Festung Europa :: The Politics of a Humanitarian Tragedy

As the rolling coverage of the horrific terror attacks on Paris continued to squeeze out every last drop of usable information, two separate bits of news caught my eye.

First, in typical Parisian fashion, the top trending hashtag on Twitter immediately following the attacks was #OpenDoors – Parisians took to Twitter to ask their compatriots looking for shelter to come and share their flats and homes.  It was astonishing, and yet somehow not at all surprising that this very international city, famed for its hospitality should react in this open way.

Paradoxically this ‘openness’ policy is seemingly what caused this attack. France has been leading the EU in pushing for other member states to accept the huge numbers of Syrian and African refugees ; and while many had questioned this policy the state had gone ahead and agreed to house and shelter large numbers of migrants, fleeing the civil war in Syria and the violence in sub-Saharan Africa.

Amongst the larger and richer EU nations only Germany has done more to house, clothe and feed the many hundreds of thousands of people who make the perilous journey to mainland Europe. A few weeks ago the Chancellor, Angela Merkel, announced that Germany would take in an additional 800,000 refugees (roughly 1% of the population). This immediately started a huge rush to get to Germany from within Europe and emboldened those yet to make the journey from the badlands.

While she may have had genuine humanitarian concerns, this was a shrewd decision – based mainly on social welfare and economic considerations. Germany’s industrial powerhouse is slowing down, added to this, life expectancies are rising. This puts a pressure on the present generation of tax payers whose tax Euros go to the social welfare of retirees. Unfortunately, Germany’s population growth rate has been steadily declining for more than a decade. This makes it difficult for the industrial powerhouse to perform as well as it wants to and for the state to get its social welfare contributions.

This uncharacteristically unilateral decision by the Chancellor – who has usually played a stickler by the EUs rules hitherto – put huge pressure on the other EU states to either follow suit and face an electoral backlash or face a breakdown of the Schengen system. Sweden imposed border controls, followed swiftly by Hungary and Slovakia who erected border fences – as they neither had the economy to absorb the new workers nor the social safety net to look after them. Italy and Greece, reeling from their own economic depressions threatened to flood southern Europe with undocumented migrants.

At the heart of this matter are a few questions that need answering: firstly, are these people to be treated as economic migrants or political asylum seekers? If the migrants are political asylum seekers, then will they and their families be repatriated to their homelands once the conflict is resolved? This would raise fresh issues.

Between now and when peace and stability is restored, the migrants may enter the social welfare system of the host nations, children may be born in the EU states and may enter the state schools. What is to happen to these people? Are they to be sent back by force, if they refuse to go voluntarily? Further, if a number are sent back, who decides who has to leave and with what criteria?

If they are to be treated as economic migrants, then what of Europe’s own unemployed youth? Spain, Portugal and lately Greece have seen record unemployment amongst the youth and it may be legitimately asked, what right does Germany or France have to provide opportunities to people from non-EU states while fellow EU-member states suffer.

These questions need answers and unfortunately the climate isn’t conducive for it. However, before long such matters will have to have solutions. Europe cannot afford a rightward swing. Unfortunately, that’s exactly what seems to be happening. Poland has elected a hard-right President who campaigned on an anti-immigrant stance and won handsomely. This might give ammunition to France’s Marie-Ann Le Pen and German PEIGDA party to harden their stance. The UK’s UKIP also isn’t far behind and recently grabbed headlines during the recent Calais Crisis by calling on the Government to bring out the Army.

Europe simply cannot afford another right-ward tilt, especially as it is now, embarking on a project to become more than ever, a tightly knit, inclusive global community of peoples.

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The second – not unexpected at any rate – was the reaction of some sections of the American media who immediately managed to find a shared sense of victimhood with France. As words like “American values” started making appearances on CNN, several ex-law enforcement officers and almost all the Republican Party candidates and grandees called on the President to take more effective steps to combat ISIL in the middle east, including putting “boots on the ground”.

Things got out of hand a few weeks later, when Republican Party front runner Donald Trump called for Muslims in the US to compulsorily have ID cards. Not to be left behind, other primary candidates joined in the shrill chorus – establishment candidates Jeb Bush and Ted Cruz called for only Christian refugees from the middle east and Africa to be taken in; former neurosurgeon Dan Carson likened the refugees to ‘rabid dogs’ and in the US Congress, 48 Democrats helped pass a Republican bill for greater scrutiny and vetting of refugees while almost a quarter of all state governors signed a petition saying that they wouldn’t allow Syrian refugees into their state.

There is a section of the politicians in the US that believe that the Islamic State (IS/Da’esh) can be beaten by a show of force. However, mindful of their domestic pressures, they’re not committing to “boots on the ground”, just smart bombs and predator drones. This is problematic on many counts.

