EU: A Question of Priorities

 December 21, 2010

After hearing daily about the problems experienced by the EU’s common currency, austerity measures and the like, one might be forgiven for being inclined to believe that the crisis and its ugly aftermath are the most important issues confronting us all. In fact, the most disquieting development, as suggested by a recent poll published by The Economist, is our lack of optimism in our collective future. Whilst a majority of Chinese, Brazilians or Indians, for example, are listed in the poll as optimistic about their future, only about a third of industrialised countries’ inhabitants express similar views.

One reason for this is, of course, the gap in economic performance. The Chinese, Brazilian or Indian economies are growing, on average, at a respectable rate of 8 percent per annum, as compared to a sluggish 2.5 percent for the US or 2 percent for the EU. Furthermore, within the Western group of nations, countries like Ireland and Greece are now experiencing their third year of negative growth, while Spain’s economic growth goes neither north, nor south. Ill-conceived or too drastic austerity measures are compounding the economic woes of many nations, with no end in sight for cutbacks in the provision of public services, however vital some of these are.

Optimism and the strong economic performance displayed by the 3 heavyweights of emerging countries should, however, come as no surprise. The same Economist statistics mention the fact that whilst US students’ performance is below the OECD average, the Chinese score consistently higher in maths, physics and most other subjects. Moreover, as the working population in the US, Japan and the EU is ageing, the BRIC countries with the exception of Russia have a youthful, dynamic and growing workforce. The number of college students in China has quadrupled lately and in order to avoid unemployment among them, the country’s leadership has been sending thousands of newly-qualified job-seekers to further their studies abroad at the state’s expense…

The EU could have avoided most of these problems as well, as the 12 recent entrants are known to have a young, well-qualified workforce. The education systems of the Czech Republic, Hungary, Poland or Romania, to mention but a few, consistently produced high achievers in maths, physics, chemistry, biology – areas where some of the EU’s education establishments are weak. Unfortunately, the main potential beneficiaries of their talents and skills – countries like Germany, Britain or France – have made it hard for applicants from Central and Southeast Europe to fill available positions, by protecting their job markets even as they are experiencing serious skill gaps.

To add insult to injury, the newly-adopted austerity packages are also targeted at the education systems of EU countries, big or small. Last summer, the UK’s conservatives have decided to treble university admission fees. At the other end of Europe, a Romanian conservative government has cut 40 percent of the health budget and froze the already inadequate sums allocated to education, while leaving untouched the budgets of the country’s seven secret services. This comes on top of the 25 percent cuts to doctors’ and teachers’ salaries voted this summer. Teacher-bashing on public television has become president Basescu’s sport of choice, as if the country’s economic problems are expected to vanish regardless of how much Romania spends on educating its workforce.

To be sure, any politician worth this name should have avoided proposing or voting for cutbacks in health and education. No civilised society, East or West, can hope to function, let alone prosper, in the absence of a decent health system or by depriving itself of the benefits normally associated with a quality education system. This is a point that both the IMF and EU officials should have emphasized when they mandated member countries to reduce public spending and adopt austerity packages. As matters now stand, however, teachers and doctors are lumped together with perennial tyre kickers and spongers who bloat the payrolls of many EU member countries. By looking the other way and getting their priorities wrong, the same officials are as guilty as the national politicians that were directly responsible for such cuts. (sources: The Economist, The Guardian, EVZ, Capital.ro)

Other People's Secrets

 December 7, 2010

The secret US intelligence files and diplomatic correspondence released by WikiLeaks have not stirred my interest enough to read them in detail. To me, most of them are other people’s secrets. Important as some of these might be, I find it somewhat indelicate to take advantage of the opportunity of studying them this way.

At this point in time, I cannot say for sure whether the military intelligence official who leaked the files is a hero or a villain. I guess it all depends on where one stands on these issues. From the point of view of the Washington establishment the man is, understandably enough, the scourge of the earth. For political leaders around the world and even for the public at large, the revelations contained in the leaked documents are an eye-opener, when they aren’t downright shocking.

