Archive for category European Union

Merkel’s Faux Victory?

merkel

Germany’s election of September 22, 2013 appeared for awhile to suggest that Angela Merkel would be able to form a majority government, not needing a coalition partner.    That has happened only once in German post-war history:  the CDU/CSU under Konrad Adenauer had a majority from 1957-61.

The result, however, turned out slightly – and only slightly – different.

With over 71% voting, here is the result of the second ballot, the ballot where Germans choose their party preference:

chart

Clearly the CDU/CSU total of 41.5% is far above that of any other party.  But there are a few quirks in the German system.   First, a party has to get 5% to have any seats in the Bundestag.   This means that in the Bundestag the parties on the left earned 42.7% of the vote.   After that and a host of extra seats were figured out the end result in the Bundestag is this:

bundestagseats

(*Aside for political science folk:  In Germany half the seats are apportioned through single member districts, and half through a second ballot with party preference.  However, the allocation of the second ballot seats is done to get the Bundestag to reflect the second ballot results, meaning the second ballot is the most important.   This is done at the state level, not the national level.   Sometimes in a state a party may win more seats in the first ballot than they deserve based on the second ballot result.  They don’t get any new second ballot seats, but can keep the extra seat – the Bundestag is expanded for that purpose.  All parties who get under 5% on the second ballot are denied representation in the Bundestag, but can keep any seats won on the first ballot.  If they win three first ballot seats they get their second ballot representation.  So if the FDP had won 3 first ballot seats, they’d get their 4.8% of Bundestag seats.  They didn’t do that).

So with 630 seats, the Union has a conservative block of 311 seats, while the parties of the left have 319.  Conservatives would protest that the 4.8% for the FDP and 4.7% for the AfD reflect conservative values (though the AfD’s anti-Euro stance is completely opposite of Merkel’s position), meaning that most voters had a preference for a party on the “right.”  Yet those parties didn’t make the Bundestag.

So it’s possible that the SPD, Greens and Linke (left) will form a red-red-green coalition.   That seems unlikely.   The SPD hates the fact the Linke even exists.   Die Linken are getting most of the votes on the left in former East Germany.   In the West the SPD got 27.3% and the Linke only 5.3%.   Here are results from the East:

eastvote

In the East the Linke get 21.2 vs. 18.8% for the SPD.   The SPD has vowed to defeat the Linke, which was built atop the old Communist party of East Germany, and it’s successor party, the Party of Democratic Socialism (PDS).   However, the Linke are not going away – they even got 5% in the West!   Perhaps the SPD needs to recognize that the left is divided in Germany and deal with the Linke.   Twenty years ago that was impossible because the old PDS was still too communist in orientation.   Now that’s faded.

The Greens, also more popular in the West than East, have a strong civil rights background that cause them to see former communists as anathema.  All this has meant that the division on the left has been insurmountable – the Linke were poison.   Yet that hasn’t been true at the state level, and maybe now that the Cold War is nearly a generation in the past the SPD and Greens need to have serious talks with the Linke.

Merkel, on the other hand, is left in a situation where no one wants to govern with her.  From 2005 to 2009 she joined with the SPD for a left-right “Grand Coalition.”  The SPD was hurt by that, and there is virtually no desire within the party to join Merkel again – they have nothing to gain and a lot to lose.  Better to be an opposition party.   The Greens could reach an agreement with the CDU, but on policy grounds they come from a very different perspective.   The negotiations would be tough.  Beyond that, they see what happened to the FDP, who ruled with Merkel from 2009 to now.   In 2009 the FDP had 14.5.   They dropped down nearly 10% to the point that their future as a party has been questioned.   Governing with Merkel could be poison for the Greens.

So Merkel might end up having a minority government, tolerated by the SPD and Greens (meaning they’d vote alongside the government on most issues while not joining it).   That could work, but minority governments are inherently unstable.   If a new Euro crisis emerged, she might not be able to get her priorities through the Bundestag.

So her victory is tainted.   She’ll have a tough time getting a stable coalition partner and may have to rule a minority government.  Or perhaps the SPD will decide that their party is floundering and it’s worth the risk to forge an agreement with the Linke and Greens to create a government of the left.  That would shock the world, but certainly is possible.    Back in 1969 President Nixon called CDU Chancellor Kurt Kiesinger to congratulate him on the election, only to find that the SPD would reach an unexpected agreement to form a coalition with the FDP, making Willy Brandt Chancellor.  It’s possible, though unlikely, that Merkel won’t remain Chancellor.

So today the world reports on Merkel’s victory, and the CDU/CSU as the strongest party in Germany, gaining significantly from their 2009 result.  But thanks to Germany’s electoral quirks, this victory may prove hollow – and it may not be a victory at all.  Stay tuned!

2 Comments

Why the Euro will Survive – and Thrive

American and British commentators are often surprised, annoyed or dismayed by the fact the Euro trudges on, as both the European Central Bank (ECB) and the core states of Europe do what is necessary to protect the currency and avoid contraction of the Euro zone.   Why are German taxpayers willing to pay so much to protect banks in Ireland, or government debt in Greece, Portugal and Spain?   Why do Greeks accept an austerity program that put them into depression – and in 2012 elect a new government that favors that very program?

First, what is the Euro crisis?    On the surface it’s a sovereign debt crisis – southern European states have so much debt that investors are doubting they can pay it back.  This means that to sell bonds states have to offer a higher interest rate, since the risk is higher.  However, it’s not just a debt crisis.   Consider these bond rates:

bonds

Note how Germany and the UK’s rate has been dipping, meaning it’s easier for them to sell bonds, while Spain and Italy’s cost more – though historically near the average.  Only Ireland and Greece had an extreme crisis.   Those two were caused by very different factors.  Ireland’s deregulation of the financial sector was patterned on American practices, and thus they got hit hard by the bubble bursting.

The problem for Greece is not just debt, but structural weakness in their entire economic system (that’s why it’s always a false comparison when politicians try to compare the US or even California to Greece).

debt explosiondebtgdp

 

The first is telling – there has been a debt explosion throughout the Eurozone, including Germany.   This makes clear that one of the structural aspects of this crisis is a need to reduce debt.    Debt always goes up in a recession since revenues are down and claims for aid increase – yet with the bursting of the bubble it has become crystal clear that debt to GDP ratios above 60% are unsustainable.

