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).

A Beacon of Islamic Democracy

 June 15, 2011

When it comes to geopolitics, few major shifts are more important than the emergence of an Islamic democracy in Turkey. Long resisted by the Turkish military and its western allies, the accession to power of Erdogan’s AKP party in 2002 has provoked major changes for the better in Turkey’s economic performance, institutional architecture and foreign policy orientations.

For the first time since 1946 – the date a democracy of sorts was inaugurated – a political party has succeeded in securing a third consecutive mandate, bringing much-needed political stability to a crisis-prone Turkey. As a result of the June 12 elections, Erdogan’s party has obtained a solid 49.9 percent of the votes. The electoral score reflects not only the recognition of the government’s achievements in social and economic terms, but is interpreted by many as a mandate for further reforming Turkey’s outdated 1982 constitution.

Back in the ’90’s, I was unfortunately alone in publicly supporting the Turkish Islamic politicians in their quest to form a government. In the wake of the Iranian revolution, most western specialists feared that such an occurrence would shift Turkey’s allegiance from NATO to the Iranian camp, which currently enlists countries such as Lebanon. Turkey’s evolution in the past decade proves, however, that an authentic Islamic democracy is both possible and potentially beneficial. For the first time in decades, countries like Greece or Armenia have nothing to fear from their militarily powerful neighbour, whose foreign minister Ahmed Davutoglu inaugurated a “zero problems” neighbourhood policy.

Today, when the Arab revolutions are in full swing, it is the Turkish, and not the Iranian model, which has won the hearts and minds of many Arab reformers, from Egypt to Syria and beyond. In hindsight, it is worth pondering what would have been the potential consequences of thwarting Turkey’s Islamic political project again in 2002. In the current circumstances, however, the new Turkish foreign policy agenda and the projection of its soft power across the Middle East have so far succeeded in preventing the Arab world’s slide into despair and anti-western religious fundamentalism. (sources: Zaman, The Guardian, The Economist, EVZ)

The E-G8 Deauville Summit

 May 31, 2011

As a regular user of internet services as well as a content provider, I was very interested in last week’s e-G8 summit. The idea of bringing together the chieftains of the internet industry and the world’s most powerful political leaders seems a step in the right direction. The internet as a platform and applications such as social media have an awesome power to help people network,educate themselves and even promote major political change, as the unfolding events in the Arab world illustrate. As always, however, along with great power comes great responsibility.

If during the ’90’s hopes of a new frontier in business development via e-commerce have somewhat evaporated in the wake of the dot com bubble, academic research, political awareness or activism and some areas of the mass-media have benefited enormously from the IT revolution.

This is not to say that all is well in the virtual world. The relative absence of adequate regulation protecting personal data and the confidentiality of communications / business transactions is sapping users’ confidence. The fact that executives of internet companies resist the introduction of minimal norms and regulations governing further development of services proves that neoliberalism is still affecting the mentality of many – albeit not all – in the business community. J.A. Schumpeter, the noted Harvard economist otherwise known for his professional admiration of American corporate achievements, was nevertheless in favour of the introduction of laws and regulations governing innovations and business development in general. To make his point, he used an analogy from the car industry, demonstrating that automobiles have been able to reach ever-increasing speeds only after being equipped with adequate brakes and safety features, which had to be developed first.

As matters now stand, however, intellectual property rights are trampled upon by “content farms”, children are exposed to pornography, and governments, from the US on down, can unlawfully obtain data from personal emails and have access to confidential files on a regular basis. As a consequence, the cyber world looks more as if it were governed by the laws of the jungle than those of civilised states protecting their citizens from harm or legal abuse.

One issue that has not been discussed so far at e-G8 is the hegemonic position achieved by the United States due to its status as the global communications hub. In the long run this has to be addressed in a way that could relieve the national security concerns of European, as well as Asian governments. As the recent financial crisis has shown, America’s position as the centre of both global finance and global communications by no means guarantees the integrity and smooth functioning of the two systems, on the contrary.

The EU’s political leadership also has to investigate why the invention of the internet by local specialists was not followed by a development of applications for it. Lack of technological savvy is surely not one of the reasons. It’s a sad spectacle to witness the fact that even the most mundane applications such as operating systems for PC’s and leading edge word processors, not to mention search engines or efficient email services come from the United States. Instead of endlessly dragging Microsoft through the European courts, it might prove a better idea to provide financial and tax incentives to interested European e-entrepreneurs or existing IT corporations to develop home-grown IT products for the 500-million strong European market.

