Timothy Garton Ash: States are born by accident but sustained by ardour

Here is another way to think about what is happening in Ukraine: as the latest chapter in the self-decolonisation of Europe. After dismantling the Soviet empire towards the end of the 20th century, Europeans went back to finishing off the Austro-Hungarian and Ottoman ones, including successor states such as Yugoslavia and Czechoslovakia. Now it is the pre-Soviet Russian empire that is being challenged. Think of Russia’s president as Tsar Vladimir the Last.

The unmaking of empires is a messy business. They are not made of Lego: take it apart and you have a neat red block here, a yellow one there. What decides which group of people on which patch of land gets to be a state? Cultural, linguistic, ethnic and historical commonalities certainly play a part. So do the legacies of long-forgotten international diplomatic agreements, and territorial divisions internal to an empire or multi-ethnic successor state. Local political will and leadership is crucial. Perhaps most important of all is historical luck, the fortuna that Niccolò Machiavelli calls “the arbiter of half the things we do”. It was such a mix of history, will, skill and luck that brought Kosovo its still not universally recognised independence.

I was seized by this thought about the untangling of old empires some years ago when I visited the breakaway para-state of Trans Dnestr, on the eastern edge of Moldova, next to Ukraine. In its weird Soviet-retro capital, Tiraspol, I came upon a grand equestrian statue of the Tsarist military hero Field Marshal Alexander Suvorov. The statue celebrates his founding of that city at the end of the 18th century. Earlier, in Uzhhorod, a city on Ukraine’s western frontier with Slovakia, I had dropped in on the self-styled Provisional Government of Subcarpathian Rus – or Ruthenia for short. The prime minister was a professor of medicine, who graciously received me in a small office in the local hospital. The foreign minister had driven over from his home in Slovakia. The justice minister made the tea. I nearly persuaded them to sing their national anthem, which begins “Subcarpathian Rusyns, arise from your deep slumber”. Ridiculous, you may say. Operetta! But then fortune spins the kaleidoscope of history, and suddenly there is an internationally recognised country called, say, Moldova or Montenegro. Its sons and daughters, not thinking to question their nationalist history textbooks, grow up taking this nation-statehood for granted.

Meanwhile, and subversively, the frontiers of old empires re-emerge on the electoral maps of new democracies, as if traced in invisible ink. Chart the majority vote by colour and the 19th-century domains of the Austro-Hungarian or German empires shine out in orange; Russian or Ottoman in blue. In Ukraine, in Romania, in Poland: the parties and colours vary but the phenomenon is the same.

Liberals are good at articulating universal principles for the equal sovereignty and self-determination of individual human beings. They get in a complete muddle when it comes to peoples. Why should Kosovars have a right to self-determination but not Kurds? If Scotland, why not Catalonia? If Catalonia, why not Padania? Padania is the name proposed by the Lega Nord for an independent north Italy. As empires and multinational states weaken, the cry goes up: “Why should we be a minority in your country, when you could be a minority in ours?” (I borrow the brilliant formulation of the Macedonian scholar Vladimir Gligorov.) Or, as the Russian nationalist Vladimir Zhirinovsky provocatively put it: if Ukraine can have its revolution, why not Crimea?

Crimea was given to the Ukrainian Soviet Socialist Republic at the behest of Nikita Khrushchev 60 years ago, in February 1954, to mark the 300th anniversary of the 1654 treaty of Pereiaslav, which Soviet propagandists reinterpreted as having marked the “reunification of Ukraine with Russia”. This decision was described by the Soviet Ukrainian communist Nikolai Podgorny as “yet another affirmation of the great fraternal love and trust of the Russian people for Ukraine”. Ho, ho. Even if Khruschev was not drunk when the decision was made, as is sometimes maliciously reported, there was nothing inevitable or historically “natural” about this – or, for that matter, “unnatural”. If it had not happened, Crimea would today be part of the Russian Federation, with a large minority of discontented Crimean Tatars and Ukrainians. But it did happen – so the anger surges the other way.

There is no historical necessity in such outcomes, but two things we should learn from more than a century’s experience of Europe’s self-decolonisation. First, once people have a state, they tend not to want to give it up. “You know,” a Macedonian friend told me soon after the Former Yugoslav Republic of Macedonia became an independent state, “I think Macedonia did not have to be a country; but now it is, I quite like it that way.” The number of states in the UN keeps going up. Waiting in the wings are the members of Unpo, the Unrepresented Nations and Peoples Organisation – among them, the Crimean Tatars.

Even more vital is a second lesson. As that great anti-imperialist Mahatma Gandhi insisted: means and ends cannot be cleanly separated. How you do it is not merely as important as what you do; it actually determines where you end up. A velvet divorce, as in Czecho-Slovakia, takes you to a different place than a bloody one. So does a peaceful, voluntary staying-together (Scotland and England, perhaps?) rather than a forced one. The use of force always has unintended consequences. Tsar Vladimir may claw back domination of Crimea, but his actions will ultimately reinforce the independence of Ukraine.


Timothy Garton Ash is professor of European studies at Oxford university and the author of ‘Facts Are Subversive’

FT

David Gardner: Spain and Britain need not fear the F-word

It is probably not accidental that the two EU countries facing the most imminent challenge from separatists within their borders – the UK from the Scots, and Spain from the Catalans and Basques – are old, proud, post-imperial nations whose unionist integration was essentially the enterprise of monarchy. The eventual answer to this problem does not have to be either separatism or unionism (monarchy is a secondary issue). It could as well be a creative form of federalism, even though federalism as a word, let alone a formula, sends semantic shivers up the political spine of both countries.

Yet if the majority nationalists – also known as unionists – were to look more empathetically at their minority nationalists, they might detect the ambiguities and hesitancy behind much separatist discourse. Instead, Madrid uses Spain’s constitution as a tablet of stone to bludgeon Catalans and Basques, London threatens the Scots with being shut out of sterling, and both capitals – episodically echoed by Brussels – warn independence means probable banishment from the EU.

Surely it has occurred to all three capitals that these minority nations might settle for something short of secession; that, on close examination, there is something like a triangle at work here in which the Catalans are watching the Scots, who are watching the Basques, who are watching the Catalans, who are also looking at the Basques – all to see who can get more, and how.

But there is a curious reluctance to discuss alternatives – especially to develop further the asymmetric federalism that already exists in the UK and Spain, where Scotland, Catalonia and the Basque Country already have more home rule than other regions, yet want still more.

When Catalan leaders look at Scotland, they see that the British government has allowed September’s vote on Scottish independence, and chosen to campaign against it. Madrid says flatly that Spain’s constitution prohibits any plebiscite. In 2006, the Catalans did hold a referendum, approving an enhanced statute of autonomy, after affirmative votes in the Catalan parliament and both houses of the Spanish parliament. That law was eviscerated in 2010 by the Constitutional Tribunal, acting at the behest of the centre-right Popular party now in power in Madrid – which catapulted Catalan separatism from the fringe to the mainstream.

The Scottish National party has long taken an interest in the Basque Country, where the governments there and in adjoining Navarre collect almost all their own taxes. This fiscal autonomy has helped mainstream nationalists transform a moribund rust-belt economy into an engineering powerhouse – and diluted the potency of radical separatists, at least so far. That may be why Alex Salmond, the wily SNP leader and Scotland’s first minister, initially wanted two questions in September: one on independence and another that would have given Scotland fiscal autonomy. The reason the Basques are nervously watching the Catalans is clearer.



Under the Basque fiscal formula, the autonomous government remits to Madrid roughly eight times less revenue per capita than the Catalans. When Artur Mas, the Catalan president, met Mariano Rajoy, Spanish prime minister, in September 2012, he sought fiscal autonomy “with solidarity” – the right to collect taxes but put more into the central pot than the Basques do. Basque leaders, who feared a reopening of their advantageous deal, heaved a sigh of relief when Mr Rajoy dismissed the Catalan idea.

There are, of course, differences in these febrile situations. A common feature is that mainstream nationalists tend to be ambiguous about independence and ambidextrous in their alliances. In Spain, Catalans and Basques have allied in the past with right and left in Madrid, the better to secure more devolved power; the SNP kept a sinking Labour government afloat in 1978-79 in exchange for the first devolution referendum. The mainstream nationalist chameleon usually changes into bright separatist colours when thwarted.

Yet as Catalonia is poised to trigger a constitutional crisis in Spain, Mr Mas has left himself wiggle room, saying Catalonia needs its “own state”. That formula might fit inside a reformed constitution that offers the Catalans more of what the Basques have.

Offering Catalans a Scottish choice seems beyond the Spanish polity and is miring the debate in the reductive idiom of identity politics, which catches anyone suggesting federal solutions in its crossfire. In the UK, there is more recourse to technical objections to asymmetric federalism, for example that equity demands uniform rules in areas such as taxation. But equity and freedom should be bedfellows. Denying the yearning for freedom in the name of égalité is an outdated Jacobin concept; not so fiscal solidarity.