The second chart shows that there is wide variation of debt growth since 2008 – but Ireland, Greece, Spain and Portugal have had the greatest debt increase, and are four of the problem states.  Italy’s debt growth is less, but while Italy hasn’t had a debt explosion, they’ve had consistently high debt.

spainitalydebt

 

Italy’s actually made significant structural reforms and was not hit as hard by the recession as others in terms of new debt – yet it’s debt level is one of the highest in the Eurozone.

The problem in Europe is that there is a core set of countries with strong economies that simply have to find a way to reduce debt and a set of weaker economies that have managed to hide their structural problems with debt or financial gimmicks.  The recession laid that structural weakness bear.

Many Americans want to blame European social welfare programs for the crisis, but that’s’ also easily disproven.  The chart showing debt to GDP ratio growth since 2008 shows Sweden actually reducing debt, and the Scandinavian countries faring well.   Germany is running a 7% current account surplus and remains the engine of Europe.   Countries with the best social welfare systems are faring very well, even better than the US.

germany

This is evident in bond rates.   Germany’s 10 year note now has a yield of 1.3 %.  That means that despite high debt levels, investors have faith in German bonds thanks to the strength of the German economy.    The US, UK, Sweden, and France all have yields of about 1.8% – still very cheap.   Ireland’s yield is now under 4%, thanks the EU and IMF recapitalizing Irish banks.   The worst of their crisis seems over – Ireland’s was a banking crisis caused by financial deregulation and that’s easier to solve than structural debt crises.

Ever since the ECB, EU and IMF made clear they’d do whatever it takes to protect the Euro, Spanish and Italian yields have gotten down around 4.5%  – historically a common yield.    Portugal is over 6%, and Greece still over 11%, meaning that markets still aren’t confident about Greece despite the EU bailouts.  Clearly, though the sense of crisis is passing, the smart money is now on the Euro.

So why – why has the Euro proven so resilient and gotten so much support?   Simply, the Europeans realize that if the continent fractured between the wealthy core and poor fringe, it would harm everyone.  Greece, Spain and Portugal, late joiners of the then European Community  (EC), would see their progress towards modernizing their economies punctured.   The core countries would also suffer.  They’d lose markets in the fringe countries, and their currency — perhaps a contracted Euro – would appreciate so much that their exports would suffer.

If the Euro were to break up, the poor countries would do like Iceland did – allow a depreciation of the currency to effectively cut everyone’s pay by 50%.    But defaulting and inflating on the fringe would do severe damage to the core’s banking system, as they are heavily exposed to that debt.   So it’s in the core’s interest to make sure that doesn’t happen.

Some of called Merkel the "Abraham Lincoln" of Europe, keeping the EU together

Some of called Merkel the “Abraham Lincoln” of Europe, keeping the EU together

German Chancellor Angela Merkel, in demanding countries undertake austerity programs and reform their economic structures in exchange for bail outs, has been criticized as wanting to force everyone to have the German model economy.   Germany’s gaining control of Europe!   But the German model works – and it’s what Sweden and other northern European countries follow.  You base your economy on supporting production and having sound fiscal and monetary policies.

If Italy, Greece, Spain and Portugal aren’t forced to structurally adjust to the realities of 21st Century globalization, they’ll fall behind and might never recover.  If they do – as hard as the next few years will be – they could emerge with new economic structures in place to allow them to grow and have sustainable, productive economies.   That will be good for everyone.

What the skeptical commentators don’t get is that the European Union has developed a different notion of sovereignty, one that sees the destinies of the European states as linked.  That’s a different way of thinking, people aren’t just German or French, but also European.   Such a re-conception of sovereignty is incomplete and has pockets of opposition.  But as Merkel pushes the EU towards a model of fiscal union, with other states recognizing it is in their self-interest to follow, the European Union might once again defy skeptics and prove itself stronger than ever.

 

8 Comments

Say No to Berlusconi

Mario Monti, Italian Prime Minister since Nov. 2011

Mario Monti, Italian Prime Minister since Nov. 2011

Mario Monti announced he was resigning from the office of Prime Minister of Italy despite a heroic year in which the Italians did what most people thought couldn’t be done.  He stabilized their finances and help brighten the outlook for the EU and Euro in the on going financial crisis caused by southern European lacking fiscal discipline.

Monti’s resignation, which will become official after the 2013 budget is passed, came as a surprise, sending shock waves through financial markets and the Italian political system.  This sets the stage for a critical election in February.

When Monti came into office interest rates for Italian bonds were above 7%, and Italy’s budget deficit was growing quickly.   Monti has managed to lower rates to 4.4% (meaning borrowing money is cheaper), though on news of his resignation it shot up to 4.8%    Total debt has stabilized at 125% of GDP.   Monti’s reforms  included budget cuts, reform of the labor market and other policies not always popular with the public.   As it became clear that Italians had the political will to deal directly with their problems, confidence in both the Italian economy and the Eurozone grew.

So why is Monti resigning?   Monti’s government is a ‘government of experts’ designed to make pragmatic decisions with as little politicization as possible.    Back in November 2011 Silvio Berlusconi resigned as Prime Minister after losing his majority, with international markets showing no confidence in Italy’s policies or leadership.   Monti was chosen as a technocratic leader both left and right could agree on, but one without a political mandate.

On Thursday December 6 Berlusconi withdrew his party’s support from Monti’s government.  Monti had always said that without broad political support a technocratic government was untenable.     But this sets up a potential showdown.

Silvio Berlusconi, one of the worst leaders in post-war European history

Silvio Berlusconi, one of the worst leaders in post-war European history

In my opinion, Berlusconi has been a disaster for Italy.   First elected Prime Minister in 1994 in the wake of the collapse of the Italian first Republic and the party system that defined it, Berlusconi promised to chart a new course for the country.  He said his party Forza Italia (forward, Italy!) would make Italy a modern well governed state, absent the corruption and undisciplined economic policies of the old system.    Despite being Prime Minister three times — from 1994 – 1995, 2001 -06, and 2008-11, he has not followed through.

