The euro: tough sanctions not the answer

 October 24, 2010

The recent Merkel-Sarkozy compromise regarding penalties against EU states which ring up big budget deficits has been attacked by German coalition partners, experts and the press for being too mild on offenders. In an article published on Europe’s World (“Designing a new institutional architecture for the eurozone”), Mr. Jurgen Stark, executive board member of the ECB, had endorsed strong punitive measures against those who break the Growth and Stability Pact convergence criteria. He is not the only expert to endorse strong automatic sanctions for offending states. But how wise, for example, would it be politically to suspend the voting rights of states for finding themselves in financial difficulty ?

Before the euro’s introduction, its supporters had to contend with strong opposition to European monetary union not only from the US, the UK and Japan, but also from Germany. Germans were loath to renounce their beloved deutschemark and German economists even challenged the right of Germany to adopt the EMU in court.

Now that the euro has proven its usefulness and value, a small group of countries within the EU, which includes Germany, Finland and the Netherlands, wants to use strongarm tactics against weaker monetary union partners in order to rein in their budget deficits and reduce their public debt load. Alas, not all 16 members of the monetary union have trade surpluses, most even have to run current account deficits in order to import German goods. Requiring financial rectitude and dispensing punishments to those who do not comply , highlight German insensitivity to the problems experienced by the economies of EU countries other than their own.

This is not to say that EU members should not behave in a financially responsible manner, be transparent in their finances and accountable in their actions. I am simply saying that clobbering them for experiencing financial difficulties will not entice others to join the euro-club. Making the rules too rigid or adopting unreasonable sanctions could see the euro remain the currency of a small group of countries, regardless of how beneficial a common currency is.

The 3 % budget deficit target was agreed upon at Maastricht when the European economies were booming. Its main proponents were representatives of countries whose stringent fiscal management is the exception within the EU, and not the rule. From the start, however, the 3 % target was an over-optimistic benchmark that did not factor in any potential for economic turmoil down the road. Before the launch of the monetary union, I had sensed that the 3 % deficit target was going to be a major problem once the boomtime would be over, and I wrote so at a conference on the EMU in 1997, advocating for a flexible budget deficit target. This is because some EU countries could indeed achieve balanced budgets, while others – because their economy is weaker – chronically run a budget deficit. Here, a compromise, not a German-type diktat is needed in establishing a deficit target of, say, some 5 % of GDP, making the European Union accommodating to all, not only to a few.

To complement that, an IMF-type institutional arrangement should be arrived at within the EU, which would combine incentives and financial assistance with stringent reporting rules and measures aimed at mandating member-states to behave in a fiscally responsible manner. The sanctions in case of non-compliance, to be sure, could not include half-evicting member states, by suspending their voting rights. Going down that road, the Union would run the risk of remaining with only one member – Germany…

Realistic deficit and public debt targets, as well as a carrot-and-stick approach to enforcing fiscal discipline across the Union are what we actually need. What we do not need are tight-fisted central bankers and closet disciplinarians who take their own countries’ exceptional budgetary situation as a yardstick for us all.

India's Energy Diplomacy

 October 15, 2010

If compared to China, India’s energy strategy is far less successful to date. Although it closely matches China’s (investing in oil assets worldwide, developing oil & gas fields in Iran, joining transnational pipeline projects, signing bilateral supply contracts or developing special relationships with countries such as Saudi Arabia), India’s efforts to diversify its energy supplies away from coal run into strong opposition from the United States and major logistical problems.

India’s energy needs

According to the researchers of the Council on Foreign Relations and India’s Planning Commission, the country faces formidable hurdles in meeting its current and future energy needs, if it wants to maintain its current 8 percent per year economic growth rate.

Over the next 25 years, the Indian government’s priority is the eradication of poverty. To get there, however, India will need to keep growing by 8 percent a year for the full quarter-century. Indian officials, however, fear that this noble goal is going to generate huge energy shortages, as Indiahas been less suceessful in securing energy supplies from its neighbours or from Central Asia than China has been.

