Financial Crisis

Italian PM Warns of European Disintegration From Mutual Resentments

James Joyner — Wed, 08 Feb 2012 11:48:09 -0600

Italian Prime Minister Mario Monti fears "backlash" stemming from "mutual resentments" between Northern and Southern Europeans spurred by the financial crisis.

Appearing on the PBS NewsHour, Monti declared, "I try to avoid that backlash by always presenting the necessary sacrifices that Italians have to go through not as an imposition from Brussels or Germany or the European Central Bank, but rather as a necessary step that Italians have to undertaking -- to undertake also at the suggestion of Europe, but basically for their own interests, for the interests of ourselves and of future generations of Italians."

While allowing that "This is precisely meant to avoid backlashes," he worries that "the euro zone crisis has indeed brought about quite a bit of misunderstandings and the re-emergence of old phantoms about prejudices between the North, the South of Europe, and a lot of mutual resentment."

Taking this to its logical conclusion, he observed, "And it is very, very important that we all take this with great attention in order to avoid that something that was meant to be the culminating point of the European construction -- namely, the single currency -- turns out to be, through psychological negative effects, a factor of disintegration of Europe."

While the populist sentiments along these lines--particularly in Germany, Greece, and Italy--have been obvious from even a casual reading of the newspapers over the last two or three years, it's a subject that national leaders have until now avoided talking about publicly. Whether his candor is a function of his long career as an academic or the fact that he was appointed to his position and doesn't have to be overly concerned about electoral consequences, it's a discussion worth having.

Further, he's right: allowing these resentments to fester puts not just the common currency but the European project as a whole in jeopardy.

That said, there are rather fundamental cultural and structural differences between North and South that have to be dealt with honestly as well.

NewsHour's Margaret Warner asked him, "Do you think that by calling for more competition in the economy, as well as budget cuts, you are asking the Italian people to really change their central character or culture?"

Again, speaking more like a doctor of philosophy than a prime minister, he answered honestly and insightfully. But he's been in politics long enough to toss in some pandering, too: "To some extent, yes. I am fully aware of this, and basically our mission and my wish is to have the Italian people value more and more some strong qualities they have in their genes and traditions -- that is, a strong entrepreneurial spirit and a sense of -- and a sense of solidarity in society." He added, "But I definitely think that Italy can become a more competitive place only if we introduce in our system much more meritocracy, which means much more competition and accountability in all decision points of corporate, as well as the public administration."

The juxtaposition of these issues presents an enormous political challenge. On the one hand, "Europe" will remain a fantasy so long as differences in cultures which have existed independently for centuries can not be accommodated. On the other, the common currency and deeper political integration can not work if Europeans don't all play by the same basic sets of rules.

James Joyner is managing editor of the Atlantic Council. Photo credit: Reuters Pictures.

Buck Up, America!

Harlan Ullman — Mon, 05 Dec 2011 10:02:40 -0600

The mood in the United States is sour. Although President Jimmy Carter never used the term, a "malaise" is infecting the country. Unemployment, poverty, even obesity and other measures of discontent are running at or near record levels. Abroad, conditions look equally grim.

The Arab Spring, a tragic misnomer, is by no means a road to peace, prosperity and democracy. Coalition forces will be out of Iraq by New Year's with few guarantees that Iraq will be less violent and more stable after nearly a decade of conflict.

While NATO says the security situation in Afghanistan is moving in a positive direction, governance and stability, the ultimate guarantors of a more stable country remain fragile at best. And last weekend's attack that killed two dozen Pakistani soldiers well inside the Pakistani border will inflame and not dampen the already tense relations between Islamabad and Washington.

The euro crisis is far from resolved and the behavior of stock markets and bourses indicates that solutions aren't at hand to deal with the massive debt and economic issues plaguing not merely Europe but the global financial and economic systems as well. That the U.S. Congress and its so-called supercommittee of 12 couldn't reach agreement on finding a way out of America's financial and budgetary woes compounds the angst and fear sweeping global markets.

No wonder Americans are entering a winter of discontent.

