Dark clouds on the Eurozone Sky

 August 3, 2015

In Wolfgang Schaeuble’s Germano-centric EU, no institution is more important – apart from his Politburo-like Eurogroup and the Office of the Chancellor – than his Ministry’s Council of Economic Advisers. The most influential adviser among them is Professor Hans-Werner Sinn from Munich, a Christian missionary-manqué turned tele-economist.

Like any good German, Professor Sinn has but a few ideas, but fixed, which he peddles forcefully with evangelic zeal in the national and international media. That is, when he is not using them as ideological tonic poured regularly in his Finance Minister’s ear.

When he doesn’t appear on TV to explain to his nation why the euro-crisis is like a bottomless pit for German money, or impart advice to the lawyer-trained flock which dominates the Eurogroup, Professor Sinn presides the Ifo think tank in Munich where he benevolently enforces – according to his hapless colleagues – a virulent form of “intellectual despotism”.

One of the fixed ideas Professor Sinn has advocated in the media and to Wolfgang Schaeuble since 2012 is of course that of Grexit. He is apparently convinced that countries like Greece and Portugal would need an internal devaluation of their wages and pensions of between 30 and 40 percent in order to shore up their competitiveness, compared to a 10 to 20 percent devaluation in Spain and Italy. Such steep reductions would not possible without generating huge social strife within the European Union, therefore Greece or Portugal should temporarily exit the eurozone. Thus, instead of resorting to this internal devaluation (read drastic reductions of salaries and pensions), they would revert for a while to their national currencies, which could be devalued and used as shock-absorbers while at the same time reducing their debt load via haircuts.

This simplistic way of trying to “solve” a complex situation has been lapped up by Wolfgang Schaeuble, like he did with another incredibly stupid idea: the “schwarze null” option as the main goal of budgetary policy. (It seems that neither surpluses nor deficits are desirable in Schaeuble’s world.)

To make his ideas triumph, Hans-Werner Sinn has blown out of the water all other options, such as “dexit”, or two EU currency zones, which was put forward as early as 2011 by a much more thoughtful colleague of his from Munich, Professor Alfred Steinherr. How exactly has Sinn achieved that ? By presenting – in a 2013 Project Syndicate commentary – the dexit option as if it were just another zany brainchild belonging to George Soros, knowing full well that in European capitals the billionaire’s reputation alone would be enough to kill any further debate on dexit.

Since the 13th of July 2015 diktat from Brussels, Professor Sinn and the five “wisemen” from the German Council of Economic Experts have aggressively started a campaign aimed at arming the Eurozone with new rules and procedures that would make the eviction of financially-shaky EU members easier. As lawyer-trained politicians generally find it hard to grasp complex economic arguments, this proposal could become EU official policy tomorrow. This could only make matters worse, as the adoption of exit rules will not contribute substantially to addressing the euro’s and the eurozone’s plight.

 

Undoing Germany's "Reluctant" Hegemony

 July 30, 2015

To those in the know, the Italian peninsula was not only the cradle of the Roman Empire or Rome the centre of the Catholic faithful, but also the birthplace of capitalism and of countless statecraft innovations and institutions still widely used around the world today.

During the middle ages, the Italian city-states thus discovered and perfected what is commonly known among IR specialists as the “balance of power” mechanism. Every time one of the city-states became too powerful economically or militarily and tried to subdue the others, most of the rest of the city-states would form a coalition against the offender, thus preserving their sovereignty over their economic and political affairs.

This time-honoured tradition continued long after the development of nation-states and was successfully used to control the hegemonic designs of European powers, such as France or Germany, to give but two of the best-known examples. For the past two centuries, until some sixty years ago, balance-of-power arrangements were initiated, financed and operated by Britain, which succeeded in defeating both Napoleon and Hitler and in bringing their hegemonic designs to an end. British leadership in this field prevented the loss of sovereignty by continental nations and during the 20th century it preserved democracy and the rule of law, albeit not always by peaceful means.

It would be a mistake to believe that old hegemonic designs nurtured by economically more powerful European nations have vanished since the creation of the European Union. If anything – as demonstrated by the recent developments from the 13th of July 2015 – such hegemonic efforts which chiefly belong to Germany are played out within the existing political structures and institutions of the European Union.

