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NATO's Niche

How will a military alliance continue to function if many of its members are opposed to armed interventions and if modern security threats have moved beyond concerns over territorial integrity?

Answer: Turn the military alliance into something completely different.

That at least seems to be the conclusion of the group of experts tasked with creating a draft of NATO's new strategic concept. Their findings, released this week, envision a NATO defined by a host of new responsibilities from multilateral weapons procurement to cyber defenses to expeditionary actions. In her presentation as the group's chairperson, Madeleine Albright said "NATO is more than a military alliance; it is also a political community."

I would agree with Albright's perspective on NATO. Since NATO's efforts in the 1990s to encourage democratization in Eastern Europe, the alliance has assumed greater responsibilities in political, economic, and security fields. NATO's scope has certainly expanded beyond preserving the territorial integrity of its members, though this remains a central aspect of the organization's DNA. In this sense, the group of experts are merely highlighting what is already the case: NATO is no longer simply a defensive alliance.

But what is NATO exactly? If not a military alliance, then what? Secretary General Anders Fogh Rasmussen has said that NATO should become the "the forum for consultation on global security." Secretary Albright sees the alliance developing "partnerships" with key countries, with Russia on the top of that list. And some EU leaders simply hope that NATO can act to help member states streamline military expenditures and reduce redundancies. I believe NATO must be careful to not try to be everything to everyone. It must seek to focus only on those areas where it can provide real added value to its members states and the international community.

What do you think? What is NATO's niche in the international community? How should the forthcoming strategic concept envision the future of NATO?

The Euro Comes of Age

Sixteen months ago, I began to grow worried about Greece's debt problems and its implications for the euro. At the time, I wrote,
The euro area has yet to demonstrate its cohesiveness when confronted with the growing economic divergence of its member states and even the specter of a sovereign debt default....Leaders will have to act together to show their commitment to preserving the single monetary policy in the euro area.
Yesterday, EU leaders rose to the challenge and solidified the euro's position in world monetary affairs. The announced $1 trillion package does more than provide indebted countries with a source of funds during periods of crisis; it demonstrates the commitment of leaders to the concept of European integration. In so doing, European officials have significantly increased the credibility of the EU in the eyes of their American counterparts and taken the first step towards some degree of fiscal integration.

A few details of the announced aid package are particularly noteworthy:

Continue reading "The Euro Comes of Age"

Progress in the Balkans

There has been a lot of positive news coming out the Balkans recently. Some of the highlights include:

(1) Albania and Bosnia-Herzegovina will soon be approved for visa-free travel to Europe. According to a recent EU report, the two countries have made significant progress and could be cleared for unrestricted travel in the Schengen area as soon as October.

(2) Two weeks ago, Croatian president Ivo Josipovic apologized for his country's role in the Bosnian wars. The apology followed Serbia's apology for the Srebenica massacre one month ago. Serbian President Boris Tadic has taken a decidedly more conciliatory tone, promising to work towards reconciliation between the nations in the region.

(3) In a historic summit, presidents from Turkey, Bosnia-Herzegovina, and Serbia met in Istanbul this weekend and agreed to intensify efforts to resolve border disputes and encourage greater regional cooperation. The meeting was an unprecedented show of cooperation between BiH and Serbia, and the presidents emphasized their desire to continue the cooperation in the future.

(4) NATO continues its tentative expansion into the Balkans with Bosnia being offered a Membership Action Plan (MAP) during the recent summit of NATO ministers. Significantly, Serbia has stated it supports Bosnia's NATO aspirations. NATO also discussed "militarily disengaging" from the country, removing the remaining peacekeepers.

All is not perfect in the Balkans of course. Serbian fugitive Mladic remains at large, unrest continues in Kosovo, and significant minorities in Croatia and Serbia continue to vociferously deny any wrongdoing in the Balkan wars. But all things considered, there are many reasons to be optimistic. Personally, I believe the lure of membership in the European Union and NATO are valuable catalysts in motivating the needed reforms. The progress in the Balkans is incremental and slow but it is substantive. That should offer some assurance to NATO officials struggling with Afghanistan and to EU supporters wondering about the long-term relevancy of the Union.

