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.

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From “¡Viva la Revolución!” to “¡Viva la Normalización!”?

mandela-obama-castroOn January 3, 1961 the United States withdrew diplomatic recognition of the Cuban government and closed its embassy in Havana. But on December 17, 2014, after more than five decades of hostility and isolation, the two countries took a major step towards normalization. –Peter Kouretsos– Calm down and light yourself a cigar. Preferably a Cuban one. There are plenty of reasons to worry about President Obama’s announcement that the United States will begin to normalize relations with Cuba. But overall, it’s still the right thing to do.

Normalize: (verb); (pronounced “\ˈnȯr-mə-ˌlīz\”); to establish or resume (relations) in a normal manner, as between countries.

What exactly are we actually talking about here? Truthfully, we don’t know what will become of this development, other than “normalization of relations.” What does that mean? It means the U.S. and Cuba now have the ability to begin talks on how to establish official embassies, have diplomatic relations, and negotiate over trade with one another. But while the President has the power push to re-establish these diplomatic relations that were severed over five decades ago, the Senate still has a lot to say about what this all means going forward. For example, when the President nominates his ambassador to Cuba, the Republican-controlled Senate must confirm that nomination. And if at some point down the road, the President announces his intention to lift the U.S. embargo of the island-nation, the Republican-controlled Senate must sign off on that too. The elephant in the room is, of course, the embargo. Probably the most important sentence of the President’s address yesterday was “I look forward to engaging Congress in an honest debate on lifting this embargo.”   Taken to its logical conclusion, this is where normalization could eventually lead.

This is not to say that severing relations with the Cubans and implementing the embargo didn’t always work. Our Cuba policy had its place in the context of the Cold War; it forced enormous costs on the Soviet Union, both politically and economically. But even back then, there were efforts to begin what ultimately happened yesterday, from several administrations. But for now, the Obama administration’s decision to begin warming U.S. – Cuban diplomatic ties will not result in a surge of imports and exports between the two nations. Further, restoring full relations with the United States will not solve all of Havana’s problems either; its restrictive policies have and will continue to make it difficult for companies to do business in Cuba. Their poor economy is not so much a result of the American isolation and embargo as it is the result of long-term structural problems; problems that will take considerable time and political will to reverse.

So what happens now? It’s important to keep in mind that this is just the initial start of negotiations between the two, which can cover a whole host of issues and take many years. If, as some critics fear, this initial warming of Cuban – American relations does not erode Cuban oppression, then the Congress surely won’t even think about eliminating the embargo, and President Obama or a future president can reverse these policy changes should they find the regime in Cuba to be uncooperative.  But who knows? Maybe Hyman Roth can finally get that casino deal he was looking for all those years ago.

Hyman_Roth_GF2Let’s get one thing straight though: the Cubans are no angels. But the folks who make the argument that Cuba is too evil to have any sort of relationship with the United States quickly forget that we normalized relations with China, Vietnam and even Myanmar. Our foreign policy is littered with other examples of relationships with “immoral” nations. It’s a hard pill to swallow for some, but a strictly Wilsonian-based foreign policy only gets you so far. The world is complicated. We could do better to reserve our more coercive diplomatic and economic tools for other situations: like for the Islamic Republic of Iran’s pursuit of a nuclear weapons program; for Russia’s recent escapades in eastern Europe; and for North Korea doing what North Korea does best.

There are many reasons to cry for a trial and public hanging for the Castros, but when the Castro brothers die, is the last building we want to have the most influence 90 miles from Jimmy Buffett’s house in Key West to be the Chinese embassy? We could either be part of the making of a potentially free Cuba in the future, or be bystanders. Because one thing is clear, Cuba is not going to collapse with the current status quo. And a pivot to the Asia-Pacific is nice, but the most important long-term commitment the U.S. can make is improving relations within our own hemisphere. It starts with things like this, and it can end with a reshaping of Latin American geopolitics. (More on that later.)