There is no reason why some regions, especially those with a deep-rooted sense of nation, should not have greater self-rule than others if that is what they want – the cost, to paraphrase the King James Bible, of sharing a house of many mansions.


David Gardner


FT

Sergey Karaganov: Russia needs to defend its interests with an iron fist

The disintegration of the Soviet Union was not viewed as a defeat by the Russian people, but the west treats Russia as a defeated nation all the same.

President Vladimir Putin has been trying to bring together most of the countries of the former Soviet Union in an economic alliance. This would have strengthened the region’s economic competitiveness and helped ward off the kind of instability that bedevilled the Weimar Republic after the dissolution of the German Empire. However, the west has done more or less everything it could to prevent this legitimate rapprochement.

The Ukrainian elite has been unable to steer its country towards a more prosperous future. In 1990 Ukraine’s gross domestic product per capita was similar to that of Belarus; today, it is half. Each change of government has brought a worse cadre of incompetents and thieves into Kiev’s corridors of power. The elections in 2004 – in which the west openly interfered – ushered in the presidency of Viktor Yushchenko: nationalist, unbelievably incompetent but staunchly pro-western. In 2010 he was replaced by Viktor Yanukovich, whose flaws were just as deep.

This discredited elite has clung to power by playing off Russia and the west, extracting favours in return for fleeting professions of allegiance. The last round came when the EU, humiliated by a string of rejections, offered an association deal that would have precluded Ukrainian participation in the Russian-led customs union. Mr Yanukovich, hoping either to secure a loan from the west or to blackmail Russia into generosity, pretended to embrace Europe. When Russia responded with the promise of a loan, Mr Yanukovich duly switched sides.

Demonstrators who were disgusted by this behaviour took to the streets of Kiev. Soon they were joined by murky rightwing fringe groups, who attacked police with firebombs on and off for weeks. The Russian government believes these protesters were openly supported by the west. Then the shooting began and Ukraine plunged deeper into chaos.

These events happened against the backdrop of a campaign of anti-Russian propaganda and smears that lasted for more than a year. I lived through two decades of the Cold War, but I am hard pressed to remember such an avalanche of lies. This took an especially vicious form during the Olympic Games in Sochi, which were a triumph for Russia and its athletes.

In Russia pundits saw a clear purpose in this campaign: to lay the ground for a new policy of containment. This refreshed memories of the double standards and lies that have been characteristic of the west’s behaviour for the past 20 years. We were reminded of the eastward expansion of Nato, over the pleas and protests of a weakened Russian state. Had Ukraine been absorbed into the alliance, Russia’s strategic position would have become intolerable.

When calls for reason proved powerless to stop Nato’s expansion, Russia halted it instead with an iron fist. In 2008 Russia responded to an attack by Georgian troops that killed Russian peacekeepers and scores of Ossetian civilians. Ukraine has since designated itself a nonaligned state, although Nato officials continued to try to lure it.

It is against this background that Russia’s actions over the past week must be seen. The iron fist is once again being shown to revanchists seeking consolation for the geopolitical and moral loses of the last decade. Of course, some in the Russian establishment also want to strengthen their positions or cover past mistakes by seeking confrontation with the west.

To prevent the situation from deteriorating further, all sides now need to calm down. A trilateral conversation on the future of Ukraine should take place between that country, Russia and the EU, as Moscow has repeatedly proposed.

The outline of a compromise is clear. A federal structure for Ukrainian institutions – and a switch to a parliamentary system in place of a presidential one – would enable the people of each region to make their own choices over language and cultural allegiance. Ownership and control of the gas transportation system should be shared between Ukraine and its neighbours. The country should be allowed to participate both in Russia’s customs union and the EU association deal.

The crisis has exposed the failure of our post-Cold War policies, but it can be put to constructive use. We should belatedly begin work towards the common goal of an Alliance of Europe stretching from Lisbon to Vladivostok, in which people and trade would flow freely. We should merge the soft power of Europe with hard power and resources of Russia, as prominent Europeans and Mr Putin have often proposed.

Russia is at last turning economically towards the rising east. It will be a great loss – for Russians and other Europeans – if this shift is accompanied by political, social and even cultural estrangement.

Sergey Karaganov is dean of the faculty of international economics and foreign affairs of the National Research University – Higher School of Economics in Moscow


FT

John Kay: The startling human progress that economists fail to see

The ancient Greek runner Phidippides conveyed with his dying breath the news that the Persians had been defeated at Marathon. We do not know how long it took him to complete the course to Athens or even whether his epic journey actually occurred. We do know that the winner of the first modern marathon, at the Olympic Games of 1896, completed the course in just under three hours.

But modern humans have become better at performing even simple physical tasks such as running. You would have been a medallist in that first modern Olympiad with a time of 12.6 seconds in the 100 metres. But you would now have to achieve less than 9.8 seconds to be a contender. The longer the distance the greater the improvement. Within the next few years, it is likely that someone will complete a marathon in less than two hours. This represents an average speed gain of 0.4 per cent a year over the past century. The largest contributor to improvement is improved technique – systematic training, scientifically planned diet and careful pacing. The steady accumulation of human knowledge makes us more productive at more or less everything.

Wider markets also drive productivity improvement. The successful competitors in the early Olympics were mostly drawn from western Europe and the US, and from a limited social class even in these countries. Today’s runners are selected from a much wider pool of potential candidates.

In athletics as in business, globalisation has facilitated more specialisation, and enabled the identification of particular locations of competitive advantage. Many of today’s fastest long-distance runners come from east Africa, and most of the best sprinters are people of west African descent brought up in Jamaica or the US.

The evolution of sporting performance is a metaphor for the sources of economic progress – one that reveals several misunderstandings about its nature. One is the idea that economic growth puts increasing strain on resources by demanding more stuff. The principal source of economic growth is our capacity to learn to do things better. Even if we wanted to stop that process, we could not.

Today we would not employ Phidippides to take a message from Marathon to Athens, even if he could break the world record of two hours, three minutes and 23 seconds. A copper wire could transmit the news in about 0.14 milliseconds. Twitter could have saved Phidippides’ life. The most important source of economic advance comes not from doing the same things better, but from achieving the same objective in a completely different way.

Two decades ago, the Yale economist Bill Nordhaus described how humans have always sought to illuminate darkness but have done so in very different ways. People once drew cave paintings by the light of a wood fire. Jane Austen wrote novels by candlelight and William Gladstone walked streets lit by gas. Thomas Edison switched on incandescent electric bulbs. Today we use low-energy fittings that emit almost no heat.

When we measure price and output we look not at the price and output of light but the price and output of items we use to create light. These are very different things. While the prices of wood, candle wax, gas and electricity have tended to increase, the price of light has fallen. Our statistics not only fail to reflect the trend, they mistake the direction.

Prof Nordhaus went on to suggest that measures of real wages, real incomes and, of course, prices might therefore be in error by a large margin. Yet despite a brief flicker of interest when some politicians hoped that this kind of analysis might be used to curb increases in state pensions, the methodology behind official economic statistics has barely changed.

If we had asked the Athenian general at Marathon what advances would help him, he would have asked for sturdier shields and faster runners.

Henry Ford observed that his customers would have asked for a faster horse. Militiades did not imagine that what he really needed was a fibreoptic cable.

The true heroes of our time are the philosophers who see that messages can be made to travel at the speed of light, and the entrepreneurs who see that the best way to do things better is usually to do them differently.


John Kay


FT

Nicholas Burns: The US and EU have options to outmanoeuvre Russia

O impacto economico de medidas contra a invasão russa podera ter forte impacto negativo na recuperação da economia europeia e, em menor medida, na economia mundial.: elevação do preço do petroleo  e outras commodities. É por isto que acredito que a Alemanha, que tem grandes interesses economicos na Russia e depende do  seu gas, dificilmente apoiará medidas contrarias ao  seu interesse nacional . A Crimeia ficará sobre influencia russa via anexação ou republica autonoma com pouca autonomia na pratica. A questão em aberto é o status do resto da Ucrania. A minha aposta é no modelo adotado na Finlandia. Do ponto de vista realista não seria racional colocar em risco a recuperação da economia europeia para defender a autonomia de uma região com uma longa historia de relação proxima ao imperio russo.  Se é boa ou ruim para os ucranianos não tenho como avaliar, apenas que é o cenario mais provável. No cenario catastrofico( e improvavel) haveria conflito armado e ai tudo poderá acontecer. É sempre bom lembrar que segundo historiadores da guerra de 1914, ninguem acreditava que ela era possível, já que não interessava a ninguem,  no entanto aconteceu e foi uma carnificina muito superior a segunda guerra mundial. 

By sending troops across Ukraine’s borders, Vladimir Putin, Russia’s president, aims to weaken and destabilise the struggling new government in Kiev and coerce it to stay within Moscow’s orbit. Thus begins the opening act of a dangerous crisis that risks dividing Ukraine along ethnic and geographic lines. It is the most serious threat to Europe’s security since the end of the cold war.