A super majority says the country is headed in the wrong direction and no longer sees the wars in Afghanistan and Iraq worth the costs. An equal percentage sees the economy worsening and expectations for a better life diminishing. President Barack Obama's ratings are low and Congress's is in single digits in terms of its failure to perform. Most Americans have been turned off by the seemingly endless series of Republican debates and the absence of an acceptable candidate emerging from the pack.

Cynically, Americans are feeling sorry for themselves and, in their minds, with good reasons. The American dream has become a nightmare for many and unobtainable for most. Trust in institutions and government -- with lawyers, investment bankers and politicians taking the greatest heat -- is at abysmal levels. And part of this agonizing period is public understanding that while real solutions exist, the political process is incapable of taking or implementing any of them.

My late and great mother-in-law had a simple answer to these matters. Shortly before she left his world for a better place, she was visiting her then newly married daughter in Washington some 35 years ago. We were living well above our station and had several fancy dinner parties for her.

It was 1976 and American was in a blue funk. A president had been forced to resign in face of impeachment or worse. Vietnam was an ignominious defeat, America's first, with the image of the last helicopter fleeing the U.S. Embassy in Saigon visibly etched in the psyches of many of us who fought there.

The military was held in contempt, government was disrespected and the economy was in tatters, still suffering from the Arab oil embargo of late 1973 in the wake of the Yom Kippur War that October.

Indeed, as a precursor of things to come, Hanafi Muslims had occupied the B'nai B'rith building in Washington and killed a number of innocent civilians, mostly Jews, in one of the first acts of Islamic terror to strike America.

Over dinner, the conversation turned to these dismal matters and general pessimism enshrouding the nation. My mother-in-law, married to a British law lord, took great exception to the bleak proceedings. Reminding us of the Great Depression in England and the sacrifices Britons made during World War II, this diminutive lady turned to an admiral or senator seated next to her with formidable intellect and spunk saying, "You Americans must simply buck up!"

When we consider what our forbearers endured from the first colonists who faced pestilence, famine, drought and many other privations including hostile American Indians not anxious to have their lands confiscated by foreign invaders, are we so worse off today? The American Revolution and Civil War were times of real crisis as were the Great Depression and Pearl Harbor.

America was indeed lucky that for some five decades after World War II, the country enjoyed the advantages and benefits of its unprecedented economic and military superpower status. The American dream was real and was obtainable.

Today, that legacy no longer exists. In blunt terms, Americans have spent or wasted the inheritance from prior generations.

Denial is often the first response to reports of danger. And many of us are in denial in believing that our situation is more desperate or dangerous than in any time in our history. My mother-in-law had it correct -- Buck up America!

Harlan Ullman is senior advisor at the Atlantic Council, and chairman of the Killowen Group that advises leaders of government and business. This article was syndicated by UPI. Photo credit: AP Photo.

A Silver Lining to America’s Waning Influence

Jorge Benitez — Wed, 02 Nov 2011 12:26:18 -0500

From Helene Cooper, the New York Times: President Hu Jintao of China will arrive in Cannes, France, this week pondering a plea from Europe for tens of billions of dollars to help the continent get out of its debt crisis. And President Obama will arrive with a smile, some hearty handshakes, and his own plea: that Greece get its act together and that Europe fix its economic ills, which he has called one of the biggest drags on the United States’ own ailing economy.

The two contrasting appearances at the Group of 20 economic meeting are a stark example of waning American influence. Without the spare cash that Mr. Hu has at his disposal — and the power that can come with it — Mr. Obama has struggled to cajole his own allies into taking the steps he believes are necessary to lift the global economy.

Yet the relative decline of the United States as an international force also comes with a silver lining. For decades, the United States has been the global rescuer of last resort. It is a role that has brought significant costs, both financial and human.

The last few months may well end up being an inflection point, in which the United States, though easily still the world’s leading power, no longer has quite the responsibility or the burden it once did. The pattern has been evident in the Arab Spring, with the American military playing mostly a supporting role in Libya, and now in the European financial crisis, with Asian money coming to aid the Europeans.

“Why would the United States want to have influence over a train wreck?” said George Friedman, the chief executive of Stratfor, a geopolitical risk analysis company. “If the Chinese want to provide $150 billion bailing out European banks, more power to them. . . .”