In fact, Italy’s performed best when Berlusconi was not in office, including the job Romano Prodi did on economic policy in the late 90s to get Italy into the Eurozone.   As Prime Minister Berlusconi mirrored the corruption of the first republic (he was convicted of fraud in October — he’s out free as he appeals, but that’s just the tip of the iceberg of his questionable and likely illegal actions), and the Italian budget mushroomed.

Unfortunately the Italians may vote him back into office.   He claims he wants to stand again, and as media mogul he has the capacity to shape the narrative of the short election campaign.   Despite his faults, his personality and appeal to conservatives means he’ll win a lot of votes.

Pier Luigi Bersani, who will represent the center left in Italy's election

Pier Luigi Bersani, who will represent the center left in Italy’s election

Ironically global markets would be happier if a former Communist, Pier Luigi Bersani, were to defeat Berlusconi.   Bersani’s center-left coalition has pledged support for Italy’s commitments and vowed not to go back to the kind of politics and spending of recent years.   Berlusconi, however, has been skeptical of Italy’s commitments and has hinted that he wants to increase spending and undermine the work done last year by Monti.

Of course, Monti might himself run.   He could hope to get support from centrists and moderates who want to transcend the polarized politics of the left vs. right, and reward Monti for the work he’s done the last year.    Monti would not have the backing of a major party organization, but Italian campaigns are short, intense, and not that expensive.

A Monti victory would not only keep him in office, but give him something he now lacks – a political mandate.   A technocratic party is supposed to avoid political controversy.    When Monti pushed through labor law reforms, he met considerable opposition from Italy’s strong labor unions.   Rather than picking a fight he negotiated with them and a compromise set of laws passed.    With a political mandate, Monti’s hand in such negotiations would be stronger, though it’s unlikely he’d seek political confrontation.

The Italian parliament

The Italian parliament

This election is important for both Italy and the EU.  If Monti were to win, there would be an enthusiastic response from markets and renewed optimism that the worst of the Euro crisis is passed.  If Berlusconi were to return, Italian bond yields would rise and both Italy and the EU could be thrown back into a deep crisis.   Moreover, Italy’s path out of a flawed and corrupt system of governance would be halted; Berlusconi represents precisely what Italians must reject.

Signs are good that Berlusconi’s shine has worn off.   He’s down in the polls, and even he wanted more time to prepare for the next election.   His fraud conviction and his record as Prime Minister overshadows his media appeal and charisma.  By hanging on he deprives Italian conservatives of a viable alternative.    When markets prefer a former Communist to a successful capitalist businessman, that says something!

Still, Berlusconi has had a remarkable capacity to come back and no one should underestimate his Machiavellian political skills.    His return to power would be a disaster for Europe and Italy.

3 Comments

European Union as a Model

For three years I have been running in place in terms of my research.   It’s not that I haven’t worked.  I’ve delved into new literature and even did some writing.    I’ve blogged about it here and here.   Yet somehow, despite lots of notes, books read and false starts, I’m left where I started – lots of ideas and ambitions, but no clear research strategy.

How do I restart my research?   My last publication was in 2009, when I shifted to this “new project.”   The final draft of my last major work, German Foreign Policy: Navigating a New Era, was sent to the publisher on April 3, 2003, the day my first son was born.     With young kids I purposefully cut back on research, but now I have a desire to write and produce but progress is elusive.

The problem is that I lacked a clear center.   The themes have been shifting- the changing nature of sovereignty, the impact of the communications revolution and social media, the profound challenge created by energy and environmental crises, the dysfunctional nature of economic policy throughout the industrialized world and the shift of power and influence from the West towards countries like China, India, and Brazil – whew!    How do I come up with a clear framework?   At times I think I have a track and then somehow it goes astray.

So I started to think.   What is the point of my research, why am I motivated to move away from examining German foreign policy?    The answer is because I feel myself lucky and intrigued to be living in an era of real crisis and transformation (the theme of this blog).   As a social scientist I find it fascinating to be on the planet at this time, watching as one era folds into another, bringing about profound change.

Watching the political discourse, its clear in the attacks on Obama that many people are lost in the 21st Century, trying to understand it through a 20th Century anachronistic lens

A motive of mine is to focus on what I see as the biggest barrier to successful navigation of this period of transition – old thinking.   Old thinking is everywhere!   When I see someone call Obama a “socialist” or a “Marxist,” I shake my head in amazement — can’t they see how obsolete looking at the world in those terms has become?   When people argue against globalization, talk as if a fossil fuel based economy is sustainable or speak of American power as if it still has the force it did in the last century, I realize “old thinking” dominates much of the political discourse.

That’s true in the US, but not so much in Europe.   I’m surprised by how Americans dismiss the European Union.   When the Eurocrisis started a couple years ago bloggers said things like ‘bye bye Euro’ and a few dismissed the possibility that the EU could survive.   I realized they were imagining people in the EU to be thinking about politics just like they were – with ‘old thinking.’  This is especially true from Great Britain and the US, the two former hegemonic powers where old thinking remains strongest.

E pluribus unum?

Yet within the EU, new thinking has already become entrenched.   The EU achieved the goals set by the Kyoto accords without harming their economy and are cutting ambitiously moving forward.   Germany plans to be off fossil fuels by 2050.   Military power is considered best used for humanitarian interventions sanctioned by the UN and not raw pursuit of national interest.  Sovereignty has already been replaced by subsidiarity, and globalization is taken as a matter of course.

That’s it – the European Union needs to be the center of the research.   All policies and issues connect, and it takes me back to a literature I know well and have been studying since the 80s – European integration!   Moreover, I think there needs to be some work done really stressing the revolutionary, positive and sustainable aspects of the EU at a time when people want to prematurely embrace its demise.   The fact the EU won the Nobel Peace Prize this year only adds to its relevance.

