30 April 2013

Turkey and Shanghai Five

A couple of months ago, I posted a piece about Turkey's seemingly inexorable drift towards Asia, citing the Prime Minister Erdogan's public declarations to join the Shanghai Cooperation Organization (SCO), known as Shanghai Five.

As you might know, the SCO was formed by China and Russia and has Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan as its members.

A couple of days ago, Turkish Foreign Minister Ahmet Davutoglu signed a memorandum of understanding with SCO for Turkey to become a dialogue partner of the organization.
"This is really a historic day for us," Turkish Foreign Minister Ahmet Davutoglu said in Kazakhstan's commercial capital Almaty after signing a memorandum of understanding with Shanghai Cooperation Organisation Secretary General Dmitry Mezentsev. 
"Now, with this choice, Turkey is declaring that our destiny is the same as the destiny of the Shanghai Cooperation Organisation (SCO) countries."
To be sure, in and of itself this is not a big deal, as dialogue partner status is below that of observer status that was previously given to India, Pakistan, Iran and Afghanistan. But in his speech, Davutoglu claimed that it was the beginning of a deeper process of cooperation.
"I hope at the next summit in (the Kyrgyz capital) Bishkek we will be present, as well as at ministerial meetings," Davutoglu said. "This is the beginning of a long way, walking together, hand in hand and shoulder to shoulder."
It is possible to see this move as just a symbolic rebuke directed at the European Union. But I think there is more to it than the desire to send a signal to EU officials and European leaders.

As Turkey is part of the European Customs Union, it is already benefiting from the free trade advantages offered by EU. Formally joining the union would not bring much additional benefits. In fact, it would make life more difficult for its industries by subjecting them to stringent environmental and social regulations.

By opening up to Asia (while maintaining its ties to EU) Turkey is betting that it could become a true bridge between the two continents. With the proposed high speed train to connect China to Europe, Turkey hopes to become a major conduit between East and West. They also believe that their strategic goal of becoming an energy hub, supplying Europe with natural gas and oil through an extensive network of Central Asian and Middle Eastern pipelines would enhance that position.

One other interesting aspect of this Asia policy is to hedge Turkey's military bets as well. There are hints that SCO could become a larger security organization to counterbalance NATO. If that were to materialize, as a NATO member Turkey could find itself in a unique position.

In short, I can't see much of a downside in all that for Turkey. Actively pursuing a rapprochement with the Shanghai Five is a win-win proposition for them.

But if I were a European politician I would pay closer attention to the evolution of that relationship.

28 April 2013

The PKK Strategy Involving Turkey, Iran and Syria

If you have been reading this humble blog since its inception you might know that my starting hypothesis was the inevitability of a larger peace process in the Middle East that would solve the Kurdish and Palestinian issues.

Recently, a good friend of mine told me that, until a couple of days ago, she thought that my working hypothesis was, well, let's use the term loopy to be charitable to the resident contrarian. She did not think that peace between Kurds and Turkey would happen in my life time. And don't let me get started about Israel and Palestinians.

I understand her reaction perfectly. It is shared by almost everyone I know. The daily stuff coming out of Middle East is mostly sound and fury. If you try to absorb it all you'll end up with the impression that these tales are told by Shakespearean idiots. While that might fit the bard's metaphor, these regional actors are far from being stupid. They might appear crazy but they are actually crazy like a fox.

Of all the actors in the region, I find the PKK the most fascinating. They managed to pursue (rather successfully) an armed struggle against the mighty Turkish army for three decades. They remained a thorn on Turkey's side and on the side of most of its neighbors. They formed ever changing alliances to play one country against another only to change sides rapidly when the winds shifted direction.

In short, they are as astute a player as anyone has seen in that region.

As you might know, a comprehensive peace plan is being negotiated by Turkey and the PKK (hence my friend's change of heart about my hypothesis). After three decades of mutual animosity the two sides are joined as partners in a historic process.

Mural Karayilan
A couple of days ago, Murat Karayilan, the acting leader of the PKK, announced that his organization is withdrawing from Turkey. This was something most people doubted even a few days earlier. The PKK would never acquiesce to such demands, they claimed.

Well, they did. And there is a reason for this as I will explain in a minute.

The peace plan itself is fairly simple:
  • Gradual withdrawal of PKK forces from Turkish soil
  • Constitutional amendments made by Turkish government
  • PKK completely lays down arms once Ocalan and other Kurdish militants released from prison
The timing is very good since currently the Turkish government is drafting a new constitution and if the peace process is not disrupted prematurely, one or more of the civilian offshoots of the PKK are likely to be integrated into the process.

I concur that normally, the PKK would not have withdrawn from Turkey and easily given up its most potent trump card in these negotiations. My thinking is that, they did so because they have better and bigger trump cards up their sleeves.

As I wrote before, the PKK has two satellite organizations in Iran and Syria, the PJAK and PYD respectively. The PKK created them in 2003 and have been using them to form temporary alliances with different players at critical junctures.