America and Europe have few real tools to limit Mr Putin’s troop movements and prevent him from destabilising the rest of a poor, divided and weak Ukraine. That leaves only one real option: to follow a persistent diplomatic strategy to outmanoeuvre Mr Putin in a lengthy struggle over Ukraine.

Nato has no legal security obligations to Ukraine in this crisis. A US and European military counterpunch to Mr Putin’s Crimean land grab would risk a major continental war among nuclear powers. That is not going to happen. The west will not fight Mr Putin for Ukraine and he knows it. That is why, in part, he felt emboldened to act. Americans and Europeans must therefore go on the offensive in another way – by raising the costs to Mr Putin for his reckless actions.

First, they can start by assembling a chorus of global leaders to denounce Mr Putin for breaking Europe’s long peace since the end of the cold war. Public criticism, of course, will not change Mr Putin’s course. But it could begin to isolate him and cost Russia some of the soft power strength it gained from the Sochi Winter Olympics. That is important to Mr Putin.

Mr Obama has already spoken out. Other leaders, led by Germany’s Angela Merkel, and from India, Brazil, Japan and South Korea, should now follow to defend the most sacrosanct principle of the international system: the inviolability of Ukraine’s borders, territorial integrity and a country’s right to choose its own future.

Second, the US and Nato must begin to sanction and repudiate Mr Putin. The White House has all but said Mr Obama will not attend June’s Sochi Group of Eight Summit. The other leaders should announce they will also boycott. In addition, they should expel Russia permanently from the group.



Third, the US can take further concrete measures on its own. Washington can suspend negotiations on agreements important to Mr Putin such as the Bilateral Investment Treaty. In addition, Mr Obama should encourage Congress to enact additional sanctions on Russian leaders under the Magnitsky Act, and to look for other ways to end a business-as-usual attitude with the Russian Federation. The EU can suspend some of its own economic agreements with Russia to hit Mr Putin where it will really hurt.

Fourth, the US and Europe need to act quickly to provide concrete support to the shaky new government in Kiev. Together, they should announce an economic assistance package backed by a long-term IMF agreement to support the nearly bankrupt Ukrainian economy.

They might consider a creative way to demonstrate that support – a visit to Kiev by the foreign ministers of the US, Poland, Germany, the UK and France to stand with the new Ukrainian leaders. They should also give them some frank advice: go out of your way to signal acceptance and inclusiveness to the millions of ethnic Russians who were alienated by the revolution in Kiev. Do not give Mr Putin a rationale for further military adventures in Ukraine’s east.

Fifth and finally, Nato should reaffirm publicly its core promise to all members, the Article V pledge of mutual defence in a crisis. Mr Obama should call an emergency meeting of Nato leaders to reassure, in particular, the 10 new members from central Europe who were not so long ago part of the Warsaw Pact or the USSR itself. Nato, if necessary, should build up the collective defence of these countries. Nato, after all, is the only reason Moscow has not set its sights on Estonia, Latvia and Lithuania in particular.

Mr Putin chose this fight on ground familiar and advantageous to him. He won round one and is still on the move. But it is not clear if even he knows how the crisis may end. And his blunt use of force will not play well with the majority of Ukrainians or the world beyond.

The struggle for Ukraine is shaping up to be the kind of contest for power with the Russians that cold war US presidents managed so effectively. Advantage in such a long, twisting contest should shift, in the end, to the stronger, more mature and democratic governments. Mr Putin’s Russia is not among them.

Nicholas Burns is professor at Harvard’s Kennedy School and former undersecretary of state

FT

Merkel will not banish Britain’s EU demons

Margaret Thatcher was right. Campaigning to keep Britain in the EU, the former Conservative leader declared that Europe opened windows on the world that would otherwise close with the end of empire. To protect and promote its interests around the globe, Britain needed an anchor of authority and influence on its own continent. That was 40 years ago. Nowadays, it falls to Angela Merkel, Germany’s chancellor, to make the case for British engagement.

Thatcher’s argument, offered to the House of Commons before the 1975 referendum on EU membership, is not heard often in today’s Tory party. Hardline eurosceptics, who have wrenched control of policy from David Cameron’s government, shake a fist at geopolitical realities. Unshackled from the EU, they imagine, their plucky island nation would be restored to its rightful role as a global power.

The impact of such delusion is already being felt. There was a small glimpse of this when Ukrainian protesters gathered in Kiev’s Independence Square to overturn the government of Viktor Yanukovich.

A couple of decades ago, to the great credit of John Major’s government, Britain was a powerful champion of the efforts to extend security and democracy eastward. Yet the efforts to mediate in Ukraine devolved to Germany, France and Poland. Britain stood on the margins. Such has been the extraordinary narrowing of strategic focus that Mr Cameron seems more anxious to lock out immigrant workers from the former Communist bloc than to support Ukraine’s claim to a European future.

Ms Merkel was feted this week with lunch in Downing Street, tea with the Queen at Buckingham Palace and a rare audience of both houses of parliament in between times. The contrast with the low-key reception for François Hollande when the French president visited Britain a few weeks ago was no accident.

The German chancellor had been invited to make the case that her host has allowed to go by default. Mr Cameron well knows that she is an indispensable ally. His promise fundamentally to renegotiate the terms of British EU membership was never terribly credible. Without some rhetorical support from the continent’s most powerful leader, it would be entirely threadbare.

This insight has not been lost on Ms Merkel. One senior German official has been heard to remark – only a little unkindly – that she has two European missions: the first to rescue the euro, and the second to save Mr Cameron from his own political miscalculation. The open question is whether he has the political courage to help himself.

The signs are not encouraging. The prime minister has widened the channel separating Britain from the continent by overturning 40 years of British European policy. Hitherto, even when governments stood aside from this or that EU project, they have insisted on a seat at the table. Mr Cameron leaves an empty chair.

He had hoped – naively – that the promise of a second referendum would turn the tide of Tory Europhobia. The reverse has been true. Many sceptics demand changes in the terms of the relationship that they know well can be achieved only through departure. The original sin, you hear them say, was the transfer of sovereignty in the treaty of Rome.

Ms Merkel’s readiness to offer an eloquent counter-argument was not entirely altruistic. For Germany, the most important relationship in Europe will always be that with France. Without the Franco-German axis, the enterprise will founder.

Berlin, however, does not want an exclusive arrangement. It also looks for allies in the more freewheeling north of the continent. Britain is an obvious choice. Berlin worries too about Europe’s standing in the world. Ministers close to Ms Merkel make a telling point: what would it do for European prestige if the EU lost one of its most important, albeit troublesome, members?

So Ms Merkel wants to be helpful. Between the lines of her speech you could read that she will back reforms that promote a more outward-looking, competitive union. Some of the rules on social policy can be revisited and brakes applied to EU intrusions into matters better left to national governments. Protections can be offered to those nations that remain outside the eurozone.

There are, however, limits. Ms Merkel will not accept changes to the treaties or exemptions for Britain that would jeopardise the essential fabric of the union. For his part, Mr Cameron dare not list his demands with any precision for fear of inviting his party’s sceptics to dismiss them as inadequate.

So even as she asks Britain to stay, reprising Thatcher’s arguments about influence in the wider world, the chancellor is making plans against the possibility it will leave. The demarche in Kiev was a sign of things to come: Poland has begun to look a natural substitute for Britain as Germany’s northern ally.

There are lots of reasons why Britain has felt uncomfortable in the EU – why, in the phrase of Lord Patten, the former Tory minister and EU commissioner, it has never really “joined Europe”. Political culture, geography and imperial history have all played their part.

However, what most infuriates those now dragging it towards the exit is the idea of membership of a club Britain does not lead. A US secretary of state got it right some years ago. Never underestimate, Edward Stettinius wrote to president Franklin Roosevelt during the second world war, the difficulty an Englishman faces in adjusting to a secondary role after so long seeing leadership as a national right. As they say in Europe, plus ça change.

Fonte: FT

Editorial do Financial Times, Brazil’s economy: go-go to so-so

O editorialista do FT tem toda razão: demitir o Guido Mantega e colocar em seu lugar alguem com uma visão da economia "market-friendly traria grandes beneficios, mas como ele reconhece isto somente deverá acontecer depois da eleições. Alias, criticas da midia internacional simplesmente ajudam a mante-lo no cargo, já que nenhum governo aceitaria correr o risco de ser acusado de fracote na defesa da honra nacional. Já vimos este filme, quando Berlusconi foi duramente criticado pela The Economist.

It was a horribly public Freudian slip. Last week Brazil announced $19bn of budget cuts designed to shore up the country’s sagging credibility among investors. But during the presentation, the planning minister accidentally called President Dilma Rousseff “President Lula” – her charismatic predecessor who governed the country when it could seemingly do no wrong. Although the mistake was laughed off, it said a lot about Brazil’s transformation from a go-go country into a so-so.

During the boom years, when Mr Lula da Silva was president, Brazil grew on average 4 per cent a year – and in 2010 racked up an impressive 7.5 per cent spurt. Now, by contrast, its $2.2tn economy is teetering on the brink of a technical recession. Worse, nobody sees where future growth might come from. Brazil is even considered one of the “Fragile Five”, a group of countries considered particularly vulnerable should the US Federal Reserve increase interest rates.

