The Power and the Money

Nots on the new Brexit deal

The new Brexit deal seemed like a weird animal.

The old Brexit deal kept the whole U.K. in a customs union with the E.U. since nobody wanted a customs border running down the Irish Sea. The new Brexit deal seems to run a customs border down the middle of the Irish Sea. Surely there is more than that? I thought to myself.

So I read the damn thing. And here is what it says:

1. Article 4 says that the U.K. may strike free trade agreements (FTAs) with third countries, “provided that those agreements do not prejudice the application of this Protocol.” Meaning that the protocol does not guarantee that foreign goods will enter N.I. tariff free. Rather, it guarantees that N.I. goods may be exported to other countries tariff free as long as the U.K. has an FTA with them.
2. Article 5 establishes that the only way you can move a good from the Rest of the United Kingdom (RUK) to N.I. is to prove that: (a) That good will not be processed in any way once in N.I.; and (b) That good is determined to be not-at-risk of entering the E.U. by the “Joint Committee.” There are no clauses about the makeup or procedures of the Joint Committee. At some point, then the U.K. will have to make this determination, either before the good leaves the RUK or when it enters N.I.
3. Article 6 establishes that protecting the U.K. against smuggling from the E.U. is entirely up to the U.K., as long as they do it in the North Sea or the RUK.
4. Article 7 creates a separate “Made in UK(NI)” tag for goods made in N.I.
5. Article 10 requires the U.K. to stick to E.U. rules on state aid for private companies.
6. Article 12 lets European officials monitor the way U.K. officials enforce European law in N.I. It also retains the authority of the European Court.

In short, yes, N.I. stays in the E.U. single market, unless both London and Brussels agree that a particular good can be shipped into N.I. without any problem. 

So this is not some sort of technowonder panacea. It is a deal that Europe offered the U.K. quite a while ago. Leo Varadkar must be pleased that London finally caved, although he can not say so. (Note the title of this post!) 

To be honest, I can see why this might be better from the point of view of a Brexiteer. The Brexiteers seem to have given up on keeping the United Kingdom together as a primary goal anyway. Given that, what is so bad about an internal customs boundary? Article 12 looks a bit squicky, true, but it only applies to Northern Ireland and the Joint Committee (however it is constituted) will give London a bigger say than it has now.  

On the other hand, it seems like a pretty radical plan, separating N.I. from the RUK. But so was Brexit. 

One of these things is not like the others, trade war edition

So, the Trump administration just announced tariffs on a swathe of European imports, and the Europeans announced they would retaliate. More Trumpian trumpety trump?

No. The WTO is working as it is supposed to work, regardless of the predilections of member governments.

A bit more detail: a WTO panel just ruled that the E.U. was illegally subsidizing Airbus and gave the U.S. the right to slap tariffs on $7.5 billion of European exports ... out of $488 billion last year. Now, as @geoffreygertz will tell you, trying to ID unfair trade practices in aerospace is a fool's errand. But that didn't stop the WTO panel, which ruled the way it ruled. So the Trump administration is acting just like any other in imposing the tariffs. (With one wrinkle and one threat, which we will get to at the end.)

But what about the European threats of retaliation? Isn't that a sign that we're in a whole new world?

Nope. The Europeans have actually threatened to retaliate WHEN and IF they win their own WTO case against the USA for illegal subsidies to (you guessed it!) aerospace. You then get two perfectly legal outcomes.

1. Both sides keep the subsidies and keep the new tariffs.
2. Both sides (or one) walk back both the subsidies and the tariffs. The WTO was /designed/ to make outcome (1) palatable, even if most politicos at the time expected (2) to be the common outcome.

The WTO does not prevent trade conflicts or outlaw protectionism. What the WTO does is keep trade spats within bounds. The E.U. and the U.S. punch each other. The WTO referee then decides if the blows were kosher or below-the-belt. If the latter, the WTO referee then gives the wronged party one-and-only-one chance to punch back. After that, we hope both fighters will kiss and make up, but even if they don’t, the point is that they then stop punching. 

The WTO stops endless retaliation. It does not prevent one or two rounds of tit-or-tat. Right now, therefore, the system is working as designed. And it will even if the Europeans win their case and impose tariffs on the USA. Of course, this is Trump World, and who the hell knows what might happen? But as of right now, nobody should think there's anything weird about these tariffs.

But there is a wrinkle. The U.S. is thinking of imposing rotating "carousel" tariffs on an ever-changing selection of European products. That would hurt the Europeans more (and increase uncertainty) but look okay under the rules.

Kinda violates the spirit, but hey. Even there, though, the wrinkle is not the Trump Administration: it is the Trade and Development Act of 2000, which allows the USTR to periodically revise the list of products subject to retaliation when another country fails to implement a WTO dispute decision. Mexico employed them against the U.S. last year.

Of course, with all the norm breaking going on, it is possible that Europe will break the rules. The French finance minister has implied that Europe should go to the mattresses and apply sanctions now.

That said, I doubt that Europe will throw out the WTO handbook unless the U.S. does so first. The German foreign minister, Heiko Maas, stated that Europe will follow the rules and wait until it wins (it assumes) its counter-case against U.S. subsidies. And the collective nature of European decision-making makes it unlikely that the E.U. will throw caution to the wind; there is no one official to damn the torpedos.

In short, while the Trump administration has broken many many rules and trashed the world trading system, this latest kerfuffle is an example of the system working precisely as intended. 

Brexit is over?

There is nothing really new in the piece. I am just laying out my thoughts, because I am a little confused. Which I suppose is standard for anyone trying to think about Brexit.

Specifically, I am confused as to why commentators continue to discuss the future form of Anglo-European trade relations. As far as I can tell, the U.K. just agreed to remain part of the single market and customs union for trade in goods. 

This would be rather more integration than Norway or Turkey currently enjoy. 

