Arming Ukraine: Breaking it down

Should we arm the Ukrainian government forces?

Since the conflict began last year, the U.S. and Europe have been limiting military support for Ukraine to non-lethal equipment; things that enable the individual soldier like body armor, medical supplies, and night-vision goggles. Late last year, President Obama signed a bill that authorized the provision of more lethal weaponry to Ukraine’s military but left it up to the White House to decide whether to follow through on that move. So technically speaking, the decision has already been pre-approved. The question is, should POTUS follow through, or leave it as an option down the road for him or for the Clinton Administration next administration?

Looming over the Minsk negotiations currently underway is the prospect of deeper sanctions on Russia, an economic collapse in Ukraine, and the risk that the conflict descends into an all out war. I would use the phrase “descend into proxy war” as a piece in Bloomberg did, but is it a proxy war if one of the supposed sponsors of said “proxy war” has been openly engaging in the war since last year? A technicality I suppose.  But I digress.

So far, sanctions have failed in their aim of pressuring the Kremlin to reverse course in Ukraine. That’s not to say sanctions haven’t hurt the Russians, but it looks like they are willing to tolerate much more pain than the West is likely to give. And the increase in violence has brought back a question that the Europeans and NATO would rather not ask again: what is the next step if the Russians do not stop?

Below is a collection of most of the arguments for and against the U.S. providing the Ukrainians with lethal defensive weaponry. I read a lot, and I tend to get lost in my own thoughts, so a lot of times I jot things down like this. Welcome to my brain:

Do it:

Perhaps the most cited case for arming Ukraine is a joint report from the Atlantic Council, the Brookings Institution, and the Chicago Council on Global Affairs. Among the authors are former Supreme Allied Commander for NATO Admiral James Stavridis, former Under Secretary of Defense Michele Flournoy and former U.S. Ambassador to Ukraine Steven Pifer. If you want to have an opinion on this issue, you should definitely read the report, but for the purposes of this blog post, here are some of the key points:

  • The U.S. should give Ukraine “lethal defensive arms.” This includes more capable counter-battery systems, UAV’s for reconnaissance, electronic countermeasure systems, light-armored vehicles, and anti-armor missiles. Providing them with things such as these will raise the costs for a new Russian offensive.
  • Giving Ukraine weapons will help bring the conflict to a stalemate. Moscow will get the message: the cost of further military action will be too high. From there, a political solution can be seriously discussed.
  • If the U.S. and NATO don’t support Ukraine in a concrete, military-oriented way, the Kremlin will see this inaction as a redux of Georgia in 2008, and turn its attention to destabilizing the Baltics in a similar fashion.
  • The aid won’t allow Ukraine to defeat a new full-scale attack by the Russian military. But it would allow Kiev to inflict significant costs on Moscow if they chose to attack.
  • Deterrence is the main takeaway here. Providing these lethal arms to Ukraine will deter further escalation by Putin. Providing these arms reduces the likelihood that Russia will escalate the crisis.

Pretty straightforward.  Another decent summary is in an Op-Ed written by some of the above-mentioned authors of the report.

Don’t do it:

There has been equal, if not more, push-back by a number of scholars and subject-matter experts of similar stature to the authors of the joint reports. But it’s more scattered.

One piece that stood out was from Eugene Rumer, a Russia and Eurasia expert formerly at the U.S. National Intelligence Council, and Thomas Graham, a former senior director for Russia at the National Security Council. They have made a compelling case against sending lethal arms to Ukraine. Major points of their case, along with a some others:

  • Giving lethal arms will not sway the Kremlin to back down in Ukraine. And it could bring the West one step closer to a direct military confrontation with Russia.
  • We cannot be certain that these arms won’t go to the Ukrainian volunteer armies and private militia groups, which lack adequate training and discipline.
  • It will take many years to reform and bolster the Ukrainian military and security service, which is undertrained, underfunded, scowering for recruits, and crawling with Russian spies, making it unlikely that a delivery of such lethal arms would make a meaningful difference when going toe to toe with the Russians and the separatists.
  • What happens if Russia decides to escalate? Is the U.S. and NATO willing to enter a direct military confrontation with Russia?
  • Short of sending in the 82ndAirborne, it’s extremely doubtful that the U.S. and NATO won’t gain any significant comparative advantage over Russia in Ukraine.
  • If the Kremlin wants to destabilize Ukraine and ensure it does not successfully pivot Westward towards Europe, it will not stop until that happens.
  • Giving lethal arms and aid to Ukraine reinforces the narrative that the Kremlin tells the Russian people: Ukraine is now a puppet of the West, and the next stop for the West after Ukraine is regime-change in Moscow.

If the U.S. provides lethal arms to Ukraine, what next?  Would doing this really change the Kremlin’s calculus? Similar lines of thought are presented herehere, and here.

Since last year’s escapades, each set of talks and ceasefire agreements has only moved towards deeper conflict. The violence in eastern Ukraine has created a humanitarian crisis – aside from the thousands killed and wounded, some one million have also been displaced – and a geopolitical crisis, between a European community that has hoped to put armed aggression in its past, and an insecure petro-state in decline determined to relive its imperial past and stick it to the West through armed aggression.

It seems that both sides agree that the Kremlin sees no reason to stop. It is also likely that Putin will try to solidify his gains in eastern Ukraine before the delivery of any more supplies or weaponry to Kiev can make a difference on the battlefield. Long-term, I see a frozen conflict in Eastern Ukraine, and I think this is something Putin would not mind having in his hand. I think it is also pretty clear to all parties involved that Ukraine matters much more to the Kremlin than it does to Washington, Brussels, Berlin, and the rest of Europe. What to do about that reality is the million dollar question (or if you’re in Russia, the 6,5109,500 ruble question.)

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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.

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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!”

“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.