Stagnation or recession: What threatens the banking system of Germany and the eurozone in 2020
“One of Germany’s most acclaimed experts” in economic risk analysis, Marcus Krall, “predicts the collapse of the German banking system and the eurozone by the end of 2020.” Krall describes the euro as an “erroneous structure,” whose existence is maintained for political reasons. According to Krall, the euro has a negative impact on Germany’s competitiveness and “weakens the country’s banking system”. Most eurozone countries would “have gone bankrupt” long ago if the European Central Bank did not support them by lowering interest rates. “At the end of next year, Europe may face a dramatic decline in the availability of loans.” There will be massive bankruptcies of businesses, and the unemployment rate will soar. In an attempt to save the situation, the ECB will resort to emissions, which, in turn, will provoke a leap in inflation and “loss of savings not only of the Germans, but also of everyone who invested in euros.” The crisis in the European economy will undermine political support for the euro, “and countries will return to their national currencies.” It sounds threatening, but let’s try to look at the details.
The slowdown of the German economy has been in place for several years. According to the returns of the year 2018, the GDP growth dropped to its lowest in the past 5 years and amounted to 1.5%, which is a decline of 0.7 compared to 2017. The largest EU economy “narrowly escaped a recession”. In the second quarter of this year, German GDP decreased by 0.1% against the same period the previous year; which, in annual terms, reduced the growth rate to 0.4%. Official forecasts for the results of the current year have been reduced to 0.5% – more than three times, compared with last year’s expectations. By early autumn, forecasts for a further decline in exports amid fears of a general slowdown in the global economy led to more expectations of a further slowdown of the economy. The government of Angela Merkel, after expressing optimism about growth prospects for the current year, began to acknowledge the problem.
The economy of Germany is to a large extent dependent on exports, and any serious turmoil in international trade will cause Germany more damage than any other EU country. An important factor is the ongoing trade war between the United States and China, which is on the verge of a new escalation. What also creates a negative outlook for the entire European economy is the prospect of Brexit without an agreement between London and Brussels. Finally, the Chinese economy is slowing down, which has caused a decrease in demand for German export products, primarily cars. According to The Financial Times, in the first half of this year, the output in the car-manufacturing industry dropped by 12 percent. Also, the anti-Russian sanctions are hitting “the German farming sector and processing industries; German companies are losing jobs and profit,” – reports Gazeta.ru. Meanwhile, consumer spending and domestic investment continue to grow. Unemployment is at its lowest since the reunification of Germany. Reports of September 9 say that in July German exports rose again by 0.7%, rather than fall, as most observers had expected. Nevertheless, entrepreneurial confidence continues to decline in almost all sectors of the economy. Thus, the GDP growth rate in the 3rd quarter will make the key factor: in case of a decrease, we will be able to talk about a recession in Germany in the formal sense of the word.
Like most European banks, German comapnies have long been fighting a fierce battle to maintain the profitability of business amid the long-running period of ultra-low interest rates. Meanwhile, bond yields, especially long-term ones, continue to decline throughout Europe. The yield on German government bonds is negative for all securities with a validity term of up to 10 years inclusive. For 30-year bonds, the yield fluctuates around zero. The rate difference between short-and long-term borrowings – the main source of income for banks under normal conditions – is close to zero. As investors rush in search for safer assets, the forecasts are disappointing: negative rates will persist “for several more years.” Another negative prospect for the German banking system is the de facto negative rates on ECB deposits. In fact, banks have to pay the Central Bank for keeping their capital in its accounts. The prospect of a new drop in the ECB interest rate in the near future is causing more anxiety among investors.
The ECB is signaling its willingness to lower interest rates in order to neutralize the slowdown in the entire eurozone. Experts predict that the ECB will either keep rates at the current low level or lower them even more, at least until mid-2020. In these conditions, the German government is likely to resort to tough measures to secure a deficit-free budget, at least in 2019. However, the policy of cutting the state debt could be revised. At the end of this summer, German Finance Ministry officials publicly spoke about a “package of economic incentives” that could be put into effect in the event of a recession in Germany. Depending on the extent of such stimuli, the balanced annual budget policy may be put at risk.