Domestically, the country’s consumption boom has run out of steam. Low investment during the boom years has revealed itself as a series of growth-crimping supply bottlenecks. Externally, softening commodity prices have opened up a potentially worrying current account deficit. Equivalent to 4 per cent of gross domestic product, it is covered by foreign investment flows. But for how long? Private equity groups are just the latest investors to pull in their horns.

Ms Rousseff inherited some of these problems from her predecessor. Others stem from the worsening global environment. Yet as she approaches the end of her first term, many are of her making too.

A series of tax breaks and other “supply-side” measures designed to boost industrial production only widened the budget deficit, which was then fudged by creative accounting. She encouraged the central bank to cut interest rates, which stimulated the economy but also increased inflation. In addition, lower rates weakened the currency, which was much needed but provided another inflation boost. Combined with a bossy-boots, Dilma-knows-best style, the end result is that Ms Rousseff and her administration have lost credibility in the eyes of investors, and just when times are getting tough and she needs it most.

Still, all is far from lost – and that is not only true about the Brazilian soccer team’s chances in the World Cup. Almost everyone, in government and outside, agrees that the economy needs to change. The real question is how?

One constraint is October’s presidential election. Ms Rousseff’s popularity has recovered from last year’s street protests and she remains the favourite to win. Nonetheless, most believe she will postpone tough decisions until afterwards. (Few believe Brazil will achieve the mooted budget cuts as the cost of energy subsidies soars due to a long drought that has drained hydroelectric plants.)



Another way is to push ahead with Brazil’s ambitious infrastructure programme and boost growth that way. Yet while some projects now offer investors attractive terms, many others are languishing: an upgrade to São Paulo’s main airport has so far only led to a new car park. Lastly, there is the sheer unwieldiness of Congress. Ms Rousseff, a stern technocrat, lacks Mr Lula’s ability to cajole and push unpopular measures through.

All of this brings her back to square one. How to rebuild credibility? At least the central bank has been given free rein to boost interest rates to curb inflation, while Ms Rousseff has marketed the country, emphasising her commitment to low inflation and fiscal probity. The easiest way, though, might be to shake up her team. Guido Mantega, the finance minister, has long lost investors’ regard. Replacing him with a market-friendly candidate could do wonders. Alas, that is likely to be postponed until after the election too.


Fonte: FT

Adam Posen: Abe has good medicine but Japan needs a stronger dose

Japan’s recovery programme is showing promising early results. Last autumn the economy enjoyed its fourth successive quarter of growth, its best performance in more than three years.

Many observers rightly praise the Bank of Japan’s shift to positive inflation targeting for contributing to the country’s recovery. Yet monetary policy is only one of the three “arrows” called for in Prime Minister Shinzo Abe’s programme for the Japanese economy. Also important are fiscal consolidation and structural reform. These initiatives, too, are moving in the right direction with the right priorities. But like monetary policy, they need to be bold to succeed.

This is a stronger endorsement than it may seem. Too often, economic reform programmes fail to deliver. Some get the analysis wrong and end up driving the economy further into the ditch. This was the case in Japan in the 1990s when policy makers failed to recognise the risk of persistent deflation. Arguably, it has been the case with US fiscal policy since the 2009 stimulus.

Others get the analysis right but fail to prioritise, going after too many small goals at once as in Indonesia in 1998 or Greece today. Sometimes this reflects a belief that austerity measures alone will reform the economy. Such misplaced faith lies behind many of the euro area’s failures, as it did in Argentina’s a decade earlier. All too often, even sensible economic policies are undermined by an emphasis on process ahead of substance. For example, policy makers in Italy have long laboured under the self-defeating belief that governance must be reformed before the economy can be tackled.

So far, Abenomics has avoided all of these errors. The economic analysis was correct: a return to inflation will make it easier for taxes to rise and reforms to take hold, as they must if the country is to return to a sustainable path. Mr Abe has prioritised a few key reforms – notably increasing female labour force participation, consolidating farms, breaking down labour market divisions and raising competition in healthcare – which are sensible and feasible. The government has not wasted momentum on administrative initiatives before starting its economic reform efforts.

What is needed now is more of the same. The Abe government already has the right ideas; it does not need to devise new initiatives. Instead, it needs to raise its ambitions for the programmes it is already pursuing.

On the fiscal front, the prime minister’s basic plan can be summarised as follows: do not panic. Raise the consumption tax permanently in steps. Spend for emergencies but make those expenditures temporary. Increase taxation and cut expenditure on the older generation that has already benefited from intergenerational transfers.



But Mr Abe needs to be bolder. On the consumption tax, for example, the limit of his aspirations is to increase the levy to 10 per cent over the next 20 months. Even this may be postponed. The government should commit to do far more – raising the tax to at least 20 per cent over the next several years, a level common in the OECD.

Similarly, increasing female labour force participation is the right priority for structural reform. At least 3m Japanese women who could work are neither in employment nor looking for a job. A few million more are squandering their capabilities in limited roles.

Providing affordable child care, and visibly removing the cultural and institutional barriers that prevent women from advancing in the workplace, are proven approaches for achieving this goal. Mr Abe is right to pursue them. But instead of providing 150,000 new nursery places, the government should be creating as many as 400,000. Instead of setting a target for 30 per cent of public sector managers being women, and voluntary guidance in the private sector, it should be setting a compulsory target of 40 per cent for both.

Likewise in the agricultural sector. Production quotas are being removed, which will raise productivity, but more should be done. Small farms should be merged to make them more efficient. Wage subsidies for new hires should be applied nationally, instead of current measures that loosen hiring rules only in special zones.

In short, the Abe government has understood Japan’s economic problems correctly and concentrated its efforts on areas where it can do most good. But the efforts have been insufficient. Far greater ambition is required. True, half a loaf of reform is better than none. But it is probably not enough to return the Japanese economy to sustained strength.

For Mr Abe and his cabinet, economic revival is a means to an end. They want Japan to remain a vital ally – in both senses, energetic and necessary – to the US and Asian neighbours worried by the potential pressures from China. That would require annual growth of about 2 per cent, and a tax base that permanently closes the structural budget deficit. Mr Abe’s current programme is insufficient to achieve this.

The good news is that meeting an external threat is a stronger impetus for reform than growth alone. The Meiji revolution of 150 years ago was prompted by Japan’s desire to stand up to colonial pressures, such as Admiral Perry’s fleet. It produced an economic transformation. If Mr Abe wants to restore Japan to strength, he needs to raise his ambitions.


Adam Posen is president of the Peterson Institute for International Economics

FT

An east-west battle over Ukraine can be avoided

Amid the tragedy, euphoria and confusion in Ukraine, the risks of renewed confrontation between Russia and the west are rising. An east-west struggle over the fate of Ukraine would be a tragedy for the country – increasing the risks of civil war and partition. But while a brutal arm-wrestling match between the Kremlin and the west – with Ukraine as the prize – is a distinct possibility, it is absolutely not in the interests of Russia or the west. On the contrary, the Russians, Europeans and Americans have a common interest in preserving Ukraine as a unified country that avoids civil war and bankruptcy.

Talk of “common interests” between Russia and the west in Ukraine risks being dismissed as pious and unrealistic. It should not be. Just before the downfall of Viktor Yanukovich as Ukraine’s president, there were promising signs that Russia and the EU could work together. When three EU foreign ministers negotiated a shortlived deal with Mr Yanukovich, they were joined by a Russian representative. Vladimir Lukin, the man sent by President Vladimir Putin’s government, is Russia’s human-rights ombudsman and somebody with a background in liberal politics – not a Kremlin stooge.

Of course, the combustible ingredients for an east-west confrontation over Ukraine are also very visible. Over the weekend, Susan Rice, the US national security adviser, warned that it would be a “grave mistake” for the Russian government to send troops into Ukraine. Meanwhile, Sergei Lavrov, the Russian foreign minister, has expressed anger that the deal witnessed by Moscow’s representative unravelled so quickly, and has accused the crowds in Kiev of being led by “armed extremists and pogromists”, as well as “rampaging hooligans” – the kind of talk that could be used to justify Russian intervention.

Behind this heated rhetoric there is a genuine clash of interests and viewpoints. Many Russians find it hard to accept that Ukraine should even be an independent country in the first place. And while the Putin government has accepted the legal reality of Ukrainian independence, it also sees the country as vital to Russian security and part of its natural sphere of influence and cultural hinterland. The EU has been deeply ambivalent about promising Ukraine eventual membership of the EU – fearing the impact of admitting another large, poor country. But the Europeans and Americans do feel that it is crucial to stand up for the principles of democracy and self-determination in Ukraine.

Both Russia and the western powers have a conspiratorial view of the other side’s role in Ukraine. The Russians see the hand of western intelligence agencies behind the demonstrations in Kiev. The west tends to assume that Mr Yanukovich and his henchmen were simply the puppets of Moscow.