Norway is in the single market but not the customs union. It follows European regulations and trades tariff-free with the E.U., but there are customs checks on the borders because Norway imposes its own tariffs on goods from third countries. Turkey is in the customs union but not the single market. It imposes the same tariffs as the E.U. on imports from third countries but it does not follow European regulations. So there are customs checks on its borders to insure that only goods that conform to European law are allowed to enter the E.U.

But the U.K. cannot have customs checks on the Irish border. So unless Northern Ireland agrees to leave the British Customs Area, the U.K. needs to stay in (at least for goods) both the single market and the customs union. And that is what the recent declaration says. The U.K. “will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

So no customs checks because the U.K. will follow every European rule on every single physical tangible thing that anyone might want to bring into the country. Which also means accepting the decisions of the European Court of Justice about the interpretations of those rules.  

This represents an unprecedented level of economic integration for a non-E.U. country. Heck, I am not sure if there is anywhere in the world that integrated absent some sort of political union. 

London will still in theory be able to stop Europeans from being able to legally work in the U.K. in return for giving up access to the European market for British service exports. But no more “global Britain” signing trade agreements with countries around the world. 

I am surprised that the political reaction in Britain has not been stronger. Where are the Brexiteers? Or have they been yelling and I am just missing it on this side of the Atlantic?

“Frankly, I’d like to see the government get out of war altogether and leave the whole feud to private industry.”

Thus spoke Major Milo Minderbinder in 1943.

Was he right? Does contracting out combat support functions save money? I mean, that is not quite the whole feud, but it is some of it.

The best answer comes from study published by John McGrath, at Fort Leavenworth. Below are the figures from Table B-2 for various American wars. The figures apply only to the Army but rightfully include staging areas in Korea and both Gulf Wars: Japan and Kuwait, respectively.

So what do we got? At first glance, success! A higher tooth-to-tail ratio, awesome sauce!

We are back to the levels of World War 2! (AEF = American Expeditionary Force of WW1; ETO = European Theater of Operations in WW2.) Hooah!

Only, well, that does not include the contractors. We really should put them back into the mix, since they did jobs that soldiers did in Gulf 1 and before.

Ah. Well. Not so good.

Now, to be fair, these figures do not include the extensive host-country support the U.S. received in Korea, which would make that war look pretty bad. (Korea would fall to 28% combat troops on a BOTE calculation.)

They also do not include potential cost savings. After all, if private contractors are cheaper, then you would expect that the military would use more of them. Calculating that, however, is incredibly complex, because American operations have become far more capital and resource-intense over time. The simple calculations show ever-rising real deployment costs, but that could be a reflection of the fact that the American soldier in Gulf 2 was rather more lethal (and well protected) than the American soldier of Gulf 1, who was both more lethal and better protected (and better fed) than the American soldier in Vietnam, who was more lethal than the American soldiers who beat Hitler.

It is hard to figure.

But the headline figures should induce skepticism.

This, note, is just for outsourcing support functions; we have not gotten into questions of outsourcing actual genuine combat. You know, what Major Minderbinder really wanted to see. That is an even less-satisfying topic for another post.

What makes a nation?

Florida is a bizarre state. Not only is it different in extreme from the rest of the country; different parts of Florida are different in the extreme from each other. It just should not work. But somehow it does. Every so often somebody idly proposes splitting the state, but it’s never gone anywhere. Ditto secession. Despite the enthusiasm with which non-Americans jump on news of secession movements in California, Texas, Hawaii and Vermont, none of them show even the slightest sign of going anywhere.

Why then is the European Union in trouble or the United Kingdom under threat? It isn’t political oppression, despite what the people in England (regards Europe) or Scotland (regards England) might tell you. Both polities are acceptably democratic, no matter what objections you might have to the constitutional particulars. Is it language? Obviously not in the case of the United Kingdom, and almost-certainly not in the case of the people demanding Brexit, since the European Union has done nothing to weaken English. (Nor any other language; quite the reverse, by demanding full translations from everything into everything.) 

So what is it? Why is the U.K. under strain and why is the E.U. under strain? The obvious answer is that the cultural splits in Europe are much bigger than their equivalents in the United States. 

Alberto Alesina (Harvard), Guido Tabellini (Bocconi), and Francesco Trebbi (U. of British Columbia) decided to answer that question. What did they find? Well, simply put, cultural differences within Europe are less than within the United States. You got that? Texans and New Yorkers differ more in their beliefs about family, religion, trust, sexuality and the state than do Castillians and Dutch or Greeks and Germans. Moreover, cultural differences within European states are bigger than the differences between European states. 

(Amusingly, you can use their methodology to compute the most European part of Europe. You get Germany and Austria. But you also get the Belgium, the Netherlands, and oddly enough big chunks of Spain and Portugal. So much for stereotypes.)

In summation:

A comparison between the E.U. and the U.S. suggests that fundamental cultural differences among Americans are not bigger than that amongst Europeans. Along this dimension, if Americans can share a well functioning federal union, so could Europeans. Needless to say, the United States had 250 years of nation building and 150 years have gone by from the Civil War. Europe has had a much shorter common history and only 70 years have gone by since the last inter-European war. Americans share a common language and geographic mobility in the U.S. has been much higher than within Europe, or even within individual European countries. Mobility helped creating a melting pot and thus a common identity, but apparently did not dampen cultural heterogeneity.

In other words, you are left with nationalism as a defining force by itself. Which leaves you with two possible implications:

1. It might be easier to build a European polity than the current troubles imply;
2. Building any multinational polity is impossible. Two political communities can be identical in every respect, but as long as they define themselves as nations then it will be very hard to create a shared polity;
3. We are reading too much into all this. The stability of the United States and the problems of the United Kingdom are both contingent. Give the U.S. a few bad breaks or give the U.K. better politicos and none of this would be happening. 

Thoughts? It certainly seems as if nationalism has a mysterious strength of its own. But maybe not! Maybe it is all on (3): political communities grow and disintegrate in hinky contingent ways; nationalism follows (or doesn’t.) Frex, you can’t get the near-identical West Indies to unite but you have no problem holding the unbelievably diverse United States together. 