In 20 years, the euro has turned Germany into a key EU economy, critical for the economic stability of the entire union. At the same time, it has become a major factor that cemented the isolation of Germany in Europe. As skeptics had predicted, the admission to the eurozone, despite tough selection criteria, of countries very different from the economic point of view, led to the fact that a deterioration in the global economic situation hits the weakest member countries the hardest. According to critics, “the euro exchange rate is clearly too high for France and Italy (this becomes a blow to their competitiveness), and too low for Germany.” During the Eurozone crisis of 2009, there appeared a vicious circle: the dominance of the Federal Republic of Germany’s economy in the EU allowed Berlin to dictate its conditions for strict budgetary savings to most of Europe. This, in turn, gave rise to an outbreak of anti-German sentiment in a number of countries on the continent, including Greece and Italy.
By now, Central Europe has turned into a supplier of semi-finished products and spare parts for German enterprises. The rest of the EU countries are a market for German goods. Simultaneously, Germany is forced to pay for the economic failure of an increasing number of its partners in the eurozone. Thus, the economic power of Germany, while being the backbone of the entire economic system of the EU, has become almost the main threat to the European integration project. Even though the German economy boasts a significant amount of strength, “weak domestic credit performance, the risk of a global trade recession and the slowdown in China” will continue to “push” Germany to recession, – SaxoBank analysts quoted by Gazeta.ru said in the middle of the year. According to the June results, industrial production went down by 5% year-on-year. The ZEW economic sentiment index has reached its lowest level since December 2011. According to Eurostat, published in early September, the total GDP of the euro area countries grew by only 0.2 percent in the second quarter, which is two times lower against the first three months of this year.
In late August, The Economist made a prediciton that Germany would follow the path of Japan, which has been waging an incessant struggle against the threat of stagnation for decades. Like Japan, present-day Germany is rich, burdened with a large state debt, as well as an aging population. Trends in the German bond market also signal “endless stagnation.” Concerns are growing that politicians have “forever” lost their ability to improve the state of the economy. Moreover, the decline in consumer prices “pushes” discount rates yet lower. As a result, many experts believe that Berlin may be faced with the need for a more “self-oriented” policy, at least in the economic sphere.
Meanwhile, considering EU membership criteria, the majority of the eurozone member countries are in no position to take any significant steps in the event of a genuinely unfavorable turn in the global economic situation. The presence of the euro and the “unprecedentedly” high degree of independence of the ECB with its extensive powers put severe restrictions on the possibility of influencing the economy of individual states. In accordance with the current requirements of the eurozone, governments have to either increase taxes or reduce government spending – even if it harms the national economy. Formally, there is a monetary mechanism to counter economic upheavals in a particular eurozone country to minimize their consequences for other participants. From the point of view of abstract macroeconomic indicators, this mechanism has been functioning well up to now. But, judging by what we witnessed in Spain, and then in Greece and Italy, its socio-economic and political costs are extremely high.
Also, the ECB itself is pretty hard-up at the moment. In the spring, it extended the program of preferential lending to the banking sector. However, inflation is steadily below the 2 percent target, and interest rates, as mentioned above, are fluctuating around zero. The government bond retirement program, especially in the case of Germany, is already approaching the limit established by the current legislation. Given the situation, economists fear that in the event of a new economic shock, there may simply be “no room left” for monetary policy measures. According to pessimists, “Europe has already reached this point.” Thus, for the first time in the past decade, we can talk about the need to use fiscal stimuli. And it is completely unclear whether the decisions, which are likely to be the result of numerous political and bureaucratic compromises, will prove effective. Thus, the recently announced plans in the fiscal sphere of individual countries indicate, according to economists, the high probability of an increase in the eurozone budget deficit – up to 0.8 percent of its total GDP in 2019, The Economist reports. While the budget deficit keeps growing in Italy and France, Germany does not lose hope for a small economic growth in annual terms. In the absence of a common eurozone budget, “general” fiscal measures can again turn out to be only the arithmetic average of the diverse decisions taken at the national level. Optimists expect fiscal stimuli to add 0.2-0.3 percent to eurozone GDP growth by the end of this year. Yet again, much depends on Germany with its extremely significant “space for maneuver”.
