Baltimore’s Unrest: A Manufacturing Crisis?

Orioles_Announce_Partnership_with_Baltimore_Schools

John Angelos is right. Yes, American manufacturing jobs are being lost. But that issue is not limited to America.

I love spring. I especially love spring in Baltimore, where I did my undergrad, too. For one, it meant the end of the semester for all of us at Loyola. All the studying and hard work paid off, and summer was around the corner. It also meant baseball. Yes, even as a Yankees fan, the Baltimore Orioles grew on me. As students we could get tickets on Fridays for $5 and sit up in the cheap-seats, but it was always a great time, with great view, and with great people.

This week I was saddened to learn that springtime, a time marked by the start of baseball season, was disrupted. My Jesuit upbringing has taught me that justice requires those destroying property and endangering the lives of others to be held accountable, but it also requires that those who have abused their authority to be held accountable too. It’s a sad state of affairs. And caught in the middle of all this is baseball, America’s pastime, which was overshadowed by events that remind us that our nation’s past isn’t so easily buried.

Buck Showalter and the dugout have pretty much kept to themselves. But in response to a Baltimore sports broadcaster’s complaints that the protests were now negatively affecting the daily lives of other citizens, John Angelos, son of Baltimore Orioles owner Peter Angelos, and Chief Operating Officer of the team, took to Twitter to defend the protests, delivering a passionate reply that caught the Internet’s attention and went viral. You should read the whole thing, but I’ve managed to find a connection between this sad state of affairs and international relations:

That said, my greater source of personal concern, outrage and sympathy beyond this particular case is focused neither upon one night’s property damage nor upon the acts, but is focused rather upon the past four-decade period during which an American political elite have shipped middle class and working class jobs away from Baltimore and cities and towns around the U.S. to third-world dictatorships like China and others, plunged tens of millions of good, hard-working Americans into economic devastation, and then followed that action around the nation by diminishing every American’s civil rights protections in order to control an unfairly impoverished population living under an ever-declining standard of living and suffering at the butt end of an ever-more militarized and aggressive surveillance state.

A good chunk of those “middle class and working class jobs” being “shipped away” that Angelos is referencing are manufacturing jobs. A popular case study for Baltimore in particular is the Bethlehem Steel mill, once a booming sector and proud employer of many residents of Baltimore. No more though, but not for the reasons you would think if you read Angelos’ words.

A case can be made that free trade policies are partially responsible for some job losses cited in Angelos’ argument. But the larger, less sexy explanation is that it’s also a phenomenon driven by better technology and increased productivity and automation, which also leads to a decline in manufacturing jobs across the board, not just in the U.S. The decline in U.S. manufacturing as share of GDP between the 1970s and today is part of a larger global phenomenon, and it’s one I touched on in an earlier post. But here’s a nice graph with some examples:

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That’s only a small piece of the pie. If you want to take a look at the whole thing, go here for the raw data.

The trend is pretty clear. Australia’s manufacturing/GDP ratio went from 22% to 9.3% between 1970 and 2010. Brazil’s went from 24.5% to 13.5% in the same period. Canada’s dropped roughly 9%. Even the “industrious” Germans went from a little over 30% down to 18%, and Japan’s from 35% to 20%. China is no exception to this. As its economy goes through a fundamental restructuring from a heavily export-based economy to one slightly more geared towards domestic consumption, manufacturing as a % of GDP is also beginning to fall in China, along with manufacturing employment.

So is Angelos missing the forest for the trees, aside from the fact that globalization is a big reason why the Orioles have been able to get some pretty good players from other countries? That said, the snippet that I highlighted and italicized in the beginning is a popular narrative, and it’s a narrative that is getting even more attention with the heated debate surrounding the Trans Pacific Partnership (TPP), a free-trade agreement between 12 countries that account for 40% of global GDP, including the U.S. and Japan but not including China. As the chief negotiator for foreign relations, the Executive Branch negotiates these agreements, but Congress must ultimately sign off on any foreign trade agreement. In the past, the Congress has granted presidents “trade promotion authority” (TPA), also known as “fast track,” which would give presidents the authority to place trade agreements before Congress for a simple up-or-down vote (no filibusters or adding amendments to the deal). Will the Congress let TPP happen? President Obama is doubling down on it, so he’s certainly determined to make it part of his Administration’s legacy, even if it fails. But don’t expect opponents or proponents of this to go down without a good fight. For more information on TPP, check out this backgrounder. And while you’re at it, pray for Baltimore. I can promise I’ll be rooting for the city extra hard this season.

Mexico & The United States: Challenges, Opportunities and Threats

With summer right around the corner and folks taking some vacation, Mexico is a popular spot. Matter of fact, my mother just went to a wedding at Los Cabos in Baja, California and my sister is going to Cancun for her honeymoon in a few weeks.  Mexico, and Latin America for that matter, was my “first [academic] love,” the first region that I delved into while studying International Relations. And surprisingly, I haven’t talked about Mexico at ALL.  This post then, is long overdue.

U.S. Secretary of State John Kerry and Mexico’s President Enrique Pena Nieto met at Los Pinos Presidential Residence in Mexico City on May 21, 2014

Secretary of State John Kerry has visited 48 countries and traveled almost 500,000 miles. But until he arrived in Mexico last Wednesday, he had not visited the United States’ closest neighbors, Mexico.

At first glance, Mexico has nothing going for it.  It has few navigable rivers and few good natural ports (Verazcruz is perhaps the best one).  To make matters worse, it has many disassociated territories, along with lots of highland jungle and deserts.  This in of itself may lead you to believe that it will never be a strong state.  It probably should be a failed state,  but thankfully, it’s nearest neighbor is the global superpower.  It has access to income and access to markets that it wouldn’t have had otherwise had it not been for their proximity to the United States.  More importantly for the purposes of this blog post, it has access to a drug consuming population that it wouldn’t have had otherwise.  Mexico has gone from an economic footnote, to perhaps the next big thing.  And by mid-century, the country will be stronger than ever.  Mexico is on track to becoming the next China.

Mexico’s Geographical Challenge:

Mexico has some of the worst types of terrain in which you can develop a successful economy and culture with.  Here, there are few areas where you don’t need irrigation, and unlike our chunks of arable land in the U.S., Mexico’s is much more dispersed.  None of these arable chunks of land in Mexico are connected.  That means any piece of infrastructure you build has to be built everywhere else, making it difficult to get any leverage.  The climate also make transport issues difficult.  As a result Mexico will always be capital poor with substandard infrastructure.

Land Use in Mexico Most of Mexico is highland or mountainous and less than 15% of the land is arable; about 25% of the country is forested. Dark Purple: Land suitable for intensive farming, has irrigation infrastructure. Light Purple: Farm with limited infrastructure for temporary/light farming. Gray: Limited farming, no irrigation infrastructure. Brown: Farm livestock, limited infrastructure. Light gray: Suitable for farm livestock or limited irrigation project. Yellow: With or without livestock limited infrastructure for livestock. Not suitable for farming. Green: Forest with limited or no infrastructure. Not suitable for farming.