Institutions such as the Eurogroup, although they do not have a legal existence, nevertheless wield enormous power over the economic and financial affairs of EU member-countries since the introduction of the euro. Within this group, Germany plays the leading role and with the help of a few satellite-states makes all the important decisions.

There are other EU institutions, such as the ECB, the ESM or the Commission, that are manned by technocrats who have more decision-power than any elected political leader of any country. Here too, Germany has succeeded in throwing its economic weight around and has used the European Union’s design imperfections to establish its de facto leadership .

Reluctant or not, German dominance within the EU is by now an established fact and should be actively resisted by the rest of the EU member-states, like any other hegemonic episode in our continent’s history.

When one country becomes economically or militarily too powerful at the expense of all other members of the group it belongs to, there are usually two standard responses to such a situation: bandwagoning or balancing.

Today, countries like Austria, the Netherlands or the Baltic states have preferred to bandwagon, becoming German satellites in the process. They have displayed a propensity to endorse Wolfgang Schaeuble’s vision of “reform” for the EU’s structures. The German Finance Minister has declared during a conference at Brookings Institute in April 2015 that even Germany’s former arch-rival France, not only Greece, needs to be “restructured” by a troika, citing however “democracy” as a temporary stumbling block…

The other response – that is balancing – is the preferred method of Italy and France, consummate operators of balance-of-power mechanisms in the past. This is how Shahin Vallée, former advisor to ex-President Van Rompuy, has recently described the current situation in The New York Times:

“This forceful attitudes and the several taboos it broke reveal that the currency union that Germany wants is probably fundamentally incompatible with the one the French elite can sell and the French public can subscribe to. The choice soon will be whether Germany can build the euro it wants with France or whether the common currency falls apart.

Germany could undoubtedly build a very successful monetary union with the Baltic countries, the Netherlands and a few other nations, but it must understand that it will never build an economically successful and politically stable monetary union with France and the rest of Europe on these terms.

Over the long run, France, Italy and Spain to name just a few, would not take part in such a union, not because they can’t but because they wouldn’t want to. The collective GDP and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.”

Since the 13th of July 2015, the number one priority in most EU capitals is no longer the Greek crisis, but how to deal with Germany’s latest hegemonic offensive. Ideally, a “Dexit” followed by the formation of a two-union Europe along the lines I have described in my earlier posts could replace the current dysfunctional union. Alternatively the union might disintegrate, USSR-style, into a myriad of nation-states large and small, dominated by populist or nationalist governments. Such a development, however, would gravely affect economic life as well as the security situation on our continent.

EU: What Are Latin Countries Waiting For ?

 July 23, 2015

Very few American experts grasp the motivations behind the construction of the European Union. As a result, American specialized literature abounds with misguided comparisons, such as that between the US Civil War from the 19th century and today’s tense situation between Europe’s North and South.

Yes, the EEC was initially formed in 1957 to prevent intra-European military conflicts in the future and to create a large-enough internal market for aspiring member-states to rebuild their economies and prosper.

Nonetheless, the European Union does not and will never have the same objectives as – to use another example in US commentary columns – American colonists did against British domination at the end of the 18th century. This is so because unlike nations around the world, the countries of Europe appeared on the ruins of the Roman Empire. Whenever politicians, kings, emperors and military leaders attempted to unite the continent’s nations into larger political units, their inspiration – whether consciously or not – has always been the Roman Empire.

Before 1957, quite a few European nations had tried their luck, rather unsuccessfully, at duplicating Roman hegemony across the continent. The emperors of the Holy Roman Empire, followed by Napoleon or Hitler have all done their best, in their own way, to emulate the Romans’ success by military means. Their efforts eventually ended up in failure, as no European nation was either big enough or strong enough to impose its will on all the others except for brief periods of time.

For the first time in the continent’s history, however, the launch of the political project of the European Union aimed to achieve unification by peaceful and democratic means. The experiment has been partially successful until two decades ago, when neoliberal policies and an ill-inspired monetary union have fatally undermined it.