However, Berlin is still in two minds about it, probably, because in the case of fiscal stimulus measures, consensus is important, along with a good coordination of actions of the governments of different countries. Only in this case could fears of stagnation disperse. Finally, the scope of necessary incentive measures requires a high degree of political credibility. Therefore, it cannot be ruled out that an economic recession in Germany could introduce substantial changes to the plans or dates of the transit of the supreme power scheduled for 2021. For Germany it took more than for other European countries to stop resisting the idea of fiscal stimulus for the economy. Now, observers argue whether the German authorities could go too far. In any case, they have yet to agree on such key parameters of the general budget of the eurozone as its size and permissible applications. Meanwhile, as pressure on the European economy keeps growing, a collapse of the eurozone can no longer be ruled out.
At present, there are still chances for Germany to avoid a recession, if not in the technical, then in the practical sense of the word. And even if it starts, the Federal Republic of Germany will enter it with one of the lowest unemployment rates among all countries of the world. By their nature, most factors that push the German economy “down” can be considered temporary. Nevertheless, more and more experts come to the conclusion that the economy of Germany “is balancing on the brink of recession.” The banking sector of Germany is busy struggling to maintain business amid zero or negative yield on assets, just like most banks in other countries of the euro area. Every day, it becomes clear that, in order to save the eurozone, the participating countries will have to make the difficult choice between delegating some part of fiscal sovereignty in favor of the hypothetical “common” supranational “finance ministry”, on the one hand, and on the other, going on with their attempts, which are increasingly costly, if not utterly useless in the current conditions, to withstand cyclical fluctuations in the economy with the help of the ECB monetary measures alone.
From our partner International Affairs
Meeting of BRICS Foreign Ministers in Cape Town: gauging the trends ahead of the summit
The meetings of BRICS foreign ministers in Cape Town on June 1-2 were awaited with notable impatience by the global community as several themes in BRICS development were very much in the spotlight throughout this year. One theme was the process of de-dollarization of BRICS economies and the possible creation of a BRICS common currency. Another theme was the discussion on the possible expansion in the BRICS core membership as nearly 20 developing economies have indicated their intention to join the block. Perhaps for the first time in more than a decade these issues made it into the Western mainstream media as the potential implications of BRICS decisions on the common currency and membership could have a major effect on the evolution of the global economic system.
As regards the issue of the creation of a new currency, the BRICS Foreign Ministers placed the emphasis on the use of national currencies in mutual settlements. The cautious approach of BRICS to the issue of the common currency thus far may be due to the need to consider all possible modalities of such a currency, including whether it is to be used as a means of mutual settlements, an accounting unit or as a reserve currency. At the same time, it does appear that the New Development Bank (NDB) was charged with producing a blueprint of how the common BRICS currency could be created and used in mutual transactions. Fundamentally, it appears that all BRICS economies see de-dollarization and the creation of alternative settlement instruments as expedient – the question is what are the common BRICS initiatives in this area that would be seen as optimal by all core members. There may be more substantive discussions on the BRICS common currency at the August summit, with further progress made in 2024 during Russia’s BRICS chairmanship.
With respect to the issue of the block’s expansion the BRICS Foreign Ministers have indicated that work is still ongoing on defining the criteria for new members. No concrete “priority candidates” were singled out. The gradualism in the expansion process is warranted as there may be risks associated with the expansion in the ranks of the BRICS core – the decision-making process is likely to get more complicated at a time when BRICS are set to make crucial decisions with sizeable long-term implications not only with respect to BRICS own future but also for the global economy. In the end BRICS members may come to the conclusion that expanding the BRICS core is problematic and that other formats such as the BRICS+/BRICS++ or a permanent “circle of friends” that participate in the BRICS summits may be preferable. In this respect, it is important to look at the modalities of BRICS meetings with the so-called “Friends of BRICS” that were held during the second day of meetings on June 2.
The meetings of the “Friends of BRICS” featured such economies as Iran, Saudi Arabia, the United Arab Emirates, Cuba, Democratic Republic of Congo, Comoros, Gabon, Kazakhstan as well as Egypt, Argentina, Bangladesh, Guinea-Bissau and Indonesia. Some of these countries were invited from within the group of those that had earlier applied to join the BRICS block, while others featured as representatives of the respective regions and regional associations of the Global South. To some degree the composition of the countries invited into the “Friends of BRICS” circle may offer insights into the format of the BRICS+ meetings at the summit in August later this year.