Food for thought: Currently, Senator Rand Paul is the only Republican-hopeful in the 2016 Presidential race to comment favorably on the President’s move on Cuba. And it turns out, this breakthrough in relations with Cuba was a lot of then-Secretary of State Hillary Clinton’s doing.

What can the new Taylor Swift music video teach us about the Iraq crisis?

Absolutely nothing, but you clicked on this, so it worked. Keep reading.

It’s amazing what can happen in 2 weeks when you’re on vacation. Ongoing conflict in the Levant (a fancy word for Syria, Lebanon Israel and Jordan), what looks like the beginning of a Third Iraq War, failing states in the Middle East, war between Russia and Ukraine, the usual tensions in East Asia, and an Ebola epidemic that just puts this all over the top.  I’m probably missing some things, but you get the idea. Not exactly a good year for geopolitical stability. I suppose it could have been worse.

But then the week I get back, and American photojournalist James Foley gets beheaded by ISIS barbarians and the video is posted on YouTube for the world to see.  I never knew him, but like me, I know that James was a History major from Marquette, a Jesuit University in the Midwest. He was a teacher who wanted to tell the world’s most difficult stories and make a difference, much like the Jesuits that educated him and myself.  His grizzly murder, however, cannot be separated from the seriousness of the threat that radical Islam (the Salafi jihad movement in particular) poses to the world, and the Iraq crisis we are reading about on the cover of every major newspaper.

Which brings us to the Islamic State (also known as the ISIS/ISIL).  Dealing with the Iraq crisis and the ISIS threat is a rough subject.  There are a ton of folks that got the ISIS wrong, possibly even President Obama.  The President’s take on this jihadist enemy has never inspired confidence in the counterterrorism community, and many have argued that his reaction over time to the rise of the ISIS does not reflect the seriousness of the threat we now face. In many ways, I understand it. President Obama sees other foreign policy objectives as more important in the long-run, and the Middle East crises are just one big distraction. The big one, of course, is the “pivot/re-balance to the Asia-Pacific.” In the wake of James Foley’s beheading by the ISIS, General Dempsey started his part of last week’s DOD press conference, not by speaking about the ISIS, but by discussing his recent trip to Vietnam, the first by a Joint Chiefs chairman in decades. The administration has faced setbacks to their Asia policy, but this, when paired with things you probably haven’t read about like this, this and this, is a sign that this “pivot” which pundits have criticized as “hollow” is more than just words. It’s for real and it’s strategic priority #1 for the Administration. We’re doing it the Chinese way: slowly, patiently and subtlety. And Obama wants people to understand that.

You can find a lot online about the Executive Branch’s remarks about the ISIS. For one, the President has called them a “cancer” that must be rooted out; Secretary Kerry tweeted that “ISIL must be destroyed/will be crushed,” and Secretary Hagel remarked that ISIS is a threat unlike anything we’ve seen before. So what must be done?

In the long run, President Obama’s remarks about the ISIS hold some truth; this group, and the wave of Salafi jihadism will burn itself out, that “People like this fail…because the future is always won by those who build, not destroy.”  But we would be naive to expect it to recede anytime soon. It is possible that the ISIS can be crushed in what time remains of President Obama’s second term, while defeating Salafi jihadism itself is far more ambitious. But refusing to use the time between now and January 2017 to fight the ISIS will not only give them time to grow, it would also be irresponsible.

Paul Pillar’s piece this week rightly points out that the keys to the ISIS’s destruction lie within its own unique methods and objectives.  For example, one thing that distinguishes the ISIS from other organizations is this “caliphate” they established, their conquered territory, which spans from Syria to Northwestern Iraq. It is essential to keep in mind that this “caliphate” exists in a desert region which offers few places to hide and where clear skies permit constant, pitiless bombing. What will be challenging is when they wise up and take refuge among regional towns and cities.

Airpower is only useful when forces move through open terrain. Bombing more populated areas is fine and everything, but it just so happens to be frowned up by 21st Century standards. Kurdish militias like the Peshmerga and a few battle-hardened Shia militia and Iraqi Military brigades have been able to fight back with some help from U.S. airstrikes, but their ability to seek out and defeat the group is still a big unknown.