For instance, in 2011, Murat Karayilan announced that the PJAK was going to stop fighting against the Islamic Republic of Iran. His rationale:
"We don’t want to fight against the Islamic Republic of Iran. Why? Because the goal of the international powers that want to redesign the region is to encircle Iran. Nowadays, they are more preoccupied with Syria. When they are done with that, it will be Iran’s turn. At such a phase, as Kurds, we don’t think being at war with Iran is appropriate." 
And just like that, they abandoned their Iranian Kurdish brothers and sisters and sided with Tehran. Ostensibly, this enabled them to shift their resources to Turkey and to escalate their armed struggle there. But actually, the move was sponsored by Iran to make life difficult for Turkey and to curb this latter's aspirations to become a regional super power. And the PKK played along happily.

Now that the PKK is negotiating with the Turkish government for a permanent solution, there are signs that the PJAK is reacquiring arms in Iran and getting ready to fight against the Islamic Republic.

Two op ed pieces appeared on 10 and 11 April in a Turkish daily (Radikal) penned by Aysel Tugluk, a veteran Kurdish activist and an independent member of parliament from the eastern city of Van. In the first one she hailed the peace process as "a road of no return" and a historic opportunity. A once in a century opening, she said.

In the second piece she contemplated the future implications of the peace process:
Aysel Tugluk
"At this point, we are faced with the vital question: All is fine, but what will happen to the PKK? At least in the next quarter century, the PKK will be around one way or the other, wherever there are Kurds. This could be armed for a while in Syria, re-armed again in Iran in the near future and institutional in Europe. The PKK will be in Turkey in various shapes with its programs, ideas and political and social institutions in its areas of influence and democratic activities. But in [Abdullah] Ocalan’s vision of the near future, there is an irreversibly movement of the PKK’s armed forces out of Turkey’s political areas.” [emphasis mine]
Tugluk is an important figure within the Kurdish movement and her public ruminations carry a lot of weight. It is also rather telling that the suggestion was made not by the military wing of the PKK (i.e. Karayilan) but by a human rights activist.

Right after this op ed, PJAK called upon Iranian Kurdish groups to form a unified plan of action against Iran. Not surprisingly, the PJAK's call got a frosty receptions from the other Iranian Kurdish organizations largely because of their previous move to ally themselves with Tehran against Turkey. But I am confident that eventually the PKK's formidable resources and fighting apparatus will convince the other Kurdish groups to form an alliance with them. And if the PJAK became once again a major headache for Tehran, this would make the PKK a very important actor for Washington and Ankara.

There is also the Syrian situation mentioned by Tugluk.

As I suggested many times, Kurds hold the key to the Syrian conflict.

The PYD resisted until recently to fight against Damascus, claiming that this served Kurdish purposes better. But now that they signed up with other Kurdish groups and with the peace process in Turkey rapidly evolving, they are likely to get the signal to join the effort to topple Bashar and Co.

If that happens, their presence would change the current military equation. Right now there is a war of attrition with two exhausted armies in a situation of stalemate. The entry of a reasonably well equipped and well trained fighting force is likely to disrupt the current balance of power.

Secondly, their involvement would also signal a different balance of power within the Free Syrian Army.  Right now, Turkey, Israel and the US are worried that all the major fighting batallions consist of Salafist or Jihadi groups.
 Across Syria, rebel-held areas are dotted with Islamic courts staffed by lawyers and clerics, and by fighting brigades led by extremists. Even the Supreme Military Council, the umbrella rebel organization whose formation the West had hoped would sideline radical groups, is stocked with commanders who want to infuse Islamic law into a future Syrian government.
Nowhere in rebel-controlled Syria is there a secular fighting force to speak of.
This is why even reports of possible chemical weapon use by the Syrian army were not enough to encourage the US or Turkey to supply the rebels with better arms.

Unlike the Jihadis that make up the bulk of the FSA, Kurds are staunchly secular. If they join the fight, they will provide a much needed counterweight against entities like the Al Nusra Front whose leaders recently swore allegiance to Al Qaeda. In fact, these guys went so far that even Syrian Islamists denounced the Al Nusra Front and its foreign fighters.

But currently no one can contain them and these Jihadis are moving to control critical assets and strategic areas. They plan to become the dominant group in post-Assad Syria. A Kurdish entry might disrupt these plans and change the make-up of the post-Assad system. Their presence would also reassure Alewites, Christians and other non-Sunni minorities who view (rightly) these Jihadis with deep suspicion.

In short, through its satellite organizations and its formidable military apparatus, the PKK is about to transform itself into a kingmaker in the region. Essentially, its actions could make or break the US (and by extension Turkish) plans.

And that gives them all the bargaining power they need.

27 April 2013

Debt and Austerity Debate and the Reinhart-Rogoff Debacle

If you are a wonkish person like me, you might be aware of a recent scandal that shook the unsavory school of thought I call neo-classical economics.

