Tuesday, 20 September 2011

The Real Risk Of Leaving The Euro

The calls for Greece to default on its mountain range of debt and leave the Euro for the perceived safety of its native Drachma are growing louder. Nouriel Roubini’s column in The Financial Times gives several very good reasons why such a move would make sense for Greece. Roubini acknowledges that the extensive ‘collateral damage to Greece’ of leaving the eurozone, but says it can be contained.

Other analyses, however, verge on the ludicrous. Costas Lapavitsas, a professor SOAS and a member of Research on Money and Finance writing in The Guardian, recommends default and departure from the Euro because of the ‘errors’ of the organizations charged with giving Greece enough money to pay its bills.

“Greece is facing an economic and social disaster, the results of so-called rescue by the ‘troika’ of the EU, the International Monetary Fund, and the European Central Bank. Greece must change course to avoid a grim future for its people: it must default on its debt and exit the eurozone,” opines Lapavitsas.

Noticeably absent from his analysis is any recognition that the real culprit in the Greek tragedy is the very structure of Greek economic and political life over the last several decades. The international organizations he blames had nothing to do with the out-of-control political patronage, corruption, bloated state sector, stagnant economic structure, and unpunished tax evasion that brought the country to its knees. Undoubtedly the international organizations could have responded faster and more effectively, but it is risible to blame them for Greece’s sharp descent into the third division.

Collateral Damage

Roubini is right about the collateral damage to Greece if it leaves the Euro. Banks would probably have to be nationalized, there could well be a bank holiday for a few weeks while the drachma was re-introduced, inflation would soar, savings would be at risk, and the value of the drachma would drop like a stone.

Lapavitsas blithely says such a development would give Greek companies a chance to increase exports and recapture the domestic market. What is he talking about?! Perhaps he hasn’t noticed that the Greek industrial infrastructure has been eroded to the point of extinction. Every ounce of steel, every drop of oil, every car, every electronic product, much of its food is imported. What exactly does he think Greece will export? Most Greek companies rely heavily on imported raw materials and machinery. Exactly how are they going to pay for these with a rapidly depreciating Drachma?

Greece does have certain industries, like ship yards, that could benefit. But years of union intransigence and government incompetence have reduced this industry to a shadow of its former self.

Pressure For Reform Must Continue

But the real risk of returning to the Drachma is that it could remove the pressure on the political class to make the reforms necessary to put the Greek economy on the road to recovery. Right now, under the threat of bankruptcy, the ruling party in Greece is promising extensive reforms that should have been made decades ago. Opening up closed professions, shrinking the size of the state, selling state assets, collecting taxes are just some of the reforms agreed to because of the pressure of the very international organizations that Lapavitsas criticizes.

Make no mistake. These reforms are traumatic for the ruling PASOK party that blossomed on the back of a corrupt system of patronage. They spell the end of business as usual, and could mean the end of PASOK as a major party. Who is going to vote for them if they cannot deliver the jobs and pensions they used to pass out? No wonder several leading members of PASOK are resisting implementation of these reforms. The fact that this is the only way to create a sound economic basis in Greece is of little importance to them. The risk of losing their office far exceeds their knowledge of or concern about the economic well being of their country.

The only way they could continue business as usual is to remove the external pressure for reform by defaulting on Greece’s sovereign debt, declaring bankruptcy and returning to the drachma. With inflation and depreciation it could be much easier to retain the old habits that got them into this mess in the first place.

The likelihood of a Greek default increases with each passing day. The European Union is simply not able to respond quickly to anything, let alone the risk of a default by a member state. Something like that was not supposed to happen. But despite much flapping around with endless, conclusionless summit meetings Greece may be forced to default and leave the eurozone. Whether this is a disaster for Greece depends entirely on how it is done. If such a move is taken as an excuse to abandon all the reforms discussed so far the Greek economy will remain mired in deep recession without even the hope of growth. The benefits that Roubini discusses will be possible only if the difficult steps taken under duress continue when the immediate pressure is removed.

Saturday, 17 September 2011

Good Theatre -- Bad Politics

The move by the Palestinian Authority unilaterally to declare a state is an understandable, theatrical, and ultimately self-defeating gesture. Understandable in the face of the combination of rigid Israeli intransigence and ignorance and cowardice on the part of the American political establishment. The Palestinians have always been good at political agitprop, and have often confused great coups on the global stage with real progress in the daily lives of struggling Palestinian citizens.