Overall, South Africa is sustaining the impulse towards greater BRICS openness after the BRICS+ meetings last year during China’s chairmanship. And while a full-fledged admission of new members into the BRICS core appears unlikely in the very near term, there may be further advancements made by BRICS in developing the BRICS+ format and setting the stage for a greater cooperation of BRICS with other developing economies and regional integration blocks. As regards de-dollarization and the creation of a new BRICS currency, the most important development is that these issues are now squarely part of the BRICS agenda, which raises the prospects of material changes on this front in the coming years.
Author’s note: first published in BRICS+ Analytics
Has Sri Lanka Recovered from the Economic Crisis?
Sri Lanka is navigating an unparalleled economic crisis, and according to the Asian Development Bank’s (ADB) annual report, the Asian Development Outlook (ADO) April 2023, the country’s GDP would continue to decline in 2023 before starting to slowly recover in 2024. In 2022, the economy shrank by 7.8%, and in 2023, it is expected to shrink by 3% as it continues to struggle with debt restructuring and balance of payments issues. The country’s efforts to stabilize its economy will be aided by reform measures including the rollback of the 2019 tax cuts and the recent acceptance of the Extended Fund Facility agreement with the International Monetary Fund (IMF). The speedy resolution of the debt issue and the unwavering execution of reforms are essential to Sri Lanka’s recovery from the crisis.
However, due to policy mistakes, global economic shocks, rivalries among the big powers, and pre-pandemic macroeconomic vulnerabilities, Sri Lanka was already in a precarious position when the crisis began. In 2022, a lack of foreign currency caused a shortage of goods that were necessary for survival, as well as an acute energy crisis that resulted in protracted power outages and traffic jams since Sri Lanka was running low on fuel. Many fell into poverty as a result of rising inflation and declining living conditions. The poor and vulnerable have suffered disproportionately from the economic crisis.
While different economic packages have been sanctioned for the island state and relatively sound political stability is on the eve, it can be perceived that an upward movement may be seen in the next year. This year is the year of policy reformations, then the reaping time will be 2024. Meanwhile, the Sri Lankan currency last appreciated versus the dollar by 4.5 percent on March 14. The writeup will therefore shed light on the prospects of economic upwardness.
Finally receiving approval from the IMF for a $3 billion rescue package for Sri Lanka, the island nation may now restructure its debt and expect economic growth in 2024. The IMF’s decision will enable for the prompt disbursement of a $333 million loan over four years to the South Asian nation, which is currently experiencing its worst financial crisis in decades. According to IMF director for Asia and the Pacific Krishna Srinivasan, Sri Lanka has been “hit hard by catastrophic economic and humanitarian crisis.” In an interview with CNBC’s Sri Jegarajah in Asia, he said, “This you can trace back to three factors: One is pre-existing vulnerabilities, policy mistakes, and shocks.”
However, Ranil Wickremesinghe, a six-time prime minister, was elected president by the nation’s lawmakers in July. Wickremesinghe congratulated the IMF in a tweet in response to the most recent IMF bailout and stated that his nation is dedicated to its “reform agenda,” adding that the IMF program is “critical to achieving this vision.”
Previously, as mentioned, the biggest economic crisis the island nation has seen since gaining independence began in early 2022, according to the Central Bank of Sri Lanka, and is projected to gradually cease in the second half of this year. According to Xinhua news agency, the central bank stated its monetary policies for 2023 on January 4 and noted that the sharp acceleration of inflation that started in early 2022 reversed in October. “The Sri Lankan economy, which is projected to register a real contraction of around 8.0 percent in 2022, is expected to record a gradual recovery in the second half of 2023 and sustain the growth momentum beyond,” the bank stated.