Success against the Islamic State is going to require renewed help from the people of Iraq and Syria a la 2003 to provide human, local, on the ground, intelligence; this is known as HUMINT, or “human intelligence.” HUMINT can’t be gathered from a drone (that’s IMINT and in some cases SIGINT), nor can it be gathered from the business end of a cruise missile (that’s BOOMINT. Just kidding I made that one up).  You get the point; the lynchpin for any measurable success against a group like the ISIS requires firing up our old intelligence networks in Iraq or building new ones. It is going to require these guys, and there are rumors circulating that the band is getting back together again. If that’s true, the ISIS had better watch out.

So in short, Western airpower and Special Forces which empowers and aids locals, can set the stage for the strategic defeat of the ISIS. But a permanent solution to the problem would require local actors to step up. And not just the government in Baghdad and regional leaders in Iraq; putting pressure on regional partners and allies to help is equally crucial. Many radicalized westerners have been attending SCIS (Summer Camp In Syria) via Turkey to join the ISIS.

If I didn't know any better, I'd say Syria's border with Turkey seems like a safe place for these guys to operate, arm and organize.

If I didn’t know any better, I’d say Syria’s border with Turkey seems like a safe place for these guys to operate, arm and organize.

We must find ways to compel the Turkish government to make good on their NATO membership and secure their border. The Gulf States are also a key set of regional partners that must understand that their lackluster attitude towards money-laundering schemes and terrorist funding is unacceptable, and the ISIS, and groups like them, are awash in cash because of it; they must crack down on their citizens funneling money through Kuwait that support Salafi jihad.

Bomb ISIS, Help Assad

Another key factor to decisively defeating the ISIS is defeating them in Syria. General Dempsey, Chairman of the JCS admits this, and earlier this week, President Obama reportedly ordered surveillance flights over eastern Syria this week to give the U.S. some better sense of what’s happening on the ground. These could lay the groundwork for airstrikes in Syria similar to what American planes have dropped on Iraq. The timing of all this couldn’t be more ironic: Exactly a year ago this week we were waiting to see if the U.S. would bomb Syria (Assad), but this week in August 2014 we’re waiting to see if the U.S. will bomb Syria (ISIS).

The West may have to live with, and possibly even work with, a  Syrian and an Iranian regime they have for years sought to remove. In international relations, it's sometimes like family: you don't get to pick them.

The West may have to at least entertain the thought of living with, and possibly even working with, a Syrian and an Iranian regime they have for years sought to remove. In international relations, it’s sometimes like family: you don’t get to pick them.

If we bomb Syria, who are our allies on the ground that would fill the void and retake the territory?  The moderate groups in Free Syrian Army?  I’m still waiting for someone to tell me what that actually means.  Al Nusra Front, the al-Qaeda affiliate?  Or is it Assad?  If we attack the ISIS in Syria it looks like that means we’d be helping Assad.  And if we’re helping Assad, what kind of message does that send, when our administration repeatedly calls for regime change? That if you’re a homicidal autocrat and you yell “terrorist!” loud enough, the U.S. won’t just work with you, it’ll work for you. Are we prepared to step back from our policy of “Assad must go“?

We have to try and also think not just about who we’d be fighting against, in this case the ISIS, but also about who we’d be fighting for as a consequence, in this case Assad. We have to tread carefully.  Any notion that we’d be working with Assad, a Shia dictator, would be a propaganda goldmine for Sunnis worldwide.  We would also indirectly be empowering Hezbollah, a Shia terrorist group and Iranian proxy.  Moreover, there are reports circulating that Assad’s strategy from the get-go was detente with the ISIS; he leaves them alone while they kill off the other rebel groups fighting against him. In short, it looks like Assad has allowed these radicals to thrive in order to demonstrate his own value to the U.S.  Not bad for an ophthalmologist who never wanted to be president of Syria in the first place.