The gesture is self-defeating because it will only further alienate the Americans and make the job of potential allies in the United States much harder. The response to this problem may well be a resounding ‘So What? Exactly what have the Americans and Europeans done for us so far?’ True enough in that the Americans have actually come through with very little. Israel, confident in the support of a wilfully ignorant Congress, has safely ignored any American pressure for sincere negotiations with the Palestinians or even slowing down the construction of settlements on Palestinian land. No American administration, especially in an election year, is willing to challenge Congress and the powerful American Israel Political Action Committee (AIPAC) that does so much to misdirect American policy toward this issue. However, by embarrassing the Obama administration and forcing it use its veto in the Security Council to block the statehood claim, the Palestinian leadership has just made it even more difficult to get any, repeat any, support from the United States in the future. This move even could reduce what little funding the Palestinian Authority receives. Who will fund a group that just wants to rub your face in your own weakness?

Embarrassing Relative

But the main conclusion of this train-wreck is to demonstrate just how isolated Israel has become. Israel has so few friends that it will not be difficult for the Palestinian Authority to get the required votes in the General Assembly of the United Nations. Without the American veto the statehood claim would very likely pass the Security Council. How has Israeli gone from being the ‘plucky, valiant little country defending itself against the Arab hordes’ to the embarrassing relative everyone hopes will stay away from Thanksgiving.

Under the leadership of Benjamin Netanyahu and his combative foreign minister, Avigdor Lieberman, Israel has lost much of the support it used to enjoy. As Carlo Strenger, a professor at Tel Aviv University, notes in a column in The New York Times, Lieberman runs a small, right-wing hyper-nationalist party that keeps Netanyahu’s fractious coalition in power. His role model is not the liberal democracies of the West that he openly disdains. He looks to the autocrats of China and Russia as his role models. It was Lieberman who helped destroy Israel’s relations with Turkey by preventing Netanyahu from apologizing for the killing of nine Turkish citizens in the now-famous Mavi Marmara incident. Whatever, the rights and wrongs of that incident, a simple apology from Israel could have avoided a breakdown in the important relationship with Turkey.

Israel also lost badly when the autocrats in Egypt and Tunisia fell before the popular uprisings in Egypt and Tunisia. Those autocrats gave only lip service to the Palestinian cause, and Israel was left free to do what it wanted. The people now running Egypt take the Palestinian issue much more seriously. When the prime minister of Turkey visited Egypt he was greeted like a conquering hero because of his uncompromising stand against Israel. Israel seems unaware that the equation in the Middle East has changed dramatically.

Netanyahu is counting on the continued support of a clueless American Congress. But do these congressmen know or even care what kind of Israel they are supporting? Is it the Israeli myth so well propagated by AIPAC or the reality so evident to anyone who cares to look? American supporters of Israel should ask themselves if they really want the intolerant, illiberal, autocratic Israel of people like Avigdor Lieberman. Or do they want a country that honours its liberal traditions, recognizes it is actually part of the Middle East and works to end its isolation by sincerely dealing with its neighbours?

As Strenger notes, Netanyahu also believes that Obama will be defeated in 2012 and that he will have more luck essentially blackmailing a gullible Republican than a much more sceptical Democrat. If his calculations are wrong and Obama does indeed win a second term he could be in for a rough ride. In a second term Obama might actually act on some of the fine words about peace and dignity that he has spoken about.

So yes, the Palestinian claim to statehood will be good theatre but terrible real politik. But the real tragedy is the transformation of Israel into the very caricature of the implacable, intolerant, and aggressive country long feared and despised by its neighbours. One fears that the reaction of the current Israeli government to developments at the UN will be to rely even more on military power in an attempt to contain the Palestinian movement. This will be difficult.

Monday, 12 September 2011

Why Now?

Turkey is learning the first lesson of all aspiring premier league countries – ignore international organizations when you don't like their decisions.

The United States simply ignored the United Nations when it failed to win the UN’s support for invading Iraq in 2004. Germany and France simply ignored the Maastricht Treaty when their budget deficits exceeded the rules of the treaty. And now Turkey is ignoring a United Nations’ report that didn’t agree with Turkey’s claims on the Israeli blockade of Gaza.