Arriving in Cannes on Thursday, Mr. Obama will be trying to balance providing that leadership while not taking on any of the additional burden — particularly financial — that such leadership often requires. . . .

But for all the acceptance that the United States will no longer be the world’s policeman and financier, the emerging strategy carries risks.

China, for instance, is bound to try to extract concessions from Europe for any aid, and the United States could end up losing Europe as an ally in pressuring China to take important economic steps of its own, like allowing its currency to float on the open market, which both European and American policy makers want.

And while the political appetite for myriad military adventures overseas might be on the wane in Washington, the American military remains the world’s most formidable, and the most likely to be called on to back American allies like Israel, Japan and South Korea. (photo: Getty)

Greece's Coin Flip

James Joyner — Tue, 01 Nov 2011 16:05:06 -0500

Many of us predicted that investor euphoria over Thursday's Eurozone deal would soon fade. But few thought it would explode this soon.

Greek premier George Papandreou stunned everyone by calling for a public referendum on whether to accept the bailout and the accompanying straightjacket. The vote will almost surely be No—the measure is wildly unpopular—and his government may well collapse before a vote can be held.

Paul Mason, the economics editor for BBC's Newsnight, believes that without the bailout and haircut, "Greek debt spirals out of control and the country goes bust."

Key indexes have already lost the gains made Friday and Angela Merkel and Nicolas Sarkozy are once again scrambling to find a way to save the deal. If they can't, Mason sees a wild ride:

The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro.

Most political economists I speak to believe this has been the logic all along, and brave though it has been for Prime Minister George Papandreou to try and buy time to do a proper structural reform of Greece, the implosion of Spain and Italy has robbed him of that time.

Greeks - even those fiercely opposed to Pasok from the left and right - are resigned to the fact that the country faces years of painful restructuring. The real question at issue is a) under whose control and b) in whose interest?

It is for this reason that, while the Greek CP wants out of the euro, the growingly influential far left parliamentary group SYRIZA does not, and neither does the hard-right religious party LAOS. Everybody can see that an external devaluation will be chaotic, painful and cause its own kind of social unrest, just as the attempted internal devaluation is doing.

Why would Greece take a complete default rather than a half one—and risk bringing down the entire Eurozone if not the entire global economy with it? To save their country.

Another potential reason is capital flight. Anecdotal evidence suggests that the Greek elite are buying up property in London just as fast as they can find berths in Poole for their yachts. They are voting with their spinnakers, on the basis that the game is up. In any future Greece on offer, they will have to start paying taxes and they do not want to.

One banker told me the Greek super-rich have mostly left.

The one thing governments have that investment banks do not is intelligence services with the power to wiretap people. If you ever wonder why serving politicians go grey so quickly, it is in part because they see the intelligence. So Mr Papandreou may have looked at the file and said, I can't sell this to my party, nor to my voters, and the business elite are emigrating en masse, so throw the dice.

Referendums are, always, basically a coin-toss, an all-chips on the black romantic gesture. Right now, the scale of EU-level mobilisiation to dissuade Mr Papandreou is huge.

But if Greece votes no - and goes for euro-exit - there are several plans in the process of being published that explain what you have to do. Close the banks for days, ration food and energy, institute strict capital controls - with most probably a few fast patrol boats at Glyfada harbour to check every departing yacht for cash and bonds.

Later, you get massive devaluation, with inflation; your non-sovereign debts become instantly doubled so you cannot pay them (i.e., the stock of Greek private debt to external lenders, for example, or, intra-corporate debts).

Finally, you get the chance to become competitive again. (I base this on SOAS professor Costas Lapavitsas' upcoming document, which he has verbally outlined to me).

However, despite this very, very unappealing prospect, you are at least in control of your own economy and you do not have foreign civil servants dictating what ministers can do.

Not exactly cheerful stuff but, frankly, understandable. As much as the Germans and French resent having to bail out profligate Greece, the Greeks resent having their core political decisions dictated from Paris and Berlin even more.

Naturally, this will push virtually everything else off the agenda at the Cannes G20 summit, which kicks off Thursday.