What is more interesting is Washington’s official reaction to the publishing of the documents. For a number of years now, American intelligence officials and their people around the world have been involved in the massive gathering of all sorts of information. Billions of dollars are being spent to enable organisations such as the NSA, CIA and others to peek at the private lives of ordinary citizens of allied countries, without their knowledge or consent.

Take, for example, Sweden’s case. This fall, Swedish intelligence officials have discovered that the US embassy in Stockholm has installed electronic devices that allows it to monitor the phone conversations of locals, all in the name of US national security. A few years back, a Greek employee of Vodafone from Athens committed suicide, after being required by his company to illegally tap the phone conversations of Greek ministers. Every day, millions of emails, faxes, calls and harmless transactions are being monitored by the Echelon system. The privacy of electronic correspondence in the Western world has ceased to be sacrosanct for a long time now, and this is but a small part of US intelligence gathering operations squarely directed against ordinary citizens of allied countries or their governments…

Intelligence gathering operations against countries outside the Western world are even more intense. Some time ago, China’s former president Jiang Zemin had sent his presidential Boeing to be serviced in the United States, only to find it packed full with hidden listening devices on arrival. Social networks like Twitter or Facebook are extensively used to destabilise less-than-friendly regimes like the one in Iran. Satellite surveillance of phone calls and sensitive installations in such countries have become routine, resulting in driving many such activities underground in order to avoid detection.

These are but a few reasons why I consider the US’ official attitude to the leaks as highly hypocritical. When a country, superpower or not, is prepared to go to such lengths and expense to spy on citizens’ lives, correspondence and phones, it should expect to get a taste of its own medicine in return.

Worse still, the documents portray the US as a paranoid superpower, one whose officials trust no-one, friend or foe. Mrs Clinton instructs her personnel to gather biometric data, phone numbers, credit card details and miscellaneous dirt on foreign leaders and diplomats. Her actions bring to mind Elena Ceausescu’s bugging of ministers’ houses and her sick interest in their sex lives, private conversations and bank accounts. In true American style, Ceausescu himself invested huge amounts of badly-needed cash to install sophisticated telephone exchanges in every county, capable of monitoring the phone conversations of all Romania’s citizens. (Meanwhile, the country’s economy was going to the dogs…) Indeed, what’s the difference between the dictator’s paranoid hunger for other people’s secrets and the United States’ insatiable appetite for similar kind of data ? By the look of it, the difference is only one of scale.

In this poisoned atmosphere, I, for one, have largely given up using the phone to communicate with friends and family for some time now. If one can’t have a private conversation, why have one at all ? I’ve been through this absurd situation only once before – during the Ceausescu years. I had never expected,however, that this time around the people responsible for trampling upon our collective rights to privacy would be the officials of a country calling itself “the beacon of freedom and democracy”.

Hungary Bucks Austerity Trend

 

November 30, 2010

In 1956 the Hungarians rose in revolt against the excesses of Soviet communism. During the 1980’s, the Hungarian society was already making the transition to what we now call the post-Soviet era and its communist politicians opened the country’s borders to East German refugees fleeing to the West . These days, Viktor Orban and his Fidesz Party have rallied the Hungarian public opinion against the excesses of a global economy gone astray, introducing additional taxes on global players operating in Hungary.

The so-called “crisis taxes” were introduced in order to narrow Hungary’s budget deficit. The novelty of these extra taxes, which will raise 520 billion Ft (or 2.67 billion dollars), lies in the fact that they are levied exclusively on banks, energy companies, the telecom and the retail sectors. Thus the telecom tax is expected to bring an extra 61 billion Ft, the energy sector to contribute with 70 billion Ft, whilst the retail sector to kick in 30 billion Ft. Introduced for a limited period of three years, the new taxes will help the Hungarian government avoid IMF / EU bailouts or the imposition of unpopular austerity measures, now very much in vogue in most European Union countries.