The troubles of the energy sector in India are compounded by state control over the import, production and distribution of oil and gas products, which are coordinated by 4 different ministries. More than half of India’s electricity is generated by burning poor-quality domestic coal, which is expected to run out in about 40 years. Furthermore, a third of India’s oil is imported from countries the US is at odds with, such as Sudan, Syria or Iran, whilst the gas is imported mainly from Iran, Bangladesh or Burma. India’s dependence on imported oil, which currently stands at 60 percent, is expected to grow to 90 percent by 2030. That lifts energy diplomacy to the top of India’s agenda, when it comes to dealing with countries from Central Asia, Middle East, Africa or Latin America.

India’s pipeline projects

To date, India has tried to emulate China and build gas pipelines that are needed by its electricity generation sector in order to diversify away from coal. Its two projects are the IPI (Iran-Pakistan-India) pipeline, also dubbed “the peace pipeline”, and the TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline.

First discussions concerning the IPI project started during the Clinton administration in 1993, when the so-called moderates where apparently coming to power in Iran. It involved the construction of a 2,700-km pipeline from the South Pars field in Iran, through Pakistan to India’s border, at an estimated cost of some 8 billion dollars. Beside international sanctions and US opposition which affected the project, the Iranian and Indian officials could not lock in the price for the gas to be transported, and could not agree at which border the gas supplies were going to be paid for.

Whilst the Indians insisted they were only going to pay for the gas when it reached the India-Pakistan border, the Iranians asked to be paid when the gas reached the Iran-Pakistan border. As the projected pipeline was due to pass through Beluchistan (Pakistan), home to some of the most radical Islamic tribes, India wanted to make the Pakistani government responsible for the gas’s transit through its territory, in exchange for the $1.2 per mmBtu in transit fees. Thus, practical difficulties and US opposition to the project determined India to recently abandon IPI, of which only the Iran-Pakistan stretch, or about 1,100 km, is going ahead with construction.

The failure of the IPI project has recently determined India to enter fresh negotiations with the Teheran regime for the construction of an undersea gas pipeline, which could cost 9 billion dollars. This would have the advantage of bypassing Pakistan and doing away with transit fees. Again, the project’s chances of success are slight, given the US’ opposition to investments in developing Iran’s energy sector.

In 2008, India initiated the TAPI project to bring gas from Dauletabad (Turkmenistan) to the India-Pakistan border, with a construction price tag of 3.5 billion dollars. This project is favoured by the US, but is quietly opposed by Russia, which needs the Turkmen gas for its European customers.

India, the 5th largest consumer of energy in the world, desperately needs to exponentially increase its imports of oil and gas. Consequently, it has taken an option to develop, at an estimated cost of 8 billion dollars, the Farzad-B area of the Pars gas field at the Persian Gulf, again running into some opposition from the US. Already, the Iran Sanctions Act (ISA) which slaps fines on foreign companies that invest in Iran’s energy sector, has been invoked by American officials against Indian companies. As Indian companies are the biggest foreign subcontractors of IT services to US corporations, India stands to lose vital data processing business, as well as foreign currency earnings. Meanwhile, much better capitalised Chinese state oil and gas companies are aggressively investing some 20 billion dollars in the development of the South Pars gas block.

For the time being, India is being encouraged by the US to convert its gas in LNG form and transport it by tanker. It is also currently being advised by the US to develop oil and gas fields recently found on its own territory and to invest in shale deposits in the US. With so many logistical restrictions and the threat of US sanctions looming, India’s energy diplomacy agenda is becoming ever more complex. (sources: Times of India, FNA, Iran Daily, Heritage Foundation Brief, Council on Foreign Relations Backgrounder, Hindustan Times, Financial Express, Asia Sentinel)

Disputed borders: a tripwire for war

 October 14, 2010

Whilst the world’s attention was recently focused on a relatively minor incident involving disputed islands in the South China Sea, the 4,000-km disputed border between India and China is quietly being beefed up militarily by both sides. In the words of M. Taylor Fravel, borders specialist with MIT, the border in question is “the most continuously negotiated border in modern history”.