On Tuesday, Robert Zoellick, president of the World Bank, summed up the views of many policymakers when he said that the eurozone crisis threatened knock-on effects across the entire global economy, including the emerging markets – the bank’s main clients – and that it was up to European authorities themselves to deal with the problem. “Europeans are going to have to be the principal agents in solving Europe’s problems,” he told reporters.

Mr Zoellick said that a “multi-speed” global economic recovery before the summer, in which the emerging markets if anything were in danger of overheating, was quickly weakened by a combination of renewed tension in the eurozone and the debt ceiling debate in the US. “The events in August in the eurozone, and to a degree the US, showed the effects on financial markets flowed quickly to the developing world,” he said. As for the Greek referendum, which as he noted was a eurozone rather than a G20 issue, “to me it looks like a roll of the dice”.

The agenda items that France has tried to push during 2011 – notably reform of the international monetary system and trying to reduce volatility in commodity markets – seem likely to result in no more than symbolic announcements or incremental steps, despite claims by the organisers that they will have concrete progress to report.

The G20 may make a vague promise to add the renminbi at some point in the future to the basket of currencies that make up the Special Drawing Right, the International Monetary Fund’s unit of account, or at least to look at the criteria for inclusion. The IMF may also announce tweaks – described by some experts as a “rebranding” rather than a reform – of some of its lending instruments.

But this is a long way from the challenge to the dominance of the dollar envisaged by Nicolas Sarkozy, French president, when he announced the drive to reform the international monetary system last year. And some promises for better information about agricultural production and food stocks will not fundamentally change the nature of the Anglo-Saxon commodity markets.

While predicting the twists and turns of international finance is outside my comfort zone, I'm actually quite sympathetic to George Washington University political scientist Henry Farrell's view that, on balance, this is all good news for Europe, if not the global economy.

[P]erhaps this is the best news that the European Union has seen in two years. At the very least, it’s the first time that we’ve actually seen citizens actually being asked about what they actually want (elections in which they kick the bastards out to see Tweedledum replaced by Tweedledee implementing pretty well the same austerity agenda, despite pre-election promises, don’t actually count).

To put it differently, I imagine that the strong likelihood is that the Greeks will vote ‘No’ to the proposed austerity measures. But I’m not at all convinced that this will result in disorderly default. Instead, I suspect that it will result in people running around in panic for a few weeks, grave pronouncements from senior European politicians about how horribly the Greeks are betraying their European vocation, and then efforts to stitch together a deal which might actually make sense (e.g. enough aid to prevent the economy from crashing as horribly as it is doing, as a quid-pro-quo for genuinely intrusive reformation of the Greek tax collection system). This might in turn provoke an actual real argument over what EU politics should look like post-crisis (because make no mistake – the system that is being articulated on the fly at the moment is likely to have profound long term consequences for the shape of the EU).

Or, to put it differently again, the European Union is at a point where it actually has to start taking enormous – and explicitly political – decisions about what kind of entity it wants to be.

It's a long essay, previewing a longer one that he's about to publish elsewhere, but the upshot is that European integration has been achieved through stealth and technocratic maneuvering on the part of elites, quite frequently bypassing the clear preferences of the ostensibly democratic populations in various countries. The passing of so much authority to the European Central Bank and to appointed officials in Brussels has been inexorable, with little input from the European publics and often against the expressed wishes demonstrated via referenda.

Farrell is perhaps too sanguine about the costs of implementing this vision when he allows, "I don’t know whether there is a European Union that could be affirmed (after long and painful debates) by both the Greek and German publics. I think that there is, but I’ll grant that these are not the most propitious times for finding out. Then, there rarely is a propitious time for finding out – when things seem stable, no-one has an interest in upsetting the balance." After all, the expert consensus seems to be another round of global economic calamity if the euro doesn't hold and a Greek default is followed by others.

On the other hand, there is a strong minority view that the elite demand for austerity is exactly the wrong course of action during a global depression. Given that the people are going to have to live with the consequences, it may well be that they ought to have a stronger voice in choosing their poison.

James Joyner is managing editor of the Atlantic Council.