In western capitals, the Kremlin’s operatives are seen as ruthless, corrupt, violent and deeply cynical. In Moscow, western policy makers are portrayed as hypocritical, double-dealing and intent on destroying Russia as a global power, while mouthing liberal pieties. This is not a promising backdrop on which to build international co-operation over Ukraine. And yet that is precisely what needs to be done – in everybody’s interests.

A civil war in Ukraine would be a disaster for Russia: violence and refugees would spill across the border. The fate of Russia’s naval bases in the Crimea, which is part of Ukraine, would immediately come into question. And Russia’s relations with the west would inevitably be poisoned. The country would risk being thrust back into a cold war with the west – but this time without a protective cloak of Soviet satellite states.

A Ukraine at war would be no less of a disaster for the EU. With conflict already raging in Syria, it would mean that the EU now had bloody, civil conflicts on both its southern and eastern borders. The economic collapse of Ukraine and a default on its debts – both distinct possibilities – would also damage both Russia and the EU.

If Russia and the western powers are to work together, they both need to make some concessions to each other’s point of view. The US and the EU could acknowledge Russia’s security concerns by making it clear that Ukraine will not be offered membership of Nato in the foreseeable future. They could even make this a written commitment – since the Russians insist they were double-crossed over informal assurances they claim were given about previous rounds of Nato enlargement.

In return, the Russians should drop their objections to Ukraine’s aspiration to join the EU – and accept that the country’s eventual economic integration with the EU need not be a zero-sum game that damages Russian interests. The Russians might also be reassured by the ample evidence that Brussels is in no hurry to rush Ukraine into the EU club.

Above all, the best way to avoid Ukraine being pulled apart in an east-west tug of war is to accept that the political fate of the country can only be decided by Ukrainians themselves. That means that it is crucial that the presidential elections held in May should be clean and free of outside interference. Since neither Russia nor the EU would trust the other party to guarantee the integrity of the process, the UN – which has experience of running elections all over the world – should be entrusted with the task of overseeing the rebirth of Ukrainian democracy.


Gideon Rachman


Fonte: FT

Low inflation can be a disease not a cure

Calma, calma... ele não esta analisando o cenário brasileiro. A inflação no grande bananão insiste em não convergir para a meta definida pelo Copom. Culpa de quem? Sim, é dele mesmo....

Why are you so grumpy again? What wrong with low inflation?

Nothing, so far – but you can have too much of a good thing. Inflation is also low and edging downwards in the US, Japan and the eurozone. Yet in all these places, interest rates are low and central bankers have printed enough money to get the tinfoil hat brigade screaming about hyperinflation. Such low inflation might be an indication of trouble ahead.

Are you saying that low inflation is a bad thing, or are you saying that low inflation is merely a harbinger of doom?

A bit of both – but mostly I am concerned that low inflation is a bad thing in itself. One issue is that unexpectedly low inflation redistributes from borrowers to creditors.

About time too, most savers will be thinking.

I hear you. Still, borrowers are more likely to be cash-constrained (that’s why they are borrowers) and are more at risk of bankruptcy. That means lower-than-expected inflation may damage the economy as a whole rather than just moving money from one person’s pocket to another’s. And there’s another problem with deflation: the “lower-bound” problem.

What’s that?

It’s a fancy way of saying that nominal interest rates can’t fall below zero. If inflation is, say, 4 per cent then a central bank can give an economy a shot of adrenalin by cutting interest rates after inflation to minus 3 or minus 4 per cent. If inflation is 0.7 per cent – as it’s currently estimated to be in the eurozone – then that’s impossible.

Why would anyone want real interest rates of minus 4 per cent?

Usually we wouldn’t. But, against the backdrop of a slack economy, such rates would be a strong incentive to spend. And if outright deflation took hold, effective interest rates would rise: people would earn money simply by sitting on their cash and waiting for prices to fall. Sounds great but for an economy it’s a disaster. If nobody buys anything there will be a recession and more deflation – a vicious spiral.

But that isn’t going to happen. Is it?

Don’t ask me, I’m an economist. We never know what’s going to happen to the economy. But it is a serious enough problem that even a low risk is worth losing sleep over.

Is there a constructive response?

In the case of the US and the UK, there’s always “hope for the best”. Both economies have been growing in a more-or-less encouraging fashion. One could try cutting taxes and raising government spending but it may be too late.

What about this forward guidance business?

Yes, an awkward affair. In principle forward guidance makes sense: the idea is to promise to keep interest rates very low until some condition is met, even if the economy might benefit from higher rates down the track.

Why make such a promise?

Because promising low rates for a long time is the next best thing to cutting rates below zero. Imagine buying a house: a mortgage rate of minus 3 per cent might be nice; but a promise that interest rates will be held artificially low for a while is almost as good, if you believe the promise.

That all makes sense.

Yes, but recent experiments with forward guidance haven’t been a huge success. Bank of England governor Mark Carney tied his forward guidance to unemployment rates, and unemployment rates promptly plummeted, so his attempt to commit to low interest rates ended up meaning very little. Still, it was worth a try.

This all seems flimsy. Are there any other approaches?

Most of these central banks are targeting inflation of 2 per cent, or something along those lines. But four years ago IMF chief economist Olivier Blanchard proposed a sharp break with that tradition. He floated the idea of a 4 per cent inflation target next time round. The thinking makes some sense: as long as interest rates and salaries tend to adjust, a higher target should cause little harm in good times and provide a great deal more room for manoeuvre in severe recessions.

That sounds radical.

Agreed. It’s never going to happen, which is a shame. But from the standpoint of today’s sluggish growth all Mr Blanchard’s advice would amount to is: “Next time let’s start from somewhere else.”


Tim Harford


Fonte: FT

Emerging markets can learn from America’s bank stress tests

Five years ago next Tuesday, an embattled US Treasury announced that it would conduct “stress tests” of America’s largest banks. The idea was to reassure the markets of the stability of solvent institutions, and force weaker ones to repair their balance sheets.

Some academics still question whether this exercise was rigorous enough. There is controversy, for example, about how much capital modern banks need, and how far asset prices can reasonably be expected to fall in the event of another crisis. But one thing is clear: stress tests were surprisingly effective in helping to turn investor confidence around.

In February 2009 bank shares were falling sharply, and a poll by Bank of America Merrill Lynch found that investors were so nervous about global banks that half of them had allocated a smaller proportion of capital to the sector than the industry average.

Today, however, 28 per cent of equity investors are overweight on global bank stocks, after a year in which US banks stocks rallied by 35 per cent. This is the most optimistic reading since the survey began a decade ago and the highest “overweight” of any equity sector. The securities that inspired terror five years ago have become investors’ favourite pick – more popular even than technology stocks.

There are several lessons here. One is that investor sentiment can move in dramatic cycles. Another is that market participants are no longer in the grip of crisis mentality.

It is not only in relation to the banks that investors now have a cheerier view of the world. These days the region of the world most beloved of equity investors is Europe: almost half of all fund managers want to be overweight in this region, since they think the market is undervalued. A separate survey by Deutsche Bank echoes that theme: more than a third of hedge funds apparently deem Europe the most exciting place to invest.

Elsewhere, skies are darkening. Almost a third of fund managers are now underweight in emerging market equities, a record level of pessimism – and a stark contrast to February 2009, when half were overweight. And investors think the biggest threat to growth now comes from China, the former market darling. It is a striking reversal, and one that – painful though it may be at the moment – contains an encouraging moral for emerging markets. If sentiment has swung so dramatically in the past five years, it could swing back sooner than many now foresee.

If you look back at the trajectory of sentiment towards banks, some of the improvement can be attributed to stronger US growth. Recent stabilisation in Europe has been important too. But charts suggest that the turning point in sentiment and share prices was in February 2009. That shows that credible stress tests, accompanied by measures to recapitalise the banks, can be a potent policy tool. This has big implications for Europe, given that it has hitherto produced less-than-credible stress tests (although people such as Axel Weber, head of UBS, insist that the next, third, set of stress tests due later this year will be much tougher than before).

There is a wider point too: at times of investor gloom decisive and credible government policy can sometimes act as a powerful inflection point. It is never easy to tell which event will trigger that sentiment shift; five years ago some observers doubted that the US stress tests would work given that Washington had for months been in denial about the scale of the banks’ problems, and repeatedly botched its efforts to sort them out. Indeed, there was concern the financial crisis could get worse,

But as turmoil bubbles around emerging markets, investors and Group of 20 ministers might do well to ponder that lesson – and ask what it might take for one (or several) of the emerging market governments to repeat the same trick? Is there another set of tangible policy reforms that could be produced and start to turn sentiment around? If so, what might be the 2014 equivalent of a stress test?

Do not expect the answer soon; right now denial and blame is the theme of the day in many emerging markets. But do not ignore the potential for surprises in the next few years. The cure for market turmoil can turn out to be as surprising as the cause.


Gillian Tett


FT

Mexico and Nafta at 20. Why it went wrong for one of ‘Tres Amigos’

Twenty years into Nafta, Mexico has too many criminals and not enough policemen; too many workers earning low wages and not enough skilled jobs; too many false dawns and not enough economic growth.