According to a recent study by the Central Bank of Sri Lanka, the GDP of the nation increased by 3.6% in the first quarter of 2023 compared to the same time in 2012. Compared to the previous quarter, when the GDP expanded by just 1.5%, this is a huge increase. This development has been attributed to a variety of factors, including increasing industrial production and greater demand for Sri Lankan exports. Particularly, the manufacturing industry has experienced rapid development, with production rising 6.9% in the first quarter of 2023. The agricultural industry has also done well, with considerable increases in tea and rubber exports. Additionally, there have been indications of a rebound in the tourism sector, as seen by a 29% rise in visitor arrivals in the first quarter of 2023 compared to the same period in 222. Given that the tourist sector has been one of the hardest hit by the COVID-19 pandemic and associated travel restrictions, this is particularly noteworthy.
However, since Sri Lanka’s governmental collapse and near-bankruptcy last summer, there appears to be a return to calm in the South Asian country. Fuel lines that once snaked for blocks have been removed, and a beachside area that had been the location of a protest camp for months was decorated for the holidays with Christmas lights and carnival rides. Moreover, the island’s economy still runs on a ventilator since the government has not found a solution to escape its crippling debt. Sri Lankans have come to terms with a depressing reality that includes fewer meals, smaller paychecks, and lower aspirations.
Meanwhile, instead of fixing the economy, a series of punitive tax hikes and subsidy reductions that further limited demand have brought about a semblance of stability. Although necessary, the actions are unpopular and provide fodder for the political opposition, increasing the likelihood that this administration or the one after it will back off from them. Therefore, the economy is still running on a thin line.
Economic sanctions as instruments for foreign policy: circumstances, conditions, legality, and consequences
Since the end of World War II and the emergence of the Bretton Woods Institutions, the idea of global rule-based order evolved considerably, the Western-led efforts to create the International Institution started with the Wilsonian vision, but that vision was cut short by the nationalist forces in Europe when Hitler and others disrupted world peace with a global conflict. The end of world war II offered an opportunity to the Western powers to make a true society and make it work, thus with the evolution of multilateralism, globalization, and international organizations helped the world to build a genuinely interconnected International system, where no nation can tread its own path but is always dependent on other nations, thus it’s every action has consequences. To achieve foreign policy objectives economic sanctions work as initial softening of the targeted country, organization, or any individual, but it’s not always the case as countries with dilapidated human rights record, war criminals, terrorists, and individuals of particular concern can be sanctioned without any reversal so that they cannot continue with their violations of international law, thus economic sanctions are not only categorized as the form of economic coercion. When we tie economic sanctions with a foreign policy we include its various implementation phases as well because without the implementation or enforcement the economic sanction will be of no use, in this case, we can term the naval blockade as an enforcer of those sanctions if we are pursuing it under the foreign policy objectives. The Central point here I want to make is that in today’s world the economic sanctions are an effective tool to achieve foreign policy objectives and the efficacy of these sanctions is because of the interconnected global economic system, in which the West is still seen as a dominant player. In this paper, we will explore various dimensions of economic sanctions under the garb of foreign policy objectives, and will thus focus on various circumstances and conditions will ascertain the legality of those economic sanctions and once imposed the strategic and economic consequences of enforcing those sanctions, in doing so we will focus on a variety of examples from the real world politics. As we are exploring economic sanctions as an instrument of foreign policy, here we won’t be able to enlist examples from WTO or UN, as they are international organizations, but we will be using examples from EU, because its both an economic and political union, but WTO and UN do ascertain the legality of economic sanctions.
Economic sanctions are not a new concept but it existed from ancient times and is pursued by kingdoms and states throughout history mainly as a military tool to subdue the enemy. Thus the economic sanctions have clear foreign policy undertones. But the economic sanction after the peace of Westphalia was first used by nation-states following the creation of the League of Nations (Economic Sanctions, 2019). The traditional embargo tactics emerged in the colonial era when countries developed seapower capabilities, and thus naval blockades were the main enforcer of economic sanctions (Economic Sanctions, 2019). But the development of International Organizations following the end of world war II, and later after the dissolution of soviet Union marked the beginning of a new era of the multilateral world, in which the World Trade Organization became the successor General Agreement on Trade & Tariffs the GATT (Masters, 2017). And the new era offered new ways to enforce economic sanctions, both in terms of bilateral sanctions or organizational sanctions of any country, or any other entity. Sanctions are thus not just imposed by a country on another country, but also imposed by international and regional organizations such as the United Nations, WTO, and the European Union.