In Europe, new fears of German might

Jorge Benitez — Sun, 23 Oct 2011 11:29:08 -0500

From Michael Birnbaum, the Washington Post: For decades, Germany’s role in Europe has been to supply the cash, not the leadership. With fresh memories of war, the continent was cautious about German domination — and so were the Germans themselves.

But the economic crisis has shaken Europe’s postwar model, and Germany increasingly calls the shots. As countries struggle to pay their debts, only Chancellor Angela Merkel has enough money to haul them out of trouble. And the price Merkel is demanding — more control over how they run their economies — is setting off alarm bells in capitals across the continent. . . .

And although German leaders have sought in recent weeks to soothe others’ fears in advance of high-level meetings in Brussels on Sunday and in coming days, the tone has sometimes sounded pugilistic.

“The question of who could accept a German model has been settled by the market,” said a spokesman for German Finance Minister Wolfgang Schaeuble. “We are really only talking about the details and the extent of the measures, not about their nature.”

At $3 trillion in 2010, Germany’s economy is now half again as large as those of its nearest rivals, Britain and France. Its banks are far less exposed to Greek debt than those in France, insulating it from the effects of a possible Greek default. It has thus far committed $290 billion to a European bailout fund for Greece, Portugal, Ireland and anyone else who needs it — significantly more than any other nation in Europe. . . .

“That’s the predicament of leadership,” said Joschka Fischer, a former foreign minister who has urged Merkel to do more to support the euro. “When Germany acts, there is the fear that Germany will dominate. If Germany doesn’t act, it’s the fear that Germany will withdraw from Europe. . . .”

In Germany, the dissension is raising eyebrows.

“Everybody is calling for leadership,” said the country’s deputy foreign minister, Werner Hoyer, “but no one wants to be led.” (photo: AP)

Germans question French sale of frigates to Greece in controversial deal

Jorge Benitez — Mon, 17 Oct 2011 10:50:18 -0500

From Spiegel: A huge arms deal is threatening to put French-German relations under strain. According to information obtained by SPIEGEL, France wants to deliver two to four new frigates to the Greek navy and to allow the highly indebted nation to postpone payment of the €300 million ($412 million) purchase price per ship for the next five years.

Under the deal, Greece will have the option of paying up after five years, with a significant discount of €100 million, or returning them to the French navy. The "stealth" frigates are designed to avoid detection by enemy radar and are built by state-owned French defense company DCNS. . . .

In a letter to the German government, an executive from the ThyssenKrupp group complained that the vessel purchase will in effect be co-financed by German taxpayers because Greece, reliant on aid from the European Union and International Monetary Fund, may have to restructure its debts.

A Greek debt haircut is looking increasingly likely. If this happens and Greece is rescued again with funds from the European bailout mechanisms, Thyssen's scenario would come true. German taxpayers would shoulder part of Greece's government spending and thereby be forced to pay for a portion of the frigate purchase.

"While German naval shipyards aren't getting any orders, DCNS and Greek shipyards are being subsidized and kept alive, probably with German money in the end," the ThyssenKrupp executive said. (photo: Pascal Sittler/DCNS)

Prime Minister of Canada: It’s time for Europe and the G20 to act decisively

Jorge Benitez — Sun, 16 Oct 2011 06:32:07 -0500

From Stephen Harper, the Globe and Mail: Both Europe and the G20 have important roles to play in restoring market confidence and protecting the fragile global recovery.

In Canada’s view, Europe must:

• Take immediate and decisive action to resolve sovereign debt and banking system issues. This action must be sufficient to overwhelm the problem and restore markets’ confidence.

• Carry out commitments to increase the flexibility of the European Financial Stability Facility and to maximize its impact as quickly as possible.

• Implement plans for debt and deficit reduction that are clear and credible. . . .

The choices that must be made in Europe and elsewhere are not easy. Yet, if not made, we will do a great disservice to all nations. A slow response to the recent crisis has allowed it to spread, but political will, decisiveness and a clear plan can resolve it, if we act now.