Tensions generated by the Indian-Chinese border, which in 1962 erupted into full-fledged war between the two countries, date back to the times of the British Raj. Indeed, in 1914 the border was arbitrarily established by the simple drawing of a line on a map by Sir Robert MacMahon. Following this, in 1914 the British, on behalf of the Indians, signed the notorious Simla accord with the Tibetan government, which had briefly declared independence from China. Republican China had refused to take part in the talks and never recognised the loss of southern Tibet – a territory the size of Austria that goes these days by the name of Arunchal Pradesh – to the British colony, India.

After independence from Britain, India split along confessional lines, with Pakistan and Banglandesh appearing on the map. To date, India went to war in 1965 with Pakistan over Kashmir in the north, and with China over Aksai-Chin (a territory the size of Switzerland occupied by Chinese troops in 1962), as well as over Arunchal Pradesh (a Buddhist territory rich in forests and agricultural land).

The inconclusive conflict of 1962 ended with the two armies retreating behind the Line of Actual Control (LAC) which roughly follows the infamous MacMahon line. Since then, there have been incursions and so-called border violations in their thousands, as the old MacMahon line allowed for a 10 km “give-or-take” corridor the length of the entire border.

Relations between the two superpowers remained largely frozen until the eighties when both Deng Xiaoping and the Indian leadership realised that the two countries have to finalise their border disputes once and for all. Thus in 1993, the two sides agreed to adopt the CBM (Confidence Building Measures) agreement, which provided for non-aggression, notification of large troop movements and the establishment of a 10 km no-fly zone for military aircraft.

Negotiations between China and India continued, with the signing in 2005 of a “strategic partnership for peace and prosperity” by Wen Jiabao and Indian premier M. Sinh. The partnership is aimed at ensuring that border disputes are solved amiably and would not degenerate into a second border war between the two countries.

Latest developments

The neo-conservative Bush Jr. administration in Washington decided to befriend India and use it to contain China’s rise. It agreed to overlook India’s violation of the nuclear non-proliferation Treaty and the US replaced India’s traditional ally, the defunct Soviet Union, as the country’s new strategic partner. According to Washington Times editorialists, India started to be groomed by the State Department as a “new Australia” in Asia, in spite of the Indian political leadership’s deep suspicion of the US – a 50-year ally of Pakistan.

In 2007, the US military’s involvement with India culminated with joint naval exercises in the Bay of Bengal, in which Singapore, the Australian and Japanese navies also took part. In 2009, India acquired 3.5 billion dollars’ worth of arms from the US, greatly alarming China.

Beijing describes India’s new foreign policy as based on the principle of “befriending the far and attacking the near”. Since the 1980’s the Dalai Lama – the old CIA protege – was reactivated and encouraged to tour world capitals in support of a Tibet cause, as the 1914 border accord had been signed with a de facto Tibetan state that had never been recognised internationally and disappeared after a few years.

The Indian public is continuously bombarded with news about so-called Chinese violations of Indian borders and of a Chinese military build-up of the border zones. In fact, as the same Taylor Fravel of MIT points out, China has successfully concluded permanent border agreements with all its neighbours except India and Bhutan. Its upgrade of military facilities does not target India in particular, as it encompasses the full length of China’s borders.

The anti-Chinese rhetoric has recently culminated with an article published by Baharat Verma, editor of the Indian Defense Review, in which he predicted that by 2012 China will attack India over the disputed territories. The scare tactics might, however, have been employed by the defence establishment in order to obtain the funds needed to renew its antiquated equipment. Thus, on October 7, 2010, India has signed a pre-contract agreement with Russia for the supply of between 250 and 300 latest generation Sukhoi fighter jets at an estimated cost of some 30 billion dollars, or 100 million USD per jet. Some fighter jets were already dispatched close to Arunchal Pradesh and 100,000 mountain troops were also sent to the area.