From an international relations perspective, “the real problems of the post-cold war world would not be challenges for hegemony, but the new challenges of transnational interdependence” (Joseph Nye Jr, The Changing Nature of World Power). The political leaders of the G8 proved that they are aware of this fact. It is now up to the executives of the internet industry to grasp it and live up to their many responsibilities. (sources: Dow Jones newswires, WSJ, France24)

Saving the UN from Slaughter

 April 1, 2011

UN Resolution no.1973 authorising the humanitarian intervention in Libya could rightly be considered as one of the Security Council’s most important decisions to date. It came at a crucial moment in the multilateral organisation’s history, when the UN’s very existence was threatened by US unilateralism, as advocated by a cohort of American IR experts led by Anne Marie Slaughter, former director of strategy and planning within the US State Department.

The Slaughter offensive against the UN reached its peak in 2008 with the launch of the Princeton Project. Its aim was to replace the UN with a tamer organisation, more pliable to US foreign policy objectives, namely the Concert of Democracies. The latter was supposed to authorise US initiatives, including the use of force, in a manner which best suited the US’ hegemonic agenda.

As the Libyan conflict erupted, alas, Ms Slaughter no longer worked for the State Department. Undaunted, she opened a Twitter account and tried to help Mrs Clinton, her former boss, garner worldwide grass roots support in favour of a unilateral NATO intervention against Gaddafi.

Realising the danger the UN was facing, France and Great Britain asked the Security Council to authorise a humanitarian intervention in Libya. Russia and China, traditionally committed to multilateralism and to solving international crises within the UN framework, have abstained from the vote, thus paving the way for the adoption of resolution 1973.

This latest triumph of multilateralism over US unilateralism is, however, only part of the story. The Arab uprisings have helped focus the attention of Mrs Clinton and her team away from South East Asia. The State Department’s diplomatic drive in Asia last fall, aimed at inaugurating a containment policy directed against China, has now all but fizzled out. One of the collateral victims of that policy has been key Clinton ally and fellow China hawk Seiji Maehara, the Japanese foreign minister, who resigned on March 6. He leaves behind a legacy of dramatically increased Sino-Japanese tensions, which have brought bilateral relations close to boiling point some three months ago.

The UN has proved its usefulness in a crisis by authorising the humanitarian intervention in Libya quickly. The situation on the ground in Libya, however, is far less promising, as the rebels lack military training and coordination, whilst the allied bombings have so far failed to impress Gaddafi.

NATO: hunting mozzies with the cannon

 March 26, 2011

Since the adoption of the Lisbon Treaty, the European Union is the only global actor which has enshrined in its constitution the obligation of member countries to abide by United Nations norms and resolutions, affirming in no uncertain terms the Union’s commitment to multilateralism.

After the US intervention in Iraq, the EU adopted the European Security Strategy (ESS) in 2003, which has among its objectives the promotion of security in the Union’s “neighbourhood” to the east and to the south. The same document identifies five key threats to security, one of which is state failure, as is currently the case in Libya.

Even if its External Action Service has been slow to take centre stage this spring, the EU has a military architecture of its own, which includes COPS (Political and Security Committee – a veritable “operations centre” of the Union in case of conflict); a military committee made up of chiefs of staff of individual member countries (CMUE); as well as the Union’s own military command, headed by a four-star general. The latter coordinates a 100,000-strong FRR (Rapid Action Force / Force de Réaction Rapide) and includes 400 fighter jets and 100 warships. Moreover, Article 44 of the Lisbon Treaty allows the Commission and COPS the option of mandating a group of member countries to carry out military missions on behalf of the whole Union. This is what informally happened after the adoption of UN resolution 1973 concerning Libya, at least in the first week of the intervention, when France and Britain were in the lead.

Whilst the European humanitarian intervention in Libya would have been sufficient to guarantee the safety of civilians in Benghazi, NATO’s leadership is sure to only complicate matters. The US, as its leader, is already militarily involved in Afghanistan and Iraq. In 2003, it intervened in Baghdad unilaterally, without a UN mandate. The current US national security doctrine still maintains the Bush Jr. – era commitment to unilateral action, which is a worry in most capitals around the world. The presence of American troops in Saudi Arabia and of the US Navy in Bahrain does not make the US a selfless participant in the military action against Libya.

To be sure, NATO was designed as a military alliance against a much more powerful enemy, the Soviet Union, and not for fighting in a Mediterranean country of only 6 million inhabitants. Any military strategist would easily agree that you don’t need a cannon to hunt mosquitoes. By insisting on taking command of the operations, Washington and some of its European allies are stunting the evolution of the European Defence and Security policy. Moreover, the whole Western bloc now stands open to accusations of undertaking military operations not for assisting Libya, but to further its strategic objectives and interests in the region.

