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R.E.S.P.E.C.T. for Germany's Economic Model

"It is high time the German economy got some respect. It has been faring much better lately than either the United States or Britain, despite the scornful predictions of Anglophone economic observers," writes Eamonn Fingleton in the American Prospect.It turns out that the German system was quite successfully reformed after all:

Per-capita income. Measured at ruling exchange rates as of 2008, Germany's per-capita income was $44,600. That was within hailing distance of America's $47,500 -- an impressive performance in itself and all the more so when you realize that the typical German worker put in just 1,432 hours in 2008 versus 1,792 hours for the typical American.

Life expectancy. Germans now live nearly 14 months longer on average than Americans. By contrast, as recently as the early 1980s, life expectancy in the former West Germany trailed the United States by fully 17 months (and, of course, East Germany was even further behind). A nation's life expectancy is a function of several key aspects of national well-being, and as such it is a useful reality check on purely money-based economic rankings. In particular, it tests a nation's ability to provide its citizens with decent health care.

Trade. Germany's trade performance over the longer term has been nothing short of spectacular. From 1998 to 2008 the German current account went from a deficit of $5.9 billion to a surplus of $267.1 billion. The contrast with the United States could hardly be starker: The American current account deficit shot from $233.8 billion in 1998 to $568.8 billion in 2008.

Innovation. Germany is a leader in key new technologies, including renewable energy such as solar and wind power. Germany is also the political and economic driving force behind the Large Hadron Collider, the huge new European particle accelerator that is exploring some of the most fundamental questions in physics, and the resulting breakthroughs should redound disproportionately to Germany's advantage.

Jobs. Even in the case of unemployment -- a yardstick that for most of the two decades since reunification had been a major embarrassment for Berlin officials -- Germany is now doing better than many other nations. As of December 2009, the jobless rate, at 8.1 percent, was well below America's 10 percent.

Is NATO Threatened by Diverging Priorities of its Members?

Robert Kagan's thesis "Americans are from Mars and Europeans are from Venus" was not based on transatlantic disagreements in the Bush era, but described developments that became already evident during the Clinton administration. The trend continues during the Obama presidency, even though Obama is often described as very "European."

Germany's Foreign Minister Guido Westerwelle insists on the removal of America's last remaining nuclear weapons from German territory. At the Munich Security Conference, he called them "a relic of the Cold War. They no longer serve a military purpose." According to Spiegel (in German) he also co-authored with his Norwegian, Dutch, Belgian and Luxembourg counterparts a letter to NATO's Secretary General suggesting that NATO needs to discuss how to come closer to creating a world free of nuclear weapons.

Secretary of State Hillary Clinton, however, stressed at the NATO Strategic Concept Seminar on Monday that the Alliance needs to "invest in deterrence, nuclear deterrence as well as missile defense" and expressed her concern about the current debate in Europe.

Continue reading "Is NATO Threatened by Diverging Priorities of its Members?"

Denmark Shows How to Get Support for Afghanistan

While the Dutch government broke up over the war in Afghanistan, the Danish establishment seems to be very unified and serves as "an unlikely example of how to maintain public support for the war" writes the Wall Street Journal (HT: Atlantic Community):

"The key to sustaining public support is an elite consensus that includes politicians in government and opposition as well as key opinion leaders: influential intellectuals, academics and columnists," says Dr. Peter Viggo Jakobsen, a security expert at the University of Copenhagen. (.) 

Mr. Gade, a former Danish army officer [who has led Danish efforts to maintain public support], said a key to winning the public was giving reporters deep access to soldiers, who were allowed to talk. When troops say, " 'We did a job and we did it good, and it is worth doing,' then it is very hard indeed for a lot of people to oppose, because those are the men and women who risk their lives," he said.

The article, however, also points out that recently there have been cracks in the coalition and a fall in opinion polls, with, for instance, a major newspaper withdrawing its support.

Dutch Goverment Falls over Afghanistan Mandate

It is a rather late stage in the game for the war effort in Afghanistan to claim its first political victim. But yesterday night the Dutch governing coalition broke up over the question of extending its mandate. And that less than a week after narrowly surviving a debate over the (purely symbolic) support for the war in Iraq back in 2003. The political process has its own pace in the Netherlands.