You see, two Harvard professors, Carmen Reinhart and Kenneth Rogoff published a seminal paper in 2010 to establish that there was a causal link between slow growth and indebtedness. They specifically claimed that once the debt to GDP ratio reaches 90 percent, growth actually slows down. Since both debt and growth are expressed as a percentage of GDP, one could always argue the causality in either direction: lower growth leads to higher debt vs higher debt leads to lower growth.

Theirs was the first argument in favor of a unidirectional causality. And the first one to determine a tipping point. Their work become the foundation for all the conservative demands to dismantle the social safety net and to cut government spending in order to reduce debt. At long last, here was the justification for what they have been clamoring. It was Pete Peterson's wet dream.

As a result, their work was quoted countless times in the austerity debate. Rogoff has written many op eds with strong policy conclusions encouraging spending cuts and austerity measures. His testimony before the Senate created a rare bipartisan moment of consensus about the terrible toll of high public debt.

Their reach and influence was extraordinary. Their conclusions were cited by European Commissioner Olli Rehn, by Romney's running mate Paul Ryan, by (then) Treasury Secretary Tim Geithner, by Lord Lamont, former Chancellor and adviser to the current Chancellor of the Exchequer George Osborne.

Before Reinhart and Rogoff, there was only one lonely voice, another Harvard economist, Alberto Alesina, who claimed that austerity measures lead to growth. Sadly for him and the proponents of austerity, his work was demolished and repudiated rather quickly by mainstream economists.

So when Reinhart and Rogoff emerged they became critically important in determining the outcome of the austerity debate.

There was a tiny problem. No one could reproduce their results. Many tried and failed. So their peers asked to review their data but Reinhart and Rogoff simply refused.

Fast forward to this year. A couple of professors at the University of Massachusetts at Amherst gave a special assignment to their graduate students. They were each supposed to reproduce the findings of a famous paper. When Thomas Herndon, the graduate student who picked the Reinhart Rogoff paper could not duplicate their results, he wrote to Reinhart and Rogoff, to ask for their data. Since he was a lowly graduate student, they agreed to share their spreadsheets with him.

Herndon discovered that their data contained several very significant errors. Like omitting five countries by mistake. Or assigning the same value to one bad year in New Zealand to 20 good years in Britain. Or simply excluding certain cases that did not fit with their conclusions.

Consequently, when Herndon and his two professors published their findings with corrected data, their conclusions were quite different:
They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]."
In other words, there was no tipping point and there was no unidirectional causality between high debt and reduced growth. In fact, other researchers discovered that there was strong evidence that the causality is reverse, i.e. low growth leads to higher debt.

What did the two neo-classical economists say?
"We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future. We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."
So an error that revises their conclusion from -0.1 percent to +2.2 percent is not relevant and does not change their central message.

Economics is a serious and respectable discipline. But neo-classical economics is an ideologically biased school, based on dubious axioms and sporting a fake scientific veneer.

And neo-classical economist never ever acknowledge that they were wrong. Ask Krugman how they destroyed valid Keynesian notions to replace them with bogus monetarist talking points.

20 April 2013

A Simple Point on Margaret Thatcher

You might have heard that some people danced in the streets to celebrate the passing of Margaret Thatcher. Others set up special twitter accounts, like #nowthatchersdead (thereby confusing Cher's fans). There was even a campaign to get the 1940's Wizard of Oz song, "Ding Dong the Witch is Dead" (which narrowly failed to get to the No 1 spot).

Thatcher 2012
All of this led to a debate about whether it is OK to dance on someone's grave.

The majority of observers felt that it was in poor taste to celebrate the passing of a frail old woman suffering from dementia. A smaller group of people argued that it was perfectly acceptable to debate the record of public figures at the end of their lives. And they believed that if that record largely consisted of divisive and harsh policies, it was a commentator's duty to say so with brutal honesty.

I can see the point for each position. But I am not interested in moralistic arguments.

I just want to make a simple observation about gender.

For that let me compare her record with that of her fellow conservative Ronald Reagan.

Thatcher's Legacy

Margaret Thatcher set out to destroy the trade unions as she she saw them as a destructive economic force. She did not see the relevance of trade unions in resisting income inequality. While trade unions can be unreasonable and make life difficult for everyone with their only weapon (strikes), they also play a very important role in economic regulation. They resist income inequality and by forcing businesses to pay more for labor they increase the purchasing power within the domestic market.

The Post-War bargain was to keep a balance between union wages and business profits. This worked as long as the world economy consisted of the US and Europe. Within that Keynesian model, businesses did not see the need to invest to increase productivity and this proved to be a huge mistake on their part. When Japan rose in the early 70s to compete with the US and Europe, these companies were caught off guard. Rising oil prices did not help as their relatively old production systems were not energy efficient (the same oil shock did not affect Japan's industrial output).