When it comes to monetary union, it is also useful to remember that this was largely a French-inspired project which Germany joined only grudgingly. The first monetary union on the continent was also initiated by the French under the name of Latin monetary union (LMU). It lasted from 1865 to 1927 and included at first France, Belgium, Italy and Switzerland. Interestingly enough, the LMU was joined by Greece as early as 1867. The Latin bloc’s objective for all participating countries was to impose common standards for coinage at a time when the gold standard dominated commercial transactions on the continent. More astute than Germany of late, Austro-Hungary refused to join the LMU, as it rejected the bi-metallist approach of the French to coinage.

Today’s monetary union is now clearly in danger of disintegration, but preventing such an outcome is still possible. The first step in the right direction would be for the Latin group of countries to act again as a bloc. The latter should make it clear to Germany that a Dexit solution to the current predicament is necessary in order to salvage both the euro and what remains of European political unity. As matters now stand, the political systems of the southern half of the Union are close to implosion, witness recent developments in Greece, Spain, Italy and even France. Germany, meanwhile, does not only enjoy a healthy economic growth rate, but is basking in a political stability obtained at the expense of every other country in the Union…

Again, the historical experience inherited from the Roman Empire is a very useful guide to preventing a Soviet-type implosion of the union. Naturally, Germany’s recurring hegemonic tendencies and the fact that it has benefitted handsomely from the introduction of the euro for its exports, mean that in Berlin there is at present no appetite for doing the right thing by its European partners. This fundamental lack of empathy with the difficulties experienced by economically and politically less stable members of the EU has been proved time and again, with the EU leaders’ conference held on the 13th of July 2015 being just the latest in a string of such episodes.

Still, France, Italy, Spain and Portugal need to get together to gently ease Germany out of the euro and subsequently of the EU. As I have explained elsewhere, the German departure from the current financial and political structures of the Union should not, however, be an acrimonious process. After all, a diminished but more cohesive European Union will still have to trade and live side-by-side with Germany and its satellites, and vice-versa. For the political leaders of the Latin group of countries, however, there is no better solution to the euro-crisis than asking Germany to revert to the D-mark, as it is much better able to withstand an exit from the Eurozone than countries like Greece, Spain or even Italy.

EU: Grexit or Dexit ?

 July 19, 2015

Some seventeen centuries ago, emperor Diocletian realized that the Roman empire had grown too big and too diverse to be ruled from a single centre. Diocletian therefore decided to split it in two, the west ruled from Rome by a fellow army officer and the east controlled by himself. The east-west division became more or less permanent during the reign of Constantine. It was a wise administrative decision, which saved the integrity of the empire for another hundred years.

Fast forward to the present. The European Union, built on the ruins left behind by World War II, is experiencing a similar if not identical predicament. The citizens within its 28 member-countries, are growing more and more disenchanted with the Union’s leadership by the day. Truth be told, the EU has become much too big, too culturally diverse and politically unresponsive to continue to be viable in its present form.

One of the chief characteristics of the current political arrangements in the EU is Germany’s hegemonic status over its economic and political structures. As we can all recall, the Union was formed in the wake of WWII in order to prevent yet other military conflicts on the continent, involving again mainly Germany and its neighbours. To that end, an initial nucleus of six states (France, Italy, West Germany, Belgium, the Netherlands and Luxembourg) created an economic union which helped all of them rebuild their war-shattered economies and prosper. The victorious powers led by the United States forgave Germany most of its debts, opened up their markets to German-made goods and supplied the seed capital necessary (Marshall Plan).

For six decades the European Union grew, expanding southwards and eastwards, while the German economy became a powerhouse on the continent. In the wake of the fall of communism and the implosion of the USSR, West Germany had reunited with East Germany, and started to dominate not only the continent’s economy but also its political and – since the introduction of the euro- its monetary affairs.

The latter developments have unfortunately proved to be an unmitigated disaster for all its other EU partners. In truth, events over the last decade – the financial crisis, the sovereign debt crisis, austerity policies – have conclusively proved to many specialists that Germany, with a group of northern Protestant countries, has a vastly different set of economic responses and values, which are at odds with those prevalent in the southern part of the EU.

Thus, while Germans and their allies highly value a strong currency, low or zero inflation, low or zero budget deficits, a culture of thrift and the continuous reduction of public debt, countries like Italy, France and Spain – not to mention Greece, Portugal or Ireland – would prefer a significantly weaker euro, flexible budget deficit targets, higher inflation, the resorption of public debts through economic growth instead of austerity measures, and a massive reduction in the unemployment rates affecting them.