The Guardian has a quote:

"A plan was agreed to when our soldiers went to Afghanistan," said the Labour leader, Wouter Bos. "Our partners in the government didn't want to stick to that plan, and on the basis of their refusal we have decided to resign from this government."
Bos is pretending that the Dutch did their turn and will now have accomplished a virtuous task when they go home. His coalition partners, in turn, are pretending that their plans and conditions were ever intended to have consequences. The political process has its own rationality in the Netherlands.

Yanukovych: Ukraine Will Be a Bridge Between East and West

Ukraine's President-elect Viktor Yanukovych writes in the Wall Street Journal that “Ukraine Will Be a Bridge Between East and West”:

Let me say here, a Yanukovych presidency is committed to the integration of European values in Ukraine. Ukraine should make use of its geopolitical advantages and become a bridge between Russia and the West. Developing a good relationship with the West and bridging the gap to Russia will help Ukraine. We should not be forced to make the false choice between the benefits of the East and those of the West. As president I will endeavor to build a bridge between both, not a one-way street in either direction. We are a nation with a European identity, but we have historic cultural and economic ties to Russia as well. The re-establishment of relations with the Russian Federation is consistent with our European ambitions. We will rebuild relations with Moscow as a strategic economic partner. There is no reason that good relations with all of our neighbors cannot be achieved.

Can Yanukovych bridge the gap between East and West? Will he even try, or is this article simply political posturing to console those concerned about his pro-Russia stance?

Yanukovych was the most pro-Russia candidate, and has quickly sought to improve ties with Russia; he already suggested the Russian Black Sea Fleet may stay in Ukrainian waters and made clear Ukraine will not seek NATO membership. Ukraine will however continue moving toward EU membership (Businessweek).

His rival in the campaign and a leader of the 2004 western-supported Orange Revolution, Yulia Tymoshenko refuses to concede, and has requested the high court in Ukraine overturn the election results – an outcome seen as highly unlikely.

President Obama, the EU and NATO have already sent congratulations to Yanukovych.

With Yanukovych ditching NATO and seeking to improve ties to Russia and EU membership, the United States is the biggest loser from Yanukovych’s election. This outcome should not come as a surprise however: popular support in Ukraine for NATO membership has been consistently at or below 30 percent over the past few years, making NATO membership never really likely anyhow (AR forecasted this here).

With NATO membership for Ukraine never likely anyhow, perhaps the US has not lost much. In fact, Ukraine relations with the West under Yanukovych may not be much different than it has been under the Orange Revolution leadership for a few reasons:

* Ukraine will likely continue to develop a partnership with NATO, though not membership;
* Ukraine will want pragmatic and productive relations with the United States, and still seeks EU membership;
*
The acceptance by international observers of Yanukovych's election and his intent to pursue EU membership both support the fact that while the Orange Revolution leadership has been voted out, the western values it respresented - a democratic and free society - are now embedded into Ukraine. 

Whether or not Yanukovich can balance between the West and Russia is tough to predict.  However, Yanukovich's intent to pursue this balance is likely a genuine aspiration.

Greece and Goldman Sachs

Investigative reports by the New York Times and Der Spiegel have left Goldman Sachs and Greece squirming in the limelight. For at least fifteen years, the American investment bank has been helping Greece legally massage its public finances. The arrangement enabled Greece to keep its European partners happy without having to make tough fiscal decisions. Specifically, the bank created currency swaps that enabled debt issued in dollars or yen to be swapped for euro-denominated bonds that would be paid back at a later date. Sound fishy? Those on both sides of the Atlantic think so. From the New York Times:

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.... Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

Der Spiegel has been following the issue for a longer period of time, and the frustration in Germany over Greece's behavior is particularly acute. The magazine notes that the accounting procedures have only delayed the day of reckoning:

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

The activities of Goldman Sachs in Greece are neither surprising nor novel. Indeed, Der Spiegel notes that Italy has engaged in similar activities with another bank for some time. The controversy highlights how difficult fiscal reform is in modern democracies. Today was Greece's day of reckoning, tomorrow could be America's. Anne Applebaum at Slate writes, "I have seen America's future and it is Greece."

