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Selective Amnesia on Debt Relief in today’s EU

Emanuel L. Paparella, Ph.D.

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In the ongoing Euro Zone drama, the sovereign debt held by Greece is the crux of the issue occupying centre stage. The economy of Greece has seen its debt-to-GDP ratio increase from around 120 per cent in 2010 to nearly 180 per cent today.

Greece, as is well known, belongs to a polity which calls itself the European Union and in theory conceived of itself as a community based on democratic ideals and political solidarity in the spirit of shared responsibility and distributive justice.

All that in theory or on paper. The practice however, is a different story. Germany, the main creditor of Greece, is still insisting, as we speak, that Athens must agree to more painful austerity measures and reforms, and be made to pay for past profligacy before any sort of debt relief can be put on the table. There seems to be a sort of selective amnesia at work here, given that Germany benefited not so long ago from more lenient terms from its Western allies (which included Greece) than it is now prepared to offer. The photo below is revealing: it was taken in 1953, some eight years after the end of World War II, a destructive unnecessary war provoked by Germany itself.

It is an undeniable historical fact that Germany has been the major beneficiary of debt write-off in the 20th century, not excluding Greece as a creditor, and not to speak of the Marshall Plan which helped the whole continent get back on its economic feet. This is a fact often overlooked by Greek bashers of all stripes and conveniently forgotten today.

It is also a fact that Greece’s present financial situation is the result not only of profligacy but also of a toxic combination of austerity policies that have caused its GDP to fall by more than a quarter and continuous increases in debt. These do not reflect new resources coming into the economy, but loans extended to enable Greece pay on the interest on previously incurred debt, which then get piled on to the earlier principal amount and further compounded. Almost everyone but the Germans now recognises that this level of debt is simply unsustainable and some of it must be written off.

It bear mentioning that this was a common practice in the ancient world till the Romans at the height of their imperial power put an end to it. But the German leadership and most of the people protest that this is unacceptable use of taxpayers’ money (ignoring the fact that most of the debt has gone to repay banks in their own and other “core” European countries) and will create moral hazard problems, leading other debtor countries in Europe to try and do the same. In reality is concern is more political than economic; a misguided fear that left-leaning groups may resurface in a Europe; in reality what has resurfaced are fascist leaning parties (usually anti EU) who promise law and order devoid of social justice.

But beyond serving as a reminder of German hypocrisy, the photo above offers a more important lesson: These sorts of things have actually been dealt with successfully before. “I’ve seen this movie so many times before, it is very easy to get hung up on the idiosyncrasies of each individual situation and miss the recurring pattern.” said Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard who is perhaps the world’s foremost expert on sovereign debt crises. She is convinced that it is a general lesson about the nature of debt that crises end and economies improve only after the debt is cut.

And what is “the recurring, historical pattern?” This: major debt overhangs are only solved after deep write-downs of the debt’s face value. The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be. Nobody should understand this better than the Germans. It’s not just that they benefited from the deal in 1953, which underpinned Germany’s postwar economic miracle. Twenty years earlier, Germany had defaulted on its debts from World War I, after undergoing a bout of hyperinflation and economic depression that helped usher Hitler to power. Indeed, nations in economic depression will often look for a savior who usually turns up to be a tyrant. This is a lesson that one would have hoped the Germans had not forgotten so fast.

The next two charts are instructive here:

cdb1

cdb2

The 20th century offers a rich road map of policy failure and success addressing sovereign debt crises. The good news is that by now economists generally understand the contours of a successful approach. The bad news is that too many policy makers still take too long to heed their advice — insisting on repeating failed political policies first that end up harming economic solutions.

I would preface this piece by mentioning that not being an economist myself, I have culled the economic facts from various public documents and statistics as mentioned throughout. In any case, let us consider two crucial 20th century economic events: one in the 1930s, in which Germany unilaterally defaulted on its external debt; and another in the 1950s when, as the above photo illustrates, Germany was granted substantial debt relief on very generous terms that enabled it to recover and grow into the powerful economy that it now is.