So far, Germany has succeeded in forcing all EU members to adopt its “six-pack” and “golden rule” and to maintain inflation close to zero. The outcome of these policies on the continent has translated into economic stagnation, social strife and a never-ending obsession with austerity and public debt reduction measures.

The current Greek crisis has merely highlighted the folly of such policies, as well as the unshaking determination of the German leadership to push the entire continent towards economic ruin. To avoid this, which could only lead to an USSR-type implosion of the Union, it would be more rational for Germany to leave it, reintroduce its beloved deutschemark and form an economic and political union of its own in the north of the continent. In other words, for the European Union to be saved from impending collapse, a “Dexit” option – and not “Grexit” – is what is currently needed. (Greece would not be able to threaten the survival of the EU the way Germany does.)

A Dexit should by no means be an acrimonious affair, or a disorderly one. Angela Merkel herself had alluded to the possibility of forming a Baltic Union as early as 2008. Starting with 2012, economists such as Alfred Steinherr, Anatole Kaletsky, Michael Mross, Aleš Michl, Kenneth Griffin, Anil Kashyap, Guillermo Nielsen, Ashoka Mody , Rolf Weder and Pedro Braz Teixeira have started recommending Dexit as the solution to the EU’s current economic and political predicament. The advantages of Dexit are clearly explained in a Time article from 2012:

 

“By contrast, if Germany were the one to leave, the euro would be the currency that falls in value, relative to Germany’s new national currency and also to the dollar. The weaker European countries would get to keep the euro but still get the devaluation they need, which would reduce their labor costs far less painfully than through wage cuts. In addition, the value of their outstanding debt would decline along with the value of the euro, and they would be more likely to be able to make payments on that debt and avoid defaulting.”

 

Viewed in this light, the third Greek bailout about to be concluded is rather of secondary importance. What is now needed is to start planning for an amiable and orderly Dexit, one which would benefit all EU member states. Failing to agree with the partition of the current Union into two entities – namely, an European Union centered around France and Italy and a Baltic one centered around Germany – could only result in a violent, USSR-type disintegration, accompanied by social strife, the revival of nationalism and xenophobia on our continent. Fortunately, such a partition will not lead to military conflict between the two sides further down the track, as NATO will still be there to prevent any such developments.

The SCO's Landmark Ufa Summit

 July 11, 2015

On the 9th and 10th of July 2015, the Shanghai Cooperation Organization (SCO) has held a landmark summit in Ufa (Russia), its 15th to date. Ufa has simultaneously hosted the BRICS summit, which was meant to further strengthen economic ties between its five emerging economic powers.

Founded in 2001 by Russia, China and four Central Asian republics, the SCO had until recently as its main objective fighting “the three evils: separatism, extremism and terrorism”. At Ufa, the six founding members have for the first time agreed to allow for the expansion of the organization by offering full membership to both India and Pakistan. Thus the US geopolitical push to see India included into a balance-of-power mechanism in Asia aimed at containing China has been thwarted. Accordingly, the United States will remain with a handful of allies in Asia, from the Philippines and possibly Vietnam to its old-time ally Japan.

The expanded SCO covers a huge geographical area which includes Eurasia, China and the entire Indian subcontinent, with a combined population in excess of 3 billion. Four of its members (Russia, China, India and Pakistan) are nuclear powers and have large, well-equipped military forces. During the summit the leaders of member-countries, new and old, have expressed their willingness to also enhance economic cooperation in strategically important sectors such as transport and energy production/distribution.

The State Department officials have reacted to the new developments in Asia by declaring that the United States do not consider Russia or China as “existential threats” to the Americans.

 

Turkey: Time to Mend Diplomatic Fences

 December 24, 2014

Turkey has today announced its budget for 2015. Total spending is estimated at 225 billion dollars, whereas revenue is expected to be around 216 billion USD, leaving a deficit of only 9 billion USD. The biggest items on its expenditure list are health and education, with 38 billion dollars earmarked for each, which is a significant amount by any standards. Moreover, despite the turmoil in the Middle East and stagnation in Europe, Turkey’s economy is expected to grow by 3.5 percent next year. (source: Hurriyet)

 

The good news about Turkey’s good economic performance is overshadowed by a war of words between the Turkish government and some EU officials about what is essentially an internal political affair involving journalists from Zaman. Unfortunately, every now and again EU officials feel compelled to lecture condescendingly to their Turkish counterparts on various issues, forgetting the fact that the Ottoman Empire had successfully ruled a large territory that is today part of the Union (as well as the Maghreb and the Middle East) for a few hundred years and that its army could only be stopped in its tracks in 1683, while halfway to Dover.