When communism fell, Hungary found itself without home-grown tycoons or, to use a Marxist cliché, a “capitalist class”. The void was filled by global companies, which during the 1990s acquired large chunks of the Hungarian economy via privatisations. After years of upsetting state authorities with their peculiar ways of syphoning off profits abroad and minimising their tax bill (by methods which I have described in my Asian crisis ebook), they are now called upon by the Orban government to give something back. Companies like Vodafone (telecommunications), Tesco (retail), Gaz de France or E-On (energy) and the banks will thus pay the bulk of the new “crisis taxes”. Needless to mention, Orban’s crisis policy enjoys huge public support.

To be sure, this is an unheard-of – even if fully justified – approach to raising the extra money needed to close the country’s deficit gap. Unlike the European conservative group of parties, of which Fidesz is a member, the Hungarians have decided that this time around it should be the rich global companies, and not the poor, that have to foot the bill for the damage caused by the financial and economic crisis. Why, even socialist governments in power in some EU countries – notably Greece or Spain – were strong-armed into adopting neoliberal austerity measures, which have sent their economies into the red, generated widespread unemployment and affected the incomes of millions.

During a recent state visit to Malta, Orban has declared that the measures undertaken by his government have brought back “national self-confidence” and that the 7 percent budget deficit inherited from his socialist predecessors will be cut to 3.8 percent next year. He has also told his Maltese host that an economic recovery happening only on paper, that does not reduce unemployment, is not worth having.

In many ways, Orban’s approach in dealing with the ill effects of the economic crisis is as revolutionary as the Imre Nagy – led uprising against the Soviets. Fortunately, Hungary is now a member of a different union, and Brussels is unlikely to send the tanks rolling into Budapest, although a speculative attack on the forint cannot be ruled out. Whilst neighbouring countries like Romania are unnecessarily subjecting their citizens to austerity measures which have been judged by experts as both unwise and much too savage, Orban and his team are cushioning the Hungarian nation against economic destitution. However salutary though, Orban’s novel way of solving his country’s budget woes is going to be lost on Bucharest politicians, who over the past three decades have developed the unhealthy habit of vampirizing their own conationals. (sources: The Economist, The Malta Independent, Magyar Hirlap, The Budapest Sun)

The OSCE Summit 2010

 November 18, 2010

This fall’s Deauville summit between Angela Merkel, Nicolas Sarkozy and Dimitri Medvedev has highlighted the need to include Russia in a pan-European security architecture, distinct from the decaying and confrontational-type North Atlantic Treaty Organisation (NATO). Fortunately since 1975 European nations, regardless of EU membership, have had one of the most advanced regional co-operative security structures in the world, the OSCE (Organisation for Security and Cooperation in Europe).

After an 11-year hiatus, an OSCE member states’ leaders summit is convened in Astana on the 1st and 2nd of December at the initiative of Kazakhstan’s president Nursultan Nazarbayev. Although lesser-known than NATO, the OSCE is more inclusive (it currently includes 56 states) and represents, in Fabio Liberti’s words, “the largest security forum in the world”.

From the start, the OSCE was created as a regional security organisation, the first one to approach security comprehensively. It encompasses not only politico-military activities (police, arms control, conflict prevention, border management), but also economic and environmental activities (control of money-laundering, integrated management of water resources, support for the elimination of hazardous materials) and human rights activities (promotion of human rights, minority rights, freedom of the press and gender equality).

During the cold war, the OSCE effectively contributed to the promotion of human rights behind the Iron Curtain and participated in the dismantling of the Soviet bloc. In 1990, member states have adopted the Charter of Paris for a New Europe and have decided to equip the OSCE with permanent institutions (secretariat, election bureau and a center for conflict prevention) in order to enable the organisation to respond to eventual crises. Subsequently, OSCE has installed missions in Kosovo, Sandjak, Voivodina and Macedonia. Together with the UN and NATO, it has participated in bringing to an end the ethnic conflict in Bosnia-Herzegovina and to the elaboration of an arms control agreement for the Balkans.