The first story has its origins in the peace conference after the First World War, leading to the Treaty of Versailles, which imposed 132 billion gold marks ($33 billion), of reparation payments on Germany. This was the “transfer system” famously excoriated by economist John Maynard Keynes in his Economic Consequences of the Peace, who presciently warned that this would create economic and social devastation in Germany and fuel the rise of a dictatorship bent on revenge.

The US provided credit to Germany and also reduced the amount of these debt through the Dawes Plan over 1924-29, which enabled Germany to make these reparation payments by borrowing from abroad. However, when Wall Street crashed in 1929, the US demanded full repayment of its loans, which rapidly became impossible and generated the forces leading to the fall of the Weimar Republic. In 1931, as the external public debt to GDP ratio reached 100 per cent, fiscal austerity to make transfer payments and service the debt pushed the country into Depression. Reparation payments were cancelled in August 1932, but the creditor payments remained in the form of short term debt that was continuously rolled over.

In 1933, the Nazi government in Germany declared unilateral default on all its sovereign debts and instituted capital controls. Interestingly, this default paved the way for a major debt write-off by the US and UK, cancelling a significant proportion of debts of 19 of their World War I allies in 1934 (see Chart 1 above). Of these countries only Finland repaid its debts in full. A recent study by Reinhart and Trebesch (Sovereign debt reduction and its aftermath, Harvard Kennedy School Working Paper, June 2015) has shown that this led to significant improvement in the economic landscape of these countries. They also note that debt write-offs are much more effective in generating economic growth and higher credit ratings than softer options like maturity extensions and interest rate reductions.

The second episode, initially mentioned in this piece, is even more relevant to the present times: I refer to the London Debt Agreement of 1953 that saw the abolition of all of Germany’s sovereign external debt. This was the outcome of negotiations of Germany with 20 of its creditors (including Greece and Italy, and even Pakistan). The conference was the outcome of lessons learned by the US and other creditors in the interwar period, particularly the economic and political dangers of forcing countries into depression through austerity generated by the need to repay debts.

Germany at that time held a significant amount of pre-war debt (mostly incurred for reparation payments and taken on by the Nazi government) as well as slightly more than half of the total debt that was the result of US Marshall Plan soft loans to revive the economy, which had already contributed to infrastructure reconstruction. As Chart 2 above indicates, there was significant write-off of both kinds of debt: the pre-war debt was reduced by 46 per cent and the post war debt by 52 per cent. The remaining debt was converted into very easy terms: DM 2.5 billion carrying no interest; DM 5.5 billion at 2.5 per cent annual interest; and DM 6.3 million at 4.5-5 per cent annual interest. No compound interest was charged for the long period when debt had not been services (since the default of 1933, and a five year grace period was provided until 1957, during which only DM 567.2 million would have to be paid each year.

As one German economist has noted, “The result of this debt-trade-link was a substantial contribution to Germany reaching full employment very quickly, thanks to a strong export performance”. (Jurgen Kaiser, One made it out of the debt trap: Lessons from the London Debt Agreement of 1953 for the current debt crisis, FES International Policy Analysis Paper June 2013)

Greeks are now justifiably shocked that the country that they had treated so generously when they were its creditors is now choosing to take such a hard and punishing line with them. It is true that the London Agreement took place in a Cold War context in which it was politically important to strengthen West Germany as an alternative to the Communist East. Nevertheless, the recognition of shared responsibility that was originally the underlying philosophy of the agreement was crucial in making it so effective and its outcomes so satisfactory.

Obviously the spirit of shared responsibility does not exist any longer even if the group continues to consider itself a community and a union that cares for the common good. Perhaps even more than German selective amnesia, this lack of genuine solidarity is the present real problem of the EU. The urgent question “what kind of political community are we?” remains to be answered, and not only on paper but in practice.