Worthwhile Euro-Canadian initiative: globalization can be progressive

In April of 2016, I posted about a European initiative to reform investment tribunals. I thought it an excellent idea. The idea would be to make the tribunals more like real honest-to-goodness courts, with due process and precedent and all.

Well, now that proposal is enshrined in law in the new European trade deals with Canada and Vietnam. Better still, the Canadians and Europeans are looking to broaden the system, inviting even more countries to participate. It is refreshing on two counts. First, cooperation in this world of increasing deglobalization. Second, it is a progressive multilateral institution, one which might make the world a marginally fairer place.

Nice.

Eurovision, missed

It tells you how much I care about Eurovision that I completely forgot to post this and let it linger in cloud purgatory.

 

I have no desire to watch the Eurovision song contest by myself. I have no desire to watch the Eurovision song contest with my family. I have no desire to watch the Eurovision song contest with anyone who has not previously watched the Eurovision song contest. I have never in fact watching the Eurovision song contest.

But I would watch it with Doug Muir. I sorely miss his liveblogging of the event. His drunk liveblogging, even better! 

Paranoid thoughts

 The fat crybaby has whined that he won’t defend the Baltic States unless, well ...

SANGER: If Russia came over the border into Estonia or Latvia, Lithuania, places that Americans don’t think about all that often, would you come to their immediate military aid?

TRUMP: I don’t want to tell you what I’d do because I don’t want Putin to know what I’d do. I have a serious chance of becoming president and I’m not like Obama, that every time they send some troops into Iraq or anyplace else, he has a news conference to announce it.

SANGER: They are NATO members, and we are treaty-obligated ——

TRUMP: We have many NATO members that aren’t paying their bills.

SANGER: That’s true, but we are treaty-obligated under NATO, forget the bills part.

TRUMP: You can’t forget the bills. They have an obligation to make payments. Many NATO nations are not making payments, are not making what they’re supposed to make. That’s a big thing. You can’t say forget that.

SANGER: My point here is, Can the members of NATO, including the new members in the Baltics, count on the United States to come to their military aid if they were attacked by Russia? And count on us fulfilling our obligations ——

TRUMP: Have they fulfilled their obligations to us? If they fulfill their obligations to us, the answer is yes.

HABERMAN: And if not?

TRUMP: Well, I’m not saying if not. I’m saying, right now there are many countries that have not fulfilled their obligations to us.

Add to this the fact that the only part of the GOP platform that the Trumpistas really fought against was a clause calling for selling weapons to Ukraine. Now, I do not support selling weapons to Ukraine, although I could be convinced. But in light of the above pronouncement, I find it really strange that this was the part of the Republican platform that they went to the mattresses over. 

Hey, to paraphrase the Republican nominee, I’m not saying nothing. People are talking, is all. 

Is there a very British kludge for Brexit?

This blog suggested that one way around the Brexit issue would be a brief treaty revision that declared England and Wales to be an “overseas territory” of the United Kingdom. That way, the U.K. government keeps a seat at the table  while England and Wales leave the single market. The half-Brexited U.K. would, of course, have its representation at Brussels reduced to reflect only the population of Scotland and Northern Ireland, but it would retain a national veto where one applies.

And therein lies the rub. As Callum points out on Medium: “With Holyrood being a subservient parliament in the constitutional order of this country, it can be overruled. Imagine a scenario where the E.U. wants to do a foreign policy initiative that the UK doesn’t want. London has reserved foreign policy, and Holyrood has no right to make foreign policy decision. Yet, Scotland sits on the council and has to vote some way in the council. Say, about sanctions against Russia, for instance. In theory, London could overrule Edinburgh, and force Scotland to vote for or against it. London would then have, indirectly, a veto in a club it didn’t belong to. The E.U. would, of course, have none of that, and wouldn’t accept this situation.”

One imagines that the U.K. could fudge this somehow. After all, this was the country that invented “responsible” self-government, dominion status and the Irish Free State. The question, I think, is whether there is a way that the U.K. can constitutionally make an ironclad guarantee to both Edinburgh and Brussels that Westminster cannot override Holyrood when it comes to voting in Brussels?

That, I think, is the needle that May needs to thread if she wants to keep the U.K. together without provoking a massive backlash from Brexit voters. Ideas?

Coups, public opinion, and broadcasting

The best book on coups is Naunihal Singh’s Seizing Power: The Strategic Logic of Military Coups. It answers many of the questions I had earlier about the attempted coup in Turkey. Singh is at the Air War College in Montgomery, where I am visiting. The below picture is neither from Montgomery nor recent.

The book is excellent. And it answers two questions raised in my last post. First, seizing the means of communication is key. This is not because they are key in-and-of-themselves, but because controlling them is key to convincing all actors that the coup will succeed. The putschists in Turkey failed abysmally at doing that, even before Erdogan used his smartphone to make a videocall. 

Second, popular opinion does not matter. In Singh’s words: “Public opinion has no effect on coup outcomes. Once a coup attempt begins, military actors rarely consider the reaction of civilians to the coup, and their decision to support or oppose the coup attempt had nothing to do with which side had more popular support. Statistically, coups were no less likely to succeed in countries with governments that could be assumed to have reasonably high levels of support (countries with high economic growth, democracies or one-party regimes) than the opposite.”

Here is a good review. 

Thoughts on Turkey

 Turkey is in the middle of an old-fashioned military coup, in the same league as the 2014 one in Thailand. This is not at all like recent events in our hemisphere. Honduras in 2009 was a complex and confusing situation where the constitution failed to contain political disputes. Paraguay in 2012 was only a coup in the fever dreams of the Brazilian government; the impeachment likely violated the spirit of the constitution, but it adhered to the letter. A coup may happen in Venezuela, but it will be a result of a complete collapse of order. We do not do things this way in this hemisphere.