All these achievements, its regional focus and comprehensive approach to security matters qualify OSCE as the most adequate regional security arrangement for Europe, Russia and Central Asia alike.
Recent developments

The conflict between Russia and Georgia in the summer of 2008, the tensions in Transnistria between Moldova and Russia and the current crisis in Kyrghizstan have highlighted the need to rethink European security outside its current NATO-EU-Russia dialogue. Although Dimitri Medvedev has advanced the proposal of a new security architecture for Europe and Russia, distinct from NATO, the OSCE is perfectly capable of assuming this role. To achieve this, however, the organisation would have to become consistent with its regional focus and restrict its membership to 54 countries (all the European countries plus Russia and the 5 stans), but without the US or Canada, as is currently the case.

The presence of the US withion OSCE structures has become counterproductive, as the current negotiations in Kyrghizstan demonstrate. The State Department’s pressure to involve the OSCE in the stabilisation process there has led to the organisation’s failure to successfully participate to negotiations for an end to the ethnic conflicts in the area. In truth, the Eurasian focus of OSCE, which is regional and not global, comes into conflict with the vision of an OSCE “from Vancouver to Vladivostock”. Since 2001, Russia’s Far East security problems could be more adequately dealt with within the structures provided by the SCO (Shanghai Cooperation Organisation), and it’s even likely that the OSCE will have to bring its expertise to bear in Central Asia in cooperation with the SCO.

To summarize, instead of creating another EU-Russia cooperative structure, the leaders meeting in Astana could instead consider ways of re-focusing the OSCE exclusively on regional security matters, without the participation of the US and Canada, and of funding it more adequately than it is the case right now. (sources: Le Monde diplomatique, EurActiv, Project Syndicate)

Author : Spotlight on Geopolitics
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English, External Relations  , E.U., OSCE, Russia

Towards Bretton Woods III

 November 9, 2010

The US Federal Reserve’s second round of quantitative easing has prompted near-universal condemnation by the financial leaders of Germany, China, Brazil, the ASEAN and the EU. From The People’s Daily to Der Spiegel, newspapers are full of criticism and dire predictions of an impending international currency war, which is bound to result from the flooding of the American banking system with largely un-needed liquidities. On the positive side, however, the Fed ‘s move has also accelerated calls for the replacement of the current international monetary system, also known as Bretton Woods II, with a less volatile one, which for convenience’s sake we might call Bretton Woods III.

Under the original Bretton Woods, the fixed exchange rates mechanism was anchored to the US dollar, which in turn was tied to the price of gold. In 1971, the gold standard was abandoned and exchange rates were allowed to float, an arrangement known as Bretton Woods II. The US dollar remained the world’s reserve currency. Floating exchange rates provided ample opportunity to speculators to bet against the fluctuations in the values of different curencies, or – as it happened in 1998 during the Asian financial crisis, to attack weaker currencies like the Thai baht or the South Korean won, halving their value.

The wisdom of having only one reserve currency underpinning the value of all other currencies, and floating exchange rates based on one currency alone has first been challenged by EU countries through the adoption of the euro. Its introduction has immediately lowered interest rates and eliminated the possibility of speculating the euro’s exchange rate in member countries, thus largely undermining the concept of the float.

The 2007-2008 financial crisis and two rounds of quantitative easing by the Federal Reserve have accelerated moves towards the demise of the current dollar-based international monetary system. Indeed, with only 25 percent of the world’s GDP, the US economy is already hard-pressed to provide enough reserve assets, mainly US treasury bonds, to finance world trade. According to the IMF’s projections, if current trends are any guide, the ratio of issued reserve assets, currently at 60 %, would increase in 10 years’ time to 200 % of the US’ GDP, which would greatly increase the risk for major holders of US assets, such as China, Japan or the ASEAN countries.