 

Note: this article, slightly modified has already appeared in Ovi Magazine

Professor Paparella has earned a Ph.D. in Italian Humanism, with a dissertation on the philosopher of history Giambattista Vico, from Yale University. He is a scholar interested in current relevant philosophical, political and cultural issues; the author of numerous essays and books on the EU cultural identity among which A New Europe in search of its Soul, and Europa: An Idea and a Journey. Presently he teaches philosophy and humanities at Barry University, Miami, Florida. He is a prolific writer and has written hundreds of essays for both traditional academic and on-line magazines among which Metanexus and Ovi. One of his current works in progress is a book dealing with the issue of cultural identity within the phenomenon of “the neo-immigrant” exhibited by an international global economy strong on positivism and utilitarianism and weak on humanism and ideals.

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Europe

From West To East A Somber Week

Dr. Arshad M. Khan

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It has been a somber week. 

An orphaned dugong nurtured and returned to the sea has died from eating plastic.  Mariam died from a stomach infection made much worse by the plastic which often harbors bacteria.  Only a few hundred of the sea mammals — similar to our manatees but with a forked tail — are left in Thailand.

India celebrated independence — 72 years of it — on Thursday, Pakistan on Wednesday having pipped it by a day.  All this while Indian Kashmir was in lock-down, the people caged in their houses, and food running short according to a National Public Radio eyewitness report.  One in ten is the ratio of the security personnel to the population.  It is as if the small town where I live had 20,000 instead of a couple of dozen police officers.

Mr. Modi would have you believe otherwise.  He has unilaterally rescinded Kashmir’s autonomy claiming he can because the state at present is absent a legislature.  He omits to mention he dismissed it.  The Kashmiris are livid and waiting like a time-bomb for the lock-down to end, although there have been stories of small-scale demonstrations met with tear gas and shotgun pellets.

More than pellets in the armament of the forces trained on each other, India and Pakistan each have over a hundred nuclear weapons enough to destroy themselves and give the rest of the world a nuclear winter.  In Pakistan’s favor … the prevailing wind is from the west carrying the radioactive dust to India.

While only one in ten may want to join Pakistan, two thirds of the people in Indian-held Kashmir want independence from India according to polls.  So do other areas of strife in the northeast and the eastern end of India’s southern peninsula.  In the jaws of the military and the paramilitary, success for insurgents appears remote.

Kashmir has a stronger legal case.  In 1952, Nehru promised a peaceful solution based on a plebiscite adding they had given their word of honor at the UN and a great nation does not go back on it.  So much for greatness.  At present India controls 45 percent, Pakistan 35 percent and China the rest — the troubles are confined to the Indian section.

A couple of thousand miles away to the east is a very unhappy young man.  In an economic vice of sanctions he seeks relief to fulfill his desire of economic progress for his country and a better life for his people.  Donald Trump has put him on ice, seeking more concessions on nuclear disarmament but Kim Jong Un cannot throw away his main bargaining chip.  He chose to test fire a couple of intermediate range missiles — he has long range ones also. 

In Britain, Boris the bad-enough (no Godunov for sure) is giving all indications of a no-deal brexit.  Jeremy Corbyn is asking Conservative MPs to support him to take-over in a united move to prevent such an economic disaster but so far no takers.  Boris has returned from a visit to Ireland.  Perhaps the present open border between north and south opened his eyes.

Between the Boris brexit and Trump’s tariffs on Chinese imports, the markets had had enough.  The Dow sank in the largest one-day drop of the year, although reviving a little on Friday.

All in all, a somber week indeed.

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Will Putin and Macron Open a New Political Season?

Dr. Andrey KORTUNOV

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On August 19, President of France Emmanuel Macron hosted President of the Russian Federation Vladimir Putin at Fort de Brégançon in the commune of Bormes-les-Mimosas in the Var department on the French Riviera. Given the vagaries of the weather this summer in France, the Mediterranean coast seemed a more suitable location for a meeting than the currently scorching-hot Paris.

Formally, Macron is on vacation right now, where any respectable Frenchman should be in August. However, the meeting with his Russian counterpart can hardly be seen as a part of the president’s holiday activities. Macron and Putin probably find it difficult to talk to each other about things not related to their official positions, as they are very different people.