The United Nations had a commissioned a report on the incident that occurred in June 2010 when a Turkish ship commissioned by a group that some consider a terrorist organization tried to run the blockade and deliver its cargo directly to Gaza. The Israelis intercepted the ship in international waters, boarded it, and wound up killing nine Turks in the ensuing fight. Turkey protested vigorously while Israel said it had every right to maintain the blockade to stop potential weapons smuggling to Hamas-controlled Gaza.

Turkey reacted to the report with all the self-righteous indignation it could muster. They sounded as if Turkey were the only country with a right to self-interest. The prime minister said the report had no basis and that Turkey would reduce its diplomatic ties with Israel to the bare minimum. Other Turkish ministers huffed and puffed and made thinly veiled warnings about increased Turkish naval presence in the Eastern Mediterranean. Just what this already explosive area needs.

The fact that Turkish Prime Minister Tayyip Erdoğan simply does not like Israel or its equally combative Prime Minister Benjamin Netanyahu is already well known. But why the explosion now? After all, the incident in question happened over a year ago. Why is Turkey all of a sudden making all sorts of veiled threats about events in the Eastern Mediterranean? While the death of nine Turkish citizens is indeed lamentable, it is far less than wholesale slaughter of innocents in neighbouring Syria. Syria gets a slap on the wrist while Israel – and Cyprus – get dark warnings of military intervention.

Oil and Gas

One possible explanation could be Turkey’s annoyance at being left out of the promising oil and gas exploration in the waters between Cyprus, Israel and Lebanon. Cyprus intends to explore the famous Block 12 in its southern territorial waters close to where the Israelis have made a major discovery. Turkey has objected vehemently to the Cypriot exploration. Turkish officials say that internationally-recognized and European Union member Cyprus has no right unilaterally to explore for hydrocarbons in its own territorial waters. According to them this exploration would somehow have negative implications for the isolated, economically struggling self-proclaimed Turkish Republic of Northern Cyprus that occupies about one-third of the island and is recognized only by Turkey.

Try as it might Turkey has been unable to get a single other country to join it in recognizing the Turkish part of Cyprus. This must be frustrating, especially as a group like the Sovereign Military Order of Saint John of Jerusalem of Rhodes and of Malta without a square meter of land has diplomatic relations with more than 100 countries.

But beyond the frustration and embarrassment, Turkey is desperate for oil and gas. The country has only negligible hydrocarbon resources and spends upwards of $90 billion/year importing almost every drop of oil and gas its rapidly growing economy needs. It most certainly wants to be included in the promising exploration in the Eastern Med. But this is not going to be easy.

The areas currently being explored are nowhere near Turkish territorial waters, and it is not at all clear what the legal basis would be to object just because the perceived rights of an unrecognized entity like the Turkish Republic of Northern Cyprus would be ignored. This could change if a few other countries would join Turkey in recognizing the Turkish Republic of Northern Cyprus, but for the moment this possibility seems remote.

The smoothest option would be for the troubled island to find a way to re-unite and bring the Turkish north into the international and European Union fold. Unfortunately, reunification seems more remote than ever. The Greeks in the south see no point in bringing in the poorer northern part of the island, and Turkey has shred all pretence of an independent northern Cyprus by imposing harsh conditions for any potential reunification - - regardless of what the native Turkish Cypriots might want.

So far the Republic of Cyprus has ignored Turkish objections to the exploration, and supported by the European Union, Russia, the United States as well as several other countries it is unlikely to stop looking for major oil and gas reserves.
Turkey is becoming much more adventuresome in its foreign policy, but will it risk serious confrontation by using military force to intervene in the oil and gas exploration by another sovereign country? Under previous governments I would definitely say no. But Prime Minister Erdoğan is taking the country in a new, assertive and aggressive direction. It remains to be seen just how far he will push Turkish claims in this region.

