes to increasing the political stability of the region. By spreading the message of democracy and human rights around the Islamic world now in turmoil, Turkey is also viewed by many inside and outside the Arab world as a positive force for democratic change. These are but a few reasons why the Turkish diplomacy will have to tread much more carefully in future on the Palestinian question and avoid antagonising unnecessarily Israel and its main backer, the US. (sources: Today’s Zaman, Project Syndicate, Reuters, Al Arabiya)

Investing Our Way out of the Crisis: the Ben Rosen Model

 September 25, 2011

Resolving the EU’s debt crisis might be affected by political indecision. America’s economic recovery, however, is affected by political infighting and proposals of Keynesian-style stimulus packages that have no chance of being adopted by Congress and are inappropriate at this junction in time. The lessons of the 1980’s recovery could help end the current policy paralysis in Washington

The news that Steve Jobs has left Apple due to illness has brought to mind another outstanding American entrepreneur I have actually met in Sydney in 1985, the one and only Ben Rosen. At the time, I was a very young marketing and sales consultant at ComputerLand, promoting the products of a PC industry still in its infancy.At the beginning of the 1980’s when the microcomputer revolution started, the Anglo-Saxon world was going through a severe recession. To reduce unemployment, the Australian Labour government invested heavily in retraining the unemployed, enabling many, including myself, to get jobs in high tech industries – an area of the economy hitherto closed to them due to lack of adequate skills. Ben Rosen came down to Sydney to talk to us about the virtues of a new relational dbase product – Paradox – he happened to be involved in at the time. He was jovial, friendly and unassuming. His venture capital company had made Compaq Computers the most successful company in capitalist history and he was also behind the huge success of the Lotus 1-2-3 spreadsheet package. In fact, many of today’s hardware and software companies that are the pride and glory of Silicon Valley could not have seen the light of day without his stewardship and money. To be sure, the US federal government did its bit and helped the microcomputer industry take off, as it became its most important buyer, seconded by universities all over the country. As a graduate of the prestigious Caltech Institute and the holder of a Master’s in Engineering science, Ben Rosen decided to work on Wall Street as a technology consultant. He was known to carry around to his clients an Apple IIe computer and was eager to invest in the first-ever portable microcomputer, Compaq. Unlike today’s Wall Street advisers who prefer to recommend various speculative investments to their clients, he made his reputation and money the old-fashioned American way, that is by investing in start-ups and asking his friends and clients to do the same. Together with his brother, he also invested 24 million dollars of his own money in the production of a clean car engine, a venture that did not find favour with US car manufacturers at the time. Today, when neoliberal economics have been thoroughly discredited, the work of Ben Rosen the entrepreneur and investor should become a model to be emulated. The presence of too many MBA graduates specialising in financial transactions and the relative scarcity of technology consultants, such as Ben Rosen, underpins America’s current predicament. As matters now stand, the US economy has all but hollowed out, deriving more than 35 percent of GDP from financial transactions, including speculations. Naturally, there is a way back from the brink, if only the US’ two major parties could put ideology aside and work together with the private sector in addressing the ills of the American economy and the plight of the unemployed.

Is the Eurozone Shrinking ?

 September 14, 2011

Over the next few days, EU political leaders have to decide what to do about the Greek debt crisis. Leading economists and quite a number of EU politicians are deeply divided when it comes to putting together another large financial rescue package. Economists like Professor Hans-Werner Sinn and Professor Kenneth Rogoff argue for a shrinking of the eurozone in order to save the common currency. Romanian-born French professor Florin Aftalion was kind enough to answer some of my questions regarding the euro crisis and the possible shrinking of the eurozone.

Author of The French Revolution: An Economic Interpretation (Cambridge University Press), Mr. Aftalion is Professor of Finance at ESSEC (L’École supérieure des sciences économiques et commerciales), and has taught finance at New York, Northwestern and Tel-Aviv Universities.

Q: In an article published in May this year, “Let’s Save the Furniture”, you have advanced the solution of saving the euro by suspending countries like Greece, Portugal or Italy from membership in the eurozone. Why do you think that both southern European countries and the eurozone’s core countries, France and Germany, would benefit from adopting such a solution?

Prof. Florin Aftalion: – Given that with insufficient growth its debt can only inflate, whatever “help” Greece gets, at the end of the day it will have to leave the euro, restructure its debt and devalue its currency. This being the inevitable outcome, it would be less costly for everyone concerned to have it happen sooner rather than later.

Q: The qualifying criteria for membership, as outlined at Maastricht, have been ignored when countries like Italy or Greece were admitted in the euro-club. Italy’s public debt, for example, was from the start far above 60 percent of GDP, and apparently so was Greece’s.

Was this a case of sound economics being overridden by political considerations?

F.A: – Remember that the whole “single currency” project was essentially political. When, in 1998, it came to be decided which countries were ready to join the euro, if I remember well, only Finland should have been admitted. All the other countries used creative accounting in order to satisfy the Maastricht criteria. When even that wasn’t enough to qualify a country, it became sufficient for that country to have criteria tending towards the Maastricht norms.