Economic Sanctions. Circumstances and Conditions.
Economic sanctions are imposed by the nation as a coercive measure to halt any economic activity that goes contrary to the national interests of that state. But sometimes these sanctions create a dilemma, as one nation is friendly or an ally while the other is an enemy state. Like we have the case of Nord Stream II, a gas pipeline from Russia to Germany via the Baltic Sea (Nord-stream2.com, 2017). The gas pipeline goes contrary to the United States global Liquified Natural Gas plans, as it is now set to become the largest LNG producing nation (Anon, n.d.). The Russian pipeline will allow Germany to get Russian gas throughout the year without any disruptions as it will become a direct buyer of the natural gas, and will escape being trap in a Russia-Ukraine political scuffle. The United States to halt the construction of the pipeline imposed economic sanctions, by putting the PEES Act (Protecting Europe’s Energy Security Act) into the National Defence Authorization Act, to limit the role of the Western technological firm in the construction of Nord Stream II pipeline (Atlantic Council, 2019). This decision was taken by the Trump administration in circumstances that will create a permanent dent in the US global energy future, as Germany is well connected to its European Neighbours and any direct gas link will surely extend to other countries as well, putting a question mark on its European energy market utilization plans. The sanction bill provided a few months window to Western firms to pull out of the Russian-backed pipeline. It was a result of these economic sanctions that all major Western firms withdrew from the construction putting a lid on the project for almost a year (www.spglobal.com, 2020). Thus the efficacy of economic sanctions as a foreign policy tool cannot be overruled and is used excessively in international politics. The US sanctions on Nord Stream II is an interesting case because it’s against a major power, which is Russia in this case. Quick compliance can minimize and entirely reduce the cost of economic sanctions (Doxey, 1980). The Western companies involved in the construction of Nord Stream quickly withdrew from the project to escape the sanctions. But in the case of major industrial power like Russia, compliance is out of the question. As there is a must reaction cycle to the economic sanctions (Doxey, 1980). Russia brought back the project with its indigenous technologies and national companies to complete the pipeline, though missing a crucial completion deadline this year due to US sanctions. Another important aspect is the economic sanctions and state responsibility, as China is continuing its crackdown on Hong Kong protesters there are growing calls in the UK to impose magnitsky style sanctions on selected individuals directly linked to human rights violations in Hong Kong. These kinds of sanctions are powerful foreign policy tools to tarnish the credibility of those individuals internationally. The UK is weighing whether to impose these sanctions on China as an answer to its flouting of the terms of understanding with the UK over Hong Kong (edm.parliament.uk, n.d.). State responsibility is thus the main reason for these potential sanctions, to impose costs on Chinese actions (Routledge & CRC Press, n.d.). The magnitsky sanctions were first formulated in the US, as being the economic center of the world, and the dependence of other major economic powers and institutions give it an upper hand in freezing the assets of individuals involved in violations of international law. The IEEPA, The International Emergency Economic Powers Act gives the US a comparative edge to freeze the assets of these individuals (Alerassool, 1993).
Unilateral sanctions are the most rampant form of sanctions imposed by the US on many enemy states like Iran, North Korea, and Libya, etc, while also on renegade nations like Pakistan, and few Latin American countries. (Routledge & CRC Press, n.d.). The United States is an active player in the South Asian region, as it is finding a suitable way to pull out its troops from Afghanistan, prior to that since 1970, South Asia remained a proliferation concern for the White House, as two of the leading countries in South Asia, India and Pakistan intended to acquire nuclear weapons, though there were no prior economic sanctions on Pakistan, Indian space related trade activities with the Soviet Union came under US sanctions. After the nuclear tests in 1998 US activated an economic sanctions regime on both countries, to achieve the non-proliferation policy objectives. The sanctions were imposed using The Glenn Amendment, which was enacted in 1977, which was formulated to impose on countries that detonate a nuclear device (South Asian Voices, 2018). The economic sanctions against these new nuclear powers did achieve its intended foreign policy objectives, as both nuclear powers focused greatly on the non-proliferation aspect of these weapons, and invested a right share to beef up the nuclear command and control, to avoid theft of the nuclear device and its proliferation pathways. The sanctions were lifted later after compliance from both nations as both nations imposed a moratorium on nuclear testing and since 1998, no other nuclear test was conducted in the South Asian region.