Floating exchange rates, on the other hand, beside generating volatility, have led to the hoarding of US assets, especially in the wake of the Asian financial crisis. Thus Asian countries hold in excess of 6 trillion US dollars and treasury bonds, which they feel they need for open-market operations aimed at stabilising the exchange rates of their currencies and safeguarding their exporters. The current crisis has proved them right, as countries like China and Brazil have fared better than countries with less adequate US dollar-denominated reserves.

The Chinese central bankers would like to see the dollar replaced with an artificial asset created in the post-WWII era, the SDR (special drawing rights), whose administrator is the IMF. The Economist has even suggested the possibility of replacing the dollar with the euro as the world’s reserve currency, taking as a guide the way in which the British pound was replaced by the American dollar in the 20th century.

Finally, Robert Zoellick, the director of the World Bank, has lobbied in The Financial Times for the replacement of Bretton Woods II with a multiple currency system (the dollar, the euro, the yen and possibly the yuan, if and when it becomes fully convertible) to be based on the price of gold. Gold, as Zoellick points out, has already become a parallel reserve asset as a result of exchange rate volatility. In other words, the new international monetary system will have, in broad terms, the essential features of Bretton Woods I.

As the value of dollar-denominated assets worldwide stands to be heavily diminished by the Fed’s easy money policy, and as the floating currency system generates asset bubbles and financial instability for many nations, there is an urgent need to replace the current system with one more credible, more stable and less crisis-prone. Already, during last week’s talks in Paris, Presidents Sarkozy and Hu Jintao have agreed to put the reform of the international monetary system at the top of the agenda at the upcoming Seoul summit.

It seems that in future no one country will have the privilege of issuing reserve assets to back the world’s currencies. The new system will most likely be based on the assets issued by a group of economically powerful countries and will feature managed, as opposed to floating, exchange rates. (sources: Le Monde, Deutsche Welle, Financial Times, Reuters, The Economist)

Author : Spotlight on Geopolitics
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Economy & Euro, English, External Relations  , China, E.U., euro, Japan, USA

Austerity, QE2 and the Global Economy

 November 2, 2010

Last week’s top-level political meetings which took place in Brussels and Hanoi ended up with similar calls on the US to avoid stimulating the American economy by printing more dollars. Trying to stimulate growth by flooding the American banking system with liquidity is only of marginal importance to the US economy’s woes. Yet this is exactly the measure that the Federal Reserve is contemplating this week, one known euphemistically under the name of QE2 – which stands for the second quantitative easing. The measure involves the spending of minimum 500 billion US dollars by the Fed to buy assets like treasury bonds back from banks and thus infuse more liquidity in the banking sector, ultimately benefitting potential borrowers.

The “easy money” measure bears all the hallmarks of Friedman’s monetarist theories. According to him and his followers, a financial crisis is aggravated by a lack of adequate liquidity within the banking sector. Tackling the liquidity problem is deemed to reignite economic growth.

The Fed’s move will further lower the exchange rate of the US dollar and cause the appreciation of other currencies worldwide. Already, the Japanese yen is at a 15-year high against the dollar. In the past few months, the Thai baht has risen by 11 percent, the Philippine peso by 7 percent and the Brazilian real has acquired the unenviable reputation as the most over-valued currency on earth. Since this summer, the euro has also risen by 9 percent to 1.39 dollars, badly affecting exports and the feeble economic recovery of 2009-2010 as well.

The draconian austerity measures recently adopted within the EU, combined with a printing of money by the United States are thus further endangering an already anemic economic growth in the West. The situation is so serious that even a publication like The Economist has felt compelled to finally incriminate austerity and money-printing, as the wrong policies for leading the global economy back to a sustained growth pattern :

“there is a danger of overdoing the short-term budget austerity. Excessive budget-cutting poses a risk to the recovery, not least because it cannot easily be offset by looser monetary policy. Improvements to the structure of taxation and spending matter as much as the short-term deficits.”

Fiscal stimuli, not austerity, and changes to “the structure of taxation” (!) are therefore the policies needed to bring the global economy back to 2007 output and performance levels (which, by the way, The Economist does not expect to happen before 2015 !).