The Euro crisis opens the door to analyze the global economic crisis, its causes and the way out.  The EU’s strong focus on human rights, the environment and energy opens the door to address those issues, including the diversity between France’s embrace of nuclear energy to Germany’s (apparent) rejection of the same.    The diverging paths of the US and EU since the Iraq war, including questions about the future of NATO, open the door to discussing terrorism and the nature of war/conflict in this new era.   Issues involving Islam and the West are profound in Europe.   The whole package requires a new theoretical approach to politics, building on the neo-liberalism and identity theories of the 20th Century.

That necessarily includes the impact of the information revolution ranging from the internet to social media and beyond.  But with the EU as the core, I can now envision how it will fall into place, including how all the work I did the last three years is not for naught — I simply needed something to center it.   To find that I went back to my roots as an academic, a focus on Europe and the EU.   In fact, my concluding chapter in the book on German foreign policy has those very arguments which I can build upon.

Of course!  The answer has been in front of me all the time.   I thought I had to venture away from my specialization to look at media and change.   The key is to integrate these ideas into what I’ve already been doing.   Time to get writing!

7 Comments

The EU Deserves the Peace Prize

When I first got to know the European Community it had ten states and some people continued to call it the EEC – the European Economic Community.   It was in a funk.   Greece was the newest member, but progress towards increased integration was fleeting.   The British were angry about paying so much into the system, divergent monetary policies meant that exchange rates fluctuated rapidly, and the word of the day was “Eurosclerosis” – the project to build a united Europe was stagnating, and could perhaps fail.

Studying at the Bologna, Italy Center of Johns Hopkins SAIS I took a course on “The Politics of European Integration” by Dr.  Gianni Bonvicini, a young and enthusiastic supporter of the European Community as it was called then.     As we learned about integration theory, I found myself fascinated by the process through which countries that had caused war and devastation moved towards peace and cooperation.

The choice of the EU for the Nobel Peace prize surprised many

The war and devastation had been profound in Europe in the first half of the 20th Century.   The Europeans gave us the holocaust, Communism, and colonialism.   Conquering the world, taking slaves, draining other lands of resources and wealth, the Europeans reflected the most violent civilization of human history.   To be sure, the violence was often sanitized by claims they were spreading Christianity, bringing civilization to the primitives or ‘exploring the world.’   Even now we express horror at the Taliban killing a young girl while our own drones kill innocents more often than we realize.   (Update:  ‘Europe’ here refers to the “West,” which includes the US.)

The violent and social Darwinistic turn taken by the Europeans in the 19th Century came home to roost in the first half of the 20th.   Violence, depression, war and ideological conflict took the most powerful set of countries on the planet and left them devastated.   As the US and the USSR began their Cold War, the Europeans realized that they’d never have a brighter future if they didn’t rethink the basis of their political culture.

It started small.   Former wine merchant Jean Monnet, a war time planner, recognized that cooperation and trade yield benefits while conflict and isolation lead to war.   When they couldn’t convince the Europeans to leap forward to a United States of Europe — nationalism would not die so easily — they took another track.

Jean Monnet, the “father of Europe.”

After the war the European Coal and Steel Community (ECSC) was created in order to put coal and steel under supranational control.   Since most of the coal and steel came from Germany, this was designed to both deny Germany such control, but allow Germany to use their resources for economic gain.   West Germany, France, Italy, Belgium, the Netherlands and Luxembourg were part of this organization, and it worked well.

In 1955 talks started in Messina to undertake a bolder project.   What if the six ECSC states could form a customs union, a region with no internal tariffs and a common external tariff?    On March 25, 1957 they signed the Treaties of Rome to create the European Economic Community to do just that.    The Common Market was complete by 1967, with the ECSC, EEC and Euratom (an organization for the peaceful use of atomic energy) merging to form the EC – the European Community.

The economic boom that Europe was creating after WWII yielded the desired effect — spillover.   People saw that cooperating and trading worked and in 1973 the European Community expanded to nine states, adding Great Britain, Ireland and Denmark.   Then the energy crisis hit, exchange rates started to fluctuate wildly as the US abandoned the Gold Standard and fixed exchange rate system, and it appeared the EC had hit a wall.

He had jet black hair and was very young when Bonvicini prophetically told us where the then-EC was headed

Dr. Bonvicini told us not to be fooled by the apparent crisis in the EC.   It already has served its original purpose, he reminded us, making war between France and Germany — or any member of the EC — unthinkable.   But more than that, he said the process had not truly stalled.   France and Germany pushed for the creation of the European Monetary System (EMS) in 1978.   Wild divergences in monetary policies made the EMS seem almost pointless, but he predicted someday it would yield the desired outcome: a common currency.

That was pie in the sky fantasy in those days.   How could inflation friendly France and Italy ever unite with West Germany and the Netherlands, two countries with very tight monetary policies?   Impossible!   Unthinkable!   In fact, many thought the break up of the EC probable.  The British were demanding a rebate, sovereignty now was trumping supranationalism.

Bonvicini was right.   Britain got its rebate, and soon the EC moved towards a “Europe without frontiers,” the Single Europe Act designed to eliminate diverse regulations on goods and services to make trade truly free, and cross border investment easy.   Once that was done, countries found themselves forced to converge on monetary policy, lest investment dollars flow to countries with the most stable exchange rates.   When the Cold War ended, the French and Germans led the way to create a common currency, the Euro.

With that agreement the EC became the European Union, and after the Cold War it expanded from 12 states to 27.   Many East European states were veering towards corruption and authoritarianism, but the EU demanded they embrace democracy and rule of law in order to become members.   The economic allure of the EU was too great to ignore; authoritarianism was rejected.

By the dawn of the 21st Century countries that had fought each other in massive wars now gave up their currency for a shared one, and checks at borders were removed.  One could travel from Italy to Austria to Germany as easily as traveling from Massachusetts to Maine.   Workers can go anywhere in EU for a job, students can go anywhere to study.   Corporations merged as national economies became so linked and interdependent.   Sovereignty was transformed as Europeans were citizens of both a state and the EU.