Unions did not understand the problem and continue to ask for more wages. Businesses did not understand the problem and focused on high wages as the reason for their inability to compete with Japanese goods. After several years of stalemate (and a funny economic period known as stagflation), the Tories came to power to apply the solution favored by the business side, namely wage reduction.

How do you achieve that? By going after the unions forcefully and relentless. She refused even their reasonable demands to force them into prolonged strikes and eventually economic bankruptcy.

As part of the same formula, she sold off profitable state-owned enterprises. The privatization wave served two purposes: one was to get rid of unionized workers and the other was to transfer wealth from the public sector to the private sector at a minimal cost.  The companies they sold off were (a) natural monopolies like water, gas and electricity, (b) industries that modernized themselves in recent years prior to privatization, like the British Steel (c) former monopolies who investment in infrastructure could never be profitably duplicated by competitors, like British Telecom or British Airways. 

For the business side, her government led to huge profits, much lower taxes, the rise of a gigantic finance sector (dual effect of deregulation and the need to raise large sums during the privatization process) and a formidable power position.

For the labor side, the end result was decline in union membership, loss of bargaining power, high unemployment, two recessions and rising income inequality.

Normally, it is not easy to implement such policies and expect to be reelected. But she did it by using a tried and true formula: when facing a recession and dismal ratings, go start a war. It increases public spending dramatically and it forces everyone to rally around you in a wave of patriotism.

She defended a tiny piece of rock near Argentina and the rest is history.

Ronald Reagan's Legacy

In the US, her biggest admirer and self-described partner Ronald Reagan implemented exactly the same policies at around the same time.

He destroyed the unions (in 2012, the unionized workers in the private sector constitute only 6.6% of the workforce). He reversed income inequality dramatically. His budget cuts led to a severe economic downturn that was dubbed Reagan's recession. His first term is marked by double digit unemployment in most of the United States.

Reagan tried hard to find companies to privatize but the US did not have a comparable economic asset density. So instead, he began the outsourcing revolution, that is contracting out public sector jobs to private companies. As with the Thatcher revolution this served the same dual purpose of cutting unionized public sector jobs and transferring wealth from public sector to private sector.

Like Thatcher, Reagan was also big on deregulation. He started the deregulation process in the natural gas, railroad, banking and telecommunication sectors. In fact, the starting of the infamous 2008 crisis is not the repeal of the Glass-Steagall Act but the Garn-St. Germain Depository Institutions Act passed under Reagan. This removed restrictions on loan-to-values for Savings and Loans and it encouraged banks to make very risky real estate investments (resulting in the first S&L bailout). If that sounds familiar, it's because it is a smaller version of the later crisis.

He also lowered taxes significantly for the upper brackets. They were as high as 70% when he came to power. He first lowered them to 50%. Then, in 1986 he lowered them to 28% while increasing the lowest brackets from 11% to 15%. In other words, he took from the poor and gave to the rich.

As a direct result of his policies, the US is now one of the worst countries in terms of income inequalities. Its middle class is shrinking towards oblivion. Its corporate executives became so greedy that they nearly destroyed the global economy for their personal enrichment.

And one last similarity: When his policies proved unpopular during his first term (just like Thatcher's) what did he do to? Well he invaded Grenada.

This led to increased spending (and massive borrowing) and a swell of patriotic pride. Grenada not being sufficient, he kept it up by escalating the Cold War.

Two Historic Figures at Their Death

When Reagan died (also suffering from Alzheimer's by the way) you could not believe the eulogies. Even his worst critics acted as if they were grudgingly conceding the man's massive contributions. He was credited with the productivity revolution, the end of Cold War and a large boom period.

Actually, none of these can be directly attributed to his policies. But nevertheless the man was lionized at his death. He was celebrated as one of the greatest presidents who made the US a better place.

Far from being named a divisive and hated figure he was promoted to patron saint of the GOP status. You cannot get past a GOP primary without declaring your undying admiration for and your strict allegiance to him.

So we have two politicians who followed the exact same path, implemented the exact same policies, in fact, pointed at each other as their muse and mentor.

When one of them died she became the Wicked Witch of the West.

When the other died he was canonized as St Ronnie.

Can you tell me how to explain this?

And can you tell me that there is no misogyny in that?

17 April 2013

The Gatekeepers: A Documentary

A good friend of mine sent me an email to remind me that I should watch the Gatekeepers, the celebrated Israeli documentary that brought together six former Shin Bet directors to comment on the Palestinian issue.

I knew of the documentary, as it was shown last year in Israel in the Jerusalem Film Festival. This is the world wide release by Sony Pictures Classics. Interestingly, its release became a news media event: it was reported by all the major news outlets (to see more media links just Google it).

What is extraordinary about the film is the fact that these Shin Bet chiefs are incredibly outspoken in their criticism of the State of Israel and the control it exerts over its Palestinian population. One of them, Avraham Shalom tells the director, Dror Moreh, that Israel has become a brutal occupation army.