Sunday, 4 September 2011

So Much For 'Zero' Problems

All of a sudden Turkey’s famous ‘Zero Problems’ diplomatic rhetoric has morphed into multiple problems on multiple fronts. In addition to mounting problems with Cyprus, Iraq and Iran Turkey has done something unique in simultaneously achieving hostile relations with both Syria and Israel. This is not easy

Turkey’s hyperactive reaction to the recently released United Nations report on the by-now infamous Mavi Marmara incident of June 2010 in which nine Turkish citizens were killed as they tried to breach the Israeli blockade of Gaza shows Prime Minister Tayyip Erdoğan’s unique ability to make justified anger look slightly foolish and ultimately self-defeating. He demanded an apology from Israel, didn’t get one, and used the UN report to escalate the issue

In all their huffing and puffing about the incident the Turkish leaders ignored the fact that the report actually said the blockade was legal and that Israel had every right to defend itself from terrorist arms smuggling. The Turks didn’t want to hear this. What they latched onto was the report’s justified criticism of the clumsy reaction of the Israel forces as they boarded the ship in international waters and killed nine people in the process of taking over the ship.

Erdoğan seized on this part of the report and instantly ordered a down-grade of relations with Israel and stopped all military cooperation. On top of this the Turkish government made heavy-breathing noises about escorting its merchant ships (as if the Mavi Marmara was a normal merchant ship and not deliberately trying to provoke the reaction it got) with its navy. One wonders what the Turkish Navy will do when and if another attempt to break the blockade is made inside Israeli territorial waters. The fact that this heated rhetoric might reduce Turkey’s credibility on the world stage never seems to have occurred to him.

It’s important to remember that this virulent anti-Israel stance is not generated by any Turkish version of Islamic fundamentalism. It is more just Tayyip Erdoğan being Tayyip Erdoğan. He cannot stand dissent in any form, least of all when it comes from someone he detests like Israeli Prime Minister Benjamin Netanyahu. No one in the Turkish government dares to disagree with Erdogan, and he naively expects the same obedience from leaders of other countries. In Erdoğan’s mind only one country is justified in having national interests, and that’s Turkey.

While all this was going on Turkey announced that it had agreed to install American anti-missile radar. The Islamic press in Turkey is working overtime to convince its gullible readers that this radar is really aimed at Israel, not Iran. Right. It’s doubtful that many Iranians share that particular twist of reality. The Turks were so nervous about installing this radar that they demanded any reference to NATO be removed in the documentation. Do they seriously think this is going to fool the Iranians?

Meanwhile, relations with Syria are not getting any better as the Syrian leader Basher Assad continues to defy Erdoğan’s calls for reform. Not too long ago Turkey held up its relations with Syria as a model of how neighbours should treat each other. Now Turkey is nervously hosting thousands of Syrian dissidents and is even considering joining international sanctions against the Syrian regime.

Then there is the PKK, the violent military wing of the Kurdish movement that continues to attack Turkish soldiers. After several bloody attacks Erdoğan’s patience – never in great supply anyway – ran out and he ordered air strikes against suspected PKK basis in northern Iraq. There is even talk in the hyper-nationalistic Turkish press of sending troops into Iraq to clean out the PKK bases. The fact that all this has been tried before to no avail does not seem to have occurred to anyone. I’m sure the Iraqis would love to see thousands of Turkish troops cross their border.

As if this wasn’t enough another Turkish minister made threatening noises about using the navy to block the attempts of the Republic of Cyprus to search for off-shore gas in its own territorial waters. He didn’t say exactly what international legal principle gives Turkey the right to interfere with exploration in another country’s internationally-recognized territorial waters. It would be interesting to learn just how the Turks would justify such a move that would be loudly condemned by the rest of the world, including Russia and the United States. Turkey could easily brush off criticism from the European Union (Cyprus is a member of the EU), but it might have more trouble with Russia and the US.

And, of course, there is the question of Cyprus itself. The Republic of Cyprus is internationally recognized and a member of the European Union. The Turkish Republic of Northern Cyprus is recognized only by Turkey. Chances of re-unification of the island have never seemed less likely. The Greeks in the south ask themselves what would be gained by taking over the problems of their poorer Turkish neighbours, particularly with the stiff conditions that Erdoğan has demanded. Failing unification, what will Turkey do if, as likely, it fails to get any other country to join it in recognizing the Turkish Republic of Northern Cyprus? Will it formally annex Northern Cyprus, or will the uneasy status quo continue? No easy answers, and bombast doesn’t really solve much in the real world.

So much for ‘Zero Problems.’