The states of the European Union

The EU has also worked for peace world wide.  It is the only major actor on the world stage that has accepted both UN sets of human rights, economic and political.   It is the major force behind UN peace keeping operations, and the EU has signed and met the Kyoto accord agreements, proving that achieving those results is economically beneficial rather than harmful.   The wealthy states of Europe are now helping states like Greece and Spain deal with what otherwise would be complete economic collapse.

Simply, the world is entering an era of globalization in which past notions of sovereignty and self-interest are becoming obsolete.   States are no longer independent units but interwoven in a web of economic and political relationships.   The old way of thinking, still clung to by most in the US, is obsolete.    Transitions from an old order to a new one are often violent and lengthy as people can’t let go of old ways of thinking and doing.   The EU offers a model of what can work in the future.  It reflects the most promising sign that this global transition might be peaceful rather than violent.

So congrats to the EU – a fitting recipient of the Nobel Peace Prize!

10 Comments

Four Years In

The complex (and mostly private sector) causes of this crisis defy soundbites and thus are not really a part of the current political debate.

Although in retrospect the economic slowdown that continues across the globe to this day started sometime in 2007, the realization that we were entering a period of intense economic crisis became undeniable back in September 2008.   The world stood at the brink of a collapse of credit and a spiral into severe depression.    Various fiscal and monetary stimuli helped ward that off, but many of the core problems remain:

1.  High debt levels in the advanced industrialized states from both government and private sector actors.    US total debt is near 340% of GDP, about $50 trillion.   In comparison total global government debt is just under $50 trillion.    Total global debt is at $190 trillion, or about three times the global GDP.   So this is a global problem, and it’s not primarily government debt that’s to blame.

A fetish with government debt has caused people to overlook the fact that the problem is total debt — global debt to GDP ratios are quite high

2.  Shifting demographics in the advanced industrialized states which will require a modification of retirement pension schemes and other reforms in order to stay solvent.

3.   An imbalance between consumption and production, with the former focused on the advanced industrialized states of Europe, the US and Japan, and the latter in emerging markets such as China, Brazil, and India.

Consumption rose to unsustainable levels after 2000, even as production declined – the era of consumerism was a fools’ paradise.

4.   Environmental factors involving global warming, over population, chemical poisons and other results from over a century of unprecedented material economic growth.   We don’t know how bad all this will be, but those who dismiss or minimize the danger are living in a fools’ paradise.

5.   Potential problems with natural resources, particularly oil, water, and minerals needed in order to maintain economic growth.    Energy shortages are the most visible (and have been experienced in small doses), but crises involving water and in the near future other valuable minerals may define the next century.

Political leaders are still trying to grapple with how to handle this transition.   There are no easy solutions.   Despite the election year rhetoric, no President would have fared any better than Obama on the economy – this is a global, structural crisis that defies quick policy fixes.     The two favorite solutions are dubious.   From the left you get the Krugman School that points to the need for a massive stimulus of trillions of dollars to retool the economy and get the country moving.     On the right there is a call for less government regulation and less spending.

Less government spending will slow the economy, and in fact slows it faster than tax hikes would.   Less regulation might be good in many sectors, but in some such as the financial sector it was the cause of allowing things to get so bad.   The housing bubble (which helped fuel the growth of private debt) is directly attributable to lack of regulation of derivative markets and the collapse of effective financial regulation in general.    Government regulations on small business may choke innovation, but lack of regulation of big corporate actors that buy government favors and transcend borders has been fatal.

This chart shows the problem, a massive increase in debt from 2001 to 2008 (not government debt, total debt). This is a private sector crisis, not created by governments.

Government stimulus would cause a short term spurt, but the evidence is strong that once you reach about a 100% debt to GDP ratio the increased debt does more harm than the good done by the stimulus.   In Japan goverment debt soared to 200% of GDP without stimulating growth.   Moreover, unless its directed in a manner that is assured to improve productive capacity and build the economy the money could end up going into consumption of foreign produced goods or risky financial speculation.   In short, if not done right a stimulus would leave us no better off but with much more debt and a deeper structural crisis.

So four years in, here’s my assessment of where we are – an ambiguous assessment, I admit!

1.   Gloom and doom has been overstated.   This is a long term crisis, but not the collapse of western or global civilization.  We have fiscal and monetary tools to avoid collapse or depression era numbers.

2.  Debt levels in the private sector are down significantly (total US debt has gone from about 375% of GDP to 340%).   That paying down of debt is a big deal — and is also one reason the stimulus from more government debt didn’t do more.  In a best case scenario this will continue and level out and over time economic conditions will improve.  However, the old “normal” of very low unemployment, easy credit and consumerism was built on sand – we won’t go back to 2006.

3.  Big structural issues – especially demographics, energy, water and global warming — remain unknowns.   Demographic change is less dangerous than global warming.     Demographic problems can be solved through reform of pension systems and a growing economy with more reliance on technology.  Ultimately too many people is more dangerous than too few.   We are seeing a start of a transition from fossil fuels to alternatives, and relatively large natural gas supplies suggest this could be a stable rather than sudden transition.   Global warming can make all these problems worse, however, and very little has been done on that front.   That remains the gravest threat facing humanity.

4.  Inflation is coming.   An odd aspect of this whole crisis is the way deflationary fears have overshadowed inflation fears despite weaknesses in major global currencies.   On the plus side, the ability to pay down (private) debt despite low inflation rates is a very good sign that we don’t need to inflate our way out of this crisis.   However, to keep the Euro viable loose monetary policy will be embraced by the ECB to handle Spanish, Italian and Greek debt.   The Federal Reserve may engage in another bout of “quantitative easing” (akin to printing money).   This shouldn’t yield a currency collapse or hyper-inflation, but robust inflation rates of 5 to 10% probably will occur and create new difficulties.

5.  The weatlhy are not always job creators.   The growth of debt in the last ten years have yielded a growth of wealth for the investor class.   This has not been earned through job creation but easy money schemes built on debt – the very thing that threatens the global economy.   It was built on bubble money that yielded no productive gains; this kind of easy money at low tax rates is part of the problem, not the solution.