Such concerns would make for a poor conversational gambit when Enrique Peña Nieto, the Mexican president, proudly hosts his US and Canadian counterparts, Barack Obama and Stephen Harper, in Mexico on Wednesday for their annual check-up on the North American Free Trade Agreement.

So instead he could cast them another way for the so-called “Tres Amigos Summit”. Mexico’s main problems on Nafta’s 20th anniversary, he could say, stem from the fact the country had too many macroeconomists and not enough microeconomists.

That might sound bizarre. Yet, if it was the other way around, Nafta might not be viewed as critically as it is by many now – and Mexican wages (and Mr Peña Nieto’s domestic ratings as opposed to his soaring international standing) might be better too.

Since the three countries inked Nafta in 1994, the US has not suffered “a giant sucking sound” of jobs disappearing south across the border. Canada has also maintained its cultural distinctiveness. But Mexico, while a rising star, has not quite become the developed country it thought it would.

Instead of a process of inexorable convergence, per capita Mexican gross domestic product remains a fifth of that in the US – exactly where it was in 1994. What went wrong?

For one, the world changed dramatically around Mexico.

China rose as a manufacturing power, displacing Mexican manufacturers. The 9/11 terrorist attacks caused the US to boost security, especially along its southern flank (border delays today cost the US and Mexico an estimated $6bn a year).

Mexico also made a transition from one party rule – a boon for democracy, if not always effective governance. Lastly, new technologies such as fracking transformed North American energy markets.

One problem for Mexico is that, even as the world changed around it, Nafta stayed the same. Indeed, for all the growing talk of a united “North America”, Nafta remains a series of often lukewarm bilateral relationships rather than a trilateral one.

On the political front, Mr Harper and Mr Obama have no particular chemistry, while bilateral relations are hung up over the Keystone XL pipeline. Mexico-Canada relations have stiffened since Canada decided Mexican visitors need visas. US-Mexican relations always ebb and flow.

Economic affairs have similarly waxed and waned. Regional supply chains have deepened, yet this process is not reflected in greater intra-regional trade. Today 40 per cent of total North American trade takes place within Nafta, slightly less than in 1993. (In the EU, intra-regional trade is over 60 per cent.)

None of these factors helped Mexican convergence, but they were also largely outside the country’s control. Of more fundamental importance for Mexico’s wellbeing was the huge list of microeconomic reforms it left undone while embracing macroeconomic change.

These include liberalising energy markets and breaking-up local oligopolies, to removing structural bottlenecks, such as a notoriously poor education system, and a high degree of labour informality.

After stonewalling these reforms for 12 years, Mr Peña Nieto’s ruling Institutional Revolutionary Party is now working to make many of them happen, to international if not always local applause.

Industrial policy is also enjoying a new life, in contrast to the mantra 20 years ago that “the best industrial policy is no industrial policy”. Today, there is more talk of “industrial clusters”. These are designed to encourage greater backward linkages into the domestic economy by Mexican manufacturers that more often assemble inputs made elsewhere.

All of these microeconomic policies have a single, crucial vanishing point: to boost Mexican productivity. If Mr Peña Nieto can pull that off, Mexican real wages will rise – as will his domestic popularity.

Fears in Ottawa and Washington about Mexican immigrants would also diminish. Greater prosperity might even reduce the lure of organised crime. And future Nafta summits would more likely be a true meeting of “Three Amigos” rather than an at-times uncomfortable photo-opportunity as they often are now. Who would have thought that microeconomists could play such a large role?


John Paul Rathbone


Fonte: FT

Philistines may carp but scientists should reach for the sky

In 1969 Robert Wilson, director of the National Accelerator Laboratory, was testifying before the US Congress. He sought funding for a particle accelerator (forerunner of the Large Hadron Collider at Cern where the Higgs boson was discovered in 2012). Asked by Senator John Pastore how his project would help defeat the Russians, he responded: “It only has to do with the respect with which we regard one another . . . are we good painters, good sculptors, great poets . . . new knowledge has nothing to do directly with defending our country except to help make it worth defending.”

This position requires occasional reaffirmation. It is sad that Senator Tom Coburn is stepping down from the Senate because of ill health, but less sad that he is stepping down. The blend the Tea Party brew is rather weak for Mr Coburn, who believes research should be useful and has firm views of what is useful. Research into how we ride bicycles (an interesting subject, in my view: most people can, a few cannot, and neither those who can nor those who cannot really understand how or why). If Mont Hubbard of the University of California at Davis can tell us how, he deserves a medal if not a Nobel Prize, though his bicycling robots are easy to mock.

But Mr Coburn’s greatest ire was reserved for the funding of political science. He believes that people who want to understand politics can watch Fox News – though he conceded that some might prefer to pay attention to CNN and MSNBC. Last year he tagged an amendment to an omnibus bill that blocked grant funding to academic research in this field. But American political scientists are rejoicing this month; the prohibition lapsed in the latest Congressional budget compromise.

Politicians can always win cheap laughs by reading out the titles of research projects they do not understand. In the early years of Margaret Thatcher’s premiership, her minister Sir Keith Joseph tried to abolish the then Social Science Research Council, but a report commissioned from Victor Rothschild failed to deliver the desired verdict.

Rothschild used the example of research on “kinship and sex roles in a Polish village”, a project description that had provoked much merriment in the UK public accounts committee. A respondent pointed out that the work showed how the inefficiency of fragmented land holdings increasingly tended by ageing women gave rise to economic cost and political tensions. We now know that such tensions grew in Poland in the following decade. And then the Berlin Wall came down.

Anthropology helps us understand the world, in ways that are helpful whether we are talking about the internal contradictions of communism or the pathologies of financial crises. And ideas frame the world in which we live. Stalin is supposed to have laughed at Papal criticism, asking how many divisions the Pope had at his disposal. Yet in the long run it was the Pope who proved more powerful.

The British Academy last week published an explanation of the rationale for research in humanities and social sciences. (Full disclosure – I feature in a case study.) But what is the purpose of studying history and literature? Because they make us what we are. Jonathan Bate, the literary scholar, quotes the Duke of Marlborough as saying “the English get their history from Shakespeare and their theology from Milton”, and perhaps they do. No doubt the grain merchants of Athens asked what Plato was doing to improve their harvests, and the goldsmiths of Pisa, their feet firmly on the ground, asked Galileo what use was gravity. The philistine fixation with temporary utility is swamped in the long run by the enduring power of ideas. And just one discovery such as calculus, gravity or democracy will pay for a lot of research.

Of course, there is a lot of bad and useless research. But as the Polish example illustrates, it is difficult to decide which research is useless or how research will influence our lives. The most immediate practical offshoot of particle physics research had nothing to do with particle physics at all: the worldwide web began as a means of enabling the scientists involved to keep in touch.

Pastore, questioning Wilson, was not asking what particle physics would do for the shopkeepers of Rhode Island. He was throwing an easy ball to a scientist whose objectives he supported. We need another Pastore, not another Mr Coburn.




John Kay


Fonte: FT

Renzi will not revive Italy with reforms alone

Matteo Renzi is close to achieving his great ambition. Now what?

Italy’s new prime minister will have the most difficult job in Europe. Once confirmed, he will preside over a country with three fundamental economic problems: it has very large debt; it has no growth; and it is a member of a poorly functioning monetary union.

This situation is economically untenable. Unless Italy returns to growth, its debt will become ever more crippling, ultimately making its position in the eurozone impossible. The premier’s job may be difficult, but it can be stated simply: change one or more of those three variables – without leaving a mess behind.

Naturally, there are different views about what needs to be done. There seems to be some agreement that the outgoing administration did not do enough. I never ceased to be amazed by Enrico Letta’s phlegmatic attitude to reform. It is a year now since the Italian elections, and 10 months since Mr Letta took office. In that time, precious little has happened.

Mr Renzi said many times that the Letta administration was not working properly. The question is whether Mr Renzi has a sufficiently clear understanding of what needs to be done, and whether he has a big enough parliamentary majority to support him through the swamp of economic reform policies. On the former, I am moderately optimistic. On the latter, I am not. The standard answer about what Italy needs to do is some combination of economic reforms and fiscal consolidation.

This is not completely wrong. In Italy, the case for structural reforms is overwhelming, but I doubt it would be sufficient. To see this, recall the sheer scale of Italy’s economic underperformance. According to my calculations Italy’s gross domestic product is now 15 per cent below the trend the economy was on during the 1990s. It is not the financial crisis that did the damage in Italy. It is the euro itself.

If you lose 15 per cent of something, you have to grow by about 18 per cent to get back to where you started. It is a bit like catching a running train. This number is a rough measure of the scale of Mr Renzi’s task.

I do not mean that he should raise GDP by that amount in the next four years. This is impossible. But he could get the country back on to a trajectory that will eventually close the gap – or most of it. Still, even this it is a tall order. It is a bigger adjustment than the one that Germany has gone through or the one that France is just now beginning.

