What went wrong?

Source: The Economist

In the night between the 8^th and 9^th December the European Union took a step closer towards becoming a fiscal union. Or rather a “fiscal compact”, as it has been called. Or perhaps a “stability pact on steroids” as Wolfgang Münchau referred to Angela Merkel’s proposals before the summit. However you decide to call the fledgling product of an intense night of fraught negotiations, there is no doubt that the 26 countries who signed up to it ceded a hefty chunk of their national sovereignty to the European machinery. Tax and spending plans will now be supervised at the European level and automatic sanctions will be triggered by profligate government spending.

In many ways this pact seeks to address the woeful flaws in the original Stability and Growth Pact forced on the recalcitrant European Community members by Germany in 1997. The Pact was a classic example of the “turkeys don’t vote for Christmas” dilemma. Under its original rules, when a country exceeded the government deficit limit of 3% of GDP or the debt-to-GDP ratio of 60%, the Council of Economic and Finance Ministers could issue a warning to the offender on recommendation of the Commission. Should the country not mend its spendthrift ways, a name and shame policy would ensue whereby the warning would become public. In the event of public opprobrium not being sufficient to cajole the country back into the straitjacket of fiscal rigour, the Council had the option of applying sanctions. Herein lies the snag: the countries applying the sanctions are the same ones that could find sanctions being applied to them at some point in the future should they deviate from the road of fiscal discipline! There was no incentive to set a precedent by applying the sanctions and every incentive to close an eye on excessive spending. Thus in 2003 the excessive deficit procedure (as this rather convoluted process is known) was not enforced against, lo and behold, France and Germany, the latter having preached the mantra of fiscal rectitude since its macroeconomic policy was blighted by the woeful Weimar Republic.

Source: BBC

But despite what many believe, the original flaws of the euro lie not in fiscal profligacy alone. In fact, Greece was arguably the only country blithely throwing money around in the run-up to the crisis; Spain actually had a budget surplus on the brink of the crisis. There was a debt problem, but this was in the private sector. Fuelled by the low interest rates afforded by the introduction of the euro the private sector, most notably companies and mortgage borrowers, embarked on an unprecedented spending spree. Thus whilst Spain's government may have succeeded in not breaching the 3% deficit limit, it oversaw an unrestrained debt-fuelled boom. What's more, southern europe's debt-hungry markets were happy to buy up Germany's exports, thus  fuelling Germany's surplus. And to further compound the problem,  Germany's excess savings, as a result of its citizens' frugality, were  siphoned off into spendthrift countries.

Source: BBC

 Another phenomenon we have witnessed since the introduction of the single currency has been an asymmetric shock within the eurozone. According to two policy experts “Germany’s wage trends have been themost important cause of the euro crisis. Those wage trends created anasymmetric shock that destabilized Europe”. Since the euro’s introduction Germany “ruthlessly held down wages” in an attempt to boost its competitiveness, aided by the artificially low exchange rate, whilst other members, most notably the Mediterranean countries, let their wages rise excessively. Germany thus boosted its competitiveness at the expense of its southern European neighbours, creating an asymmetric shock that fed into the current economic crisis. Whilst to claim that “Germany adopted a beggar-thy-neighbour export model” is a bit excessive, the competitiveness gap is certainly at the heart of the euro’s travails.

Source: BBC

You might be forgiven for thinking the euro’s design flaws ended here. Alas, policy-makers overlooked another crucial aspect of monetary unions, namely that of some sort of fiscal stabiliser. In most successful monetary unions, there is also a degree of fiscal union to allow for diverging economic conditions in its constituent regions. In other words, a region as diverse as Europe ought to have allowed for some sort of stabilisation mechanism to allow its members to deal with asymmetric shocks. This would have enabled them to adjust wages and prices without the grinding recession that they are witnessing now. Such “cushioning” mechanisms can be achieved through a partially centralised budget (not a fiscal superstate as some commentators would have you believe), where falling tax revenues in an adversely affected region will be compensated by rising revenues in a boom region. However, the enormous political implications of even a minimal budgetary centralisation make it an unfeasible option, at least for now.