The revelations come at a very inopportune time for Greece, the bank, and the EU. What do these revelations say about the proposed bailout of the country by the EU? Can the Euro survive when its member states can easily fabricate their numbers? (Imagine California making secret purchases in eurobond markets that are swapped out at a later date for dollar-denominated bonds.) Is the Euro feasible without greater political cohesion among the EU's member states? And what does this transaction say about the value-added of investment banks? As Baseline Scenario notes, are investment banks in sovereign markets really producing "productivity-enhancing financial innovation" or just "a sophisticated form of scam?"

Of BRICs and PIGS

There is a significant amount of hand-wringing going on in the US that the Euro is fraying on the edges. Some pundits have even coined a rather derogatory acronym for Euro-countries in economic distress: the PIGS (Portugal, Italy or Ireland, Greece, Spain). The acronym bunches together four countries with very different backgrounds but one shared fact: they all face serious budget shortfalls.

The grouping of these countries, largely by investment banks, may simplify investment and policymaking decisions to an unfortunate level. Italy for one does not want to be part of the group, and the Italian bank UniCredit has waged an effective campaign to change the "I" in PIGS to Ireland. But Ireland too has begun to restore both consumer confidence and budget stability thanks to aggressive action by the central government. Commentators seem to keep the "I" because that is the crucial vowel that holds the acronym together.

Portugal, Spain, and Greece are also all facing very different challenges. Portugal has a sizable but manageable budget deficit, while Spain is struggling with a burst housing bubble a la Florida. Greece remains the real country of concern; but then again, Greece has roughly the same debt levels as Germany, so what is all the fuss about?

The classification overlooks the more important--and legally binding---organizations already in existence, namely the EU and the Eurozone. Talk of the dissolution of the Euro is premature but rampant: the New York Times has published no less than three articles on the subject in the last two days alone (here, here, and here). At the end of the day, policymakers in Europe and the US have to honestly ask themselves: is leaving the Euro really an option? The case of Iceland clearly demonstrates what happens to small countries with large debt obligations in tumultuous times and it is not pretty.

The discussion of categorization reminds me of the BRIC acronym held in high regard by investors prior to 2008. Brazil, Russia, India, and China were touted as the hallmarks of the developing world at the time, and investments in all four countries were seen to be equally appeasing. Two years, a war in Georgia, and a global economic crisis later, the BRICs no longer look so homogeneous. I suspect the same will soon be true for the PIGS. 

How should we classify countries economically? Is there any value in
grouping problem areas? Just as a reference, I did a quick look at state budgets in the US and found five states with budget deficits greater than 10% in 2009: Arizona, California, Nevada, New Jersey, Rhode Island. Do you think CARINN could catch?

The EU's Increasing Irrelevance to the US

Reuters reported yesterday:

The European Union and the United States are likely to scrap plans to hold a summit in Madrid in May because U.S. President Barack Obama has decided not to attend, EU diplomats said on Tuesday.

Oh, that will make many in Europe's political class angry. Summits are so important to them, especially the "family photo" is considered of vital importance to national security.

An unsentimental President Obama has already lost patience with a Europe lacking coherence and purpose, opined Nick Witney and Jeremy Shapiro with the European Council on Foreign Relations and the Brookings Institution respectively in November 2009. Apparently, last year's EU-US summit in Prague, "at which President Obama was subjected to 27 interventions from the EU's assembled heads of state and government was an eye-opener for his administration."

Witney and Shapiro argued in Towards a post-American Europe: A Power Audit of EU-US Relations:

The US needs strong partners in a world that it no longer dominates. It knows it can turn to China on the economy and Russia on nuclear disarmament. In comparison, Washington is disappointed with Europe and sees EU member states as infantile: responsibility shirking and attention seeking.

The US would prefer a more united EU, but expects so little that it cannot bring itself to greatly care. When the EU is hard-headed, as with trade negotiations, the US listens. When it is not, Europeans are asking to be divided and ruled.

Will Europeans soon miss President George W. Bush?

Related posts on Atlantic Review:

Merkel got back-rubs from Bush, but she gets only a cold shoulder from Obama

President Obama and Europe

"Europeans Mourn End of Bush's Presidency"

Bush's Farewell Tour: Looking Ahead and Missing the Favorite "Punching Bag"