And this man is no shrinking violet. He once ordered the extrajudicial killing of two Palestinian bus hijackers (and had to be pardoned by his political masters). So when this man compares Israel to, well, Germany you are a little taken aback.  Even though I am not Jewish I admit I winced when I heard that.

He explained that he was not talking about the Holocaust but the occupation of Holland, Belgium, Poland and many other Eastern European countries. But still. And that is the point, apparently. To make you stop and think and take notice.

If you think this is blunt talk, take a look at this: towards the end of the film the director reads the following quote from Professor Yeshayahu Leibowitz:
“A state ruling over a hostile population of one million people will necessarily become a Shin Bet state, with all that this implies for education, freedom of speech and thought and democracy. The corruption found in any colonial regime will affix itself to the State of Israel. The administration will have to suppress an uprising on the one hand and acquire Quislings, or Arab traitors, on the other.”
Professor Leibowitz made this pronouncement in 1968, one year after Israel occupied West Bank and Gaza.
The director asks Yuval Diskin, who was the Director of Shin Bet at the time, what he thought of this prescient quote.

He replies "I agree with every word of it."

When probed to expand, he shrugs as if the whole thing is really obvious and he could not see the need for further explanation. When pressed, he offers somewhat reluctantly that he is not entirely sure about a Shin Bet state but for the rest, he says, the quote reflects accurately the relations between Israel and Palestinians.

I cannot think of any other country in the world where the current or former director of a security agency could make such a pronouncement. It is simply extraordinary. And there is a reason for that.

There is a separation between Israeli and Jewish identities that most people cannot understand. That is partly because of the corrosive influence of pervasive antisemitic discourses. Many people, even the ones who do not think of themselves as antisemitic, espouse some of the most common prejudices about Jews. The gamut runs from "them being good with money" to "them supporting anything the State of Israel does."

This is rubbish. (And one of these days I intend to write about this in some detail but for now feel free to take my word for it)

Overwhelmingly, Jews in diaspora (a) are liberal (b) emphasize education over everything else, including money (c) support social equality and progressive causes and (d) are quite critical of the State of Israel.

Now, for this latter, they might not engage in such criticism in front of gentiles because they know that, for most of them, Jewish and Israeli are interchangeable and if they say something bad about Israel, next thing they know, their gentile friends will be using that comment to make frightening generalizations about Jews.

Israelis do not conform to that diaspora profile. They are tough, very direct and they are a product of a nation state. Every nation state has its its roots in violence. In Israel it is more so because of the circumstances surrounding its creation. In that sense, like there are many conservative French or Americans who advocate tougher policies, harsher penalties, stricter rules and unequal and discriminatory practices, there are many conservative Israelis who support these notions. That is because, like their French or American counterparts, they never found themselves at the other end of these equations.

This is known as the "empathy gap," a term coined by Nigerian-American writer Teju Cole and picked up by Glenn Greenwald.

Jews in diaspora, on the other hand, do not have that empathy gap, as they have been on the wrong end of that arrangement far too many times.

The Shin Bet directors in this documentary represent that point of view. They speak like Jews not Israelis. That is why Ami Ayalon says that if, according to von Clausewitz, "victory is the capacity to create a better political reality" then "we lost the war even though we won all the battles."

The worry is that if the next directors of Shin Bet have the Israeli perspective (instead of the Jewish one) they might redefine victory as suppressing and oppressing that large population under their control. That would be what a French or American national would do and that would be expected.

In the case of Israel, that would mean the end of the Jewish identity and that would be a very sad thing indeed.


I should finish here but I am tempted to add one last thing. When I started this blog two years ago, one of my hypotheses was the likelihood (or even the certainty) of an Israeli - Palestinian peace process.

I offered three arguments in my favor. One of them was the fact that 40 prominent Israelis and chief among them former directors of Mossad and Shin Bet prepared a peace plan and submitted to King Bibi.

That was on 25 May 2011.

The movie that was just released had started production around that time.

And it was released to a global audience right after the Israeli elections. Maybe it is just coincidence.

Or maybe, just maybe, it is Zeitgeist.

07 April 2013

Why Is Everyone Worried About Iran But Not Pakistan?

I have been reading about North Korea's threats and media speculations about Pyongyang's use of nuclear weapons against its southern neighbor. Even native son Ban Ki-moon got involved to warn everyone that the crisis had gone too far.

In this instance, I can at least understand the reasoning behind the reporting. For decades, North Korea has been opposed to joint military maneuvers on the peninsula and whenever these take place (usually once a year) they issue threats in colorful language.  I (and most international observers) seriously doubt that Pyongyang will do anything stupid, but since they own a few warheads, I see the point of mentioning those threats.

What I don't get at all is the continuous coverage of Iran's nuclear program and the hyperventilating discussion about the threat they pose to the countries in the region, primarily to Israel.