Trade relations are either harmonious or full friction. This was the case in a recent US-China Trade relations, which saw an upward trajectory for over 2 decades and was turned into a friction saga by the Trump administration, as Trump hefty tariffs on Chinese imports. The US is leading in the innovation industry, and thus repeatedly blamed China for Intellectual Property theft, to combat this theft, US Democratic Senator Chris Van Hollen and Republican Senator Ben Sasse introduced targeted legislation to punish China for the IP theft by imposing economic sanctions on Chinese technological firms (Wolfe, 2020). This particular upcoming legislation shows that the concept of economic sanctions evolved considerably and now there are a separate set of legislations for each kind of violation, which can determine the circumstances and conditions of the breach, and these set of laws provide the executive with a foreign policy tool to impose sanctions and halt any potential danger to the economy. These new targeted sanction legislation according to some experts ushered in an era of smart economic sanctions (LSE International History, 2015). These kinds of smart sanctions give a credible narrative to the sanctions as it is not targeted at the innocent people of that country who don’t pose a threat to that country’s interest but affect only those entities which are being sanctioned or whose assets are being frozen.
Modern trade relations are regulated between nations via bilateral and multilateral trade agreements, as developing and underdeveloped nations seel more trade with developed countries, these industrialized countries offer certain trade concessions in the form of market access as is the case of European Union GSP (Generalized Scheme of Preferences) plus status (Generalized System of Pr Generalized System of Prefer references HANDBOOK ON THE SCHEME OF THE EUROPEAN UNION, n.d.). This kind of trade access depends on developing countries’ human rights, environment, climate change, and level of democratic standards, and low in these indicators will automatically shun the GSP plus status for that country. This kind of trade instrument thus turns into economic sanctions as it imposes costs on that particular regime to mend its ways or lose a trade partner in Europe. The GSP plus is a strong foreign policy tool to change the attitudes of hybrid regimes.
The legality of the Economic Sanctions.
The economic sanctions imposed by any country or Multilateral organization does raise an issue of legality, as mentioned earlier that most foreign policy objectives pursued by states are based on national interests and thus to protect those interests that state can go to any length using its economic relevance or might to hurt the other state. This on certain occasions raises an issue of the legal status of those sanctions. Here we have a relevant example from the US-Iran rivalry over the decades. The US is one of the first countries to link national security with International law, and thus used economic sanctions as a foreign policy, trespassing its legality. The US economic sanctions regime against Iran since a revolution and the hostage crisis is the most sustained economic sanctions framework in the world, in 1996, the US enacted the ILSA Iran and Libya Sanctions Act (Bhala, 1998). From that era in one form or another sanction, regimes remained in place against Iran. In 2015, a breakthrough nuclear deal JCPOA The Joint Comprehensive Plan of Action was signed between Iran and P5 states including the United States ended the sanction regime for a brief period of time (Armscontrol.org, 2019). Trump on winning the elections reimplemented the maximum pressure policy on Iran and breaching all International conventions announced a unilateral withdrawal from the Peace Deal and reimposed harsh sanctions on Iran (Gould, 2018). This withdrawal places the EU in a precarious position. As it saw no legal justification to withdraw from the deal, as Iran was complying as per the official IAEA International Atomic Energy Agency reports. The EU implemented its part of the deal with Iran till now. The European Union devised a trade framework with Iran to escape the US sanctions this framework is known as Special Purpose Vehicle (ECFR, n.d.). The US over-reliance on these trade sanctions compelled some of the biggest Trump critics, Nobel Prize Winner Professor Joseph Stiglitz, that the EU and China which are under illegal tariffs, must impose joint economic sanctions on the US. Illegal coercion contributes to a sustained sanction regime (Amazon.com, 2020). The US has a long history of legislation pertaining to economic sanctions as mentioned earlier that IEEPA was promulgated in 1977, the act was a replacement of the Trade with Enemy Act TEWA, in 1917 (Rogers, 1989). The repeated violation of International conventions brought the US in a very precarious situation, and two successive Presidents, President Bush, and Obama strived hard to change that image and it was the reason that the US opened to China by facilitating it to join WTO and the Obama administration did a lot to change the course of history with Iran. Which was later undone by President Trump.