For starters, an entire generation separates the two leaders: Macron is 25 years younger than Putin. And their respective terms in office are incomparable – two years for Macron versus two decades for Putin. We should also note that the French leader is a textbook technocrat whose career has been largely spent on the economic side of the government, while Putin is a classic silovik whose background is in foreign intelligence.

What is more, past meetings between the two leaders do not exactly instill confidence in future cooperation. At the start of the French presidential campaign in 2017, the Russian leadership clearly favored François Fillon, who is much closer to Putin in terms of both his politics and his personality, and someone the Russian President can more easily relate to, than Macron. Later, the Russian state-owned media held little back in its harsh (and not always fair) criticism of the founder of the “La République En Marche!” party. Macron likely remembers the warm welcome the Kremlin gave to his rival, leader of the National Front Marine Le Pen, in the run-up to the final round of voting in the French presidential elections. For his part, the young French politician has not always followed diplomatic protocol in assessing the policies and intentions of his Russian counterpart.

All this notwithstanding, literally two weeks after he was sworn in as President, Macron received Putin in Versailles. The two leaders met regularly after this, both in a bilateral format and on the side-lines of various multilateral forums. Interestingly, Macron was the only major European leader to take part in the St. Petersburg International Economic Forum last year. Word has it that the two leaders even address each other with the informal word for “you,” as both Russian and French allow such lexical liberty.

One may be a football fan (Macron) and the other a Judo aficionado (Putin); one a staunch liberal (Macron) and the other a steadfast conservative (Putin). They may differ on fundamental issues of human rights and the future world order, but Putin and Macron need each other. Probably more so than they did two years ago.

Right now, Putin simply does not have a more suitable negotiating partner in Europe than Macron. The indefatigable Angela Merkel is coming to the end of her political career and her influence on European affairs is waning. Italy is in its usual state of latent political crisis, and neither Giuseppe Conte nor Matteo Salvini are in any kind of position to speak with Putin on behalf of Europe with any kind of authority. And this is even more true for the United Kingdom’s newly appointed Prime Minister, the eccentric Boris Johnson.

A serious conversation will not happen in the immediate future between the Russian leadership and the President-elect of the European Commission Ursula von der Leyen and the High Representative of the Union for Foreign Affairs and Security Policy Josep Borrell, and it will probably not be easy. It is hard to say that the Kremlin harbors high hopes for the successors of Jean-Claude Juncker and Federica Mogherini, as they have already leveled some harsh criticism at Moscow.

Russia and Europe have plenty of topics for discussion. The settlement of the situation in Eastern Ukraine, for example, which is showing signs of promise following Volodymyr Zelensky’s victory in the Ukrainian elections. There is the situation in Syria and the threat of a new escalation in Idlib and new flows of Syrian refugees into Europe, which has been made worse by the recent decision of President of Turkey Recep Tayyip Erdoğan to suspend the agreement with the European Union on migrants. The future of relations with Iran following the sharp aggravation of U.S.–Iran relations and the threat of the Iranian nuclear deal falling apart entirely. And the future of European security after attempts to save the Intermediate-Range Nuclear Forces Treaty (INF Treaty) finally failed.

All of these issues are obviously important for both Putin and Macron. All the more so, as France will be hosting the latest G7 Summit in Biarritz just one week after the visit the President of the Russian Federation. It is entirely possible that the Normandy Four Summit on the situation in Donbass will be held in the early fall in France too. And the Second Paris Peace Forum, which, judging by the 2018 edition, is touted as a benefit event hosted by the President, is planned for later in the year.

On the whole, the President of France, who has squandered a great deal of his popularity at home over the past two years, has the chance to claw his way back in the new political season. He can try to recover at least some of his recent losses by creating an image of himself in France as Europe’s main political leader, including in matters relating to the east. “National greatness” is not an empty phrase, even for Macron’s most determined domestic political opponents.