How much can structural reform achieve? An optimist would point to studies such as those by Lusine Lusinyan and Dirk Muir of the International Monetary Fund. Imagine a parallel universe in which Italy implements a wide range of the structural and labour market reforms right this minute. According to the authors, this would eventually increase GDP by 13 per cent over what it would otherwise have been. Interestingly, and contrary to popular perception, labour market reforms matter less than product market measures such as services liberalisation. If you add in fiscal reforms, the impact could be as high as 20 per cent. Job done.

I doubt those numbers are achievable. For a start, reforms never get implemented in totality – certainly not by an Italian coalition government. Even in Germany 10 years ago the reforms were not implemented in the way they were drawn up.

Furthermore, long-term forecasts are always speculative. We do not know that the economy will behave in the same way as in the past, now that interest rates are close to zero and the banking sector is dysfunctional. Longstanding correlations between economic variables may begin to break down.

Reforms, necessary as they may be, cannot do the heavy lifting all on their own. To keep Italy in the eurozone, Mr Renzi will also need help from the European Central Bank. And that means he needs to shift the macroeconomic debate inside the EU.

Four things must happen; not all of them are under Mr Renzi’s control. First, eurozone inflation must be prevented from persistently undershooting the inflation target, as it has been recently. Second, Italy needs lower market interest rates, which would require further unconventional policy measures. Third, shaky banks must be restructured and crumbling ones closed, and a “bad bank” set up to hold the debris. Fourth, massive current surpluses in Germany and the Netherlands will have to fall. These surpluses are making it extremely difficult and painful for the eurozone periphery to adjust. Mr Renzi should channel his rebellious spirit and make this case to his northern neighbours.

For the Italian economy to return to a sustainable path in the eurozone, Mr Renzi will need to sort out the banks and stand up to his European partners. His predecessors may have left it too late. The task may now be simply impossible. To succeed, Mr Renzi will need skill, clarity, determination and, most of all, a lot of luck.

Wolfgang Münchau


FT

Mohamed El-Erian: Emerging-world fashions that change with the seasons

As I prepare to step down from Pimco at the end of March, emerging markets are once again in the news for all the wrong reasons. In Argentina the currency has collapsed, Thailand and Ukraine are riven with political conflict, and Turkey is shaky.

These developments are reminiscent of the turmoil in January 1998 when I first moved to the private financial sector after 15 years at the International Monetary Fund. Then, Thailand was reeling, South Korea was on the ropes, and both Russia and Argentina were on their way to sovereign defaults.

A recurrence of the blues in emerging markets is not what conventional wisdom expected just a short while ago. For years experts had argued that these once-ailing economies had grown strong. Bank balance sheets had been strengthened. International reserves were much larger and government debt lower. Institutions were no longer financing themselves by issuing lots of short term debt that had to be repeatedly refinanced. Governments had enacted sensible reforms. Even in the harsh winds of the 2008 crisis, the emerging world did not catch a dreadful cold.

Excessive enthusiasm for emerging markets is far from the only intellectual fashion that I have seen come and go during the past 16 years. Another was the view that western central banks possessed all the tools necessary to secure a great economic and financial moderation; one that guarantees sustained growth, jobs and price stability. But it is in characterising the role of banks in a modern market economy that commentators have been at their most faddish.

At one time a largely unfettered banking system was seen as providing the most efficient way to channel funds to productive investments that create jobs and prosperity. Since banks were thought to embody strong self-correcting forces, they could be regulated with a light touch. These days, however, the banking industry is regarded more as a leech. Banks are seen as suffering from serious institutional and human imperfections. Their main function is the enrichment of insiders. Weak competition helped. Access to emergency bank funding and insurance paid for by taxpayers gave financiers a cushion when the music stopped. This, anyway, is the currently fashionable view. It, too, is an old one. It prevailed in the 1980s when western banks had to be bailed out after an irresponsible lending spree in Latin America. The 2008 crisis has given it new life.

In some ways today’s financial sector is little different from the one I first got to know decades ago. Markets still get overexcited when things are going well, only to go into a torpor when the skies darken. If anything, an even bigger amount of money turns on significant mood swings, threatening at times to tear the pendulum off its pivot.

Human behaviour plays a role here. Market participants, whether in banks or asset management, have their comfort zones and gut reactions. They are influenced by the quarterly earnings ritual and ever-shorter performance measurement periods. And they move in herds.

“A sound banker is not one who foresees danger and avoids it,” wrote John Maynard Keynes, “but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” For too many banks, it still makes more sense to risk failing conventionally than try to succeed unconventionally.

Then there is the influence of internal market dynamics. Market participants react to one another’s trades in ways that cause movements in asset prices that do not seem to reflect their underlying worth.

Innovation and financial globalisation have played a part. It was once difficult for investors to make bets on far-flung corners of the world economy, such as Kazakh banks and Nigerian breweries. Now they can do so through exchange traded funds listed on western stock exchanges. In good times, this helps capital reach more places faster. But it can also make markets more volatile, and make it easier for instability to spread.

Emerging markets are particularly vulnerable to this phenomenon. They are far more reliant on flighty foreign money – unlike western markets, which are deep with capital from domestic savers. This accentuates both the ups and downs.

Financial upheavals reverberate in the real economy. In moments of excessive euphoria, credit flows too freely, bad loans are made and currency appreciation makes domestic producers less competitive. When the tide of money suddenly reverses, the consequences can include a credit crunch, recession and, in the worst cases, widespread insolvency.

Yet not everything has gone full circle. Regulators and shareholders no longer allow banks to make such risky bets, even though they hold more capital. Instead, more credit is extended by institutions that have less systemic importance, and can more easily be allowed to fail. Central banks have found quicker ways to deal with malfunctioning markets. And many more trades now take place under the spotlight of public exchanges.

On the surface, today’s financial system appears much more sophisticated than the one I joined 16 years ago. But because basic human behaviours remain the same, some of its underlying characteristics have not changed much. Today’s banks are still capable of both doing good and also causing damage. Prompted by regulators and public opinion, they have learnt from mistakes. But if they are to strike that still-elusive balance between efficiency, innovation and soundness, they have much left to learn.

Mohamed El-Erian

Fonte: FT

A dose of humility from the central banks

The leading central banks in the developed economies have, of course, been the main actors underpinning the global bull market in risk assets since 2009. For long periods their stance has been unequivocally dovish as they have deliberately tried to strengthen an anaemic global economic recovery by boosting asset prices.

In the past week, we have had major statements of intent from Janet Yellen, the new US Federal Reserve chairwoman; from the European Central Bank; and from the Bank of England. After multiple hours of fuzzy guidance about forward guidance, the clarity of previous years about the global policy stance has become much more murky. Central banks are no longer as obviously friendly to risk assets as they once were – but they have not become outright enemies, and they are unlikely to do so while they are concerned that price and wage inflation will remain too low for a protracted period.

It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week.

The Federal Reserve

The first point to make about Ms Yellen is that she has declared herself to be the agent of continuity not the harbinger of a significant regime shift at the Fed. Most observers (Tim Duy, for example) would say that this was always obvious but we should not allow the arrival of a new Fed chief to pass without noting that Ms Yellen does not see herself as a game-changer like a Paul Volcker or a William McChesney Martin.

They both took dramatic action to control inflation. In a similar vein, many members of Ms Yellen’s intellectual grouping at Berkeley – Christina and David Romer and Brad DeLong are prominent examples – wanted her to declare a regime shift designed to shock the US economy back towards the pre-2008 trend line. That would have involved targeting a recovery in gross domestic product of 10 per cent or more from present levels.

Why has she not done this? One compelling reason is that the members of the Federal Open Market Committee would not have supported her in sufficient numbers, and she wants to be seen as a “committee person”. Another reason is that President Barack Obama does not come from the same economic mould as FDR, so the fiscal part of such a regime shift is not on the agenda. A final reason is that she does not seem convinced that a further large dose of asset purchases would be successful anyway, in the context of a large drop in both productivity growth and the labour participation rate.

Economists at the Fed, like the Congressional Budget Office, have been moving towards supply-side pessimism, implying that more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.

There are also signs of supply-side pessimism at other central banks.

The Bank of England

The BoE’s latest Inflation Report has reduced productivity growth projections, and says that the amount of spare capacity in the economy is only 1-1.5 per cent of GDP, despite the fact that the level of GDP is still below the 2008 peak. To the extent that its latest phase of forward guidance is decipherable, the BoE seems to be eager to reassure markets that the bank rate will rise very gradually, and to a low end point, but it does not fully eliminate the possibility that the first UK interest rate rise will come this year.

The European Central Bank

The ECB also has a pessimistic view of the supply side, which explains why it does not see any urgent need for a big monetary policy change as inflation drops towards zero. That does not mean it will refuse to cut interest rates into negative territory next month. My interpretation of the supposedly “neutral” steer from Mario Draghi’s press conference on Thursday last week is that the ECB president said only that more information would be needed before action would be taken. That information would come in the form of the ECB’s inflation forecast for 2016, which would be published earlier than usual.