Meanwhile, Indian military officials and foreign policy pundits are claiming that China has replaced Pakistan as India’s biggest threat. Tensions, however, are mitigated by the fact that bilateral trade between the two countries is booming. If in 1990 this was worth 270 million dollars, the figure has reached around 60 billion dollars in 2009-2010. Clearly, India’s politicians and business establishment have a strong vested interest in normalising relations with China, whose economy is 4 times larger than India’s and is growing at a faster pace.

The Obama administration has fortunately abandoned the Bush administration’s reliance on India as a centerpiece of the US’ geostrategic realignment in Asia. President Obama is on record for saying that China and not India is the US’ main partner in Asia, provided the country abides by its self-imposed “peaceful rise” strategy.

India and China, however, still have the largest unsolved border issue in the world, with the potential to degenerate into full-fledged war at any time. If one takes into account the fact that the two countries are the largest and most populous in Asia and that they are both economically strong and nuclearly armed, one could more easily realise why the resolution of the issue cannot be delayed much longer without enormous risks for peace in Asia. (sources: Hindustan Times, Pakistan Daily, Arunchal News, People’s Daily, WSJ, Newsweek, The Australian, Washington Times, Japan Times)

China's Investment Strategy in Central Asia

 

October 5, 2010

Over the past few years, China has become a major player in Central Asia’s oil & gas and in Afghanistan’s mining sector. Its investments in the region are an important part of its worldwide FDI strategy.

To date, China’s biggest purchases of gas come from Turkmenistan. In 2009 the Chinese president inaugurated a gas pipeline that stretches for 4,000 miles from Turkmenistan via Kazakhstan and Uzbekistan to China. 30 billion cubic metres per year will be supplied by Turkmenistan, while 10 billion cubic metres will come from Kazakhstan’s gas fields. The vast amount of gas will supply some 50 percent of China’s gas needs, estimated at over 80 billion cubic metres per annum. The Chinese will pay USD 195/1,000 cubic metres over 30 years, thus bringing their country into competition with Russia, as well as the EU with its Nabucco pipeline project. To get to the Turkmen gas the Chinese paid around 3 billion USD necessary for the construction of the pipeline and the development of the fields.

In Kazakhstan, China National Petrol Corporation together with Kazmunay Gas inaugurated in 2006 a 2,200 km oil pipeline between Atyrau (Kazakhstan) and Xinjiang in China – the first such pipeline to connect China to the Central Asian oil & gas fields. In 2009 CNPC took a 50 percent stake in Kazakhstan’s largest oil & gas company, in exchange for a USD 5 billion loan to Kazakhstan.

This year Uzbekistan’s state company UzbekNeftegaz officially announced that it entered discussions with CNPC to supply China with 10 billion cubic metres of gas per annum, on top of the 40 billion cubic metres supplied jointly by Kazakhstan and Turkmenistan.

In Afghanistan, MCC of CHina has signed a 3,5 billion USD deal with the Afghan government to exploit Aynak’s estimated 240 million-ton copper deposits. To seal the deal, China has offered to build a railroad and provide the infrastructure needed, the project being the biggest FDI to date in Afghanistan. Chinese negotiators outfoxed their American and Indian competitors and worked – as they did elsewhere in Central Asia – closely with their Russian counterparts in order to finalise the deal. The Afghan government will also receive hundreds of millions of dollars every year in royalty fees after the mine becomes operational.

According to American, Australian and Canadian geologists, Afghanistan is the “Saudi Arabia of lithium” and also has significant deposits of gold, copper, cobalt and iron, which could not be exploited until now because of 50 years of continuous warfare that had ripped through the country. In the quest for Afghanistan’s mineral deposits, China is favoured to develop most of them, as it did not intervene militarily there and has Pakistan on its side. The latter in turn could help the Chinese to be shielded from attacks by the Taliban and even, if the political environment changes, to win their favour.