The Good News (What does Mexico have going for it?):

Despite all of this, Mexico will be the fastest growing economy for the next three decades. Mexico is already the world’s 15th largest economy; in the next 20 years it’ll probably be in the top ten.  And that’s WITHOUT the drug war ending and WITHOUT having a corrupt government.  There are certain things that are just hardwired into the system.  Right now, monkeys can run Mexico and it will probably end up the same way.

The United States has tripled its natural gas exports to Mexico in the last decade, and we’re going to triple that again in the next four years.  There are 9 trunk-lines under construction right now with an target completion date of 2017.  Texas won’t just be feeding Juarez with energy; pretty soon it will be powering Mexico City and Veracruz. Thank you, shale. And this is all without the recent reforms that Mexican President Enrique Pena Nieto signed into law that changes the constitution to allow foreign companies to drill for oil and gas.

Mexico also has favorable demographics, with lots of young workers and a large consumption base, largely propelled by Foreign Direct Investment (FDI).  And as horrible and violent as the drug war has been, it has pushed down Mexican labor costs; they are now cheaper than China’s.  Anywhere else in the world this wouldn’t work very well, but because they are so close to the U.S. this labor differential works in their favor.  The bigger that differential is, the more investors look at Mexico and see it as an attractive market to leverage its labor capacities to service the American market.  So I know this sounds crazy, but the worse the drug war gets in Mexico, the better it is for FDI. Foreigners can come in, metabolize the cheap labor, and sell things to the U.S. because of it.  This is the second largest bilateral economic relationship in human history.  By 2020 I expect it to be the largest.  As of right now the Mexican-American border is already the most crossed border in human history; last year it had 350 million legal border crossings.  It’s not that the Americans haven’t decided if we want to integrate with Mexico, it’s that we don’t know what to do about it yet.

The blue areas are the largest concentrations of Hispanic populations. While this map is telling, not in this map are the %increases of Hispanics which are over 50% almost all across the United States.

The Bad News (You Can’t Spell “Mexico” Without “Drug war”):

The Mexicans are the only people in the world who can WALK to the United States. In every country you have cultures that can physically transport themselves and set up ghettos en masse.  Here, we only have Mexicans and Central Americans; all of our ghetto populations are Hispanic.  That complicates things a little, since drug runners started entering the United States through Mexico after we effectively cut off their transit routes to Miami via the Caribbean.  The problem is when the ghetto issue and the drug transport issues coalesce.

Mexico’s land border with the US is 2,000 miles long. Even if the US put all of its troops on the border right now, that’s only 1 for every 50 feet.

We are seeing signs of this coalescence, as well as the TCOs’ diversification and expansion. Just last week, New York City officials seized over 50 pounds of heroin that dealers were attempting to move from New England.  Yes, New York City.  The flood of heroin coming in and out of New York City has surged to its highest levels since 1991, alarming law enforcement who say that bigger players – like Mexican Transnational Criminal Organizations (“TCOs)– are now entering the market.

You know them as “drug cartels” but I call them TCOs because they have diversified; they are not just drug-running cartels anymore.  They’ve gone UP the supply chain to South America and contracted directly with the cocoa producers.  And now they’re coming DOWN the supply chain to the United States.  They can move anything now: drugs, money, guns, people, even oil.  See, these “cartel wars” are not necessarily about drugs; they’re about transport routes and networks. It’s about geography.  The logical conclusion is that this “drug war” will spill over into the United States as they fight each other for these networks.  And in many ways it already has.  Mexican TCOs are now the dominant organized crime group in 1,000 municipalities and operate in more than 230 American cities, from San Diego to Boston.

And because we don’t have an immigration policy to integrate these ghetto populations, we’ve provided the cartels with exactly what they need to spread.  And they are kicking the American gangs’ asses.  In ten years time the current U.S. gangs – the Bloods and the Crips just won’t exist anymore, because the TCOs will have killed them all.  They will take over retail drug distribution.  And then they will begin fighting each other, just as they have been in Mexico.

We are worried about Syria, Ukraine and Afghanistan, but are we prepared for Mexican TCOs infiltrating the Spanish speaking ghettos in every major city and bringing the North American drug war here?  This is something I don’t think we can fuhgettabout.

Don’t Fughettabout Foreign Policy: Risks and Trends for 2014

David Kessler and Peter Kouretsos – Happy New Year, everybody! Big things happened in 2013: Dave and I graduated in May and we’re all still here, which means that the world didn’t blow itself up. And to us here at the Brooklyn Diplomat, that’s a reassuring sign that we’re doing ok and that it could always be worse. Not great, but ok. It helps us put things into perspective.  But we digress. We’ve been reading lots of articles lately about what to expect in 2014, and while we’ve found some of the trends, forecasts and “predictions” out there to be agreeable and insightful, the overall impression we got can only be described by one of our favorite movies (because Brooklyn, that’s why)

Ok, maybe not exactly BS, but lots of this stuff seemed pretty obvious. It’s not very Brooklyn at all. And as the official trendsetter of the modern world, the gentlemen and scholars of Brooklyn ought to have a say in what to expect in a post 2013 world.  Main takeaway from all of what you’re about to read right now: Foreign policy. Start caring about it. While last year’s headlines were dominated by economics, just one look at any of the headlines this past month shows that 2014 will be a “Foreign Policy” year.  This is what Dave and I are thinking about now as we begin 2014.  At the end, we’ll also share with you our New Year’s resolutions.

First Up: PETER KOURETSOS

#5) MENA unrest expands:

2014 is going to be a record year for violence in Iraq (a great primer can be found here). Runner ups in terms of unrest and instability are going to be obvious, Egypt and Libya, where the money is running out and the governments being propped up at the moment simply are not working. There are also serious concerns of a security vacuum in Afghanistan with talks of a U.S. 2014 pullout if a Bilateral Security Agreement doesn’t get hammered out; failure here would mean Afghanistan spirals back to the way it was before the 2001 invasion and we’re back to square one.

Adding fuel to the fire in Egypt, the interim government backed by Sisi (who may very well run for President soon) and the SCAF recently declared the Muslim Brotherhood a terrorist organization. Both the Brotherhood and the government have reached a point of no return. By labeling the Brotherhood a terrorist organization and denying them any political voice, they’ve committed themselves to stamping them out for good; or risk them returning to power and destroying them. The Brotherhood, now backed into a corner, doesn’t have much to lose. And when one group has everything to lose while another has nothing to lose, it rarely ends well. It’s a very desperate situation. It’s a very…Syria(ous) situation…

Al-Qaeda is certainly not what it used to be after bin Laden’s death, but that does not necessarily make it weaker or stronger; it just makes it different. And if we don’t adapt to that, “different” will become “dangerous.”

2014 will be a “good” year for al Qaeda.  We will see a proliferation of small, local al Qaeda “units” that will take the jihad locally. This is not to say that some groups won’t target the U.S. directly anymore, but the emphasis will be local, where they can take advantage of economic hardship, weak, ineffective and unresponsive governance, and social unrest.  They have, for example, used Western Syria as a haven to launch operations into Iraq’s Anbar province, most notably in Fallujah.