However, in 1998 the case of Greece was beyond any possible compromise and this country was allowed to join the euro only in 2001. It is not that its economic situation had changed radically in the meantime, but more “sophisticated” accounting techniques have been used. Everybody should have known that Greece was cheating.

Q: Forking out hundreds of billions of euros in order to try to avoid the risk of country default for Greece and possibly Ireland, Portugal and Italy, seems like a losing strategy. For how long do you think EU politicians can prolong the moral hazard situation that is touching a raw nerve with German, Dutch or Finnish taxpayers?

F.A.: – Two outcomes are possible. Either Greece decides to leave the euro (and at the same time restructures its debt and devalues its new currency) because it doesn’t get all the “help” necessary for remaining solvent, or Germany and the other “Nordic” countries decide to restrict the euro zone to solvent economies like their own.

Q: In the long run, do you believe that a truly solid European monetary union could be viable in the absence of some form of fiscal policy convergence among member countries?

F.A.: – Even financial centralization wouldn’t be enough to keep the eurozone together. That’s because it wouldn’t solve the problems of inflation differentials and heterogeneous labor legislations (among other problems).

Q: According to professor Hans-Werner Sinn of Munich University, the interest rate convergence which followed the introduction of the euro has saved Italy some 6 percent of its GDP for the last decade, owing to reduced interest payments on the country’s public debt. It was calculated that if the windfall had been used to pay Italy’s national debt, this would have been reduced by about two thirds by now. In your opinion, who is responsible for not enforcing the fiscal discipline among the eurozone member countries?

F.A.: – At the time nobody seemed to care about enforcing the Maastricht criteria. France and Germany for instance ran “excessive deficits”, didn’t pay any penalties and nobody objected.

Q: Coming back to your May article, you have decried the fact that the politicians of the day at the time the euro was introduced have ignored the warnings of many economists who considered the initial group of countries as too heterogeneous to make the common currency be viable in the long run.

In your experience on both continents, how big a challenge is it for economists to contribute constructively in shaping policy, given that many politicians seem to misunderstand macroeconomic theory ?

F.A.: – Politicians use political means in order to attain political objectives. Given that economists never agree among themselves, politicians will always find some professor who will approve their positions and claim against all evidence that the euro zone is an optimal currency area.

Uncertainty Plagues the Eurozone

 September 9, 2011

Major trouble, we learn from the Chinese, can be likened to a tunnel we have to go through until we reach the other side. It is hard to say whether the sovereign debt crisis that hit the eurozone two years ago is about to be dealt with more decisively this fall. To be sure, a few austerity packages and hundreds of billions of euros later, Greece’s public debt is as high as at the beginning of the crisis. Even more alarming, the size of Italy’s public debt has started to worry the international markets in August, and the United States has been close to defaulting on its 14,000 billion dollar debt, losing its coveted AAA credit rating.

There are a few glimmers of hope, if not as yet light at the end of the tunnel. The new IMF chief, Christine Lagarde has strongly urged western governments to soften austerity measures and to adopt pro-growth policies instead. On the other side of the Atlantic, Warren Buffett has publicly called on his fellow billionaires to accept a 50 % tax rate in order to help reduce America’s debt. In France, sixteen prominent billionaires have published a manifesto stating their agreement with the introduction of a temporarily higher tax rate for the rich – a call supported by many leading French industrialists. The Italian, Hungarian and even Romanian parliaments – believe it or not – are considering introducing a special tax payable by those with incomes of 25,000 euros or more (Hungary) or of 90,000 euros or more per annum (Italy). For now, however, the Italian government has quickly withdrawn its proposal, while the Romanian 1 percent “solidarity tax” (a rather ridiculously low rate, considering that for the past twenty years the country’s “business” elite has achieved this status by pillaging Romanian banks and enterprises and by systematically siphoning off funds from the national budget) still needs debating…

At the EU’s periphery, austerity is slowly but surely choking off growth, in both the UK and Greece. Undaunted, the British government wishes to buck the trend and reduce the 50 % top tax rate for the rich, in spite of popular discontent which has erupted beyond expectations in August. Greece has recorded a second year of negative growth, but again, any talk of imposing extra taxes on the rich is still taboo.

Economists and bankers worldwide are hotly debating the euro’s future. Scenarios on the table range from an imminent implosion (Roubini, Alan Greenspan), to a possible shrinking of the eurozone (Kenneth Rogoff, Florin Aftalion) which would leave some of the Mediterranean countries – unable to reduce their public debt – out. American historian Harold James strikes a more optimistic note, pointing out that over the past two years the exchange rate of the euro has held steady despite the turmoil around it. Ironically, the most affected currencies have been the Swiss franc, the Australian dollar and the Japanese yen.

The eurobond issue seems dead and buried after the German Constitutional Court decision handed down on September 7, and the fiscal policies’ convergence seems to be in. At this point in time it is far from clear, however, whether the light at the end of the eurozone tunnel is within reach. We will probably find out by the middle of next year. (sources: Reuters, Le Monde, Deutsche Welle, La Vanguardia, Courrier International, Project Syndicate, The Economist).