With the kids in bed (they are tired!) I am watching television. I think there is an interesting question about whether Erdogan’s ability to get out messages via the Internet has made a difference as to how the coup has unfolded. There is a research project there ... coup leaders always moved to seize the television and radio stations back in the day, but do we know whether such seizures mattered? Is there data?

There is another interesting question about conscript militaries. It is clear that conscript militaries can pull of coups; it has happened all the time. But do we know whether conscript militaries decrease or increase the likelihood of a successful coup given other factors, like education or the legitimacy of democracy (the latter being hard to measure).

Worth studying.

Oh, and Turkey is not the only Muslim-majority nation in NATO. (Sorry Rachel!) I spent a lot of time in the other and blogged far less about it than I should have. Ni modo, I was tired at that time in my life.

Rajoy is not making sense on Scottish secession

What else would you talk about in Alabama besides Brexit?

Well, lots of things, actually. Like airplanes! But I did spend a lot of time talking about Brexit with the mavens at the Air War College here at Maxwell AFB. My big contribution to the discussion resulted in this tweet: 

Scottish secessionists need to watch Spanish politics very carefully if they expect to remain in the E.U.

— Noel Maurer (@noel_maurer) June 25, 2016

It seems as though the Scottish government is exploring ways to remain in both the E.U. and U.K. simultaneously, although European officials were reluctant to so anything as simple as declare England an overseas territory of the U.K. Their reasoning makes sense: it is early and they do not want to get drawn into an internal British dispute. 

Unfortunately, the Spanish premier, Mariano Rajoy, is dead set against letting Scotland remain. He is afraid of giving the Catalans more ideas. But that seems stupid. After all, Scomain is intended to keep the United Kingdom united, even if it results in a customs barrier running a little bit north of Hadrian’s Wall. Refusing to comprise on the issue raises the chances of Scottish secession, which is the real precedent that Rajoy should be refusing to set. 

I do not pretend to understand the People’s Party.  They started the current support for Catalan secession by opposing the Statute of Autonomy, going so far as to petition the Constitutional Court to declare it unconstitutional. (The court obliged.) I understand wanting to keep Spain together; I even understand refusing to countenance any sort of secession referendum. But I do not understand the resolute opposition to extending quite reasonable grants of autonomy ... and I certainly do not understand what Rajoy thinks he will accomplish by opposing any Scottish attempts to remain in the E.U. without formally seceding from the U.K.

Colonize England! Or, a brief word on Brexit and Scomain

 The Kingdom of the Netherlands consists of several countries and a few overseas municipalities. Only one of them, the eponymous one sitting on the northwest shore of the European peninsula, is part of the E.U. The rest are overseas territories, including the special municipalities. 

So lets look at those special municipalities and the E.U. They consist of the islands of Bonaire, St Eustatius and Saba. Dutch citizens on those islands vote in Dutch national elections. But they do not live in the European Union. What does that mean?

First, there are border controls between the special municipalities and the European Netherlands. Land at Schipol, go through customs and immigration just like any European citizen returning from a foreign country. 

Second, they are not in the single market. They can export duty-free to the E.U. (see Article 43) but with limits: (1) Re-exports can only be sent duty-free if the overseas territory imposes trade taxes at least as high as European tariffs (Article 45); and (2) services are not included (Article 51).

Third, they can establish employment restrictions on non-Dutch citizens. (In point of fact, they can also restrict Dutch citizens born elsewhere in the Kingdom.)

So all Parliament needs to do is declare England to be an overseas territory of the United Kingdom! The English could still vote for Parliament. In fact, they would still be E.U. citizens, strictly speaking. But Parliament could restrict non-British (or even non-English) from working in England.

Of course, England-based financial firms would no longer be able to sell financial services across Europe ... but British firms based in Scotland certainly would. Moreover, the U.K. would remain an E.U. member, and thus retain its voice in Brussels debates over financial regulation. As my GWU colleague, Christopher Mitchell, has pointed out in the Washington Post, retaining that voice is vital for the sector to thrive.

Now, I do not want to minimize the problems: other than retaining duty-free access to Europe, English manufacturing firms would face all the same non-tariff barriers faced by, say, Turkish companies. The dislocation of having financial firms move to Scotland is not nothing. And you would need to institute a customs boundary along the line between England and Scotland. 

But it keeps Scotland in both Unions and keeps Britain at the European table, although its voting weight would drop considerably, given that English residents would no longer count.

There might be a problem with doing this unilaterally, however. Annex II of the consolidated Treaty on the Functioning of the European Union explicitly lists the overseas territories; London may not be able to add to them unilaterally. But it would be a legal mess if it tried; I have no idea how the European Court would rule. 

Somehow I do not think this will happen, but I am not sure why I do not think it will happen. After all, something much weirder just did happen. 

Reforming investment tribunals

 One of the advantages of living in Washington, D.C., is the chance to go to presentations and roundtables organized by the capital’s myriad think tanks. Cato is one of the best. I’m sure that statement surprises some of our readers, but it’s true. They get a lot of good people to talk about interesting issues.

In this case, the interesting issue is the horribly-named ISDS. That’s the acronym for investor-state arbitration, a subject this blog has written a lot about. Basically, the system allows foreign investors to sue governments when those governments are alleged to have expropriated (or at least damaged) their investments. The arbitral rulings are then enforced in national courts, meaning that a British investor “wronged” by the Ecuadorean government can sue for damages in an American court and have that court attach Ecuadorean assets or income streams … including, potentially, PetroEcuador’s oil sales or the proceeds from any foreign bond sales organized by the Ecuadorean government. It’s a powerful tool. And I would argue that it’s much better than a world where investors go back to their home government and ask it to bitch-slap the government that “wronged” them until it pays up.

(Of course, that still happens with some regularity, but that’s a different subject.)

The thing is, the system is profoundly undemocratic and exceedingly odd. First, the tribunals are essentially ad hoc. The parties to the dispute choose at least two of the typical three arbiters, often they choose all three. The arbiters are generally selected from a small rotating group of people … who also often act as counsel in other arbitration proceedings. (It’s like your judge in a civil was also a similar plaintiff’s lawyer.) There’s no appeal process. Decisions are (usually but not always) published but proceedings are confidential. And the system is molasses slow. It’s a goddamned mess.