Violence will grow and al Qaeda and its affiliates will grow.  The willingness of the U.S. and the Allies to devote significant resources to deal with these threats is not what it used to be (as opposed to right after 9/11).  To make matters more troublesome, the capacity for local governments and “partners” to pick up the slack simply isn’t there.  Turkey, Lebanon, and Jordan are bursting at the seams and risk becoming more unstable as they take in more refugees from the Syrian war, which is not ending any time soon.  If you want to know whether this new decentralized and fragmented al Qaeda is weaker or stronger than it was before Osama bin Laden’s death, you’re asking the wrong question.  It is certainly not what it used to be, but that does not necessarily make it weaker or stronger; it just makes it different.  In the environment described above, the so-called “al Qaeda 2.0” after 2011 becomes “al Qaeda 3.0” in 2014.

 #4) Consequences of an Iran deal:

As per the accord hammered out last November, Iran has halted its 20% enrichment and just began blending down its stockpile of 20% enriched uranium this January. The West has made good on their end of the bargain by lifting some sanctions.

Hassan Rouhani was elected for this very reason. Sanctions were biting and he has been tasked to stop the bleeding. He does not have the go-ahead from the Ayatollahs to completely eliminate enrichment, but the momentum is there in 2014 for a deal with limited enrichment in exchange for a seat as a member of the international community.

We will find very soon whether a nuclear deal with Iran is going to happen, maybe even by the end of the first quarter.  If it does, oil prices could take a hit when Iranian crude enters the market and the Saudis, Venezuelans and Russians will find themselves in a very difficult position. Petroleum exports account for a disproportionate amount of their national revenues because they have chosen not to diversify, mainly because they just never saw the need to.  Will they decrease production (and lower exports) to keep prices where they’re at now, or do they continue at current production levels and watch prices fall?

Either way, if a deal with Iran happens this year, the funds used to grease the wheels of these petro-states could begin to dry up. But if a deal does not occur, oil prices could spike, the potential for an Israeli strike will go up, the risk of other MENA states going nuclear goes up and the Iranians move much more quickly to a nuclear “breakout” capability.

3) Elections happening just about everywhere:

I know people are talking about U.S. Midterm Elections and are also on the lookout for anyone announcing a 2016 Presidential run, but I’ll let Dave take that one.  Pretty much any emerging market most investors have been talking about that can have elections this year is having elections. China is the exception here since they don’t have elections. I am also not counting Russia in this either.

A little under half of the world’s population will vote some time in 2014. The Economist breaks it down for you.

When I’m talking emerging markets I’m talking Brazil, Nigeria, Indonesia, India, South Africa, Columbia, Turkey (a full list here).  Many of these large economies have one thing in common: most of the parties in power now have been in power for more than a decade.  And for at least the past 10 years, the effectiveness of their governance has been questionable.  These countries are at a crossroads; a case in point is Turkey.  PM Erdogan must step down due to term limits but he can still win and hold the ceremonial office of President this year; we could see a Prime Minister-President seat-holding scenario similar to Putin’s Russia with Dmitry Medvedev.  But Erdogan’s AKP will still need to win local elections, and though they are still generally popular, recent discontent with the AKP’s strongarm tactics and a political crisis sparked by the Gezi Park protests could lose them some seats.

Brazil is another notable country with major elections to watch, and the World Cup (plus with the Olympics two years away) will add more to its complexity.  President Dilma Rousseff’s party will likely stay in 2014, but only because Latin American politics as a whole is uniquely more populist and often lacks strong opposition parties. Economic growth has also plummeted while public funds have been used to prepare the country for the World Cup and the Olympics. Extravagant stadiums next to run-down favelas will present the world with a Latin American version of Charles Dickens’ “A Tale of Two Cities.”

And as for the most populous Muslim country in the world in the ever-growing and important Southeast Asian region, Indonesia undergoes both Presidential and Parliamentary elections; it would do the United States some good if they re-engaged and reaffirmed their commitment to an Asia-Pacific “pivot.”  And although the popular topic right now is Ukraine, all eyes will be on Thailand as it navigates a political crisis between rival factions; it’s unlikely that an election will solve anything without an agreement between the clashing parties, and the risk of a military coup is always there.

#2 )Reforming China:

The Peoples Republic of China’s (PRC) Third Plenum launched significant and unprecedented political reforms that will fundamentally alter how China is governed.  In 2014 we will see the beginning of those, and consequently, the beginning of a new China. I’m still optimistic about China in 2014; the PRC’s resilience amid the decades of challenges it’s faced has been far too consistent to bet against.

By a show of hands, who’s betting against China in 2014? Nobody? Ok, cool, just making sure.

In Xi Jinping’s first year of governance, he’s engaged in more reform than in the PRC’s past 20 years.  This means real economic reform, a free-trade zone in Shanghai, anti-corruption moves, things that will get China on track for a serious restructuring.  But reform in China will make lots of people who have an interest in the status quo very unhappy. The Plenum was meant for Xi to consolidate as much power for himself to strong-arm these things through. The core issues and problems have never been external for China.  They have always been about, well…China. China’s core interests have always been domestic security and national unity. In fact, the new National Security body that was established after the Plenum, unlike ours, is focused on cracking down on internal matters like corruption, protests and unrest in the countryside.

China has greatly benefited from globalization, but they also have a long history of getting hurt when they expose themselves too much to the whims of other nations and foreign-based corporations that want to do business there.  The Opium Wars and the Unequal Treaty system during the 19th and early 20th centuries are the most popular examples of this.  This is why China has and will always be wary of any “comprehensive” and “binding” trade agreements and other multilateral treaties. China would much rather negotiate bilaterally, with one nation at a time, and on its own terms. So although the Bali talks and Doha give me hope for comprehensive international trade agreements, I’m not expecting China to commit to anything like it in 2014.

And if things get uneasy internally for China, with discontent and nationalism coming to a head, count on Xi and the Party to release some steam from the tea kettle and deflect those energies towards Japan and its neighbors who are suspicious of a more aggressive China. And in this kind of pressure-cooker environment, with all of their history and provoking the risk for a showdown with the Japanese as the Chinese reform process beings is real.

#1) The U.S. walks alone

The U.S. walks alone at the start of 2014, but it’s never time for it to throw in the towel. 2014 is a pivotal foreign policy year, and if they play their cards right, the United States can mitigate 2014’s risks and repair the damages of 2013.

Ok, Geopolitics 101 stipulates that there are exceptions to this: the British, the Canadians, the Mexicans and the Israelis. These relationships are maintained because of strategic choice and necessity, although there have been discussions about Israel’s discomfort with their U.S. relationship as of late.

