Opinion

Anatole Kaletsky

Will Putin attempt a last-minute Cyprus rescue?

Anatole Kaletsky
Mar 25, 2013 01:59 UTC

Vladimir Putin could restore Russia’s great power status and maybe go down in history as the country’s most visionary leader since Peter the Great. He could win respect from Beijing and Washington for averting a second global financial crisis and he could prove that Russia understands market economics better than the EU. His miraculous opportunity to do all this started with the Mafia-style “offer you can’t refuse”  presented by the EU to Cyprus on Sunday. It will end on Tuesday morning, if Cyprus banks then re-open under the conditions imposed by the European Troika, as currently planned.

One of the mysteries of the Cyprus crisis has been the lack of response from Russia, despite the obvious strategic opportunities, not just to protect its offshore deposits, but also to exploit the island’s strategic location and its military and energy potential. A possible explanation is that Europe’s indecision also paralyzed Russia -  until last night.

As long as Europe’s policy on Cyprus kept shifting, it was impossible for Russia to intervene, since any help it offered could be rejected or outbid by the EU. As a chess player, Putin probably understood that his best strategy was to wait for Cyprus to get weaker and more desperate, while the EU, and especially Germany, became more impatient and obstinate. The moment to make his move would be when Europe presented an ultimatum too painful or humiliating for Cyprus to accept. That moment arrived last night.

With the EU’s final offer declared, Putin can now make his bid for Cyprus without fearing an auction with richer EU countries who could easily outbid Russia. But will Putin make such a bid? This depends on his answers to three questions: Could Russia afford to offer enough help to save the Cypriot banking system? Would saving Cyprus be useful to Russia? And would it promote Putin’s own interests?

As always in Russian history, we must start with the leader’s personal interests. If Putin could block the Cyprus deposit levy, he would protect assets still stranded there by his oligarch associates, as well as boosting his popularity among the middle-class Russians likely to be the levy’s main victims. But much more important for Putin would be the personal prestige of helping to avert a global financial crisis and outwitting EU leaders to secure Cyprus as a geopolitical prize and a grateful client state within the EU.

The losers in Italy’s election are already clear

Anatole Kaletsky
Feb 21, 2013 18:00 UTC

We don’t yet know the winner of Sunday’s election in Italy, but the losers are already clear. And in this election, who loses may be much more important than who wins.

The obvious loser is Mario Monti, the charming and eloquent economics professor who is widely credited with saving Italy from a Greek-style debt crisis during his one-year term as Italy’s unelected prime minister. Monti could have gone down in history as the most effective and intelligent Italian leader of his generation, had he decided to opt out of this weekend’s election and instead sought appointment as Italy’s president. That is a mainly ceremonial role that can become very important in times of constitutional crisis (which in Italy occur all too often), and Monti could almost certainly have won strong endorsements  from Italian politicians on the left and right.

Instead, Monti surprised everyone by founding a political party and running for Parliament at the head of a center-right grouping. This now looks like a big mistake. According to the last pre-election polls, Monti’s group is running a humiliating fourth, after the Italian Socialist Party, Silvio Berlusconi’s resurrected personal party and stand-up comedian Beppe Grillo’s anarchic Five Star Movement. Worse still for Monti, he seems to have helped his archenemy Berlusconi by splitting the opposition to the scandal-ridden former prime minister. If Monti’s party performs as badly as expected, it will be all too easy for his opponents to present the election as a clear rejection of the painful economic reforms he imposed on his long-suffering countrymen at the behest of the German government and the European Central Bank.

Confessions of a deficit denier

Anatole Kaletsky
Nov 15, 2012 04:44 UTC

Here is a confession: I am a deficit denier.

To say this in respectable society is to be reviled as a self-serving rogue, worse than someone who denies climate change. Yet whenever I see a budget crisis — the U.S. falling off a fiscal cliff; austerity protests paralyzing Europe; Britain’s governing coalition tearing itself apart over missed budget targets -– I cannot resist the same conclusion: These countries’ leaders should take a deep breath, relax and stop worrying about deficits.

For there is actually no fiscal crisis in the United States, Britain or most European countries — including even Italy and Spain. Greece is another matter. But the very specific Greek disaster hardly justifies a generalized global panic about all government debts.

Consider some statistical facts. Interest rates are lower today than at any time in history, meaning that governments find it easier to borrow money than ever before. This hardly suggests impending bankruptcy.

Reject the politics of oversimplification

Anatole Kaletsky
Aug 16, 2012 14:58 UTC

Whatever happens in the election and the euro crisis, the autumn of 2012 may go down in history as a pivotal moment of the early 21st century – a political season that may even be more transformational than the financial upheavals that started with the bankruptcy of Lehman Brothers four years ago. Paul Ryan’s nomination to the Republican ticket means American voters will feel forced to make a radical choice between two very different visions of the government and the market, in fact of the whole structure of politics and economics in a modern capitalist state. The choice facing Europe in the next few months – starting on September 12 with the Dutch elections and the German court decision on European bailouts – is in some ways even more dramatic: It is not just about the role of government, but about the very existence of the nation-state.

But do these decisions really need to be so radical? It is fashionable to proclaim that the future is a matter of black and white: bigger government or freer markets, national independence or a European superstate. But these extreme dichotomies do not make sense. The clearest lesson from the 2008 crisis was that markets and governments can both make disastrous mistakes – and therefore that new mechanisms of checks and balances between politics and economics are required. The second obvious lesson of the crisis was that economic problems ignore national borders and therefore that ever more complex mechanisms for international cooperation are needed in a globalized economy.

