The EU's Austerity-induced Recession

 March 1, 2012

The eurozone’s unemployment rate has reached 10.7 percent in January, meaning 16.9 million people out of work, of which 5.5 million young people under 25. If we add to these figures the 2.7 million people unemployed in the UK as well as another few million jobless in the other EU member-states, we can understand why the European Union is now being viewed as the biggest recessionary threat to the world economy. Countries in the eurozone’s southern periphery, like Greece or Spain, are afflicted by 19.9 percent and 23.3 percent unemployment rates respectively. By contrast, Austria, Luxemburg and the Netherlands enjoy a jobless rate of 4 to 5.1 percent according to Eurostat. Even more alarming, the eurozone’s manufacturing sector has entered its seventh month of contraction, pointing to an EU-wide recession for 2012 and possibly beyond.

In denial about the economic consequences of their actions, the eurozone’s leaders will meet in Brussels this weekend for the signing of a new fiscal pact, whose stringent conditions are at the root of the current economic problems. Nobody that’s anybody in the economic profession still supports the view that the austerity measures – as implemented unwisely over the last two to three years – could improve the economy. Draconian austerity measures could only lead to negative growth, mass unemployment and a wave of unprecedented social unrest across Europe.

Aloof German politicians and bankers, however, are currently attacking the ECB for lowering interest rates and for providing fresh liquidities to the banks in order to spur economic activity, even as the German export engine itself is showing signs of sputtering.

Ideologically motivated national leaders from most other European countries are towing the austerity line and cutting expenses in health, education and essential social services to the bone, further depressing aggregate demand in their own countries.

Together, all these policies will in time provide the fuel for social revolutions, as stressed-out wage earners and the working poor can barely tolerate the harshness of the measures aimed at reducing private and public debt in eurozone countries. Meanwhile, labour union leaders have all but given up hope of making politicians gauge the gravity of the mega social crisis unfolding under our own eyes. One thing is certain, however. Brussels’ summitry is not expected to make a significant contribution to improving Europe’s growth prospects or to reducing unemployment anytime soon. (sources: The Guardian, Reuters, Deutsche Welle, Le Monde)

Serbia's Russian Bases Alternative

 February 18, 2012

It is a well-known geopolitical fact that from 1914 to this day, Serbia has received military support or security guarantees from Russia. The latest such support was in evidence during NATO’s intervention in Kosovo, when Russian troops were present in the province in order to make sure Serbian interests were being respected by the Western coalition.

Serbia’s deputy premier and Interior Minister Ivica Dacic has recently declared that if his country is not going to be recognised as an EU candidate-state in March, Serbia might be pushed into a closer alliance with Russia than it has been the case until now. That might involve the option of allowing the Russians to establish military bases in Serbia, a fact that could adversely affect the fragile geopolitical balance in the Western Balkans.

According to Professor Predrag Simic from Belgrade, Serbia has always been forced to perform a balancing act between the Western powers and Russia in order to preserve or promote its own national interest and geopolitical agenda. Whilst the possibility of having Russian military bases in Serbia does seem rather remote for now, EU officials should, however, be mindful of the fact that thwarting Serbia’s EU membership aspirations could ultimately lead to such an outcome.

To his credit, Dacic is a supporter of closer ties with both the US and Russia. He points out that Germany, too, enjoys a good working relationship with both powers, and that provided the US gave more consideration to Serbian interests in Kosovo, he sees no problem for Serbia in adopting a similar foreign policy approach. During his tenure as Interior Minister, Dacic has lifted visa requirements with Macedonia and Albania and has signed a number of cooperation agreements on police matters with most countries from the Western Balkans and beyond, based on his conviction that cooperation is the key to fighting organised crime. (sources: Deutsche Welle, www.setimes.com, www.tanjug.rs )

EU Foreign Policy Assessed

 February 7, 2012

Amid international media acclaim, the European Council on Foreign Relations has recently released the results of its innovative EU foreign policy research project, the 2012 European Foreign Policy Scorecard.