(Which is why state-to-state bitch-slapping persists, but again, that’s a different subject.)

Few people care in the United States, but in Europe ISDS is a big deal. In part, that’s because Europeans are more concerned with the way the system appears to be biased towards large imperial corporate power. (In practice, the bias is less clear: governments win more than they lose. But I would argue that it nonetheless exists.) But it’s also because European governments are getting hit with seats suits; thirty at last count for poor beleaguered Spain. And Germany has been smacked with a €3.8 to €4.7 billion claim over its nuclear policies.

While I was writing The Empire Trap, I had a long conversation with Steve Haber about the arbitral system. I suggested that the system would be a lot better if it more resembled an actual judicial system, with standing courts, open proceedings, real appeals and reliance of precedent. He agreed … but added that the idea was a Nirvana thesis. Wasn’t gonna happen. He was right four years ago.

And if European governments hadn’t started getting hit with suits, he would still be right! But they did, and the European public noticed, and the European Commission was seized with the issue. Which is why I got to hear Rupert Schlegelmich, the Director General of Trade, present the European reform proposals at Cato. 

The Commission’s proposals would basically turn ISDS into the Investment Court System (ICS): a real genuine court system like the one I proposed to Steve in 2012. The Europeans would write this new system into all new bilateral investment treaties (BIT). Any BITs signed by the European Union would then supersede any old BITs signed by European national governments.

First, the European proposal would enshrine a “right to regulate” in order to insure that the system could not be used to overturn legitimate public concerns, the way the Phillip-Morris, for example, has tried to use ISDS to force Australia to pay it for losses incurred by that country’s cigarette-labeling laws.

Second, it would define “fair and equitable treatment” of investors as the following:

1. No outright denials of justice;
2. No manifest arbitrariness in state actions;
3. No discrimination on manifestly wrongful grounds;
4. No abuse, meaning coercion, duress or harassment.

Third, it would define expropriation as the following:

1. Causing substantial deprivation for the investors;
2. Causing more than an economic impact on their interests;
3. Not including “normal regulatory activities” concerning “health, safety and the environment” unless they were “manifestly excessive.”

Finally, it would create a permanent court with judges appointed by E.U. governments. Said judges (like all real judges) could not serve as lawyers in other investment disputes. Cases would be allocated randomly among the judges. And there would be full transparency in all proceedings, including video.

Wow! Sounds great. But then came Miriam Shapiro to point out with a smile that there was still a lot of daylight between the U.S. and E.U.

The United States, she pointed out, agrees with Europe that it would be a great idea to improve the selection of arbiters so as to put them “above reproach” and let tribunals rapidly dismiss frivolous cases. She also allowed that Washington would smile upon greater transparency.

She then pointed out some wrinkles where it might be hard to find common ground. Frex, how early on can the new court dismiss frivolous claims? Can states provide binding guidance on treaty interpretation before cases are brought? Who pays attorneys fee? Current tribunals can award that to one side or another; the European proposal will award those to the winner. What will the special mechanisms to make it easier for small companies to sue look like? And will there be a binding review clause to evaluate the new system after five years?

But … you can forget an American administration signing on to an appeals mechanism, even if Congress likes it. Simply put, governments win at arbitration and the U.S. wins a lot. Like, always. An appeals process could change that. From Washington’s position, what ain’t broke don’t need fixing.

Anyway, interesting stuff. If the European reform happens, it will be yuuuge, another move from global governance to something more like actual global government. Which may be why, like D.C. statehood, I’m skeptical that the European proposal will fly.

Additional savings from going all America First

 The previous post looked at overseas basing costs and concluded that there were no real savings from shutting them down unless the United States also cut the military budget. Which, of course, we could do without ending our defense obligations.

The post did not account for the fact that NATO has a common budget, funded in part by the United States. That common budget comes to ... €2.1 billion, or $2.4 billion. The U.S. pays 22% of the common budget, or $523 million per year.

There are also individual NATO trust funds established for particular projects. They come to a grand total of €69 million, or $78 million. The U.S. share can vary, but assuming it’s around 22%, then you get a total U.S. contribution of $17 million. (The trust fund projects aren’t annual, but let’s run with that.)

So destroying the entire postwar Atlantic alliance system would save us $540 million per year. Call it a buck-seventy for every man, woman and child in the United States. 

That is not a lot of money. But hey, it is something. Make the Euros cough that up! Yeah! U-S-A! Winning!

Keep calm and carry on ... please

 Terrorism in Europe was much worse in the 1970s and ‘80s, even discounting Northern Island during the Troubles.  The below chart of annual deaths from terror attacks has been updated to include Brussels (and one lone death in Northern Ireland, included since the Troubles officially ended with the Good Friday Agreement.) NOTE: An earlier version of this chart mislabeled the London subway bombings, which occurred in 2005, not 2011. The 2011 spike is due to the mass shooting in Norway by a white supremacist.

Unfortunately, it is not clear that American primary voters care about the historical perspective. On November 30th, we pushed back against a breezy statement by Kevin Drum in which he argued that the Paris mass casualty attacks had no impact on the primary election. Fivethirtyeight has now published a somewhat more sophisticated analysis demonstrating the same argument: both Paris and San Bernadino helped Donald Trump in the GOP primary. 

Hopefully, history will not repeat. It would be better for the country (and probably the GOP) for Donald Trump to go to the convention with less than a majority of delegates.

Reality gets ahead of Ross Douthat speculation: Americans are from Venus!

 Ross Douthat is one of my favorite commentators at the New York Times. He comes from a fundamentally Catholic and small-c conservative background, from which he derives insights quite unlike my own. I rarely agree with him, but he does a very effective job of communicating how he arrives at his conclusions,  which I find very enlightening. You can see where common ground might be found. I encourage my readers to regularly peruse his stuff. 