And the meeting with the President of the Russian Federation is a good opening move for a party trying to make waves in “big” European politics. Despite the difficulties that will inevitably arise in the upcoming discussions with Putin, it would still be easier for Macron to negotiate with him than to achieve an understanding with the egotistical President of the United States Donald Trump, who is unable to even appreciate the exquisite taste of Rhône wine.

Of course, the current political situation creates both additional opportunities and additional difficulties for the Russia–France dialogue. Difficulties include the recent clashes between the police and civic activists in Moscow, which led to a large number of arrests. It is easy to predict that this issue will somehow emerge in the French press, as well during the talks between the two leaders, something that will no doubt irk the President of the Russian Federation.

Russian observers typically liken unauthorized opposition rallies in Moscow to the “yellow vests” in Paris, pointing out the violent actions of the French police. I happened to witness first-hand both the events that occurred in Paris last autumn and the Moscow rallies that took place in later July of this year. And, to be perfectly honest, any parallels between the chaos in Paris and the Moscow unrest are improper and inappropriate.

For one, the events in Paris can only be described as large-scale riots, accompanied by numerous acts of violence and vandalism, while the demonstrations held in Moscow were peaceful, albeit not authorized by the authorities. So, pushing these dubious analogies only further provokes anti-Russian sentiments, which are already more widespread in France than in many other European countries.

Nevertheless, as Otto von Bismarck rightly noted, “Politics is the art of the possible.” Public sentiment is important, but not the only, factor that determines the foreign political priorities of even the most liberal democracies. Russian historians generally consider the reign of Alexander III (1881–1894) a conservative, even reactionary, era, but this did not stop the President of the French Republic Marie François Sadi Carnot from entering into a military alliance with the Emperor of Russia. The rule of Leonid Brezhnev (1962–1982) is often referred to as the Soviet Era of Stagnation, yet President Charles de Gaulle nevertheless visited the USSR in the summer of 1966, thus marking the beginning of the era of “special relations” between Paris and Moscow.

In this case, of course, we are not talking about the beginning of a new era in Russia–France or Russia–Europe relations. Unfortunately, objective prerequisites for this have not yet come about. However, the presidents of France and Russia are more than capable of opening a new season in European politics in Fort de Brégançon on August 19 by achieving a tangible rapprochement of the Russian and French positions on at least one or two of the issues above without losing face and without sacrificing their principles. The unprecedentedly hot summer in Paris – and the equally unprecedentedly cold summer in Moscow – should come to an end.

From our partner RIAC

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Marine Le Pen’s Nationalist Ideology and the Rise of Right-Wing Parties in Europe

Mohamad Zreik

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“When you decide to stand against injustice, expect that you will be cursed and then betrayed and then atoned, but do not keep quiet about injustice in order to be told that you are a man of peace.” Marine Le Pen stood in the face of injustice and said the word of truth without hesitation. As the truth hurts, Le Pen has faced much criticism, insults, and opposition campaigns. Marine Le Pen, the candidate for the 2017 French presidential election, lost to Emmanuel Macron, a moderate centrist young man who believed in economic and political openness to Europe, and her loss was an expression of democracy and freedom.

What will change in France and Europe after Macron takes office? Had Le Pen come to power, what would have happened? Why was this powerful campaign against Le Pen?

Marine Le Pen is the president of the National Front and the daughter of Jean-Marie Le Pen, the extreme right-wing political party in France. Since French society is a mixture of different civilizations, cultures and religions, Le Pen has not won many votes and was not accepted by the society because her project was France first, not Europe first, and the fight against terrorism was one of its priorities, without the support of anyone or the consent of religious and political groups to carry out this process. Le Pen’s experience is not new. When her father ran in the past, he called for the reinstatement of the French franc, the restoration of French identity instead of the European one and the implementation of a French national policy without referring to the European Union.