Source BBC

What ought to have happened then was a closer coordination of macroeconomic policies, i.e. a sort of fiscal union which would have prevented the asymmetric shock and thus not placed the eurozone in such a precarious position regarding the current economic crisis. Furthermore, the only mechanism that policy-makers did not fudge, the single monetary policy, has been rendered essentially useless as an adjustment mechanism because of the vast differences in the economic conditions of member states. As Paul Krugman writes, the competitiveness divergence has to be reversed, and there are no two ways about it. Either prices rise in the north, or they fall in the south. Obviously the first option would require higher inflation than the fiscal hawks in Germany or in the European Central Bank are prepared to accept. Inflation is anathema, as such they have forced swingeing cuts on their southern neighbours which is merely compounding their recession. In attempting to balance between the different needs of the eurozone member states, the ECB has arguably interpreted its mandate of price stability too narrowly, placing the burden of adjustment entirely on southern Europe.

Source: Cartoon Stock

Southern Europe ought to have tackled the competitiveness gap long ago, when the piercing eye of the markets was not focused on its every move. Now that the eurozone finds itself in the eye of the storm it ought to abandon its fixation with price stability and recognise that with no room for fiscal manoeuvring because of ballooning deficits, indebted states cannot keep forcing austerity on their economies when global demand is sputtering. The long-term adjustment ought to be coupled with a short-term loosening of monetary policy, even if this leads to slightly higher inflation.

When the euro was conceived twelve years ago policy-makers thought, naively, that they could divorce monetary and fiscal policy. In their blind pursuit of the European unification dream they blithely waved away economic and political practicalities, crossed their fingers and hoped that members’ fiscal policies would somehow align themselves automatically. Events of the past year have made that hope look like a forlorn pipedream.

Occupy Wall Street... Is it just the beginning?

Source: CNN Money

The most important fact to realize about the rash of popular protests around the world - Occupy Wall Street in the U.S., demonstrations in Greece, Spain, London and elsewhere in Europe, violent uprisings in rural China, even the revolutions of the Arab Spring - is that they aren't about money or inequality. If they were, they would be easier to deal with. They are about perceived injustice, which reflects a deeper, fiercer problem. 

The spark of the U.S. movement may soon be obscured as it is taken over by career protesters, labour unions, and others who enjoy any chance to torment corporate managers. But the spark is where we find what's new and meaningful, and it seams to have emanated from a feeling by the protesters that they are not getting a fair shot at prosperity. They believe that big companies, specifically major banks, have rigged the system to their own benefit and to the suffering of ordinary people. 

That perceived injustice is the real root of today's rage. Yes, many Wall Street executives make tonnes of money, but plenty of hedge fund managers, for example, make far, far, more, yet no one is camping outside their suburban Connecticut offices, For that matter, America loves Warren Buffet, just as it loved Sam Walton when he was the country's richest man. Fellow citizens making billions do not by themselves   get many people riled.

Even economic inequality is not enough to send mobs into the street. Inequality in the US has been increasing for over 30 years. During most of that period the rich were getting richer, and the poor were getting richer, but the rich were getting richer faster. Though the gap was widening the lid stayed on discontent as long as everyone was moving ahead. "Inequality [actually] diminished in the recent recession, as it usually does in tough times" (Forbes, November 7th 2011). If inequality were the problem people would be less upset today than they were in 2007. 

What's new is that those with medium and lower incomes have not been getting richer for several years, while those with high incomes have been, and the unprecedented slowness of post-recession job growth has left many feeling deprived of their rightful opportunity to improve their lot. More broadly, they feel they're being punished even though they did nothing wrong, while those whom they blame for the whole mess - the bankers - got bailed out and are raking it in. Infuriating injustice. 

The elements are the same in protests worldwide, whether the specific grievance is blatant corruption, as in China and the Middle East, or violation of the social compact, as in Europe. The innocent are punished while the guilty are rewarded. That combination is intolerable.

In the U.S. this narrative is flawed and in some ways plain wrong. Most of the Occupy Wall Street probably don't know that they, as taxpayers, actually made money from the bank bailout. They may be forgetting that millions of Americans are being foreclosed on because they willingly, even eagerly, took out mortgages they could not afford. Some protesters are simply clueless, like one who responded to a question from the New York Times by saying he had never heard of Warren Buffet, or one who complained to NPR that "we are paying for the bailout", or one who told the Times that Virgin America is a good company because it's "working on creating solar planes".