In the last couple of years, I wrote a few times about Iran and Israel to explain why, in my humble opinion, an Israeli attack on Iran was extremely unlikely. I also maintained that there was no evidence that their nuclear program had military objectives and most US intelligence estimates were in agreement with my assessment. More importantly, even if the Iranian mullahs have been planning to convert their nuclear know-how into a stockpile of warheads, I believe that they are far too rational to use them: They know that Israel has far superior nuclear weapons and any attack will mean collective national suicide. In fact, Israel doesn't even have to respond directly since the US has a significant nuclear arsenal at the Incirlik military base in Turkey and they can annihilate Iran within minutes while allowing Israel the ability to perpetuate the myth that it does not even have nuclear weapons.

What is even a bigger deterrent for Iran is the knowledge that any nuclear attack would be very unlikely to reach Israel since there are twin US missile defense systems set up both Turkey and Israel continuously monitoring Iranian airspace They would quickly intercept any launched missile and open Iran up to a very destructive retaliation.

But I don't feel nearly as sanguine about Pakistan.

If you have been aware of this humble soapbox, you might remember that I posted a couple of pieces about Pakistan, as I felt that no one was paying any attention to the land of the ISI.

Recently, the Congressional Research Service (CRS), an independent research unit attached to the US Congress, issued a report [pdf] which concluded that Pakistan has been studiously adding to its nuclear stockpile.
“Islamabad is producing fissile material, adding to related production facilities, and deploying additional delivery vehicles. These steps could enable Pakistan to undertake both quantitative and qualitative improvements to its nuclear arsenal,” the recently released CRS report noted.
According to the same report, India has only 60-80 nuclear bombs.

To me, that is really worrying.

And this was not even reported by big media outlets. Just Google it, you'll see.

Let me put this whole situation in starker terms: The US and Europe have been pressuring Iran through crippling sanctions and extensive talks about its nuclear program even though they have no nuclear weapons, are unlikely to develop them in the near future and would be unable to use them even if they managed to put them together.

On the other side of the ledger, the same forces have been ignoring completely another country that has been feverishly adding to its nuclear arsenal. And that country has a seriously paranoid military which is obsessed with its larger neighbor and willing to do anything, including supporting Taliban and cutting off American supply lines to Afghanistan in its quest to undermine India.

Why does everyone ignore this situation?

Incidentally, general elections is Pakistan are scheduled in a month's time (11 May). So far, secular parties have not been allowed to organize rallies and to campaign openly. They have been declared as legitimate targets by the Pakistani Taliban. You could say that, in the past, these parties were blocked by the powerful military and the ISI and now this job is handled by the Pakistani Taliban.
For many, the situation is becoming more like the 2002 elections, when the military regime of Gen Musharraf forced the main political leaders into exile, creating conditions for religious forces and conservatives to sweep the election. 
Often those with the largest vote, the secular political forces have in the past had their wings clipped repeatedly by a powerful military establishment which finds an Islamic image of the state more suited to its security needs. 

Now that job is being done by the Taliban.
What do you think will happen if these secular parties do poorly and conservative and Islamist parties take up most of the seats?

Speaking of Pervez Musharraf, you may be interested to know that, recently, he has returned to Pakistan from his five-year exile and even though he is facing very serious charges in two pending cases, he was allowed to enter the country without any difficulty.

And as of yesterday, he was given the official go-ahead to run in the upcoming elections.

Could anyone tell me why we are worried about Iran and not about Pakistan?

03 April 2013

Cyprus: the Canary in the EU Mine?

When I first wrote about the Eurozone crisis, almost two years ago, I noted that besides the GIIPS, Belgium and Cyprus were prime candidates for a serious banking crisis. And it looks like, the events that unfolded last week finally heralded that day of reckoning.

I am not going to write extensively about the financial details of the problem, as it is covered in some detail in most media outlets. I just want to make a couple of points.

From where I stand, the Cyprus crisis is a strong indication that the Eurozone is no longer a viable arrangement. I am not suggesting that the EU and the Euro will cease to exist. They won't. At least not in the short to medium run. But I believe that one way or another the Euro itself and the area around it will have to be restructured, shedding perhaps a few members in the process.

This not idle speculation on my part as there are a few fundamental reasons for that.

Is Euro a Unified Currency?

We all know that it is not. A while ago, I explained why it wasn't by using the trade and exchange mechanisms within the EU.

Without going into all of that, let me make the same point this way: A unified currency, like the dollar, has the same purchasing power within its territory and yields the same interest rate regardless of its location. When you borrow in New York you pay the same interest rate for it as when you borrow in Oklahoma.

The Euro, on the other hand, has a different valuation depending on its location. For instance, in Germany, the Euro is lent at 2.8% but it Portugal the same loan will cost your company 6.7%.

Why is that important?

For one thing, it means that even of you could bailout banks in GIIPS (and Cyprus) and supply them with fresh liquidity, that money will not stay there but will end up in German banks.  Or to put it differently, if I had a billion euros and decided to make a deposit in a Greek bank hoping that they would lend this money locally and stimulate the economy, I would fail miserably. Because the rational course of action for the bank would be either to move my money to safety in German banks or to lend it locally with an exorbitant risk premium on it.