Given the historic importance of the decisions that have to be made this autumn on both sides of the Atlantic, it will be tragic if complex issues such as the role of government or the future of Europe are reduced to oversimplified choices between polarized alternatives.

Can a real central bank save Europe?

Anatole Kaletsky
Jul 19, 2012 16:17 UTC

Why is it that the U.S., Britain and Japan, despite their huge debts and other economic problems, have not succumbed to the financial crises that are threatening national bankruptcy for Greece, Spain and Italy – and perhaps soon for France?

After all, even the strongest British and American banks, such as HSBC and JPMorgan Chase, have now admitted that they were as accident-prone as their continental rivals. Borrowing by the U.S., British and Japanese governments is well above European levels relative to the size of the economy. These governments are not even considering fiscal consolidation as ambitious as the 3 percent deficit targets now being written into national constitutions across most of Europe – and Britain has missed by a wide margin the much less demanding targets David Cameron set himself in 2010.

Given that financial markets are supposed to be dispassionate arbiters of economic management, why are they punishing Mediterranean countries with cripplingly high interest rates, while the British, U.S. and Japanese governments are left free to borrow without any apparent limits at almost zero cost?

Why is the response to economic crisis not more serious?

Anatole Kaletsky
Jul 12, 2012 14:46 UTC

The state of the world economy these days reminds me of the famous telegram from an Austrian general, responding to his German counterpart toward the end of World War One. The German described the situation in his sector of the Eastern front as “serious but not catastrophic”.  In the Austrian sector, the reply came, “the situation is catastrophic but not serious”. In much of the world today the economic situation is verging on catastrophic, but “not serious” seems a perfect description of the political response.

Four years after the Lehman crisis, economic activity and employment in the OECD has not yet returned to its pre-crisis level. Unemployment is at postwar highs in every major European country apart from Germany and, while the U.S. jobless rate is now a little below its postwar record, it has been stuck above 8 percent for longer than at any time since the Great Depression. And in Britain, the long-term loss of output assumed by the government’s latest budget forecasts implies, according to Goldman Sachs calculations, that the six months of the post-Lehman crisis did greater permanent damage to the country’s productive capacity than the Great Depression or World War Two.

Now consider the response. In the U.S., the four years since Lehman have been dominated by economic debates among politicians, media commentators and business leaders on issues that are almost totally irrelevant to unemployment and the pace of economic recovery: how to reduce long-term budget deficits and whether to tweak the top rate of income tax from 36 percent to 39.6 percent. In Britain, the biggest economic controversy this year has been the extension of value added tax to hot pies. Europe’s response to the deepest economic depression in living memory – and an even more alarming xenophobic nationalism that threatens the literal disintegration of the euro and the European Union – has been to debate the bureaucratic “modalities” of bank regulations, fiscal treaties and pension reforms in the next decade.

A German exit from the euro could be relatively easy

Anatole Kaletsky
Jun 27, 2012 19:00 UTC

The fundamental problem of the euro is widely seen as one of “herding cats” – the impossibility of coordinating complex policies among 17 discordant nations, each with different interests, traditions and ideas. This is not true. The dividing line in Europe is much simpler. On one side are France, Italy, Spain and every other significant country, backed by the U.S., Britain, the IMF, the European Commission and the leadership of the European Central Bank, proposing serious and complex technical solutions based on genuine fiscal federation, which means the sharing of national debts. On the other side is Germany, occasionally supported by Finland, Austria and Slovakia, always saying Nein!

Every new veto threat from Angela Merkel increases Germany’s embarrassing isolation, as Joschka Fischer, its former foreign minister, recently warned: “Germany destroyed itself – and the European order – twice in the 20th century. It would be tragic and ironic if a restored Germany … brought about the ruin of the European order a third time.” But if Germany’s role as spoiler is increasingly recognized, why don’t the other countries do what this column suggested last week: Tell Merkel to put up or shut up – either abide by majority decisions or leave the euro?

The standard answer is that Germany is the “paymaster” of Europe; so without Germany the euro zone would be “bankrupt”. Such metaphors are a lazy substitute for clear thinking. To see why, compare the consequences of Germany leaving with the Greek exit, which was described as “manageable” by European officials only a few weeks ago. German departure would be less disruptive than Grexit for three reasons.

Can the rest of Europe stand up to Germany?

Anatole Kaletsky
Jun 20, 2012 19:02 UTC

As financial markets slide toward disaster, scarcely pausing to celebrate the “success” of the Greek election or the deal to recapitalize Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank – has been vetoed by Germany, and this pattern looks likely to be repeated next week.

Nobody should be surprised that Germany has become the greatest threat to Europe. After all, this has happened twice before since 1914. To state this unmentionable fact is not to impugn Germans with original sin, but merely to note Germany’s unusual geopolitical situation. Germany is too big and powerful to coexist comfortably with its European neighbors in any political structure ruled purely by national interests. Yet it isn’t big and powerful enough to dominate its neighbors decisively, as the U.S. dominates North America or China will dominate the Far East.

Wise German politicians recognized this inherent instability after 1945 and abandoned the realpolitik of national interest in favor of the idealism of European unification. Instead of trying to create a “German Europe” the new national goal was to build a “European Germany.” Unfortunately, this lesson seems to have been forgotten by Angela Merkel. Whatever the intellectual arguments for or against German-imposed austerity or the German-designed fiscal compact, there can be no dispute about their political import. Merkel’s stated goal is now to create a “German Europe,” with every nation living, working and running its government according to German rules.

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