Those exceptions aside, I am seeing signs that we’re beginning to live in a world where U.S. Foreign Policy has become less clear and less certain and decisive.  Our cuts in Defense and foreign aid make the rest of the world uneasy, and question our commitments. We’re also beginning to taper, and the money that used to float around and find its way to other nations’ markets isn’t going to be there anymore.  All other countries tied to the U.S. are concerned and are questioning the traditional terms of their relationship: South Korea, Indonesia, the Philippines, Brazil, Turkey, Saudi Arabia, UAE, Germany and France come to mind.  This includes trying to move away from U.S. standards in the global economy and changing the way they think about security, especially in light of the NSA revelations.  There is a level of uncertainty in the world that we have not seen in decades from the world’s only superpower, and I will be closely watching to see how this plays out in 2014.

Am I saying that the U.S. is in decline? No. I won’t go that far and jump on the bandwagon that started picking up steam during the 2008 financial crisis. The dollar is still strong.  The Chinese still want their kids to come to American universities. Any internationals who want to move their money out of the country brings it here.  We are still a safe bet. The legal system works and we are politically stable. In terms of U.S. innovation in energy, agriculture, biotechnology, nanotechnology, etc; the U.S. still dominates. The “dysfunctional Congress” even passed a $1.1 trillion bill that funds the government through 2014.  So no, America is not in decline. Its foreign policy is in decline. It is losing its ability to get what it wants abroad.

The same applies with Obama and Congress.  2014 will be the President’s last best chance to push an agenda for the rest of his term; after 2014 everyone gets so caught up in the election season that it’ll be difficult for his Administration to get any attention or support after this year.

As President Obama goes live in his State of the Union Address on Tuesday, his focus will likely be on the economy, the issues of growing inequality, a partisan Congress and a stagnant middle class, all important concerns.  But after all that’s happened in the last 6 months on the international front, pay close attention to which issues the President will emphasize besides the domestic ones.   I can’t say what he will choose as foreign policy priorities, but a comprehensive agreement with Iran on curbing their nuclear program, wrapping up Afghanistan and repairing the strained friendships with our allies would be a good start.  President Obama still has 3 more years in office, and second-term Presidents in their last couple of years in office often try and leave their mark on foreign policy.  And with the Obamacare rollout leaving a black mark on the President’s legacy, foreign policy can help save what’s left of it.  And I think he knows this.  And with all the talk about “national interests” in foreign policy discussions on the news, most Americans see the only “national interest” as nation building here at home. The polls speak for themselves: A majority of Americans are more disillusioned with the U.S.’s role abroad than ever before.  They just don’t see the point anymore.  And after Iraq and Afghanistan, “fughettaboutit” isn’t just a Brooklyn word anymore.  Let’s just hope that Obama doesn’t fughettabout foreign policy in 2014.

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Last but not least: DAVID KESSLER

#5) Pope Francis and the Catholic Church:

If I had to point to any one trend that I was most excited about or which I thought would be the most profound in 2014, it would be the current direction of the Catholic Church.  After emerging from the College of Cardinals as Pontifex Maximus only a year ago, Pope Francis (Formerly Bishop of Argentina Jorge Bergoglio) has already rocked the boat with his humble demeanor, his progressive tone when making remarks on various “hot topics,” and his focus on social justice for the World’s poor.  Furthermore, Francis was the first Pope to be elected from the Americas and is the first Jesuit Pope. As of late, Pope Francis has even been named Person of the Year by Time for 2013.  And as two young, Jesuit-educated, Christian gentlemen (Pete’s Orthodox and he’s excited for more Ecumenical dialogue between East and West now), we’re pleased with Pope Frank.

I see this pivot in the Church marking a major shift in how it will conduct itself in the 21st century.  While recent Popes have made significant strides toward modernizing the Church, namely Pope John XXIII and Pope John-Paul II, Pope Francis seems to be someone who can strike a balance of fully mobilizing the global youth who have been unable to identify with the Church as of late, while still maintaining the more “traditional” Catholic following.  From what I gather from Pope Francis’ various remarks, the Church will certainly be much more aggressive in the fight to combat poverty in the so-called, “developing,” world.  Furthermore, to conclude endless discourses on questions such as homosexuality, abortion, and other social flashpoints for the Church, the Pope will likely brush those questions aside in favor of addressing what he feels are the most pressing issues: poverty, faith, and community.  These are issues that he can unite the most people around and bring them closer to the Church, regardless of their views on the contentious topics.

#4) Syria:

Assad has taken some hard hits, but he has also been able to exploit and leverage the diverse conglomerate of rebel groups to survive. I don’t think he’s going anywhere in 2014.

The prolonged civil war in Syria seems to encapsulate many different global struggles, both direct and proxy.  There seems to be no immediate end to the fighting, and one can only hope that 2014 is the year that the bloodshed is concluded.  More broadly the Assad regime in Syria, assisted by both Hezbollah and Iran, is struggling to remain in power as an Alawite-led regime in the predominately Sunni state of Syria.  Meanwhile, the Sunni Arab States and al-Qaeda continue to push back against the regime and support the revolution.

Though I foresee a prolonged conflict in the Levant for a while longer, any victor in Syria (if there ever is one) would probably be Assad.  Although the international community has called for him to step down and/or negotiate a settlement, Assad and his regime have shown resilience and an incredible tolerance for pain; thus far this is evidence that he still commands substantial legitimacy among his supporters, and the state is robust enough to survive in 2014 and beyond.  In particular, the military seems to be generally supportive of his leadership, in contrast to what we saw in Egyptian in 2011, where the Egyptian SCAF refused to continue backing then-President Hosni Mubarak.  There have been some defections, but as long as the military remains with Assad, I do not believe he will be defeated unless a greater outside force (al-Qaeda or a foreign power) is able to bolster the rebels to overpower the Syrian military or dissuade them from supporting Assad.

#3) A Strained US – Russia Relationship:

Presidential Candidate Mitt Romney memorably stated in 2012 that Russia is, “without question our [the United States’] number-one geopolitical foe.” For the record, the jury is still out on whether this remark is true.  But as of late there have been many events to suggest that this Cold War mentality may be relevant.  Perhaps the most talked about man involving a deteriorating U.S. –Russian relationship, Edward Snowden, will continue to test US-Russia relations into the coming year.  The slight against the U.S. when Russia agreed to give him asylum against cries for “justice” in the U.S. is ever present. Furthermore, we still don’t know the true extent of the damage he’s done or what it is he took with him. Granting him amnesty is probably off the table at this point, since he’s been to two countries that are two of the U.S.’s greatest cyber-security threats (China and Russia). Continuing points from the previous stated trend, the Syrian Civil War is also an indirect struggle between Russia and the United States.  The United States has traditionally backed the most powerful Sunni nation in the region, Saudi Arabia, while Russia has traditionally backed the most powerful Shia nation, Iran, and consequently, Syria.  Thus, the war in Syria looks ever more like the Cold War-era proxy conflicts. As a positive, the recent deal for Syria to voluntarily give up its chemical weapons for destruction was jointly agreed upon between Secretary of State John Kerry and Russia’s Foreign Minister Sergey Lavrov has shown that we can find some common ground on some issues.