Firstly, IS controls territory where there are many innocent civilians who are trapped and have no means of getting out. Bombing those areas puts them in the very real danger of becoming a depressing statistic of collateral damage. Second, IS doesn’t have formations or columns like a regular army and thus aren’t in one place ready to be bombed. Thus the very expensive bombs that will be dropped on them won’t make much headway unless they target a commanders’ conference (which isn’t likely to be advertised). But most importantly, bombing has usually always been used as a tactic to soften up resistance so that the regular ground forces could advance and hold territory.  As this isn’t likely to happen, it’s equally unlikely that any great headway will be made against IS.

The best solution would have been for a multi-nation Arab coalition take on IS and defeat them on the ground, retaking land and restoring sovereignty of Syria and Iraq. This too is unlikely as Turkey, Egypt, Iran and Saudi Arabia aren’t likely to agree on anything; put the historic Shia-Sunni split in the mix and the geopolitical cocktail gets toxic.

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Meanwhile, the refugees keep streaming in, politicians bicker and the Islamophobes and Islamists sharpen their knives.

If you want more background, there is an excellently researched article on the Islamic State in the Atlantic here

 

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Pax Americana : Who inherited the American Dream?

Written in July 2014, just before the US presidential polls. Romney(R) vs Obama(D)

Alexis de Toocquevile wrote, in “Democracy in America” that the country’s

“…greatness lies, not in being more enlightened than any other nation, but rather in her ability to repair her faults”.

While that may have been true for the decades gone by; those looking to the current US Presidential race for signs of leadership and redressal, would be sorely disappointed.

In an article A Big Beast to Tackle (The Economist, Jul 28th 2012), the correspondent bemoans this very fact; that the US elections of late have usually boiled down to a single issue. While the issue, no doubt, is complicated and cumbersome – to say the least – that an entire Presidential election should revolve around it alone is, in the opinion of this writer, perhaps a case of over simplification.

Given that most US election campaign are a continuous feedback loop of kneejerk reactions to other kneejerk reactions, the correspondent does a good job of linearising the chain of events and presenting entire economic beliefs of the opposing camps in succinct, sentence-length quotes. However the data at the centre of this issue belies an uncomfortable truth. Government spending in recent years has been due to the foreign wars the US is fighting and the social welfare support that it has had to shell out – both due to the retiring babyboomers and the Hank Paulson lead nationalisation of mortgage lenders. Private investment spending too is lagging behind the 1980s standards. The newly-elevated Paul Ryan – the Tea Party candidate for Vice President-ship – advocates for a leaner government; but as a conservative will not cut military and security spending. That means welfare, regulatory and development expenditures will face a cap. That is perhaps not something the population at large may want to countenance.

On the other side of the political spectrum, Barack Obama will find it harder and harder to pursue an expansionary monetary policy with the “looming fiscal cliff”. The increasing in regulatory oversight – needed, the Democrats assure us, because de-regulation is seen as the primary cause of the 2009 financial crisis – is also seen as a growing burden for America’s now disappearing middle-income families.

The article is well-researched and even better presented; with each opposing view point getting an even-handed chance to be heard. While the matter certainly is debated to the fullest length possible, there doesn’t seem to be a viable endgame in sight; or better yet, a workable solution. If the US economy has to recover, the correspondent argues, somewhere a balance will have to be made. The Republicans will have to live with a marginally higher tax-rate while the Democrats will have to swallow a cut in welfare expenditure. This then, may yet help the economy; but as the correspondent writing No Miracle Cure (The Economist, Aug 11th 2012) argues, that may be too little too late.

While annualised growth in the quarter, did see a slight jump in numbers; and more people did get hired, the fact still is that this recession and recovery is vexing economists. By all accounts comparisons, the economy grew much after previous downturns. As with all matters political – Ronald Regan is being made the benchmark. While a hesitant Obama argues that whatever little has been achieved, is due to his policies; Romney claims the administration’s short-sightedness is hampering a full boom. As always, studies and reports are being pulled out of hats to show any number of factors and causes – that both parties may claim to be in support of their claim.

But forgotten amidst the din of name-calling is the fact that the 1980s saw both a slew of big name bankruptcies and a deluge of government spending; game changers in economic policy. While Regan outspent Gorbachev in military hardware, the Volker-led Fed slashed interest rates to provide cheap capital and kick-start a recovery. Neither of these two options seem viable now – not the least because the Fed’s rates are near zero already. While the article does make a cogent point about why this recession has not seen a postrecession boom, it fails to drive it point home; replying more on on-the-surface data than an in-depth qualitative analysis. It also fails to show a policy-led solution. Both these articles then, are well-meaning but, fall short of providing meat.

While this may be because both are political pieces and use the election as a backdrop – they nonetheless do not propose anything; shopping just at collating the issues at hand.

“Gentlemen, we have run out of money, it’s time to start thinking” – Sir Ernest Rutherford

Since the 1980s – heydays of Reganomics – much of US economic policy has favoured short-term profits over long term investment. That has generally led to dismantling of the regulatory frameworks and the explosion of the financial services industry – the sole job of which is to aid and abet the speculation in complex financial products.