 

On the diplomatic front, however, President Erdogan and his government have to finally come to terms with the brutal demise from power of the Muslim Brotherhood in Egypt. Truth be told, the Islamic brand of democracy promoted after the 2011 Arab revolutions by Turkey has not really caught on in North Africa or the Middle East. This is not to say that such a development will never happen in the future, but so far Arabs have shown they are less pragmatic and more radical in their approach to political Islam than the Turks, hence the fiasco.

 

Still, Egypt remains the largest Arab country and therefore Turkish authorities cannot continue to reject the normalization of diplomatic relations with Al-Sissi, distasteful as this might be in practice. The current state of diplomatic relations with Egypt could only insulate Turkey within the Arab world, an outcome that neither Mr Davutoglu, the prime minister, nor President Erdogan would benefit from.

 

Over the past few years, the promotion of Islamic values within Turkey has intensified to levels that remind us of the aggressive promotion of secularism by Kemalist authorities last century. Most politicians in Europe reject the Islamization of their own continent and do by now understand that Turks – likewise – are entitled to refuse European values and to affirm their own instead. Still, the forced Islamization of Turkish society could defeat the purpose, if the policies and the methods used to implement them prove too hasty or too harsh. In such an event, all the solid achievements of the AK Party over the past 12 years are at risk of being overshadowed by social, religious or ethnic tensions which have the potential to tear the Turkish social fabric apart.

 

Austerity and Inequality Undermine the EU

 December 17, 2014

The numerous geopolitical tensions in 2014 in Ukraine, Syria or Iraq could not obscure the fact that the most worrying problems in the world today are economic, and not geopolitical, in nature.

The total failure of austerity policies within the EU is by now the most pressing concern of governments from the North to the South of the continent. Hailed a few years back by European conservatives as a miracle cure to the sovereign debt crisis, austerity policies have not succeeded in reducing the public debt of Spain and Greece or their 25+ percent unemployment rates. Moreover, the much-touted “golden rule” enforced by Germany via Brussels has only made matters worse, bringing the EU-wide economy to a standstill. The spectres of stagnation and deflation are haunting the chancelleries of most EU countries, as is a Japanese-style extended period of economic malaise.

Another major concern for EU policymakers is the widening inequality in incomes, favouring the rich and severely punishing the European middle classes and the poor. According to the German Office of Statistics, even a seemingly successful country like Germany has 20.5 percent of its population in danger of falling into poverty, whilst the EU-wide average figure stands even higher at 24.5 percent. The bleak economic situation experienced by nearly all EU members has recently generated huge street protests and general strikes, from Belgium to Italy and from Greece to Spain. The reduction in the standards of living of the middle classes – whose existence is endangered by the past few years’ myopic austerity policies – combined with the spectre of rising poverty, have motivated students, union members and pensioners to come together in record numbers in an effort to block or even reverse such misguided policies.

In countries like Greece and Spain, radical political parties of the left such as Syriza and Podemos are in the process of undermining political support for traditional parties of the right or of the left, which stand discredited by years of enforcing economic policies that had not produced the expected results. In countries like France, the UK or Hungary, voters’ preferences are also deserting traditional parties in favour of nationalist political parties such as the Front National, UKIP or Fidesz. To add insult to injury, a deal between the EU’s social democrats and conservatives has resulted in the appointment as Commission President of Jean-Claude Juncker , ex-prime minister of Luxemburg, which is the EU’s capital of the tax-avoidance industry.

The failure of austerity policies and the growth of inequalities have not, however, made a lasting impression on German politicians or determined them to rethink their approach to solving economic stagnation and high unemployment in the EU. Quite on the contrary, the conservative leadership of Germany keeps insisting that the bitter medicine that failed to revive the EU’s economy has to be swallowed even more rigorously in the future. This is an approach that can only lead to more economic stagnation, more poverty and more social upheavals on the continent.