The secondary economic sanctions are the right way to deal with rogue states and their leaders, as they commit mass atrocities against their own people, targeting the whole population under the stated foreign policy objective is unlawful (Fabre, 2016). The sanctions policy in the West evolved rapidly after the fall of the Soviet Union, as it was the beginning of a unipolar era, as the year 1992 saw the most number of economic sanctions imposed (PIIE, 2016). As mentioned earlier, it’s now been four decades that Iran is under a sanction regime. Many experts believe that unilateral sanctions are illegal from the perspective of international law (Marossi and Bassett, 2015). The recent Chinese opening to Latin America and Central Asia is also under the US lens, and countries relying on Chinese loans come under intense scrutiny, as most nations go to IMF and world bank to bring some monetary and fiscal discipline in their countries, the Trump administration put on notice all the renegade nations and due to United States influence in these institutions their payments were delayed or halted, this is tantamount to indirect economic sanctions, but it does violate the principles of these international organizations and is thus illegal to influence or disrupt the process if all conditions are agreed upon between that particular state and the IMF or World Bank.
Consequences of the Economic Sanctions.
There are multifaceted consequences of the economic sanctions, if economic sanctions are imposed due to economic expediency to punish or change the behaviour of nations which are involved in predatory trade or dumping practices, its outcome is always positive, But if the main reason behind imposing economic sanction is political and tied to the achieving the foreign policy objectives then it can create large humanitarian disasters. As seen in the case of Iraq, which came under sanctions regime in 1990 (Breuning, 2007). This was the beginning of globalization and due sanctions regimes in place the globalization never reached Iraq, Syria, Libya, Cuba and Iran and these are one of the worst places on earth in terms of the standards of living and security. Many of the International organizations such as FATF Financial Action Task Force, which is also known as a minilateral organization, in which powerful countries influence can label any country as a grey list or black list, if this is done through unbiased scrutiny then it’s always produced great results to cap money laundering and terror financing (Nance, 2017). Due to political reasons FATF is used for foreign policy objectives, any grey or balck listing can tarnish a country’s economy in which the main victims are the common people. The targeted economic sanctions such as freezing of assets compel dictators to look inward and exploit the local economy to its own advantage thus creating more misery for the people, thus Humanitarian consequences are the multifold of the economic sanctions. Some economic sanctions against established major powers can bite back, as is the case of Russia and China, which devised its own sanctions regimes against the EU and United States. Russia is a major gas supplier to most of Europe, and it devised its own expediencies to deal with targeted US sanctions on its oil, gas and LNG companies, these expedencies allowed these countries to bypass those sanctions resulting in a foreign or energy policy failure for the other nations (www.nlb.gov.sg, n.d.). The non economic assessment to gauge the efficacy of these sanctions is often carried by our political think tanks, which rarely ascertain the costs of those sanctions on those companies. But platforms like S&P Global, Bloomberg, The Economist and Forbes do come up with irrefutable data that show where these sanctions are hurting. The multifaceted consequences make it clear that economic sanctions come with ethical and legal costs for the nation who imposed such sanctions, and in case of major powers these sanctions can backfire.
All the examples explained in the paper clearly depicts that political expediency is the major impetus behind imposing economic sanctions, and these expenedicies are thus part of the larger and sustained foreign policy objective of any nation. US and EU are in military and economic alliance and thus have more potent frameworks to impose the most effective economic sanctions, new emerging powers like Russia, China India and Brazil are well placed to impose their own sanctions, but due to their precarious or ungraded position in the rule based order make their sanctions less effective. International organizations like the EU and UN are not intended to serve the foreign policy objectives of any nation in imposing heavy sanction of tariffs on any country, but due to constant blackmailing of the WHO World Health Organization, World Trade Organization and UN as a whole, under the Trump administration created so many new precedents. The EU as a political bloc can also impose economic sanctions based on its urge to achieve foreign policy goals in any particular region.
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