In Canada, our government has taken these challenges seriously. We have backed our words with strong action. We have a prudent, medium-term plan to return our budget to balance and protect our strong public finances. We will meet G20 deficit and debt targets well ahead of schedule. Yet, we also are implementing a pro-jobs and growth agenda that is focused on promoting investment, hiring and the retention of workers affected by the global economic downturn. In short, we have sought to strike the right balance between supporting jobs and growth, and reducing our deficit in a responsible manner.

Stephen Harper is Prime Minister of Canada. (photo: Reuters)

Panetta: Achieving fiscal and national security "will test the very future of leadership throughout NATO"

Jorge Benitez — Wed, 05 Oct 2011 14:02:19 -0500

From Leon Panetta, U.S. Department of Defense: We are nearing the end of a successful campaign in Libya, and are closer than ever to achieving our shared goals in Afghanistan. But there is no doubt that this is also a time of challenge to the alliance. The international security environment is complex and is rapidly changing. Our nations are grappling with significant budget challenges, putting new pressure on defense spending that has already been in decline here on the continent. But that cannot be an excuse for walking away from our national security responsibilities.

This fiscal environment means that the United States, and all nations in NATO, must depend on their fellow members even more - even more -- to share the burden of protecting common interests. But to do that, the alliance must remain strong - and that will require members to commit to addressing growing gaps in our military capabilities even as we confront the challenges of fiscal austerity.

Many on both sides of the Atlantic have recognized that we are at a critical moment for our defense partnership. My good friend and predecessor, Bob Gates, used his last policy address as Defense Secretary here in Brussels to deliver a strong message to Europe about the need to boost its commitment to defense and more equitably share the security burden with the United States. NATO Secretary General Rasmussen has also warned about the risk of a weak and divided Europe unless it invests in its own security. While these warnings have been acknowledged, growing fiscal pressures on both sides of the Atlantic have I fear eroded the political will to do something about them. I am convinced, having played a role on budget debates in the prior times I worked in the Congress, as OMB Director, and as Chief of Staff, I am convinced that we do not have to choose between fiscal security and national security. But achieving that goal will test the very future of leadership throughout NATO.

Despite this challenge, NATO continues to do its job and demonstrate its importance to its members, including the United States. As President Obama has said, this is the most successful alliance in human history. And I believe that to be the case. We depend on it every day to provide capacity that we cannot find anyplace else. . . .

While NATO's efforts in Afghanistan and Libya show the necessity and effectiveness of the alliance, they also illustrate growing gaps that must be addressed. The Libya operation, for example, revealed significant shortfalls in capabilities. For example, NATO had a significant shortage of well-trained targeting specialists, and the United States had to make up the difference by deploying more targeters to determine the targets to be struck. In addition, shortages of supplies and munitions plagued the effort - forcing the U.S. to sell millions of dollars of ammunition, repair parts, fuel, technical assistance, and other support items simply to keep the operation going. But nowhere were the gaps more obvious than in the critical enabling capabilities: refueling tankers, provision of intelligence, surveillance, and reconnaissance platforms such as Global Hawk and Predator drones. Without these capabilities, -- without these capabilities -- the Libya operation would have had a very difficult time getting off the ground or been sustained.

Meanwhile, Afghanistan has revealed its own set of challenges. General Allen still lacks trainers - something that we all know is critical to this phase of the transition. He also continues to seek contributions to the trust funds we have collectively established in recent years in order to sustain the Afghan National Security Forces, something that is essential to their ability to provide security now and in the future. And, as in Libya, the shortage of ISR and enablers - in particular airlift - has plagued the mission from day one.

Unfortunately, these capability gaps are being exposed at precisely the time when every defense minister in NATO, including myself, is dealing with great fiscal challenges at home. By one estimate, here in Europe, defense spending has dropped almost two percent annually for a decade - at a time when many European nations have been conducting operations in Afghanistan, Libya, Kosovo and elsewhere. As a result, much-needed modernization investment has been deferred. There are legitimate questions about whether, if present trends continue, NATO will again be able to sustain the kind of operations that we have seen in Libya and Afghanistan without the United States taking on even more of the burden. It would be a tragic outcome if the alliance shed the very capabilities that allowed it so successfully conduct these operations.

Excerpts from remarks by U.S. Secretary of Defense Leon Panetta at Carnegie Europe, Brussels. (photo: Reuters)