It does not matter. What people know or don't know is not important. All that counts is what they feel. 

Even if Occupy Wall Street should evaporate, the fuel that is feeding it will not. Think of it as a warning. Cataclysm is a long way off, and it certainly is not inevitable. But we are a little bit closer. 

Is protesting an integral part of the student experience?

Student protests in London last year

The protesting student has become part of popular culture, fuelled by a certain element of 1960s nostalgia. The current student generation, however, has been decidedly apathetic, preferring to lounge on the sofa watching the X-Factor with a can of beer rather than being out on the streets defending the values we believe in. A lecturer lamented last year that we were the most “unstudenty” students she had ever seen.

The financial crisis and general social turmoil seem to have jolted the stagnating student body back to life. The resurgence in student protests over the past year has fuelled colourful commentary presaging a return to the golden days of 1968; all this seems a bit excessive, however it is endearing to see that the student conscience has not been stifled by a razor-sharp cynicism befitting a disgruntled middle-aged adult more than anything. One need not be a bleeding heart liberal to protest in the name of a cause, nor are student protests all about getting high and engaging in social disobedience under the guise of some left-leaning political slogan.

The student experience is a wonderfully vague, all-encompassing concept which has been packaged neatly and marketed like a commodity across university prospectuses. This might smack of a left-wing political platitude, but there is no denying that the “student experience” has come to denote a certain standardised way of life which we are supposed to adhere to. Thus universities have been voted number one for “student experience”, when this is something that is intrinsically personal and cannot be crudely ranked. The student experience is fundamentally a learning experience, and learning is not something we can ever hope to achieve in the lecture room alone. Poring endlessly through books only serves to further entrench apathy; it is too easy to absorb ideas from books without having them challenged and moulding them to make them our own. Protesting is a way of asserting one’s opinions, engaging with peers and perhaps, at the end of it all, to emerge with a fundamentally different view. Education is more than a streamlined process of classroom learning, it is about building one’s opinions and sense of direction. To believe that student protesting will change the world is self-indulgent, however that is no reason to adopt a defeatist approach towards asserting one’s beliefs outside the classroom and in a community of peers.

The Arab League turns its back on Assad

Source: it.ibtimes.com

“If I were in his place I would resign”. King Abdallah of Giordania has commented with these words on the situation in which the Syrian president Bashr al Assad finds himself after the decision of the Arab League to suspend his country from the organization.

The Arab community, in the mean time, sees Syria as a rogue country and considers its regime as illegitimate. Moreover the Arab League is considering the possibility to initiate consultations with the Syrian opposition, in view of a political transition.

In other words the Arab countries have gone much further than Europe or the United States, treating the Syrian regime as if it had already ended.

            Assad is assisting the collapse of the regime he received as inheritance from the father, Hafez al Assad. The calm shown by the Minister of Foreign Affairs Walid al Muallem does not diminish in any way the gravity of the situation. Muallem realizes perfectly the dangerous isolation of Damascus, and also knows that the support of Russia is not sufficient to avoid the worst. The position of Moscow – which is shared by Beijing – offers only a brief respite, but will not prevent the fall of Assad.

In Damascus embarrassment reigns because the regime does not know how to move. Until now it has tried to buy time to try and understand whether it should delegitimize the organization (which it has already defined as the “Israeli League”), convoke an extraordinary Arab summit or welcome a delegation led by the Minister of Foreign Affairs of Qatar, Hamad bin Jassim.

Without legitimacy

Bashar al Assad is the heir of the Pan-Arab Ba'athist regime created by his father, but now he sees his Arab legitimization refused. This leads the way to an internationalization of the crisis and risks putting Russia in a difficult position as well. If the Arabs, the western countries and the international organizations will unite their forces against the regime of Damascus, most probably Moscow will also have to change position.

            The republic founded by Hafez al Assad is dead. His heir will be swept away by the blood of the revolutionaries. One thing seams certain: Syria will no longer be governed by Bashar al Assad. There seems to be no other solution than the fall of the regime. As a start Assad could resign: maybe it is the only way he has left to save his life.