All told, I’m more optimistic now than I’ve been any time in the last decade about the future of the economy.   I think we’re still five years away from emerging into a new kind of global economy and there are still difficulties and pain to endure.   We’re four years in, and at least four years from the conclusion.   But there is some light at the end of the tunnel.

The real crisis is the gap between the first world and third world; while globalization is improving conditions in some areas, most of Africa and much of Asia still faces intense poverty

2 Comments

Greece Steps Back from the Abyss

New Democracy leader Antonis Samaras became Premier on Wednesday, heading a three party pro-European government.

Last weekend the Greek people faced a decision on their future with their second election in as many months.   The first election, held May 6th, was a shocker.   Greek austerity, forced upon the country by the European Union, led to a massive deepening of the Greek recession and a significant drop in the standard of living and quality of life in Greece.   Few countries have seen such a dramatic and unexpected decline as Greece has.

The people felt humiliated.   They realized that their leaders had been lying and gambling with their country’s future, putting the country in tremendous debt, fostering corruption, and then leaving the Greek people holding the bag when everything fell apart.    On top of that the Germans and the rest of the EU needed to bail them out, helping not average Greeks, but the politicians and banks that created the mess.   That anger came out in the election results.

New Democracy, the conservative party, had the most votes with 18.85%.  That won them 108 seats, thanks to the bonus of the largest party getting 50 more seats than the percentage should earn them.   That was down from 33% in the previous election, though they gained 17 seats since in 2009 they were not the largest party.

The ruling party, PASOK (left of center) fell from 43% to 13.18%, losing 119 seat (and ending with 41).    The surprise winner was the radical left wing party Syriza, led by Alexis Tsipras.   Tsipras tapped into the anger and humiliation to rise from 4% to 16.8%, passing PASOK.   The result took Europe by surprise.   In a 300 seat parliament, even PASOK and New Democracy together couldn’t form a ruling coalition, as they controlled only 149 seats.   Talks with other parties made it clear that any government that they formed would be shaky and could easily fall, which is not a good thing when the country has to make very difficult decisions.

37 year old Tsipras signals a left wing challenge to Euro-orthodoxy. If the main parties can’t show real progress, he could emerge stronger in the next election.

In the uncertainty of the moment they decided that the most prudent course of action was to ask the voters if they really meant it.   A new election was planned for June 18.   As the campaigning grew it was clear that Greeks were reading the election as a referendum on the Euro and to some extent the EU.    Should Greece remain in the Eurozone?

Tsipras made a confident, powerful and emotional argument that they should not, unless they get real concessions from the EU.   Do the Greeks really want to have their sovereign decisions made according to German dictates?   Should the Greeks accept an austerity that requires them to see the recession cascading inward and causing more pain for average folk?   Shouldn’t the politicians of PASOK and ND (New Democracy) be punished for their corruption and willingness to drive up such debt with horrific fiscal policies? Shouldn’t the Greeks be in charge of their own destiny?   After all, the Europeans want to “save” Greece to save their own banks — doesn’t that mean Greece has more bargaining power than they realize?

As Tsipras’ popularity grew many assumed Syriza would end up on top in the June election, perhaps with enough votes to form a stable coalition.   The result would dramatically increase the odds of a Greek departure from the Eurozone, even though Tsipras coyly claimed he simply wanted to negotiate “fair” terms.

After early reports had Syriza as narrowly winning as the largest party, the actual results gave that honor to ND.  ND earned nearly 30%, up over 10% from a month before, now with 129 seats.  Syriza also increased its share to 27%, gaining 19 seats.   That means that compared to 2009 it rose in popularity by 23%.    Although they didn’t come out on top, it was still a remarkable performance for a radical party once seen as too extreme to be taken seriously.    PASOK fell further, losing 8 more seats and down to 12.3% of the vote.     The former ruling party was clearly being punished.

Yet PASOK and ND could combine for 162 seats for a clear majority in government.   To provide added stability they added the pro-EU Democratic Left, whose 17 seats gives the coalition 179 out of 300.

The first recorded moves towards democracy came in Athens; it was messy but voters show democracy still works.

So what does this mean?  The Greeks took a hard look at what Syriza represented and found it scary.   The party is Euro-communist, and its radicalism would put it in opposition to the rest of Europe.  Many fear that it would drift towards dictatorship, like past Communist parties did.   That seems unlikely, but many Greeks angry about the situation didn’t want to leap to the far left or the far right — those ideologies have a poor track record.

They also had time to digest what would happen if they brought back the drachma.   First, they’d see the value of their currency plummet, which would force them to default on loans.   Second, they’d not be able to get new loans, people would trust neither the Drachma nor Greece’s ability to pay them back.    That would either mean a fall into near third world status or, should Greece try to use monetary policy to stimulate the economy, a risk of hyper-inflation.

More importantly, they wouldn’t be part of Europe any more, at least not the civilized united and progressive Europe that the EU represents.   The Greeks know that a small backwards troubled economy south of the Balkans could drift farther from the prosperity and stability that northern Europe represents.   Independence and sovereignty sound good in theory but in practice they represent a fading era.  Greece without Europe would be a Greek failure.

The problems have not been solved.   The austerity program as currently structured is too harsh and has no growth aspect designed to help Greece truly restructure its economy.    With the rise of French President Francois Hollande as a foil and potential partner to Germany’s Angela Merkel, the EU has the hard task of formulating a new approach that isn’t so harsh on Greece in exchange for stricter monetary policy controls.    The banks are going to have to take loses – the problem can’t be solved by governments alone.

Tsipras (center) has allies in Germany in “die Linke” (the left), a party to the left of the Social Democrats. Here is talks with Klaus Ernst and Gregor Gysi in Berlin.

But some of the urgency has gone away.   They have time, and in Germany, Greece and elsewhere there is growing recognition that a contraction of the Euro to an inner core of wealthy countries would damage everyone.  And the longer this drags out, the less likely it is that things will fall apart.  The EU and the Euro are revolutionary, they are redefining what a “state” is, what “sovereignty” means and how economies are structured.   Such transformations are never easy, but most Europeans realize there is no turning back.