The ECFR’s researchers have assessed the EU’s foreign policy performance in 2011 in six major areas: the relationship with China, Russia, the US, Wider Europe (Western Balkans, the Eastern Neighbourhood and Turkey), crisis management handling and the EU’s support for multilateralism. The Scorecard proves that the EU’s influence as a global player has diminished significantly as a result of the mishandling of the sovereign debt crisis. With an average unemployment rate of some 10,5 percent, the EU’s soft power model has lost its lustre, the continent being currently viewed as the main source of economic instability in the world, instead of as an active participant in providing solutions to the current crisis.

Whilst in some areas the EU’s foreign policy initiatives have earned decent marks (relationship with the US, crisis management or participation within multilateral institutions), in some others (diplomatic relationship with China, Russia, Turkey or the Western Balkans) its performance was below average.

The authors have also highlighted in the report the EU’s slow and inadequate response to the 2011 Arab Awakening, as well as the fact that to this day the EU has failed to frame a functional and comprehensive Southern neighbourhood policy.

The EU’s foreign policy leaders have traditionally been France and the UK. Recently, however, Germany, Poland and Sweden have also positioned themselves in the lead, with the rest of the member-countries falling into the «slackers» category. A common, coordinated EU-wide foreign policy is yet to emerge, as a consequence of the continent’s obsession with its internal woes and the inability of its leading countries to adopt adequate pro-growth, pro-employment economic policies. More often than not, as Justin Vaisse, co-lead author of the Scorecard has noted, EU countries prefer to conduct foreign policies which reflect their national interest at the expense of the general interest of the Union. Not surprisingly, the EU’s influence as a multilateral, multi-national model has lost most of its appeal in Asia and Latin America alike. (sources: ECFR, Le Monde, Der Spiegel, NYT)

EU Decision-making: Going the Wrong Way About It

 

January 31, 2012

We’re heading towards a Soviet-style union run by a Politburo made up of national political leaders uninterested in consulting the European Parliament on important decisions affecting our lives.

Whilst in Brussels where the EU heads of government were busily hammering out measures aimed at solving the euro-crisis, Martin Schulz held his first speech as President of the European Parliament. He rightfully incriminated the cumbersome and un-democratic way EU political leaders make decisions bearing on the future of Europe’s almost half a billion citizens. To be sure, the EU is not a fully functioning union yet and the fiscal arrangements concluded on January 30th only serve to reinforce this.

As Martin Schulz has complained, the European Parliament is rarely consulted before a vital, Europe-wide decision is made. Indeed, it seems national leaders act as a veritable Soviet-style Politburo. The German chancellor, like Russia’s leaders had within the Soviet federation, is increasingly able to railroad the other national leaders into agreeing to policies that will ultimately bring about… the unravelling of this union, as well. We have been used to comparing Germany to the other exporting powerhouse, China. So why compare it to Russia now? To their credit, the Chinese are pouring tens of billions of dollars into infrastructure projects within their ASEAN neighbourhood every year, sometimes without even being asked. Moreover, they are buying hundreds of billions of dollars worth of US treasury bonds, only to keep their business partner afloat and able to buy Chinese goods. Would anyone see the Germans doing likewise ? Not unless they really had to, and then on condition they get to take over the fiscal management of the country in need of assistance.

Look no further than the adoption of the so-called «golden rule», as a panacea for solving the sovereign debt crisis and so much more (!). Unfortunately, however, most of the countries that were forced to adopt austerity measures aimed at balancing their budgets have been beset by huge social turmoil, du jamais-vu in post-war Europe. To the current leaders who met in Brussels on Monday, warnings constantly issued by Nobel prize laureates like Joseph Stiglitz or leading economists like Martin Feldstein seem to matter little, if at all. If the trend continues, I sincerely wonder who is going to be left with enough funds to buy German cars and German machine tools around here… As Christine Lagarde has courteously reminded her German hosts recently, for every surplus country like Germany, there have to be a number of deficit countries left, in order to absorb its exports. There’s simply no other way about it. This is why the «golden rule» can only have a boomerang effect on the German economy, but to people affected by political myopia, that, of course, is no valid reason to desist.