Today Douthat is beginning an entertaining series of science-fictional tweets: 

Envisioning a future where the Bob Kagan of 2050 writes that "Europeans are from Mars, Americans are from Venus," and everyone nods.

— Ross Douthat (@DouthatNYT) February 11, 2016 

Dateline, 2035: Parisian tabloids scream "Yankee Cowards!" as socialist U.S. gov't opposes French invasion of Islamist-ruled Egypt.

— Ross Douthat (@DouthatNYT) February 11, 2016

Dateline 2032: Democrat-Socialist candidates promise "U.S. out of NATO" after American peacekeepers die policing Russo-Turkish armistice.

— Ross Douthat (@DouthatNYT) February 11, 2016

First, will humans still be peacekeeping in 2032? My guess is “yes,” but robots will be with them.

Second, it looks like fun!

Third, this blog got there first. His future has already come true! We just don’t realize it yet.

A European Border and Coast Guard?

 I once categorized the European Union as a country with a legislature and a judiciary but no executive. Doug Muir took exception to that, but I still think it holds. Europe has a bureaucracy, yes, but with a single exception of competition policy those bureaucrats do not tell private actors what to do. Rather, they tell the executive agencies of E.U. states to tell private actors what to do. People in, say, Spanish uniforms inspect car emissions (or contract with private labs to inspect car emissions), collect tariffs, monitor borders, arrest miscreants, impose fines, inspect vegetables, and carry out all the other policy missions determined in Brussels.

This is very different from real federal countries, like the United States. Europe has food and drug regulators. They never ever ever dress up like the guy on the right, who is an FDA agent named Robert Maes in the process of raiding a facility in Los Angeles. (Yes, FDA. Not a typo.) In the European Union, the European Medicines Agency might find out about a violation, but the people with guns who show up would work for (say) the Agencia Española de Medicamentos y Productos Sanitarios. 

But now under pressure from the mass migration out of Syria (and to a lesser extent elsewhere) the European Commission has just proposed the creation of a European Border and Coast Guard Agency. Go read the link. Impressed? You should be. A more detailed Q&A is here. You can find the full legislative proposal here. 

It still isn’ t quite a fully federal European Coast Guard. Yes, the EBCG will have its own uniformed personnel. Yes, the EBCG will maintain its own equipment pool. Yes, the EBCG will have the power to operate inside E.U. states without the local government’s approval. But most of its capabilities will be provided by reserve pools of uniformed personnel. The EBCG can call those personnel up for European duty whenever the E.U. so chooses, but the personnel will continue to wear their national uniforms (plus a blue armband, see page 49) and will operate under the same restrictions that the state government applies to its own law enforcement personnel. 

The authorization for all this is under Article 77 of the Treaty on the Functioning of the European Union, the first part of which reads:

1. The Union shall develop a policy with a view to:

(a) ensuring the absence of any controls on persons, whatever their nationality, when crossing internal borders;

(b) carrying out checks on persons and efficient monitoring of the crossing of external borders;

(c) the gradual introduction of an integrated management system for external borders.

I guess you could call the proposal an “integrated management system,” although that seems like a bit of an understatement. For all its limitations, it strikes me as one hell of a leap towards a federal Europe, if it happens. 

So, readers, will it happen? The recent history of the Eurozone makes me wonder. 

Europe, befuddling

 Boy, have I been wrong about Europe. In January 2015 I thought that the outlines of a deal with Syriza should be fairly obvious. Nope. By February, I realized that I was wrong. 

So while I would like to write that I think the ECB will accomodate the Greek banks regardless of the referendum, I am very reluctant to do so.

At least I am in good company in my wrongness. 

Greece really has no comparison

 A commonsense definition of “austerity” is “cuts in government spending.” Now, that isn’t quite the correct macroeconomic definition: a cut in spending combined with a bigger cut in taxes is not contractionary. But it matches a good political definition: are countries imposing pain on their populations?

And so, I give you the level of nominal government spending in Greece and the Baltic States, plus Slovakia, because the Slovaks have been incredibly annoying. The figures have been normalized so that 2008 = 100.

Whaddaya know? Greeks have endured austerity beyond anything imagined in the Baltics. Yes, the Baltics are poorer than Greece. But that is not how people feel pain: we are far more averse to losses than to unrealized gains. The pain among, say, Greek pensioners or government employees has been beyond anything the Baltics have seen since the Soviet Union fell apart.

Now let’s look at the other side of the ledger: taxes. How much pain have the Greeks imposed upon themselves in order to pay for their state? As a % of GDP:

My. Puts things in perspective. I really do wish the Balts would just pipe down already. Their countries would be in chaos were things as bad as they are in Greece. 

Greece has no comparison

 Some smug folks recently insisted to me that if the Baltic states could muscle through the current crisis, than so can Greece. Why are the Greeks so upset about more austerity?

Uh ... well, here is the real GDP of Greece and the Baltic countries, indexed to 2007:

 

There really is no comparison.

This applies even if we look outside the universe of countries that either are in the Eurozone or peg their currencies to the euro. According to Gabriel Sterne at Oxford Economics:

The decline in Greek GDP has precedents, but only in wars, commodity collapses, and Argentina. Even without exit, it is likely to have been in the bottom 4% of crisis recoveries seven years on if IMF projections for 2015 prove correct. Greece’s $-GDP will likely have declined at least 42% between 2008 and 2015. Below Greece are five extreme cases:

• Ghana (1982), whose $-GDP never recovered for years after plummeting 80% in two post-crisis years, partly related to a commodities slump;
• War-torn DR Congo, whose $-GDP fell 48% in the seven years after 1991;
• War-torn Ukraine, whose $-GDP has fallen by over 50% since the 2008 financial crisis;
• Guinea Bissau’s 1995 crisis was not so bad, but the civil war that followed meant $-GDP had fallen by over 50% five years later;
• Argentina (for crises in 1980 and 1995, not 2001)

Sterne goes on to argue that this implies that the situation really cannot get much worse in Greece should it be forced into Grexit. 