C’mon guys. It’s only awkward if you make it awkward.

During the upcoming 2014 Winter Olympic Games in Sochi, Russia may also display the status of relations between the two nations.  To prepare for Russia’s gig on the global stage, President Putin has granted amnesty to thousands of prisoners, including his biggest rival, oil-tycoon Mikhail Khodorkovsky.  This is an attempt to show that Russia has not receded to its harsh Soviet ways.  It should be noted, however, that these acts of “good will” may only temporarily improve Russia’s image rather than act as precedent for real reform within Putin’s Russia.  The US-Russian relationship will certainly make headlines over the upcoming year, but if the past is a judge for things to come, it looks like only headlines we’ll be reading will be about a stagnant or deteriorating relationship. Let’s hope at least for the former.

#2) A key year for the U.S. in 2014:

On the U.S. domestic front, another exciting year of political gridlock and debacle is on the horizon.  As President Obama enters the New Year with his lowest approval ratings since his inauguration, he will be quarterbacking the salvation effort for his signature legislation, the Affordable Healthcare Act (ACA, aka “Obamacare.”)   The website setbacks we’ve been reading about will be corrected in the coming weeks and Obamacare will receive its real test: whether the nation is willing to choose to enter healthcare exchanges or pay the penalty of not acquiring healthcare.  From my point of view, the ACA is here to stay and Americans will likely warm up to it if, and only if, enough people choose to enroll in Health Insurance rather than pay the penalty.  Whether the new system will work as efficiently or as cost effectively as legislators suggested is to be seen in the coming years.  However, the Democrats have been running on the ACA (or at least the idea of it) for nearly 50 years. They cannot afford for this to fall through. And it’s unlikely that Republicans will repeal it; it’s much easier to give out a social good than to take it away.  Thus, I would say that Obamacare is here to stay at least for the next 8-10 years.

Democrats, Republicans, and pretty much everybody else may be pointing fingers at each other, but one thing’s for sure: U.S. leaders have their work cut out for them in 2014.

On the flip side of American politics, the Republican Party will look to maximize the Obamacare confusion and win support to its cause while overcoming internal discord.  Within the party, two very distinct groups have emerged that are going to butt heads: the traditional “establishment” Republicans and the Tea Party Republicans.  Outspoken members of the Tea Party faction include Senators Ted Cruz, Rand Paul and Congresswoman Michele Bachmann.  Notable establishment GOP members include Senator John McCain and Governor Chris Christie.  While the traditional Republicans hold the majority of high ranking Republican positions, the Tea Partiers have secured some significant grassroots support.  The Tea Party’s most notable contribution (or lack thereof) to politics was their integral part in triggering the Federal Government Shutdown of 2013.  During this episode, the Tea Party legislators did exactly what they said they would do when running for their seats in government: attack the ACA by any means.  Unfortunately for both the nation and the Republican Party, this “noble stand” was a decisive defeat that cost the country weeks of Federal Government impotence.

From where I stand, the division and subsequent struggle for the Republican Party, ought to happen as soon as possible.  Political infighting followed by consolidation is nothing new, even internationally: Remember how Tony Blair led an internal movement within his Labour Party, moving it from the far-left/left to the center-left. And in 1997 the Labour Party achieved its first election victory since 1979.  Likewise, a strong leader from the center-right in the U.S. can assume a similar Tony Blair-like role over the party before the Presidential election of 2016 and move it in a more moderate direction.  The sooner and more decisive the struggle, the better.  A good barometer of this internal struggle will certainly be the upcoming 2014 congressional elections.

#1) Have No Fear, the Global Economy is Here!:

Finally, in regards to the global economy, I predict a very fruitful year.  [The majority of] Europe will return to greater prosperity and competitiveness than before the European debt crisis began.  The U.S will continue to grow its economy but it too must find solutions to reducing its public deficit so as to achieve sustainable economic growth.   The Chinese will continue to power forward with after a year of robust growth in 2013, although we’re beginning to see signs that they’re beginning to pump the brakes .  Japan will continue to be mired in its incredible public debt (which it will attempt to solve by printing more money) and oncoming demographic collapse (which can be mended by immigration reform, but probably little will be done to address that).  Russia and Brazil will get their time in the sun during the 2014 Winter Olympics in Russia and the 2014 World Cup in Brazil.  Both events will be great opportunities to show off the economic advantages for foreign investment in their respective countries.  Russia ought to seek continued growth, which has been strong since President Putin came to power. Brazil, on the other hand, has seen rather sluggish economic growth as of late and will certainly try to reverse that trend. As for the smaller economies of the world, they ought to perform positively if history is any judge of future trends.  Overall, the coming year will continue to see a dramatic reduction in Global Poverty and the world economy will grow substantially.

Nobody can account for all the bumps in the roads, and I’m sure 2014 will see its fair share of black swans. But the world will keep spinning.

IMAG1123

Two New Year’s Resolutions from two new graduates:
Pete: “Apply to Grad School in the Fall so I can defer my student loans next year!”
Dave: “See more friends and keep thinking scholarly and happy thoughts! We’ll get through 2014 everybody, let’s also try to enjoy it a little too!”

How to Argue with your family about Foreign Policy tomorrow: Thanksgivukkah Special

There are three things people always talk about: Sports, Politics and the Weather. This Thanksgivukkah you’ll be hearing about all three, so here’s a handy guide on how to hold your own against misinformed family and friends at the dinner table.

Guaranteed your first course is going to start off something like: “We don’t make stuff here anymore”

One of the most popular claims that I have wishbone to pick with is when people claim our country’s going to hell in a hand basket because everything’s made in China and all we have to show for it is a “service economy” that just gets us into financial crises. They’ll point out that there are fewer manufacturing jobs in the US today than there were when they were growing up. If you have your smartphone out, pull up this graph and tell them to give it a look:

Industrial Production...Manufacturing

Exports

However, like a good debater, you’ll concede that fewer people are employed in manufacturing today than “back in the day.” And you’ll even show ‘em the numbers to prove it:

All Employees...Manufacturing

The takeaway here is American manufacturing output is enormously higher today than it was 40 years ago [actually, ever…]. However, that growth is at the expense of fewer employees, which in economic jargon means increased productivity; doing more with less. This is because of all sorts of things, like improved business processes and technology to increase efficiency. So we DO make things, lots of things actually. It’s just that we make more things with less people.

Second course: “Jeez, you see Putin lately? Russia’s shoving our face in the dirt and looking better every day. Cold War all over again!”

International Badass? Absolutely. Geopolitical rival? Not quite.