As worried central bankers from Frankfurt and Tokyo will also meet this week, it will be interesting to see what countermeasures, if any, they will decide upon in response to the Fed’s expected QE2 decision. Unfortunately, even central bankers disagree when it comes to measures like austerity, fiscal stimuli and changes to taxation levels, let alone Western politicians under pressure from their electorates to cut taxes further or to reduce the size of government payrolls. With an expected Republican win in the US midterm elections and with conservative politicians in power in the EU’s leading countries, the outlook is rather gloomy. The continuation of current policies will see the Western world condemned to a Japanese-type decade of economic stagnation or, at best, sluggish growth.

Meanwhile, the Chinese economy will ring up another decade of stellar growth rates, if current and past trends are any guide.

India's New "Look East" Drive

 October 28, 2010

In a surprising turn of events, Indian prime minister Manmohan Singh has this week launched his new “Look East” trade and foreign policy, during a week-long state visit to Japan, Malaysia and Vietnam.

India’s main concern these days is that of increasing the country’s foreign trade volume at least to pre-crisis levels. In Japan, premier Naoto Kan and Singh have announced the conclusion of the CEPA (Comprehensive Economic Partnership Agreement) and together they have explored ways of increasing bilateral trade, which currently represents only 0.8 percent of Japan’s external trade.

Singh believes that significant increases in trade could be achieved because of the “complementary nature of the Japanese-Indian trade relationship”, meaning that the Japanese have the capital and technology whilst the Indians have the labour force and the market. China’s rare earth minerals embargo and ways to go around it were also on the agenda, as well as a bilateral nuclear energy cooperation deal. India would like to solve some of its energy problems by building nuclear plants with Japanese help, which, however, might not be as simple as it sounds. India’s nuclear weapons program has alienated the Japanese public and there are concerns that India has so far refused to sign the nuclear non-proliferation treaty – a major sticking point in the negotiations.

Discussions between the two premiers also touched on regional security issues, with Japan asking for Indian advice regarding China. Whilst agreeing to cooperate closely with Japan in avoiding security threats for the two countries as a result of Chinese assertiveness on border issues, Singh has advised his Japanese counterpart to engage China through dialogue and to use patience as a weapon.

The underlying philosophy of the latest Japan-India security partnership in Asia is spelled out by a member of India’s National Security Advisory Board in no uncertain terms. According to him, “when there is a bully in the classroom, it is important for the other students to show unity. That is the meaning of a strategic partnership”. In European parlance, the Indian official is referring to the establishment of a balance of power mechanism aimed at containing China’s Asian ambitions. Such a strategic agenda mirrors that of the US State Department’s and looks to have been heavily inspired by it.

On his Malaysian leg of the tour, premier Singh has announced the signing of yet another Comprehensive Economic Cooperation Agreement (CECA), aimed at doubling trade volumes with Malaysia by 2015, from the current $7.3 billion a year. As in Japan, security and counter-terrorism were high on Singh’s agenda. Again echoing the State Department’s latest policy initiatives, he has told his Malaysian hosts that

“in today’s unsettled world, it is all the more important for societies that are democratic, multi-religious and multicultural to work together”.

To be sure, this is exactly what Mrs Clinton has been advocating at the start of her “new American moment” crusade of democratic versus “authoritarian” states…

Aware of Indian obsessions with China’s higher growth rates, Malaysian premier Najib Razak has stated that he largely agrees with The Economist’s recent cover story on India which predicted that soon India’s economic growth might surpass all expectations. ( I have read the main article myself, which in truth is not one of The Economist’s best).

The Indian premier’s new “Look East” policy, whilst it might lead to increased trade in East Asia, is sure to lead to an increase in diplomatic tensions with China, at a time when India needs more, not less, access to Chinese markets. When trade with China will deteriorate as a result, the Indian premier and his foreign policy pundits will realise that following into Washington’s footsteps is largely a thankless task. (sources: Deutsche Welle, Asahi Shimbun, The Himalayan, The Hindu)