By contrast, the US – which spent a reported 940 billion USD over the past 8 years in Afghanistan – and their Indian ally are not likely to capitalise on the development of Afghanistan’s mining sector. (sources: Asian Times, Reuters, Xinhua, The Guardian, Far Eastern Economic Review, WSJ, Daily Finance, NYT)

Elections with geopolitical implications

 October 4, 2010

Last Saturday and Sunday the citizens of two small European countries, Latvia and Bosnia, went to the polls to elect new parliamentary and presidential leaders, respectively. Both countries are experiencing severe ethnic tensions that could, if unchecked, drag into the fray larger neighbouring federations, such as the EU or Russia.

Parliamentary elections in Latvia

Latvians went to the polls to elect 100 deputies for the country’s Saeima. Affected by the economic crisis, Latvia is struggling with 20 percent unemployment and a sharp decline in economic activity. The Latvian society is divided among ethnic lines between the Latvian majority and the Russian minority.

Although voters have returned the centre-right coalition of the incumbent prime minister to power, the leftist pro-Russia Harmony Center party has gained 30 seats in the new parliament, up from 18 seats, and 25 percent of the votes. This is good news, as the party’s leaders had vowed to reach out across ethnic divides to ordinary Latvians, more interested in solving their economic woes than in any nationalistic feuds. The election’s outcome will thus benefit Latvians as well as the country’s relationship with its often-demonised neighbour Russia.

All too often in the past, Baltic countries like Estonia and Latvia have been used as a tug-of-war with Russia, by fuelling ethnic tensions there. Estonian nationalist politicians, for example, did all they could in 2008-2009 to bring about a deterioration of diplomatic relations between the EU and Russia.

Election results in Bosnia

Disgruntled voters in Bosnia have sent two moderate leaders to the collective presidency of the country. Croats have elected Zeliko Komsic and Muslims replaced their incumbent president with Bakir Izetbegovic, who declared during the campaign that he is interested in reaching out to the country’s other ethnic groups.

The exception is represented by the Serbs from Republika Srpska, who elected Nebojsa Radmanovic – a secessionist leader – as their president. Nebojsa is quoted as saying that if Serbs could not get a better deal from the current political arrangement, he would lead the tiny republic to secession from Muslim-Croat Bosnia.

Technically still a Western protectorate, Bosnia has so far failed to implement needed reforms after the signing of the Dayton agreement in 1995. The country is ridden with corruption, Bosnia being the poorest state entity to emerge from the ashes of the Yugoslav federation. The current federal agreement and three-partite, rotating presidency have pleased no-one, least of all the Serbs. Ethnic politicians still dominate Bosnian life, a fact that represents a further source of tension at the EU’s doorsteps. (sources: AFP, Reuters, LA Times, Baltic Times, Le Monde)

The onset of a social tsunami

 June 17, 2010

Most of us over forty remember how it all started. The first neoliberal victories won by Margaret Thatcher in Britain led to the near collapse of the British trade union movement. The victory against Soviet-style communism and the fall of the Berlin Wall have led to ten years of economic euphoria in the West, resulting from the opening up of the Central and Eastern European markets. Unexpectedly, neoliberalism’s main economic tenets came undone during the first decade of the new century.

By way of analogy, the current sovereign debt crisis in Europe could safely be regarded as neoliberalism’s very own Stalingrad. Even before the 2007 financial crisis, the flawed logic of supply-side economists started to produce negative social results. Yes, profits accumulated for a while, but these only to a handful. True, most products became cheaper as a result of moving entire industries to former Soviet countries or to China. Lower taxes did initially benefit consumers, but provoked a dearth of social services, investment in infrastructure, hospitals and schools. After thirty years of neoliberalism, most people find themselves poorer and their children less educated than generations of the previous fifty years.