The European political leaders who gave in to the US’ relentless campaign to hand over the command of operations in Libya to NATO have thus hurt European interests, as well as those of countries in the Mediterranean region. This will become apparent in the weeks to come, as NATO was not designed for conflicts in this region and for small-calibre enemies like Gaddafi. In actual fact, it seems the American insistence to put NATO in charge was not motivated primarily by concern for the Libyan people, but by a willingness to prevent Europeans from operating an autonomous foreign and security policy in their own neighbourhood. If anything, this episode highlights NATO’s obsolescence, as it struggles to find an adequate role for itself in the 21st century.

America's Arab Policy Quagmire

 January 31, 2011

At the start of his presidency, Barack Obama spoke about his administration’s intentions to mend fences with the Islamic world. In hindsight, we might be forgiven to think that he meant Kenya’s Islamic community and not the Arab one. The plight of Arabs living in US-backed authoritarian states does not seem to get the same kind of attention at the White House as Indonesian Muslims, for example. It is, unfortunately, in the Arab world that the United States has made its biggest foreign policy errors and blunders outside of Latin America.

The desperate protesters taking to the streets of Cairo or Sana hope to force out of office two presidents viewed as pivotal to US securitary concerns in the Middle East. They have nothing to lose : their leaders are corrupt and inefficient, their freedoms do not really exist except on paper and their countries have failed a long time ago to care for their interests, instead of those of the US and its Israeli allies.

The US foreign policy in the Middle East has revolved around two objectives. The first is ensuring America’s oil supplies, hence the US military presence and support for the kingdom of Saudi Arabia. The second one is supporting the state of Israel and guaranteeing its existence against incredible geopolitical odds, hence the close relationship established between the US and Egypt. Since September 11, 2001, a third US objective has been that of fighting Islamic extremism, which has become a convenient excuse for propping up Arab political dinosaurs in Egypt, Yemen or elsewhere in the Middle East. The way these objectives have been put into practice, however, has come at the expense of ordinary Arabs, which these days see themselves deprived of jobs, basic foodstuffs, human rights or a future for their children. It was, therefore, only a matter of time until the militarised and securitised regimes friendly to the United States or Israel came to an end.

The European Union countries, on the other hand, have been trying to alleviate the hardships of the Arabs. Millions of young Arabs have established their second home in France, Italy, Spain or even Germany. Their hard currency remittances, the European investments in Maghreb or Palestine or outright European financial assistance have mitigated the hardships inflicted on the Arabs by insensitive US foreign policies. Not anymore. Since the outbreak of the financial crisis, EU nations have been forced to adopt unpopular austerity measures, fight illegal immigration and cut back on foreign aid packages. Accordingly, the worsening global economic situation has laid bare the incapacity of most US-backed Arab governments to provide for their citizens or to treat them in a humane and lawful fashion.

The authoritarian leaders currently being contested by protesters in the streets have been given all the US military assistance required to keep them in power for decades. In Mubarak’s case, such assistance amounts to no less than 1.5 billion dollars per annum. Ali Saleh of Yemen gets 250 million dollars for his army and security apparatus. Meanwhile, poverty-stricken Egyptians or Yemenites find it hard to feed themselves or their families, and in some cases they do not have a decent supply of water.

This Jeffersonian US foreign policy has lately been sugar-coated with some misleading Wilsonian trappings, but its essence has remained the same for a long time. Even among the US foreign policy elite, Arabs are thought to be uninterested in democratic values, which explains its support for authoritarian Arab rulers.

Fortunately, as the example of Turkey proves, Islamic societies are not incompatible with democracy. Slowly but surely, Arab intellectuals have come to realise that electing their political leaders freely and removing them when they fail to provide adequate leadership for their countries is a better alternative to the current political arrangements.

American political leaders are quick to criticise the autocratic regimes of Russia or China, but they are slow in conceding that the US’s Arab foreign policy is now in shambles. Nor does their protégé Mubarak get his countrymen’s message straight: his solution to the protesters’ call to resign was to appoint his chief spymaster, Omar Suleyman, as vice-president and change the government. These window-dressing measures continue to be contested in the streets by ordinary Egyptians and leading intellectuals alike. To be sure, the appointment of Suleyman, who is the Mubarak regimes’ interface with the US and Israel, is an indication of how strong the ties between Washington and the octogenarian president really are.

As much as he would like to, President Obama cannot invoke enlightened Wilsonian ideals and support hugely unpopular Arab regimes simultaneously. If anything, he could turn to another fellow Nobel prize winner, Mohamed El Baradei, for inspiration, who is living proof that not all the prize’s recipients are undeserving.