So much for stimulus.

The Euro cannot survive such regional disparities for a prolonged period of time. On top of that simple capital flight and cost differential, there is the issue of the conflicting economic targets between the center and periphery. As Krugman has been saying for some time now, implementing austerity to keep Germany's inflation targets will mean deep deflation in GIIPS (and Cyprus). You ever took Economics 101, you might remember that deep deflation equals collapsing prices, contracting economies and, of course, high unemployment.

Just yesterday, it was announced that the Eurozone unemployment rate has reached %12.

This is simply untenable, either economically or politically. Sooner or later, something will break.

What Are the Troika and Germany Doing?

Besides the structural problems associated with the Euro, there are also serious issues created by the peculiar policies of the Troika (i.e. the EU, the ECB and the IMF), Northern creditor countries like Germany and the banks.

Let's quickly recap the measures they have been implementing to deal with the crisis.

As you will remember, when the real estate bubble burst in 2008, Iceland was first to collapse. Its banks were given way too much money by the usual suspects and they simply went bankrupt under the weight of their excessive debt. Banks and the creditor nations put the squeeze on Iceland to guarantee those loans. Iceland did not budge. They said, sorry mate, you knew the risks when you made the loans, that's capitalism, you win some, you lose some.

At the time, there were dark predictions about Iceland becoming an outcast in the international financial circles. None of it came true. Within a couple of years, Iceland was back on its feet and was borrowing money on very good terms.

In the same time frame, Ireland was faced with the same situation: Too much money channeled into their banks by the same institutions and not enough real estate demand to make those loans profitable. In that case, the usual suspects convinced Ireland to nationalize the private debt of its banks. Banksters, who, until then, were praying to get half of their money, realized that with a little bit of trickery they could be made whole again. As a result, unlike Iceland's, the Irish economy was ruined and there is still no end in sight.

The Irish case was important because it effectively took the element of risk out of the banking game. You make risky loans, charge risk premium for them and if something goes wrong, you scream bloody murder and they take money from the poor and pay you back.

That was really lovely.

The third case was Greece. The first leg of the bailout plan, as conceived by the Troika and its assorted allies, consisted of engaging in a prolonged PR campaign to vilify Greeks as lazy and useless cheaters. We were presented all kinds of anecdotal evidence that Greeks were just greedy losers who grabbed money like there was no tomorrow. Thanks to that barrage of negative stereotyping, no one asked the obvious questions: How could a few politicians' largess account for a national debt that reached 160% of GDP? Or how could the banksters continue to shovel money into Greek economy while simultaneously teaching its government ways to hide this excessive level of debt? Or how could the EU be unaware of Greece's extraordinary indebtedness given the huge sums involved?

Once that narrative was in place, no European taxpayer would agree to bailing out such lazy bums. That made the proposed solution (imposing austerity measures) very palatable despite its huge social cost: Forced austerity meant that the Greek economy would keep shrinking for the foreseeable future; its population would become increasingly more unemployed and impoverished and yet despite all this suffering, its debt to GDP ratio would remain more or less the same or possibly become worse.

No one wondered how and why this was a good idea. Everyone felt warm and fuzzy that those cheaters finally got what they deserved.

Then they turned to Spain and Portugal. My post entitled "Can Anyone Tell Me What Is Wrong With Spain?" highlighted the inherent contradictions between the mainstream narrative and the local economic realities. Of nearly 200 hundred posts I did in over two years, this one got the most clicks. The numbers I offered seemed to indicate that the Northern creditor groups forced Spain into a recession and a high unemployment situation despite its diversified and comparatively healthy economy.

Then it was Italy's turn. For a few months, the business pages of mainstream papers were full of "contagion" theories, telling us how Italy's imminent collapse was going to bring down the Euro and the European project. The narrative became so strident, so urgent and so convincing that eventually the Italian MPs forced Prime Minister Berlusconi to resign. Then they replaced him with an unelected politician: a former EU Commissioner and an advisor to Goldman Sachs.

Regarding Monti and his evidently successful reign, consider this. Can you enumerate any of his specific policies that averted the imminent collapse of the Italian economy? Me neither. That's because he did not do much. Sure, he tried to push through some reforms. But when they were met with resistance, in a time-honored Italian fashion, he watered them down. Tellingly, in his BBC profile his main achievement was listed as calming the markets. But the piece is silent about why the markets grew calmer under him and more importantly, why the same steps could not have been taken by Berlusconi.

Enter Cyprus

At the beginning of the 2008 crisis, Cyprus was doing very well. Their debt to GDP ratio was under 50%, which was much better than Germany's or most of the Eurozone countries'. Their unemployment was hovering around 4%, also exceptionally low for Europe. And they had a steadily growing economy since 1974.