A sensible guess at that forecast can be made, given that it will depend on market forward rates for oil prices, which are falling. JPMorgan reckons the likely forecast for eurozone inflation in 2016 will be 1.5 per cent, compared with 1.2 per cent in 2015. That seems to offer Mr Draghi enough evidence of a prolonged period of exceptionally low inflation, which is what he needs to get the German Bundesbank to support action. But it does not point to a threat of outright deflation, without which ECB balance sheet expansion looks improbable. Mr Draghi went out of his way to differentiate between these two different states of the economy last week.

Conclusion

If the central banks are becoming more pessimistic about the supply side, this could spell danger for markets that have perhaps already priced in a strong medium-term recovery in GDP towards previous trends. Without the prospect of this GDP recovery, the high share of profits in current GDP could start to pose problems, especially if the central banks are expected to raise short rates within a year or two. Regardless of the path for short rates, asset purchases are petering out everywhere except in Japan, and Chinese liquidity withdrawal is adversely affecting Asian monetary conditions.

Yet the prospect of genuinely hostile central banks for markets still seems some way off. Above all else, policy committees seem highly uncertain about the right path for interest rates now that asset purchases are ending. But there is an emerging degree of consensus that global inflation, notably wage inflation, remains inconsistent with their mandates.

The Romers wrote: “Central bankers should have a balance of humility and hubris.” At present, they seem to be leaning towards humility about what they know and can achieve. In an environment of unavoidable doubts about the labour market constraints that they are facing, it seems that they will let wage inflation increasingly act as the judge and jury for the stance of policy. Their latest refrain is that inflation will return to target, but only over a prolonged period, and that wage inflation will be the crucial signal.

Only when wage inflation starts to rise should markets really start to worry.


Gavyn Davies

FT

Philip Stephens: Yellen, tapering and a moribund G20

So there you have it. The US Federal Reserve sets monetary policy to fit conditions in the US economy. If decisions taken by the Fed cause collateral damage elsewhere, well, tant pis. So much for global governance.

Janet Yellen was loud and clear in her testimony to Congress this week. In so far as the Fed’s policy of withdrawing monetary stimulus had spooked markets in emerging economies, the turbulence did not represent a “substantial risk to the US economic outlook”. Put this another way: the world’s most powerful central bank pays attention to what happens in China, India or Turkey only in so far as it washes back over the US.

In one respect, the Fed chairwoman was offering a statement of both the obvious and the politically prudent. The duty of the Fed is to promote the economic wellbeing of the US. Had Ms Yellen said it was tailoring its tapering programme to the wishes of policy makers in Beijing, Delhi or Ankara, her first appearance before Congress as chairwoman might have been her last. Members of the House of Representatives are not noted for their devotion to multilateralism.

The emerging economies take a different view. Raghuram Rajan, India’s central bank governor, hasattacked the US for its apparent indifference to the global upheaval as rising states have been forced to raise interest rates in the face of Fed tapering. He has half a point: while the west headed into recession after the global financial crash, it was growth in the emerging world that kept the economic show on the road. Now that the US is recovering, it has returned to the old selfish ways.

The snag is that had Mr Rajan been in Ms Yellen’s seat he would have said much the same thing. Like the Fed, the Indian central bank sets interest rates to suit national economic conditions. The governor answers to Indian politicians. They would not applaud a policy framed to accommodate the concerns of central banks elsewhere.

I suspect that Mr Rajan would say the dollar’s position as the world’s reserve currency places a special responsibility on the Fed. But for as long as India, China and the rest remain jealous guardians of national sovereignty, asking the US to adopt a uniquely internationalist stance is futile.

There was a moment in the immediate aftermath of the global financial crash when governments from the advanced and rising states seemed ready to break the cycle of selfishness. In the early meetings of the Group of 20 nations, policy makers recognised their national interest in the mutual endeavour to prevent a slide into a 1930s style-recession.

It did not last. The passing of the immediate crisis has seen meetings of the G20 fall into the familiar pattern of such international gatherings: the responsibility to act in the wider global interest always belongs to someone else. None have been more jealous guardians of national prerogatives than the emerging economies.

The facts of economic interdependence cannot be wished away. At some point turbulence in the rising world may well exact a toll on the US; at which point, presumably, Ms Yellen could argue that countervailing action was in the US national interest. But this represents a strategy of waiting for the damage to be done. What a waste.

Less than two months in to 2014, parallels with events a century ago, when the first world war put an end to an earlier era of globalisation, are already wearing thin. In an eloquent speech in London the other day, Christine Lagarde, the managing director of the International Monetary Fund, suggested that policy makers should focus instead on another anniversary.

The 44 nations who gathered at Bretton Woods in 1944, Ms Lagarde observed in her BBC Dimbleby lecture, understood the connection between interdependence and collective action. The architects of the IMF and the World Bank looked beyond the deceptive lure of unvarnished sovereignty.

At this, the original multilateral moment, the representatives of 44 nations, Ms Lagarde recalled, “were determined to set a new course – based on mutual trust and co-operation, on the principle that peace and prosperity flow from the font of co-operation, on the belief that the broad global interest trumps narrow self-interest”.

Now there’s a manifesto for the G20.

Philip Stephens

Fonte: FT

Martin Wolf: Enslave the robots and free the poor

In 1955, Walter Reuther, head of the US car workers’ union, told of a visit to a new automatically operated Ford plant. Pointing to all the robots, his host asked: “How are you going to collect union dues from those guys?” Mr Reuther replied: “And how are you going to get them to buy Fords?” Automation is not new. Neither is the debate about its effects. How far, then, does what Erik Brynjolfsson and Andrew McAfee call The Second Machine Age alter the questions or the answers?

I laid out the core argument last week. I noted that the rise of information technology coincides with increasing income inequality. Lawrence Mishel of the Washington-based Economic Policy Institute challenges the notion that the former has been the principal cause of the latter. Mr Mishel notes: “Rising executive pay and the expansion of, and better pay in, the financial sector can account for two-thirds of increased incomes at the top.” Changing social norms, the rise of stock-based remuneration and the extraordinary expansion of the financial sector also contributed. While it was a factor, technology has not determined economic outcomes.

Yet technology could become far more important. Professor Brynjolfsson and Mr McAfee also argue that it will make us more prosperous; and it will shift the distribution of opportunities among workers and between workers and owners of capital.

The economic impacts of new technologies are many and complex. They include: new services, such as Facebook; disintermediation of old systems of distribution via iTunes or Amazon; new products, such as smartphones; and new machines, such as robots. The latter awaken fears that intelligent machines will render a vast number of people redundant. A recent paper by Carl Frey and Michael Osborne of Oxford university concludes that 47 per cent of US jobs are at high risk from automation. In the 19th century, they argue, machines replaced artisans and benefited unskilled labour. In the 20th century, computers replaced middle-income jobs, creating a polarised labour market. Over the next decades, however, “most workers in transport and logistics occupations, together with the bulk of office and administrative support workers, and labour in production occupations, are likely to be substituted by computer capital”. Moreover, “computerisation will mainly substitute for low-skill and low-wage jobs in the near future. By contrast, high-skill and high-wage occupations are the least susceptible to computer capital.” This, then, would exacerbate inequality.

Jeffrey Sachs of Columbia university and Laurence Kotlikoff of Boston university even argue that the rise in productivity might make future generations worse off in aggregate. The replacement of workers by robots could shift income from the former to the robots’ owners, most of whom will be retired and are assumed to save less than the young. This would lower investment in human capital because the young could no longer afford to pay for it; and in machines because savings in this economy would fall.

The argument that a rise in potential productivity would make us permanently worse off is ingenious. More plausible, to me at least, are other possibilities: there could be a large adjustment shock as workers are laid off; the market wages of unskilled people might fall far below a socially acceptable minimum; and, combined with other new technologies, robots might make the distribution of income far more unequal than it is already.

So what should be done?

First, the new technologies will bring good and bad. We can shape the good and manage the bad.

Second, education is not a magic wand. One reason is that we do not know what skills will be demanded three decades hence. Also, if Mr Frey and Prof Osborne are right, so many low- to middle-skilled jobs are at risk that it may already be too late for anybody much over 18 and many children. Finally, even if the demand for creative, entrepreneurial and high-level knowledge services were to grow on the required scale, which is highly unlikely, turning us all into the happy few is surely a fantasy.

Third, we must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?

Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects.

Finally, if labour shedding does accelerate, it will be essential to ensure that demand expands in tandem with the rise in potential supply. If we succeed, many of the worries over a lack of jobs will fade away. Given the failure to achieve this in the past seven years, That may well not happen. But we could do better if we wanted to.

The rise of intelligent machines is a moment in history. It will change many things, including our economy. But their potential is clear: they will make it possible for human beings to live far better lives. Whether they end up doing so depends on how the gains are produced and distributed. It is possible that the ultimate result will be a tiny minority of huge winners and a vast number of losers. But such an outcome would be a choice not a destiny. A form of techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them.


Martin Wolf


Fonte: FT