According to neoliberal theorists, economic growth, lower taxes and free trade would eventually trickle down prosperity to all. Instead, they have given rise to an ‘investing class’ who used the profits accumulated in their accounts in unproductive, i.e. speculative ways. This led to a series of bubbles – the dot.com bubble, the Japanese real estate bubble, the US sub-prime bubble – that ultimately culminated in the global financial crisis, similar in proportion if not in outcome to the one in 1929.

The situation created after 2007 led to the counter-offensive of states against mindless speculative activities, deregulation of financial markets and neoliberal economic philosophy. The latter, had it been applied in full, would have led to the withering away of states altogether. In other words, what Marxists were dreaming of doing, neoliberal societies very nearly achieved.

The counter-offensive of political administrations against neoliberalism has shaken the very foundations of the Washington consensus. Increasingly, Western politicians, industrialists and trade union bosses are talking about the opportunity of adopting a new development model, the Beijing consensus, in which state-led investment for major projects is again the main engine of economic activity.

Not surprisingly, the investing class, its rating agencies and press have resorted to savaging the European Union’s southern flank, provoking huge financial losses to the Spanish, Greeks, Italians, Irish, and ultimately to France and Germany. In this protracted battle one could foresee the signs of a social tsunami in the making. The signs are everywhere, from Athens to Bucharest, from Germany to Spain. In the months and years to come, the protests will increase in intensity and are set to sweep away entire political structures built around neoliberal tenets.

To be sure, this is not an exercise in ball gazing, but the result of an extrapolation of observable tendencies, as J.A. Schumpeter would have put it. A few years from now, huge economic inequalities within societies would cease to be acceptable. Financial speculation and low taxes would become a thing of the past. Whilst foreseeable, the outcome is not going to be reached comfortably and without defeating entrenched and powerful financial interests together with their many helpers.

Author : Spotlight on Geopolitics
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English, External Relations  , neoliberalism

A Farewell to US Democracy

 January 23, 2010

It’s official : as of Thursday, January 21st 2010, US democracy as we all knew it has ceased to exist. In a highly controversial ruling, the US Supreme Court has done away with the ban on financial contributions by corporations in candidate elections. Thus, the American political system, already antiquated, will drift further away from those of its European counterparts. In contrast, most European countries grant equal media access to minority party candidates and severely limit donations to political parties. The decision, taken with 5 votes to 4, is seen to favour the Republicans, who were battered in the last presidential elections. It also puts to rest the bipartisan McCain-Feingold law of 2002 which tried to limit the influence of big money in federal campaigns. Considered by Russ Feingold “a terrible mistake“, the Court’s decision “has given corporate money a breathtaking new role in federal campaigns”. (source:IHT) Speaking on CBS on Sunday, John McCain has said that the movement he led to reform how campaigns are financed is now dead. Mindful not to yield too much power to American corporations, well-known for their predatory behaviour, US lawmakers had adopted the Sherman Antitrust Act in 1890 and in 1907 Congress voted the Tillman Act, prohibiting corporations from financing political campaigns. If they wanted things to move their way in Washington, corporate chieftains had to pay for the services of lobbyists. Not anymore : the Supreme Court’s decision paves the way for them to “buy” the services of senators and congressmen outright. The Supreme Court’s decision seems to lend weight to Leo Strauss’ neo-conservative theories according to which ultimate power in the USA rests with a “king”, a non-elected official who can overturn election results and demote presidents. These constitutional powers in the US are awarded to the Chief Justice of the Supreme Court. Leo Strauss believed that modernity is just a myth perpetrated by gullible intellectuals and that democracy does not really exist. He contended that even countries like the United States have the equivalent of a medieval ruling class, made up of barons and princelings of American industry. As what goes around comes around, the United States becomes in effect the mother of all banana republics – a land where corporations can look forward to dictating their will to political institutions too weak to resist their financial backers.

Author : Spotlight on Geopolitics
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English, External Relations  , USA