Personally, I still do not understand why an agreement is proving so hard. Greece should not cut pensions or agree to a big primary surplus. The Europeans should agree to roll over debts that will otherwise inevitably go into default. Everyone should then use the breathing room to think about how to reform Greek tax collection and cut Greek debts. Voila.

But no. I really do not understand it. The only logic I can imagine is that they want to scare the bejeebus out of Spanish voters or anyone thinking of voting for a radical new party. What am I missing?

Still not worried about Brexit

 Well, the Labour Party will not save you. (In a weasel defense, let me state that the prediction at the link was that Labour will win if Scotland walks. But see below: we did think that Labour would win anyway, and we was wrong.) 

Still, I am not worried. First, the polls augur well. The blue dots show support for the E.U. The green dots show support when asked, “Imagine the British government under David Cameron renegotiated our relationship with Europe and said that Britain’s interests were now protected, and David Cameron recommended that Britain remain a member of the European Union on the new terms. How would you then vote in a referendum on the issue?”

As long as David Cameron can finagle something out of his European partners, these numbers make it seem like it would be an easy sell to the British public. As long as “something” does not involve a treaty change, I suspect that the rest of Europe would be quite willing to go along. Unless he humiliates himself, he should be able to get a pro-E.U. majority without breaking a sweat.

Now, should we trust the polls? After all, they got the recent general election fairly wrong. But I would make three points. First, constituency polling is much harder than national polling. That said, there is evidence that the polls actually blew the national vote share, so that might not be as much consolation as you would hope.

Second, the reason the national vote shares were off appears to have the last-minute collapse in Liberal Democratic support. That is tactical voter behavior consistent with the model that Victor Menaldo explained in comments: try to create momentum for your party by telling pollsters how you want to vote,  but then bail out for whichever leading alternative you dislike less when election day rolls around. In a two-option referendum, tactical voting is not an issue. The polls should be more accurate as a result.

Finally, the general election trend was against the Liberal Democrats and in favor of the Conservatives. (Click on the vote forecasts tab.) If the numbers turn around in the next few years, then we will revise our forecast, of course.

But what could destroy the pro-E.U. momentum? It is hard to see anything. UKIP would have to make some pretty damned convincing arguments to sway these margins. Or Cameron would have to royally botch things up in Brussels and Berlin. Even a recession would not do it; people are less likely to take risks in bad times.

In short, much ado about nothing.

Unless the above is wrong. What could make Brexit a contender?

Why does everyone overlook history when discussing European defense?

 European Commission President Jean-Claude Juncker recently called for a unified European Army. Jane’s then pointed out that the real efficiencies would come from a single European Air Force. An official U.K. spokesperson then predictably said no, even though London really can’t stop other countries from going ahead: “Our position is crystal clear that defence is a national, not an E.U., responsibility and that there is no prospect of that position changing and no prospect of a European army.”

There are many fine arguments against a united European military. But, perhaps predictably, a British analyst advanced what is quite possibly the stupidest. “There’s no point in talking about an army unless you're talking about a federal state.”

Oh, for f--k’s sake. Back in 1952, six governments wrote 86 goddamned pages explaining exactly how you could build a single army without a federal state. It would be useful to explain why it would be a bad idea to take the 1952 treaty off the shelf and apply it today. (Article 10, for example, would need extensive rewriting.) It would be useful to explain why the treaty creates a federal state by stealth. (AFAICT it doesn’t, but if Mr. Keohane thinks it does I would be fascinated to hear why.) It would be useful to explain why the idea is a political nonstarter in 2015. (It is, but I do not understand the reasons.) 

But we just get some handwaving. The fellow doesn’t even seem to realize that Europe came within a few French votes of a single military 63 years ago.

The ignorance of history is breathtaking.

Anyway, a call to our friends at AFOE: why does a resurrection of the EDC appear to be off the table?

Juan Linz was wrong

 I think I need to spell it out more clearly: Juan Linz was wrong.

(1) There are very few instances of democratic collapse in Latin America which involved partisan gridlock. The only one which clearly fits the bill is the Brazilian coup of 1964 ... except for the fact that Brazil tried a parliamentary system in 1960-63, which did nothing to resolve the country’s underlying political conflicts. Three others fit if you squint hard: the Argentine coup of 1966, the Honduran coup of 2009, and the Chilean coup of 1973. The latter, however, also involves a President who was in open defiance of the Supreme Court as well as Congress.

This is a small subset of the democratic collapses in Latin America. 

(2) Now, Latin America is all presidential regimes, save the 19th-century Brazilian Empire and that brief early-Sixties experiment. But Africa has a mix of presidential and parliamentary systems. And on that continent, both systems are equally-likely to break down.

(3) Postwar Europe has not had a lot of democratic collapses, but there have been a few close calls. They do not fit the Linz formula. Perhaps the coups in Czechoslovakia and Hungary should not count, because they both involved the Soviet Union ... but they nonetheless occurred in parliamentary systems. The collapse of the Fourth French Republic was not a coup per se but it was certainly a constitutional breakdown ... and the Fourth French Republic was a parliamentary system. The 1982 putschists in Spain launched their assault on a parliamentary government. Finally, the 1960, 1971, 1980, and 1997 coups in Turkey overthrew prime ministers, not elected presidents.

The U.S. may go into a crisis. We may develop a political culture most unsuited to our constitutional structure. Jonathan Chait explores that idea here. But if that causes us to go into crisis, it won’t be because of our constitution per se.

Not worried about Brexit

 Grexit, yes, still on the list. (And were I a Greek minister, I suspect I would prefer capital controls followed by Grexit to sucking an additional 1.5% of GDP out of my economy this year and 3.0% the next.) But Brexit? Nope.

First, the polls do not favor it now. Second, I suspect that David Cameron will campaign against it, just as he did against electoral reform. With the election behind him, he would be insane not to do so.