I’m really not sure why Forbes called Putin the most powerful man in the world this year, maybe it has something to do with him being a real-life Bond villain or his Judo black-belt.  In all fairness, in terms of awesomeness and manliness, Vladimir Putin is the Russian Teddy Roosevelt. But back to the point. Snowden’s bound to come up in the discussion, but that’s small potatoes when you’re talking a geopolitical rivalry. The Russians also like to troll us every now and then, especially at the U.N. but that’s to be expected. But put this into some perspective: Russia’s latest achievement was persuading Obama to not bomb a country he didn’t really want to bomb anyway to preserve a norm that not really vital to the U.S. national interest. To call the Russian Federation a rival you’d have to prove that wherever we go, the Russians counter us. Latin America? No. Africa? Nothing. South Asia? Don’t see them. The only exception here is Central Asia, where all of the countries ending in “-stan” are. That’s it. Showing some graphs and numbers for this point is pointless. There’s not much to compare.

By far, the most heated topic is probably going to be: “Blehblehbleh [something about China]”

China may very well surpass the U.S. as the world’s largest economy, but let’s not eat all the stuffing before you get to the turkey here.

China is rising and taking over the world and the U.S. and the West is in decline. This is the debate of the century, something that’s been the topic of heated discussion by scholars, policymakers, academics, journalists, just about everybody. There’s no way you’re going to “win” this one.

But if you wanted to have an educated conversation about it, here goes nothing. In a Pew survey, 23 of the 39 countries surveyed said China is or will soon become the “world’s leading superpower.” By 2030 (or sooner for some) the People’s Republic will take over the U.S.’s role as the world’s largest economy. So it may actually become the world’s largest economy. But it will not become a superpower. Although it has seen impressive levels of growth over the years, China has its constraints too. China’s leaders know they must slowly reduce the role of the state in the economy; in other words a transition away from model that is too dependent on corporate and government investment. But that’s what the Communist Party has been running on since its inception, so there’s also an identity crisis surfacing. It’s also pretty clear that it’s fudging its growth data. It also doesn’t help that the proportion of the Chinese population of working age peaked in 2011 and has started decreasing in 2012. By 2025, 14.3% of the population will be 65 and over. An aging population will increase labor costs, reduce savings and investments, and strain healthcare and social welfare systems. Then there’s also the daily challenge of feeding 1 billion people and keeping them unrebellious. And you can’t really fudge your way out of that.

Fundamentally, the Chinese military has been, at its core, an internal peacekeeping force for the provinces. Though there are signs of China seeking to project power outward in the form of developing a blue-water navy, there are rivals in Japan, India, South Korea and a bunch of Southeast Asian nations. Territorial disputes are just part of the trouble. It’s uncertain how this will all play out, and then there’s always the North Koreans a wild card in itself. There are some choices that China has to make down the road if it wants to avoid a war.

Bottom line: Agree to disagree on this one. It’s kind of 50:50 here. Strong economy? Yes, but in many ways it’s still a developing country. Superpower? Maybe in the future, but not yet.

As the World Increases its Dependence on Fossil Fuels, Producers Decrease Theirs: The GCC

Burj Khalifa is currently the tallest manmade structure in the world.

Burj Khalifa is currently the tallest manmade structure in the world.

David Kessler—Have you ever seen the film, Mission: Impossible – Ghost Protocol?  If yes, then you may remember the scene when Ethan Hunt (Tom Cruise) scales an enormous tower hotel in Dubai to thwart Moreau from delivering the nuclear launch codes to Wistrom.  Whether you have seen film or not, the hotel in the film is named Burj Khalifa and it is currently the tallest structure in the world.  Since the opening ceremony in 2010, Burj Khalifa is symbolic of a trend that was started decades ago to diversify many Gulf Cooperation Council (GCC) countries away from their main export: fossil fuel.

Ethan Hunt (Tom Cruise) may have reached new heights in his latest mission, but so have the Gulf States. Keep reading, people!

Ethan Hunt (Tom Cruise) may have reached new heights in his latest mission, but so have the Gulf States. Keep reading, people!

When one thinks about the GCC nations (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) one cannot easily disassociate them from fossil fuels, the world’s most valuable resources.  However upon closer observation, one can witness a changing environment.  From the futuristic skyline of Dubai, to Bahrain’s strategic position in the world of finance, to the massive investments made by the Qatar Investment Authority, many of these states are global players in markets besides fossil fuels.  These trends reflect different causes for diversification among which include: insulation from “oil shocks,” depleting oil reserves, threatening alternative energies, and the desire for more foreign investment.  Ultimately, the basic need to reduce reliance upon fossil fuels is what drives these countries to diversify.  Now lets take a brief look at this change in three dynamic countries: Bahrain, the UAE, and Qatar.

Bahrain

The Kingdom of Bahrain is perhaps the most threatened nation by reserve oil depletion.  If production increases at the current rate, it is estimated that their reserves could be fully tapped out in as little as 10 years.  Nevertheless, oil does account for 60% of all exports in the country.  Thus, diversification is clearly necessary if Bahrain wishes to continue economic growth.

The capital city of Al-Manama (Manama) is the finance capital of the Gulf and competes with Malaysia for the title of “global capital” of Islamic Banking.  Like Dubai, Manama’s skyline is as impressive as any advanced nation’s and reflects the construction investments made in Bahrain in recent years.  Structures such as the iconic Bahrain World Trade Center and the massive development, “Bahrain Financial Harbour”, make Bahrain a hub for international business.  Furthermore, these feats of architecture also make Bahrain an ascetically pleasing place for investment and tourism.  Another reason for Bahrain’s privileged position as a center of finance can be attributed to having one of the most valuable currencies in the world.  One Bahraini Dinar is worth $2.65.

Bahrain's Grand Prix attracts Formula One enthusiasts from all over the globe to the small island.

Bahrain’s Grand Prix attracts Formula One enthusiasts from all over the globe to the small island.

Tourism is another big investment that Bahrain has made in recent years.  The Ministry of Culture of Bahrain has proclaimed Manama as the “Tourist Capital of the Arab World,” dividing the tourist seasons into four categories: Culture tourism, Sports tourism, Leisure tourism, and ECO tourism.  The annual Bahrain Grand Prix, is one of the premier tourist events in Bahrain and attracts (wealthy) Formula One enthusiasts from all over the world.  Another enticement for tourists to visit Bahrain is its liberal views towards alcohol, where the substance is legal.  As a result, multitudes of people from Saudi Arabia, where alcohol is not legal, flood into Bahrain on weekends to enjoy themselves.

Qatar

Many know the State of Qatar as the richest nation, per capita, in the world.  Unlike the other two countries, its main export is another familiar fossil fuel: liquefied natural gas.   Qatar is making strategic investments into expanding non-fossil fuel sectors such as finance, tourism, construction, services, and manufacturing.  Of the three countries, Qatar is the most reliant upon its fossil fuels which account for roughly 85% of its export earnings.  Nevertheless, Qatar has capitalized on key investments such as ownership stakes in foreign firms, the global media outlet: “Al-Jazeera,” and being awarded the opportunity to host the 2022 FIFA World Cup.

The Qatar Investment Authority, which is responsible for economic diversification, is reported to have made, “investments in a number of high-profile real estate, hospitality, manufacturing, sporting and retail brands overseas, such as Harrods and the Shard building in London, the Raffles Hotel Group, locations in New York and Paris, Volkswagen, Credit Suisse, and Xstrata.”  These strategic investments open up new methods of cash flow into the country that can be allocated to further diversifying the nation’s economic portfolio.  Furthermore influencing global corporations can bring more foreign investment into Qatar.