Their problem was the same as Ireland, Iceland, Spain and a host of other countries who were given too much money. Early on, Cyprus had partly copied the Irish formula by offering a very low corporate tax rate (10% and as far as I know, the lowest among EU countries) to attract foreign companies. They also tried to become an offshore financial haven. They signed a deal with Russia in 1982 which made possible for Russian companies to move their profits to offshore accounts by passing them through Cyprus without paying taxes.

The banking infrastructure that was built to accommodate these transactions got the attention of the usual suspects. They shoveled money into these relatively inexperienced Cypriot banks, increasing their assets to €152 billion or 8 times the island's GDP. When you manage such large assets and have to show returns, you do what the Irish, Spanish or American bankers did, invest them in the booming real estate market and its highly risky assets. In Cyprus' case the island's economy was too small, so they invested much of it in Greece.

Then Greek real estate market tanked and Greek banks went bust. The exposure of Cypriot banks to Greek debt was roughly €30 billion or 1.6 times the island's GDP.

Here is where it gets interesting. If you followed the Greek debacle you might remember that the so-called "haircut" process was spread over two years. In the beginning, Merkel, the French and German banks and ECB's Trichet were adamant that no haircut was acceptable for senior debt holders. During that process, Bank of Cyprus and Laiki Bank began buying Greek debt in huge quantities from, you guessed it, Deutsche Bank. It was a gamble. But they figured that Germany would never allow a huge haircut and the yield on Greek bonds were huge at the time.

Between the two of them, they gobbled up another €6 billion of Greek debt. Right after that, Germany made an about face and a 75% haircut was announced. Once they wrote this off, these two banks had no money left to operate and they had to approach the government for a bailout.

Since the government had already hit its borrowing limit, they in turn had to approach the ECB. The Troika took over and said that they are willing to give Cyprus 10 billion euros if Cyprus could raise 6 billion euros by itself.

Where do you get such funds if you have no ability to borrow money? The Finance Minister asked if Russia would buy some offshore oil and gas bonds from Cyprus. Russians said no, thank you. The offshore oil and gas deposits came with a long standing territorial dispute with Turkey and Russia did not want to antagonize its rising neighbor just as Syria was about to go up in flames.

The Troika then suggested that the government should tax all accounts in Cypriot banks. They proposed a 6% levy on savings below €100,000 and 10 % above that amount. The wink-wink, nudge-nudge gesture behind the suggestion was that most of that money belonged to Russian oligarchs anyway and they would or should not care.

That did not go over very well. So, the final plan was to leave the deposit of €100,000 and less alone and  confiscate up to 60% of larger deposits (actually they plan to turn them into shares in local banks).

Of all the strange policies the Troika implemented since the beginning of the banking crisis in Europe this is the most peculiar.

Think about it.

- It is estimated that the island's GDP will shrink by about 20 % in the short term. No matter how you slice it, this will be catastrophic for ordinary people. And I don't see how the Cypriot economy can recover from this.
- I seriously doubt that the Russian oligarchs had much money in Cyprus (if I knew about it two years ago, surely their advisers would have known much earlier that that). But whoever these Russian deposit holders are, it is safe to assume that they are closer to Kremlin (as this is the norm to operate in Russia these days). Why is it a good idea to piss these people (and Kremlin) off? Does Europe need more confrontations with Gasprom?
- Next year, Latvia will join the Eurozone. They too have large deposits from Russian companies. Will these account holders stay in Latvia on the basis of this precedent? If not how will that affect Latvia's economy?

The Future of EU

Perhaps the most important consequences of the Cyprus "solution" could be the realization that the Troika is not trying to find solution for local economies. People might look at the overall picture and discover that the EU and the ECB have not been acting to save local economies or bailout local banks: they have been trying to protect the senior debt holders (banksters) and creditor nations.

Worse, in some cases, they have been forcing entire economies into prolonged recessions.

The European project and all the talk about solidarity and unity and economic and political integration could become a wry joke for the people at the periphery as they continue to suffer under crippling austerity measures with no end in sight.

Moreover, whenever you have large segments of the population (and  especially the middle classes) decimated for long periods of time, you create a very volatile situation that encourages extremist political formations. The rise of Golden Dawn is the most prominent example of that scenario. But other European countries are affected as well.

In Spain, Espana2000 is openly emulating Golden Dawn and is growing steadily. Le Pen's Front National in France is already very popular and it could become the largest right wing party during the next presidential elections in France. In Italy, Northern League, a party called fascist-lite, was part of Berlusconi's coalition and has been gaining more electoral support every cycle. The same is also true for National Alliance. In Portugal and Eastern Europe, anti-immigration parties are on the rise and their positions that could once be labeled center-right are not solidifying into extreme right platforms.

Unless there is a major shift soon, we may one day look at this relatively insignificant bailout process in Cyprus and say that, although we did not realize it at the time, it was indeed the beginning of the end for the European project.