Aside from the above-mentioned concerns, I think an analogy can be made here. Consider FDR’s allying with the Soviet Union. Joseph Stalin, a homicidal maniac, was used to defeat what was perceived as a mutual, shared threat. There was an implicit understanding that we wouldn’t be buddy buddies after the war, but eliminating Nazi Germany was in both of our national interests.  We did business with Joseph Stalin, but we never trusted Joseph Stalin. Which brings me to my next analogy. Observe below. Skip to 01:55 and stop it at 02:23

Michael Corleone: C’mon Frankie… my father did business with Hyman Roth, he respected Hyman Roth.

Frank Pentangeli: Your father did business with Hyman Roth, he respected Hyman Roth… but he never *trusted* Hyman Roth!

Point is, we’ve played this game before. A lot.  If an understanding is made with Assad, it doesn’t have to be advertised.  In fact, the White House repeatedly denies that it will work with Assad in rooting out the ISIS in Syria.  We don’t have to trust them, but we may have to work with them.  Or work alongside them, however the Obama Administration wants to phrase it.

The other elephant in the room is Iran.  We cannot talk about dealing with the ISIS without Iran in the equation. In fact, there is a slow, gradual process of detente between the U.S. and Iran that some analysts see as inevitableThey can help, but what will it cost?  Here’s what I think they want in return: no more sanctions and a wink and nod to stop hampering their nuclear programme. It may sound ridiculous, but even if we end up not budging on those things, the thought exercise lends itself to an important lesson: no situation being dealt with can be handled in a vacuum. Things you perceive as unrelated could be the deal breaker for the other guy. We have to be careful when we compartmentalize issues. This not only applies internationally but domestically too.

To an outside observer like myself, the bright idea factory looks like it’s putting out a lot of smoke, but no one is offering policy and strategy options.  Let’s ease back on the rhetoric and think this one through, even if it means not talking about the ISIS for a while. These guys couldn’t imagine, nor afford, the western media PR campaign that is currently covering them.  They aren’t the world’s first militant organization, and they certainly won’t be the last.

Double-edged Sword: What implications – if any, would the growth of nuclear power have for preventing the spread of nuclear weapons?

Peter Kouretsos – – – Given the growing concerns about global warming and energy security, many states are interested in either expanding their nuclear power or acquiring it if they do not already possess it.  The International Energy Outlook 2013 projects that world energy consumption will grow by 56% between now and 2040; nuclear power is still expected to play an important role in that energy mix, even with the continued development of existing fossil fuel technology and renewables.  In fact, according to the IAEA there are some 30 states operating nuclear power reactors, and some 40 states have asked for assistance in starting their own, even after the 2011 disaster at Fukushima.  But this so called “Nuclear Renaissance” is a double-edged sword.  Nuclear facilities that can make fuel for peaceful reactors can also produce fissile material for a nuclear weapon.  And with the demand for nuclear power comes the risk of further nuclear weapons proliferation.  The challenge ahead of us then is to maintain the peaceful and transparent growth of civilian nuclear power.  The outcome will depend on which states acquire nuclear power and which mechanisms are put into place that can constrain the weapons-side of nuclear power while not hindering its civilian-side.

These 30 states already operate nuclear power plants and 40 more want help with starting up their own programs.

Scott Sagan from Stanford has correlated the system of a state’s government to its compliance under the Nuclear Non-Proliferation Treaty (NPT).  He found that most autocracies that were signatories of the NPT developed nuclear weapons programs after they signed it.  Why they “cheat” depends on factors exclusive to those states, but he found that this is not characteristic of Democracies.  As an international framework that is meant to be as inclusive as possible, the NPT does not discriminate against any system of government.  However, special attention should be paid to non-democracies that acquire nuclear power, as their institutions and decision-making processes are often more opaque, making them more unpredictable.

Countries with pervasive corruption are more likely to have fissile material “mysteriously” disappear. Transparency International comes out with an annual Corruption Perceptions Index, identifying which countries abuse power, engage in secret dealings, you know, corrupt things like that.