28 Comments

More Europe for the Euro

The duo to not only save but also strengthen the Euro

The European Union has a history of turning crisis into opportunity.    At many times during its existence people thought that the project went too far, and that sovereignty would trump interdependence.   There was the ’empty chair’ crisis in 1966 when De Gaulle threatened to leave the EEC (then a group of six states) if they didn’t agree that all decisions have to be unanimous.

It was for many proof that sovereignty would always win.   Yet while they did let DeGaulle have his way on the issue he was angry about, the Luxembourg compromise that brought France back did not embrace DeGaulle’s principle of sovereignty first.   He accepted that because he was facing a revolt from below – the French people and French business thought DeGaulle was endangering France with his brinksmanship.   Already the eight year old organization had altered national interest.

Giscard and Schmidt ignited the “Franco-German engine” of European integration

In the seventies it appeared that the loss of the Bretton Woods system fixed exchange rates doomed the EC (now 9 states) to having no coherent monetary cooperation.   That could undermine the whole project, it was argued.   However, right when so-called Eurosclerosis was at its worst two people turned the situation around completely.   Former Finance Ministers and now leaders Helmut Schmidt of Germany and Valery Giscard d’Estaing of France developed the European Monetary System, the precursor to the common monetary policy.   Then when the Cold War ended many people thought the EC had run its course, that Germany would look eastward, and the organization might perish.

Instead German Chancellor Helmut Kohl and French President Francois Mitterrand forged the treaties that created the European Union, introducing a common currency and ultimately embracing rather than fearing the states of eastern Europe.    Now the EU has 27 members, 17 of them part of the Eurozone (states using the Euro as their currency).

In that backdrop the current crisis should be seen as a precursor to another step forward in bringing Europe together.   However, commentators in the US and Great Britain seem eager to declare the Euro dead or something that should have never been tried.   They are wrong.

The current crisis is serious, and shows some fundamental problems with Eurozone policy up until this point.   When it was originally planned, leaders knew that states could only support a common currency if they had similar fiscal policies.   That led to strict criteria demanding convergence on interest rates, inflation rates, budget deficits and total debt to GDP ratios.  If those criteria had been strictly enforced, there would be no crisis today.    Unfortunately, those criteria were loosened, often for political grounds.   In order to speed the spread of the Euro, economic dangers were discarded.

The problems began when the cost of unifying Germany turned out to be immense, causing Germany to violate the original criteria.    France also had an economic slowdown leading to a similar loosening of the rules.    They were the ones who needed to enforce discipline, and once they broke the rules it was hard to keep others in line.

They might have tried, but the bubble economy of the first decade of the 20th Century created an illusion that all was well.    Debt may be high, but the world economy was growing and investments were yielding considerable profit.  In that deluded atmosphere countries like Greece, Italy, Ireland, Spain and Portugal ignored the warning signs — and their problems were ignored by those in the EU who should have known better.

Even if France and Germany lead, Greece may not follow. Populist Alexis Tsipras could lead Greece a different direction should he emerge victorious on the 17th – but even he has to understand the consequences.

The southern states bring to the EU a different ethos than the northern European states.    Greece is a prime example.   The level of corruption and public sector employment is immense while the actual productive economy is small.   Getting into government is a way to make money and gain perks.   As their public sector boomed, it was funded via debt and risky investment schemes.    When the bubble burst in 2008, the problems were laid bare.

Yet its not just a problem for the south.   Someone had to finance that massive debt, after all — and those someones were predominately northern European banks and investors.     So a default on debt or economic collapse in the south would quickly spread all through the EU, bringing down German banks as quickly as Spanish ones.   The economic contraction could yield a depression that might spread far beyond Europe.   In short, the bubble delusion led northern Europeans to finance the southern European excesses, making them just as vulnerable.

The map is slightly out of date – Estonia joined the Eurozone last year (2011)

The problem is that the creators of the Euro were right at the start:  you can’t have monetary union without strict rules forcing fiscal policy coordination.   They were wrong that just setting criteria would be enough — criteria can be ditched, after all.

The solution is clear:  1)  Find ways to eliminate and/or pool the debt from the southern European states.   While this is often correctly decried in countries like Germany as a bailout of states with incompetent economic policies, not doing so could also bring down the financial sector of the big, rich, northern states.    Therefore, Germany and others have to bite the bullet and help pay for the corrupt folly from the south.   However, that also leads to 2) there needs to be a tighter set of rules and institutions to force rational fiscal policies on the southern European states.    Often decried as an ‘austerity’ that simply deepens the recession in the south, it’s a necessary step to a sustainable economy.   Adding to debt and spending more without restructuring those economies will simply make the problem worse.

So if Germany and states in the north have to pay more, states in the south have to give up a kind of easy money life style that allowed them to live excessively beyond their means for so long.  Tax evasion, early retirements, massively large public sectors and the like will have to give way to an economy built on productivity and work.

If it works, the restructuring will be good for everyone.   Southern states will start to have real rather than faux prosperity and develop their productive capacity.   Not only will this save banks in the north from massive loses due to defaults, but will also be an engine of eurozone growth.

The poor/corrupt/unproductive south is unsustainable in a 21st Century European Union.    The difficult but necessary transition they’re going through will ultimately end the rich/poor dichotomy between northern and southern Europe.    The Euro will emerge stronger, and a Europe with much better coordinated fiscal and banking policies (overseen by real institutions not just vague rules) would be a far better bet than leaving the national economies to follow their own idiosyncratic paths.

Merkel and Hollande know the stakes.   They know that they can join past Franco-German duos in turning a crisis that many thing will tear the EU apart to one that strengthens it and brings it together.   The negotiations won’t be easy, but given the history of the EU and the recognition that the era of fully sovereign independent states is over in Europe, I’m confident they will be able to accomplish the task and make the EU a model of how political economy in the era of globalizationn can be structured.

17 Comments

An Excursion into Poland

No border checks crossing from Germany into Sublice, Poland

It’s becoming increasingly clear that the world is going through an economic event that is more like the Great Depression than any other economic downturn since WWII.   The system has become unsustainable and there will never be a return to “normalcy” as it was defined before 2007.    Yet glimpses of a solution can be seen in thinking about the changes of the last twenty years, including a Polish border town named Sublice.