As if that were not enough; the top tax rate for all Americans was cut to about 23%. This exempted people from paying tax on capital gains, interest and dividend. Everywhere you looked people were diverting money from the safety of bank checking accounts to the financial markets. Financial intermediaries, eager to cash in, lent a helping hand; and very soon tens, even hundreds of millions of hard-earned savings were being channelled into speculative ventures – that had little or no interface with the real economy – the one with goods, services, assets and liabilities. Large corporations, which had analysts’ expectations to beat and ever increasing profits to post, soon realised that the cost of capital was increasing – as money was being sent to the financial markets – and that availability was falling as people used savings to buy derivates rather that dinnerware.

While much of this shift from real to financial economy was engineered – and to great perfection – another, perhaps intended, consequence was that all this speculation has made the domestic US economy heavily dependent on the Forex markets. This was done in two ways. Firstly, as domestic consumer spending came down, corporations made less profits and employed less people. To maintain profitability, they moved much of their operations abroad, to less expensive – read emerging – economies. This meant that all capital moving across borders would have to go through the foreign exchange market.

Also as more and more speculation was allowed, international denomination of derivatives and other products became the norm. Here too the foreign exchange market played its part – channelling the excess money to places it deemed worthy, by tweaking the demand and supply of particular currencies. Another consequence, though perhaps not as immediately apparent, was the indebtedness of the US government. As tax cuts pushed down the administration’s revenue collections, heavy wars and a somewhat unnecessary war footing (first the cold war and now the war on terror) and the welfare payments meant that outflows increased. This gap was financed using bonds – also denominated in US Dollars, but sold in all bourses worldwide.

Here too was the invisible hand of the forex markets. Emerging economies – where high quality goods and services may be procured for a fraction of the cost of developed nations – are equally under the same strain. Corporations looking to outsource manufacturing and development come with the condition that de-regulation and a freely denominated currency is a must for investment. The hapless and often poor and populous countries can do little but comply. Here, it may be interesting to note that all of the nations today deemed as “emerging” were not so long ago colonies of the very same nations called “developed”.

Many have posited that political independence was given on paper only while turning the “captive markets” (apologies for the unintended language) into shared markets. The USA, by the looks of things should be sitting pretty, but that is not true either. The rise of the financial sector has led to the rise of service jobs. Corporations, looking to squeeze another drop of bottom-line figures have sent all the jobs to low cost countries.

All this has led to a drop in the number of manufacturing jobs in the USA. Most middle income households over the last 30 years drew the salaries from manufacturing. The loss of that competitive advantage has left people with reduced salaries and the economy with fewer jobs. This is a double whammy. Not only does this leave the consumers with less spending power; but more crucially essential linkages in the business-to-business chain – the backbone of any strong economy – get broken.

Technological advances and innovation, both of which lead to higher capital expenditure, have been lost from the American lexicon. Without constant capital expenditure, no society maintains the conspicuous consumerism that had come to define the “American Dream” in the decades after 1980s. As, the gap between government revenue and expenditure widens, in the same way the gap between the rich and the poor continues to widen, leaving the “squeezed middle” to bear the brunt of taxation. Unfortunately, this means that a great deal of policy debate has to do with who should pay how much tax and if taxation should be progressive – that is based on the person’s ability to pay them.

While that is a good way to bring about social equality (and raise revenue) it nonetheless has taken the debate off base. Tax policy debate should be more about how to raise tax revenue effectively and cheaply. Then only should the debate go on to who pays how much. Conservatives (in the US at least) are so called because they want to conserve the Constitution. In speeches and across campaigns they have often mentioned the founding fathers of the nation – though never which exact founding father. If it was Alexander Hamilton – the first US Secretary of the Treasury – then he would probably be horrified at the situation. Hamilton was a proponent of what can only be described as a “national industrial policy”. That means higher taxes of industry and tighter controls. The Republican Party’s idea of low taxes, no regulation and small welfare spending would be anathema to Hamilton. The Democratic Party too has its problems. It wants to raise taxes, increase welfare spending, but corporate lobbyists dog it’s every move. And while the Walter Mittys derive solace from the EU’s troubles, the fact is that populist, not common sense rules the roost.

In the final analysis, the USA is still the dream of every graduate of every business school in the emerging world. It is still the destination of every person fleeing persecution or poverty from every corner of the globe.

Robert Kennedy once said,

“There is discrimination in this world and slavery and slaughter and starvation. Governments repress their people; millions are trapped in poverty while the nation grows rich and wealth is lavished on armaments everywhere. These are differing evils, but they are the common works of man. They reflect the imperfection of human justice, the inadequacy of human compassion, our lack of sensibility towards the suffering of our fellows. But we can perhaps remember — even if only for a time — that those who live with us are our brothers; that they share with us the same short moment of life; that they seek — as we do — nothing but the chance to live out their lives in purpose and happiness, winning what satisfaction and fulfillment they can”

No words before or since have captured the idea of America – The Free World better. However, much of that is being washed away by nit-picking on welfare. Mark Twain once said that an ounce of History is worth a pound of logic. It is a pity then that economists don’t study history and historians don’t study economists (and politicians study nothing but ballot papers and gallup polls).