Serena Williams Recieves PSG Jersey

The QIA has made lucrative investments in recent years such as the acquisition of football club PSG. This particular placed Qatar center-stage in the world of sports. The photo above shows Nasser Al-Khelaifi, the President of PSG and former tennis professional, presenting Serena Williams with her own PSG jersey after she won the Qatar Total Open tennis tournament in 2013.

One of the most recent (and more well known) acquisitions of the Qatar Investment Authority was the French Football Club, Paris Saint-Germain (PSG), purchased in 2011.  The buyout costed the Qataris about $135 million.  Since then, PSG has spent over $250 million, an outstanding spending binge, to recruit some of the best talent in the sport  Zlatan Ibrahimović, Thiago Silva, Ezequiel Lavezzi, and David Beckham.  The club’s latest acquisition, former Napoli world-class striker, Ednison Cavani was purchased for an astounding $84 million.  QIA’s investment has yielded a championship in the French “Ligue 1” for the 2012-2013 season.  So far, PSG has proven to be a profitable venture for Qatar and, more importantly, and interesting an unconventional way to promote the Emirate.

On the home front, Qatar plans to invest over $200 billion between construction projects and infrastructure.  This includes building a bridge, the Bahrain-Qatar Causeway, which would connect Bahrain to Qatar over the astounding 40Km of water that divides the two states.  The massive construction boom will no doubt be, at least in part, to prepare Qatar for the massive tourist influx as it hosts the 2022 FIFA World Cup.  Stadiums, roads, housing, and other attractions must be constructed to service the global entourage.  The event will bring tourists from around the world to visit the Arab state and will be an opportunity to display the richest nation in the world’s economic prosperity.  Nevertheless, other than the World Cup Stadiums, Qatar has planned the construction of at least 19 “megaprojects” which include: a new international airport, city infrastructure, highway networks, education facilities, and state-of-the-art public transportation systems.

The UAE

Like Qatar, The United Arab Emirates (UAE) is one of the richest countries in the Gulf and has, visibly, invested heavily in non-fossil fuel sectors.  The Burj Khalifa is only a recent addition to the UAE’s construction boom in the past two decades.  This growth, however, took a hit from a bursting credit bubble that seriously stalled development from 2008 – 2011.  Nevertheless, the hard-times seem over as the Emirate of Dubai resumes incredible expansion of construction projects and foreign investment floods into the country.

Oil is still the UAE’s main commodity export with a 45% share with the profits from oil exports being funneled, with apparent success, into broadening: finance, tourism, construction, and manufacturing sectors.  In particular, the economy of the UAE has expanded 4.4% last year however the tourist industry in Dubai grew at an astounding 18.7% the same year.  Many incredible construction feats are still in the works such as the “Falconcity,” which will exhibit replicas of many great wonders of the world in one place; the “Hydropolis,” an underwater hotel; and the “Dubai Sports City,” a sports complex the size of… you guessed it, a small city!

Investors have been quick to jump on the opportunities in the UAE which include a stable political atmosphere to conduct business, free-trade zones for manufacturing, and a sizeable pool of consumers.  Regarding manufacturing, many free trade zones have been established across the UAE.  Large investments in Abu Dhabi’s heavy manufacturing industries and Dubai’s lighter manufactured goods have witnessed a boom in this sector.  As a result, manufacturing in the UAE happens to be the second fastest expanding, non-oil, sector in the economy.

One of the more interesting accomplishments of the UAE is the expansion of the gold market in Dubai.  Dubai is positioned strategically both geographically and economically to conduct trade of the precious metal.   Dubai has acquired a substantial 29% of the global gold trade.  Dubai has assumed this position thanks to low taxes, cheap labor, and low prices.  Furthermore, the UAE’s location between Africa and Asia allows it to easily tap into rapidly growing markets.  Not surprisingly, some refer to Dubai as the “City of Gold.”

Why does this matter?

At a time when the global economy is focused on the rapidly developing economies of the BRICs nations as well as the smaller “emerging markets” in Asia, Africa, and South America, the MENA region is mainly recognized as a region in upheaval.  While this holds true for most nations in the region, the Gulf States (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) have managed to insulate themselves from the turmoil to varying degrees.  In particular, Bahrain, UAE, and Qatar have made recent strides in diversifying their economies away from fossil fuels in an effort to prepare for more sustainable, long-term growth. The strategic geographical position at the crossroads of Europe, Asia, and Africa make the markets in the Gulf quite accessible and attractive.  Moreover, these states have higher per capita incomes than many states in Europe, and all of the BRICs, securing a large consumer pool for foreign investment. This article simply scratches the surface taking a glance at three out of the six GCC nations that are all moving forward towards diversification.  It will be exciting to see how the GCC countries develop as their economies continue to expand away from fossil fuels and achieve a deeper level of integration in other major industries.

A map so you all can get a visual of where the (GCC) states lie on the map in relation to the rest of MENA. C'mon, you seriously thought you'd get away without another refresher in some geography?

A map so you all can get a visual of where the (GCC) states lie on the map in relation to the rest of MENA. You seriously thought you’d get away without another refresher in some geography? Fughettaboutit!


“Beware of Greeks Bearing Debt: Will Greece Go Off the Euro Standard?” – David Kessler

 

I am pleased to announce that Dave Kessler has agreed to join The Brooklyn Diplomat team. This operation is now a two-man wolfpack! Dave’s a fellow Loyola grad and loves reading and writing about global affairs. He’s taken a few more economics courses (ok, maybe a lot more) so he will be able to offer more geoeconomic analysis than I am comfortable dealing with. That hasn’t stopped us from having intellectually stimulating conversations on things like the eurozone crisis and the rise of China though. In his spare time, Dave loves thinking big thoughts with his Jesuit educated bretheren, and hitting the gym with some of them (me included). Welcome Dave! Now without further ado, David’s first piece!

Greece is the posterboy for the “European Sovereign Debt Crisis.”  In the media there is always talk of a new “Greek Bailout.”  Academics, officials, panelists and the average Joe all debate about where Greece went wrong and how it can fix itself.  The fiscal conservatives point to all that is wrong with “big government.”  The socialists blame the “draconian” austerity measures forced upon Greece and her people by foreign financiers.  Others point to pervasive corruption, Southern European culture, and further variables to attribute to Greece’s disastrous state of affairs.  Any and all of these things may be to blame, but perhaps Greece’s currency is the foremost problem causing such misery.