Iceland's Long Shadow

The recent eruption of Eyjafjallajökull is not the first time Iceland has thrust itself upon the European and global stage.

Indeed, this small Nordic country with only 315,000 inhabitants has played a remarkably prominent role at important junctures of history. Four of these periods come to mind:

1) The Icelandic eruption of 1783 led to "the year without summer" for much of Europe and the resulting famine contributed to the civil unrest in France. Some historians go so far as to say the French Revolution was a direct result of the volcanic eruption on Iceland.
2) The invasion and occupation of Iceland in World War II marked the transfer of naval power from the United Kingdom to the United States. While Great Britain invaded the island in 1940 to preempt a German invasion, the British quickly recognized they were unable to maintain their occupation force on the island. By 1941, American forces were occupying the island, and the new hegemon in the neighborhood was quickly recognized.
3) The Cod Wars between Iceland and Great Britain was one of only two major conflicts between NATO countries and nearly led to a full-fledged war between the two island nations. The conflict centered on fishing rights in Iceland's coastal waters and eventually led to international law regarding fishing rights and the EU's Common Fisheries Policy. Lingering concern about Icelandic fishing rights continues to be the biggest reason why Iceland remains outside the EU.
4) Beginning in 2003, Icelandic banks and investors were on the cutting edge of a global financial sector that used complex models, leveraging, and financial products to make enormous profits. But by 2006, it was already becoming apparent that the incredible explosion of the Icelandic banking sector was not sustainable and the island was on the leading edge of the global economic meltdown.

And now, citizens on both sides of the Atlantic have again remembered the island in the middle of the North Atlantic. 
It is just unfortunate that the lovely mid-Atlantic country always seems to remind us of its presence in such unpleasant ways.

Norway Wins the Olympics

With the Winter Olympics now behind us, countries are seeking to evaluate how they fared. In the US, there is plenty of self accolades for the record haul of 37 medals. In Russia, the poor performance of the Federation has led to the resignation of the head of the national team and remarkably brusque comments from Medvedev. And while Canada did not win the overall medal count, gold medals in hockey and curling leave our northern neighbors with plenty to be happy about.

But the real winner of the Olympics is Norway. On a per capita basis, no other country earned as many medals as this small Nordic country. And it is not just Norway. Nine of the top ten per capita medal winners are European countries with populations smaller than 10 million inhabitants. The following chart shows the top 26 medal winners ranked on a per capita basis. (HT: Mark Warren)

What explains the dominance of European countries in the Olympics? History, climate, and geography certainly play a role. David Brooks suggests it also has to do with social capital and natural toughness. I personally wonder if sports are an emphasized expression of national sovereignty in Europe because other forms of national identity, such as currency and foreign policy, are increasingly transnational in scope. Some dedicated federalists in the European Union are pushing for an EU Olympic team, at least according to this web page. But I suspect the likelihood of that ever happening is close to zero.

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?"


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?

Anything You Can Do I Can Do Better

The health care debate in the United States has recently spurred a tangential conversation among pundits: Is America's or Europe's economy better? The controversy was initiated by Jim Manzi who recently wrote that Europe's bloated welfare state has destroyed its competitive advantage:
From 1980 through today, America's share of global output has been constant at about 21%. Europe's share, meanwhile, has been collapsing in the face of global competition - going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world.
Paul Krugman has responded in kind, arguing:
The story you hear all the time - of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation - bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works.
Economists and journalists have been busy debating the question. Greg Mankiw cites GDP figures to question Europe's wealth, Mark Perry compares European countries to US states, Noah Millman asks why we are asking this question, and Clive Crook says the question is unanswerable.

The debate over the economic prowess of the US and Europe recurs at regular intervals. But it rarely leaves us with any new information. To some extent, the debate sounds like two teenage students trying to prove which one is at the top of the class. At the end of the day, the economies of European countries and the United States are closely intertwined, as the recent financial crisis has demonstrated. Unfortunately, the debate over the "right" economic system may cloud the bigger opportunity: how will Europe and the United States lead the global economy in coming decades?

What do you think? Who has the better economic model? Is that the right question to be asking?