Many political analysts believe that if Le Pen was able to reach the presidency, Europe would enter a phase of wide change, since Germany and France are the two pillars of the European Union, the departure of France will lead to an imbalance in the European Union and to a weakness in its structure. Le Pen’s proposed program did not impress many advocates of freedom because it negatively affects the rights of refugees and works on a harsh policy with foreigners coming to France. As an Arab citizen and human rights defender, I will not accept Le Pen’s proposals at the beginning, but I meet with her on many things and concerns. The European continent has become a place for the export of large numbers of people who are doing terrorism in the world and the great margin of freedom in Europe has made it a tool for making evil and to strengthen the role of ideologically unclean groups, all due to the issue of human rights and the right of opinion and expression.

The European continent is witnessing a widespread campaign against the EU, the BREXIT in Britain was no accident, as well as the rise of right-wing parties to take power in Denmark and the Netherlands and demand a firmer policy, and it is noticeable that the right-wing European parties are growing in France, Italy, Spain, Hungary and Austria. The project demanded by Le Pen has become necessary on the European continent, especially with the financial crises in the European Union and the many terrorist acts that threaten European security.

From the Treaty of Westphalia to the founding of the European Union to the present Europe, the situation has changed a lot. The idea of a civilian state was necessary to end the 30-year war and the founding of the European Union came to unite the European continent after it was divided during the Cold War. Today, in the era of globalization, openness and freedoms, the economic crises that hit the world in general and Europe in particular, and the incidence of terrorist acts are increasing rapidly, and I am afraid that Europe will become a place of terrorist acts and a center for terrorist group. Therefore, the world today needs leaders such as Le Pen to control human insanity and restore stability to the international community.

The success of the experience of democracy in a certain part of the world does not mean that it is the ideal system and that it can easily be applied to the rest of the world. Many peoples of the world are not suited to democratic regimes, and the failure to implement a democratic system does not mean that the regime that will govern this country is oppressive and unfair, but one that suits the form of the state and the needs of the people. Henry Kissinger acknowledged that the idea of the European Union could not last forever because European countries since ancient times were not based on the doctrine of unity and participation.

I still dream of the beautiful Europe of the 1980s, when it was the center of international economy and trade and when the international political decision was linked to Europe. Europe today is a mass of endless economic crises and a center of attraction for terrorist acts that threaten European and international security, without forgetting the US decision, which often affects European sovereignty. Le Pen’s project is to reject American hegemony, return to French roots and adhere to French identity. The idea of a closed door policy and a strict policy with foreign expatriates is an internal French affair.

The situation in France will not be better after the arrival of Macron and terrorism will not stop, Emmanuel Macron is trying to give more economic, social and cultural freedoms and more integration with the European community. Of course, economic and political cooperation will have a positive impact on France and Europe. But in return for this cooperation, what special benefit will France gain, knowing that Macron has put forward the idea of establishing an EU military force, which means that the EU’s role will be not only economic and political but also joint military action.

The series of terrorist operations has not ceased after Macron’s arrival, and is increasing day by day. From France to Britain, Belgium and Germany, the target is Europe, which is the victim of terrorism. Terrorism wants Europe to become unstable and panic and make it a “New Land of Jihad”. Of course, Macron’s European policy plays an important role in strengthening the position of terrorist groups and creating fertile ground for them. Terrorism needs freedom and open borders to turn the impossible into reality.

When Le Pen raised the voice and said that we are French and wanted to rearrange the French house, she knew that France was the target and if it was not immunized, Great France would become just an idea in the “Museum of History”. Le Pen, an ultra-nationalist, does not scare me as an Arab Lebanese. Why would I be afraid of someone who wants to fight terrorism and oppressive ideology? We all love unity and freedom, but on the other hand there are some emergency circumstances that push the political system in a country to take an unusual path. Today, right-wing approach can make a difference, which some describe as extremism and lack of respect for human freedom.

The world today needs leaders like Marine Le Pen in every corner of the globe. The world today is ruled by force, and is afraid of those who say the word “no” to every stranger and outlaw. Le Pen has lost and the French will regret this option sooner or later because the European future does not bode well!

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