With one out of every four laborers out of work and youth unemployment at more than 60% this year, Greece’s situation (as well as Spain’s) has nearly reached Great Depression proportions. This is further disturbing when one considers that the entire economy of Greece has contracted from a high of $341.6 billion in 2008 to $289.6 billion for last year representing a GDP decline of roughly 15% in just four years. To exacerbate the financial troubles facing Greece, prices have risen steadily as the crisis has worsened! The trouble is that the most attractive method by which Greece can become competitive again is through consumer price deflation; this is due to the fact that as part of the Eurozone, Greece, although a soverign nation, cannot control the value of its own currency.  As for the Euro, it has fluctuated against the USD from   €1.6 : $1.0 to €1.2 : $1.0 from 2008 – 2013. Currently estimates stand at €1.3 : $1.0. Because the supply of Euros is controlled by an independent institution, the European Central Bank (ECB), Greece cannot engage in recession countermeasures such as “Quantitative Easing” (“QE) as is currently being mobilized in the US. QE is a tool whereby a central bank increases the money supply by purchasing securities.  Therefore, Greece has solely fiscal alternatives to control the collapse of its economy such as deficit spending (a method John Maynard Keynes suggested in his work, The General Theory of Employment, Interest and Money, to alleviate the Great Depression.)

Sadly, these options are also compromised due to the austerity measures placed upon Greece as a precondition for bailout loans.  These bailout packages have come with serious public spending reductions, including the slashing of 150,000 jobs from 2010 to 2013.  Thus, austerity creates more unemployment and reduces short-term growth potential. Moreover, the growth potential in many countries facing similar situations like Greece is challenged by the need to acquire capital in order to repay loans. As a result, instead of tax reduction, which aids growth, tax increases often occur during austerity in many debt-stricken countries.  Thus, countries such as Greece are forced into a corner where they can engage in neither monetary nor fiscal expansion to stimulate their economies.  But Greece’s situation is not news to historians. Although the “Greek Question” is unique in its specifics, it is strangely familiar to another such situation that occurred in 1920s Britain.

Following the First World War, the great nations of the world returned to the monetary system known as the “Gold Standard.”  For decades before World War I, the Gold Standard played its part as the rock upon which a nation’s currency could rest.  Due to the heavy debt burdens during the War, countries left the gold standard as they printed new money to pay for the war.  After the war, nations thought it best to return to the former gold standard.  With a percentage of a nation’s currency directly underwritten by an amount of gold, nations could trust in the sable value of each another’s currency.  An exchange rate would be determined for a specific currency to gold and an individual could go to a bank and exchange his/her currency for that amount of gold.  All currencies pegged to gold were considered “reserve currencies” as was gold itself.  In the 1920’s, this gold standard began to unravel.  One of the key reasons for this dramatic change was the reality that, because a specific percentage of a nation’s currency was underwritten by Gold, the amount of liquid money in an economy was restricted by how much gold was in circulation.  The positive end of that system was the low level of inflation experienced by a country on the gold standard, making a safe investment for other nations.  Conversely, the key negative end of this system was the inability for that currency to depreciate in times of recession.  This was due to the fact that the amount of money in a society was regulated by the supply of gold.  Moreover, domestic prices of goods and services are slow to adjust to an overvalued currency.  As a result, prices of export goods and services may be compromised due to a currency that is too expensive during times of economic recession.  This could, and did, lead to high levels of long-term unemployment for countries like Britain during the 1920’s (Pg. 218).  To counter the high price of the British Pound Sterling, the British authorities and Bank of England attempted to deflate prices within the economy. They achieved some success, albeit failing to bring prices to a competitive level (Pg. 220). (Liaquat Ahamed brilliantly describes the whole gold standard failure in his book Lords of Finance: The Bankers Who Broke The World.)

The straw that broke the camel’s back was the beginning of the US Stock Market Crash of 1929 that sent shockwaves across already weak world markets.  By 1931 Britain became one of the first major industrial powers to abandon (Pg. 479) the gold standard; following this Britain began to recover that same year. This was a result of a depreciation that followed their departure from the gold standard.  Once sterling was allowed to depreciate, it could compete with other competitive nations’ currencies as British goods became less expensive.  Thus, by departing from Gold, the British Pound Sterling was revalued in monetary markets while simultaneously giving the British government and the central bank more control over their money.  The Pound Sterling was no longer pegged to gold.  (Soon after Britain, almost every other nation left the gold standard and few have ever returned.)

The Nobel-Winning economist Milton Freidman once wrote,

“The argument for a flexible exchange rate is, strange to say, very nearly identical with the argument for daylight savings time. Isn’t it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual separately change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.”  (Although today currencies fixed to precious metals such as gold are not common, there are many currencies that are pegged in much the same manner to other currencies such as the USD.)

Right now the Euro is a freely floating currency however its valuation represents the currencies of 17 states with total financial disunity.  Without a united fiscal policy, the Euro and its value simply cannot represent the individual needs of each economy.  The belief in establishing the single currency represents ideas that a European currency would work very similar to the US Dollar.  Let’s address this point further.  Though the US Dollar represents 50 individual states, the comparison stops there.  Firstly, if prices are too high in one state, one can much more easily move to another state because English is generally spoken throughout the country.  Secondly, the federal government provides financial unity that European Union lacks; If a certain state is in financial difficulty, the federal government can supply it with aid (the recent American Recovery and Reinvestment Act of 2009 is an example).  Finally, the most profound difference in the examples lies in the political structure of the Eurozone.  In the US, the federal government is incentivized to help states out because its representatives in key leadership positions (Congress/President) are elected by the whole population of the country.  In Europe, a German MP is not elected by Greek citizens; therefore to the German MP there may be much less incentive to approve an aid package to Greece.  Conversely, because Greece does not add to Germany’s economy, a German taxpayer should be skeptical about paying for a Greek bailout.

Due to these inhibitors, Greece is using a virtually fixed currency.  Greece must now seriously weigh its options in regards to the single European currency.  As observed, Greece can’t seem to stop the hemorrhaging of its economy despite its attempts at reform.  Both its monetary and its fiscal instruments are currently unavailable and it has very few options.  Its options are: A) wait until the depression passes and remain on the Euro or B) leave the single currency and risk the return to the Drachma.

This is no easy choice. The single currency has indeed brought some clear advantages, none the least of which is political unity with its Western and Northern European neighbors who now have a vested interest in its survival.  Furthermore several transaction costs of doing international business within the Eurozone have been completely eliminated due to a common currency, not to mention also the relative stability of possessing a hard currency (a currency that is accepted almost anywhere in the world).  Finally, there is now even hope that certain other notoriously recessed economies such as Spain are finally returning to growth in the near future.  For Greece however, there are signs that the worst has yet to come.  In May of this year, the Organization for Economic Cooperation and Development (OECD) forecast did not expect the economy to improve in Greece until 2014 at the earliest.  Furthermore, it stated that improvement would result, “…if export demand strengthens, competitiveness improves further and investment returns.”  All three of these factors are heavily influenced by the value of the Euro and can be undermined if the Euro appreciates before then.

What Greece needs now is a serious assessment of the risks and benefits of being on the “Euro Standard” and take it from there.  Perhaps, like Britain in 1931, Greece will leave the fixed currency model and adopt a currency that can represent only its economy. Britain did not join the Euro yet still reaps the benefits of being in the European Union, perhaps Greece could follow suit.