An expansion of nuclear power would create more risks for proliferation, as the number of people, installations, infrastructure nodes and transportation requirements increase.  A key thread that can link vulnerabilities in all of these variables is corruption.  Of the 177 countries surveyed in the latest Corruptions Perception Index, less than 1/3 scored above 50 out of a possible 100.  Many of those states operate nuclear power facilities, and some are even nuclear-weapons states.  Of the states that intend on pursuing a nuclear program in the near future, more than half scored in the bottom percentile.  The AQ Khan network in Pakistan is a prime example of how a state’s pervasive corruption can hinder counter proliferation efforts.  We still do not know the full extent to whom he helped nor the extent to which he helped them, but we are still dealing with the global fallout caused by this nuclear scientist.  As we spread nuclear power around the world, we must be wary of states with pervasive corruption, as it increases the likelihood for theft of fissile material and affects the severity with which nuclear security measures are executed.

Dr. Abdul Qadeer Khan, the creator of Pakistan’s first nuclear bomb, was also the largest single proliferator of nuclear weapons technology and know-how. He has been linked to the advances in nuclear technology in North Korea, Libya and Iran. His associates also met with Osama bin Laden in Afghanistan. He is hailed as a national hero to this day, and upon learning about the bin Laden raid in Abbottabad, the Pakistani government sent the military to Dr. Khan’s compound. They thought we were coming for him too.

An article  from Foreign Affairs some time ago gives a nod to Bernard Baruch, warning in 1946 that the line between “safe” and “dangerous” (proliferative) nuclear activities would change and need constant reexamination.  Perhaps the current global expansion of nuclear energy warrants a redrawing of this line. Indeed, a contentious issue is what the actual definition of “right to enrich” in Article IV of the NPT means.  Iran is the most popular example of navigating this discrepancy, but even South Korea, a U.S. ally, is making a push for domestic enrichment capability.  For many countries, this is seen as an important step in developing their nuclear industries, as well as a mark of national sovereignty.  If it is indeed a sovereign right for all states to acquire nuclear power, we all must ensure that the reactors and fuels used are properly safeguarded and 100% accounted for. Provided that signatories from here on out accept certain limits on enrichment and accept enhanced safeguards, the risk of proliferation can be mitigated.  In order to further curb these risks, the growth of nuclear power makes worldwide adoption of the Additional Protocol to the NPT a necessity.  A first step we could take is to prohibit any new country acquiring nuclear power to begin their program until they adopt the NPT with the Additional Protocol. Certainly more rules and regulations imply a lack of trust, but when it comes to this potentially destructive technology, “trust, but verify” ought to be at the top of our lexicon.

Though there is a correlation between the growth of civilian nuclear power and the risk of further proliferation, this does not make proliferation a certainty.  Civilian nuclear facilities can give states cover to develop nuclear weapons capabilities, but the political and economic motives to pursue such a weapon will likely be the primary instigators. To be sure, factors like deterrence theory, domestic politics and great-power ambitions have played a role in the decision of some states to acquire nuclear weapons; but the majority of states with nuclear power have refrained from this acquisition.  To further influence these decisions, the U.S. and other powers should make it clear to all that the costs of acquiring a weapon will outweigh the benefits, while they themselves continue to demonstrate “good faith” under the NPT by leading a reinvigorated movement towards nuclear disarmament.

Who has what when it comes to nuclear weapons, at a glance.

Most of all, in order to curb the proliferation risks that come with the growth of nuclear energy, one more thing will be required of individual states, that each with their own individual interests, deplore: cooperation.  This is especially true when countering nuclear terrorism, something that cannot always be dealt with by IAEA inspectors or conventional theories of deterrence.  The one thing we can control is access to fissile material; and all states that possess any facility containing it should have to accept more intrusive control measures and inspection procedures than they do today.  T.S. Eliot remarked that sometimes people “…dream[ing] up of systems so perfect that no one will need to be good.”  If he was correct, then the greatest implication of spreading nuclear power will have to be vigilance.

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.

“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.