And what if the European Parliament, since the spring of 2011, was in favour of the introduction of eurobonds? Nobody has invited its representatives to have a say at the summits where such decisions are taken. Let’s face it: for complex issues, inter-governmentalism as a decision-making mechanism has proven highly detrimental to the running of the Union’s affairs. More often than not, the Commission and the European Parliament look on as powerless spectators of the ongoing series of policy blunders which, instead of solving the crisis, aggravate it.

Whilst national governments are being constrained to stop much-needed investments in infrastructure and other projects, the European Commission is supposed to pick up the slack and spend some 82 billion euros on regional projects in order to kickstart growth. Now, if anyone believes that this sum is going to make a significant dent in the continent’s unemployment, good luck to them. Sure, as Martin Schulz has observed, the adoption of a 0.05% financial transactions tax would bolster the EU’s budget by 200 billion euros per year, but who listens to Euro-parliamentarians ? As in the illustrious Soviet example, apparently nobody…

Author : Spotlight on Geopolitics
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External Relations  , E.U., euro

The US' Strategic Defence Review Assessed

 January 28, 2012

The Defense Strategic Review (DSR) released by the Pentagon on the 5th of January 2012 summarises the Obama Administration’s geopolitical agenda and strategic priorities. From it, experts can discern which country is considered the new enemy of the USA, although President Obama’s speech on the occasion does not mention China by name.

In France, the refocusing of the US strategy on the Asia-Pacific region is viewed by Professor Jean-Jacques Roche from ISAD as a positive development. Whilst he observes that some of the new EU members (countries like Poland, the Czech Republic and even Romania) might express their misgivings about the planned US troops withdrawal , Western suppliers of military hardware should supposedly rejoice. Professor Roche believes that the Pentagon’s DSR could kick-start the accelerated development of the European Defence Agency (EDA) and increase the mutualisation of the defence capabilities of the EU’s member countries.

The two reasons given by the US for the elaboration of the new military doctrine are the changed geopolitical environment and the radically different fiscal circumstances. In other words, the adoption of the new strategy is supposed to save the US some $450 billion over ten years, fiscal consolidation being nowadays regarded by Washington as a national security imperative…

We can also gauge from the document who the US’ current friends and enemies are. Unfortunately, China is identified as a potential foe, in the same paragraph with Iran. In the Middle East, America’s friends and allies are the Gulf countries and Israel. In Asia, India, South Korea, Taiwan and Japan are the allies supposed to offer the US the means of putting in place – if needed – a balance of power mechanism against China. This time around, the US needs Russia on its side, especially in the wake of the upheavals in the Middle East – hence the reset.

Interestingly enough, the Indians are advised by their own experts to refuse bandwagoning on the issue. Thus R.S. Kalha, an ex-Secretary of the Indian Ministry of Foreign Affairs, notes that in the past the US had forced India to settle on Kashmir. He rightly observes that South-East Asian nations are loath to become close allies of either China or the United States, for such an option could prove disastrous for them. R.S. Kalha believes that the Indian leadership should be prudent on the matter, as a clear-cut alliance with the US might prove detrimental to Indian interests. He knows that the nature of the US – China relationship is very complex and that a military conflict between the two giants seems highly unlikely, as long as China needs the American export markets and the US needs China to continue to buy its T-bills. To be sure, the relationship between the two powers is deeper and more complex than the one established by Washington with its Soviet counterpart during the Cold War.

The reception of the Pentagon’s DSR by the Chinese government was a rather cool one. The Chinese leadership seems unwilling to intensify confrontation and to become a new cold war target for Washington. The People’s Daily has insisted that China should continue with its economic development and avoid being dragged into a military competition with the US, as the Russians had. Still, the Chinese intend to continue to take care of what they call their ‘peripheral security interests’, in spite of the new assertiveness of the new US defence policy in Asia. For all other issues, the Chinese apparently intend to cooperate with the US in solving potential tensions via dialogue. (sources: Le Monde, Pentagon Paper, People’s Daily, IDSA India)

Towards a two-union Europe ?

 January 15, 2012

Standard & Poor’s decision this week to downgrade the country ratings of France, Italy, Spain and Portugal, not only aggravates the sovereign debt crisis, but it actually divides the EU in two.