On the Frankfurt an der Oder side, ready to cross into Poland

I first visited Sublice in January 1992, accompanying a group of students from St. Olaf College who came to Berlin as part of their “Global Semester” led by Dr. Rod Grubb.   A bus took us to the border, and we crossed the Oder river into Poland. We had to get our passports stamped, answer questions, and then pass through a narrow passageway into Poland.   Along the east bank of the Oder tents spread out for as far as we could see — Poles came to the border, waiting for the chance to swim across and evade the overstretched German security forces.

In Berlin East Europeans were selling cigarettes below market value in every piazza.  Berlin had become the auto theft capital of the world, as cars would be taken the short distance to Poland, repainted and resold on the German market.   Right wing violence was rising in Germany as well.

Article 16 of the German constitution vowed that no one claiming to be fleeing political persecution would be sent back until an investigation of that claim was completed.   This was a response to how Jews were often sent back from countries they escaped to before WWII, only to be killed in the holocaust.   With the fall of the iron curtain East Europeans were rushing to rich Germany in droves, and when caught they claimed political persecution.     That required that the German government give them food and shelter until a hearing on their case could be held.   With the massive influx, the courts were years behind schedule with former East German bases converted to hold all the refugees claiming persecution.

To many East Germans this was absurd — money was spent to feed and house foreigners while East Germans were unemployed and losing out.    Ultimately they changed the law to limit the countries where political persecution existed, but in early 1992 the situation was tense.   The situation in Eastern Europe was dire; Germany was the gateway to the West.

Modern supermarkets and even a shopping mall now define Sublice, which still obviously targets Germans coming over with Euros (Poland still uses the Zloty)

In Sublice  we saw horse drawn carriages and poverty was extreme.    Our Deutschmarks could go far, but there was nothing to buy.   Even the meal we had tasted as if the meat wasn’t exactly fresh.   The roads were potted or unpaved, the houses in disrepair.   When we crossed back to Frankfort an der Oder (not to be confused with the huge western city of Frankfurt am Main) it felt like we were going back to the first world.

This year Frankfort an der Oder was almost indistinguishable from the West.  I could recognize and point out the East German architectural, city layout, and the like, but to the students it was a clean modern little city — nicer than many in the US.

Heading to the “Bazar” – the town’s flea market which has grown from a chaotic mess to a lively, orderly market

Sublice is a step below Frankfurt/Oder still, but so much different than twenty years ago.   It is clearly a border down, with signs in German.   20 years ago when we went to the town flea market it was punctuated by people selling off their possessions in a chaotic maze of stands and sellers.    It’s still there, now with a nice sign labeling it the “Bazar” and clearly defined rows of shops selling quality items and, of course, Spargel.   Spargel (white asperagus) is in season and being sold everywhere during the trip.    As we walked by the people running the stands switched into German to try to get us to purchase fresh ‘just picked’ Spargel.

Although the orderly market place denotes increased prosperity and development, part of me misses the romantic chaos of the market I visited in 1992!

Poland is still obviously behind Germany, and towns far from the border lack the influx of German Euros.   But the success since 1992 hints at the solution to our economic woes today.   After the nationalist reaction to the East European “invasion” after the end of the Cold War, Germany and the EU chose to embrace the East and welcome them into the EU.   To succeed we need to resist knee jerk nationalist reactions and recognize the power of integration and cooperation.

The reason Europe grew after World War II and the reason Poland is growing now is because of openness to trade and cross border investment.   Simply, when humans cooperate peacefully and work together, we succeed.  When we close ourselves off, fear losing what we have and see life as a zero sum game, we end up with war and stagnation.

The EU, despite current problems, is an undeniable success story as countries once at war with each other have achieved new levels of prosperity thanks to trade and integration.   Indeed, Americans skeptical of the EU often don’t get how integrated these economies are; there is no turning back to the obsolete order of fully separate and sovereign independent states.

For all the particulars of the current economic crisis, the big issue is that we have a globalized economy that has outgrown the institutions, rules and norms of a system based on sovereign states.   Big money can evade regulations, democracy is weakened by how the global economy forces states to make particular choices – whether it’s Greek austerity or German tax payers bailing out failing economies.    This is true for China and the US, as interdependence enforces harsh limits on government efficacy, even as people expect governments to provide solutions.

The Oder river, with Germany on the left, Poland on the right

Standing at the Oder river, thinking about the past and trying to glimpse into the future, one thing was clear: we need to look beyond the political institutions of the past era.   Sovereignty based on independent states and the Westphalian order has become obsolete.   Humans need community but they don’t need the state.    Governance is essential, but can come in many forms.    Just as Berlin and Sublice are changing, so is the whole planet.   We need to let go of old thinking and use imagination and logic to think of a way to come together and reconceptualize politics for the future.

1 Comment

Tired in Munich

“Goodbye Euro, why Greece must now leave the Euro zone” – a very interesting analysis.

A very short post today.  Our flights last night were good, we got in today, found our way into the city and our hostel, and then went for a walk tonight at the English Gardens, though rain came at the end.    Most of us had Doner Kepabs for dinner and now we’re trying to stay up until 9:00 to avoid jet lag.

Three thoughts occur to me as I read through really solid articles about the current crisis in Greece:

1)  Germany benefits from this in a very real way.    The Euro is weak due to weaknesses in Greece, Spain and Italy.    Germany has a strong, productive export economy and it’s growing.   If the D-Mark was the currency of record for Germany, it would be much stronger than a Euro pulled down by Greece.   That would make Germany relatively more expensive and weaken its growth.

2) There is a real wall of separation between concern for the future of the Euro and concern for the EU.   The EU is safe and still something Germans and Europeans prize.   The Euro is safe among a core set of countries.   Germany will never go back to the D-Mark again, the Euro is the German currency now.

3)  Students note how much less run down German cities are than American ones, and how the infrastructure is strong here.    That’s right – America is in decline.   You notice it when you travel.

Too tired to write more.  Good students, a fun day, and its nearing bed time!

7 Comments