The most affected group is made up of the Latin countries bordering the Mediterranean. Their interest bills are going to rise to levels that, in some cases, will make it prohibitive to finance their budget deficits and therefore to continue to provide quality public goods and services to citizens. To make matters worse, this group of countries has to swallow the bitter German pill of budget austerity at a time when long-term economic recession and possibly even stagflation look increasingly likely.

The second group of countries, headed by Germany, has kept their AAA credit rating. It includes Denmark, Sweden, the Netherlands and the UK, for example. Switzerland and Norway also belong to this group, although they are as yet unaffiliated to the EU. The main preoccupation of Germany and its like-minded northern European partners is fighting inflation, not unemployment. This is in sharp contrast with the economic philosophy of the Latin group of countries, which are quite tolerant of higher levels of inflation and budget deficits, provided these are used to significantly bring down unemployment.

Whilst a two-speed Europe might not be in the cards, in a not too distant future we might be faced with the prospect of two separate European unions, built out of the ashes of the current one. Thus, as Angela Merkel herself threatened in 2008, the Germans might be more interested in building a Baltic union, which could conceivably attract Russia as an associate, whereas the Latin countries might wish to explore further a separate Union for the Mediterranean that could potentially integrate Tunisia, Morocco, Libya and Algeria.

As far-fetched as this sounds, such an outcome might, however, prove to be the only solution to having a too-large and dysfunctional union, in which national interests prevail at the expense of the greater good of all existing members. In truth, the provisions of the Maastricht Treaty, the austerity packages and the German insistence on having an European Central Bank solely dedicated to fighting inflation do not work in practice for a majority of EU members, and especially for the first group of countries mentioned above. At this point in time, all good ideas aimed at solving the EU’s woes — such as fiscal union, the emission of eurobonds, a central bank dedicated to fostering employment, a common defence and security policy that works — have been discarded by Germany and some of its closest allies. In these conditions, no expert or responsible politician could be blamed if alternatives to the current union arrangements are actively being considered by them.

Two-speed Europe

 October 31, 2011

The decisions agreed upon by EU leaders during the 26th of October summit – the leveraging of EFSP, the “voluntary” 50 percent reduction of Greece’s debt, improved coordination of fiscal policies within the eurozone countries, the appointment of a super-commissioner with fiscal oversight responsibilities – have all been judged as steps in the right direction by the financial community. Stock markets have reacted positively and so have a few major rating agencies.

Less enchanted with the outcome are, however, the leaders of the ten EU countries which are not currently part of the eurozone. As a result, the summit was the scene of harsh verbal exchanges between David Cameron and the French president, for example, but tensions were equally evident among the Swedish and Romanian delegations.

The non-members of the eurozone feel that the Union is heading towards a two-speed Europe. In other words, its core is made up by the 17 eurozone member countries, headed by Germany and France, whilst the rest are relegated to the periphery, geographically as well as economically. The UK’s chief concern, as the leading financial centre of the Union, is the insistence of eurozone member countries on introducing a financial services tax which could cripple the activity of the City of London. Romania, on the other hand, has expressed reservations about the measure to recapitalise EU banks with large exposure to the Greek, Italian or Spanish debts. As most of its banks are foreign-owned, that might lead to a drastic reduction in lending to local companies. All the other leaders feel already excluded from the important decision-making process, which will take place in the first instance within the euro-club and only afterwards discussed with the rest of the EU’s political representatives.

The emergence of the two-speed Europe could have been avoided by the northern kingdoms if they had agreed to join the eurozone from day one. At the time, countries like the UK and Sweden, for example, sported healthy finances and a fiscal discipline which were in accordance with the criteria established at Maastricht. All is not lost, however. Membership of the eurozone is still open to them in the future, if only they could overcome their reluctance to join. The newer EU members, such as the Czech Republic, Poland, Romania and even Bulgaria are all making strenuous efforts to reduce their budget deficits, improve tax collection and prepare their economies for becoming full members of the eurozone in the years to come.

Viewed in this light, the existence of a eurozone core that could act as a catalyst for change upon the “periphery” is not altogether as negative a development as some EU political leaders wish to present it to their electorates. (sources: Der Spiegel, Reuters, Le Monde, The Economist, The Guardian)