Not a Greek tragedy, really

 The Greek situation is near incomprehensible. These posts are just me thinking out loud, sometimes in the hope that somebody wiser will chime in. (In this case, someone did! But where is the old SHWI crew? Insights wanted.)

To start, let me make my previous post clearer. It is not about the money: even a full default would net the Greeks only 0.7% of GDP per year in additional spending. This is the same number that Tom Warner calculated for the Greek primary surplus. (Go read the link.) 

So the imbroglio is not about enabling a spending spree in 2015. There is no money for that. What then is it about?

I think of it this way: (1) What do the Greeks want? (2) Why do they need European cooperation to get it? 

What do the Greeks want? Simple: they do not want to have to hit an impossible fiscal target in 2015 and beyond. Their economy has been absolutely crushed, much harder than Ireland or Portugal. And the Greeks have implemented more austerity. It is entirely reasonable for them to want to avoid sucking an additional 1.5% of GDP out of their economy over the rest of 2015. 

Why can’t they get it without European cooperation? Two reasons. First, Greece doesn’t just owe interest this year. It has to make a whole lot of principal repayments. That debt needs to be rolled over or refinanced. Some of it is due the IMF, which might be cooperative; it was with Argentina in 2003. Some of it is due private creditors. That debt would be need to be restructured unless official finance was forthcoming. Mitu Gulati is the expert, and I have every intention of asking him his thoughts on the matter, but I think that should be doable. 

And if neither refinance nor legal restructuring for private debt is an option, then Greece can just default. What are they the private holders of Greek bonds gonna do? Sue? Good luck with that.

But the IMF and private parties are not the main creditors: most of that money Greece’s public debt is owed to the European Union in one way or another. So Greece would need to get the Europeans (read: Germany) to agree to a rollover. 

Why not just default on the Europeans? Well, here is the second reason the Greeks need European cooperation: Greek banks depend on special finance from the ECB. Pull that, and the Greek banking system collapses. 

The question seems to be, then, would the Europeans actually send Greece spiraling into another depression, even before the country emerged from the last one? I was extremely doubtful a month ago. My opinion is changing, however. Not because the  Germans are proving more intransigent than I expected. Rather, the center-right governments of Portugal, Ireland and Spain are proving more intransigent than I expected. In the words of Noel Whelan: “Centre-right governments have no interest in seeing this new left-wing Greek government succeed.” 

Whelan argues mostly for Ireland (it is worth reading) but the logic applies to Portugal and certainly to Spain, where both the People’s Party and the Socialists have an interest in heading off the rise of Podemos.

That said, I still think this will be resolved with a haircut and without Grexit. Here is the French finance minister, Michel Sapin: “It is a problem of wording, although the legal tool cannot be anything else than an extension of the program. What [Greek finance Minister Yanis] Varoufakis has told us, what I have understood, is that he agrees in principle with the extension of the program. Everyone agrees on this: you have a 1.5 percent primary surplus, you cannot do anything in this period that worsens that surplus.” There are also some pro-Greek noises coming from the Italian finance minister, Pier Carlo Padoan. 

If the Europeans can agree to call a violation of the bailout program a new program, rather than insisting that it be called an extension, then everyone should be able to strike a deal.

Unless J.H. is right.

Tyler Cowen is a very smart guy but ...

 ... this is just crazy hyperventilation. 

For the last few weeks there have been three models in the running:

1. The Greek government is calling the Germans Nazis because they figure Grexit is coming no matter what and they want to get the populace riled up as a distraction from the disasters, or

2. The Greek government will cave so cravenly on the substance that they want to have it on the record books that they supplied some expressive goods for a few weeks’ time, namely insulting the Germans and claiming that the Troika is dead and buried, or

3. The Greek government is simply full of out-of-control, ideological maniacs.

Right now it is looking like #2 — however unlikely it may sound as a model of retrospective voting and intertemporal substitution — is closest to reality.  What the relevant legislatures will go along with, however, still remains to be seen.  Arguably the insults and posturing have narrowed the possible bargaining space by hurting feelings all around.

Seriously, Professor Cowen? There are several other options, you know. I really would like you to explain your logic. I still don’t understand why a Greek default would lead the ECB to sink their banking system. And if that’s what you think will happen, I still don’t understand why I shouldn’t consider that to be an expression of out-of-control ideology from a bunch of maniacs in Frankfurt and Berlin.

Help! I am honestly confused.

Here is a rather more sedate look at the same events.

The Greek problem for dummies

 Since I am really not well versed on Greek finances, I’ve been looking at the numbers. The bottom line is that debt forgiveness will help the Greeks, but not by a whole lot this year. They just do not have a lot of money to spend.

The Greek state ran a primary surplus of 1.2%, according to the Ministry of Finance. This is rather less than the 4.5% target for 2016. It is even less than the 1.5% that the IMF projected for 2014.

Greece needs to make interest payments of 2.9% of GDP in 2015, assuming zero growth. It also needs to make principal payments worth 8.6% of GDP. Greece will receive payments from the ECB via the Outright Monetary Transactions program (formerly the Securities Market Programme) worth 2.2% of GDP.

Upshot: unless there is growth in tax revenues (good luck) the country will have only 0.5% of GDP to use for stimulus. (1.2% primary surplus + 2.2% from the ECB − 2.9% interest = 0.5% total balance.) That assumes that all of its principal due is rolled over or refinanced.

On the other hand, the Greeks still do not have a whole lot of room for manuever. A full default would net them only 1.2% of GDP and even that would depend on default being orderly. Moreover, their primary surplus jumps around a lot, so they will still need a lot of short term borrowing to keep the lights on.

In numerical terms, the whole battle is over 0.7% of Greece’s GDP.

Of course, that isn’t really the battle. The Greeks want two things (1) independence from Brussels/Frankfurt/Berlin and (2) avoiding the further spending cuts and tax hikes that the troika wants for this year. Much more austerity would be needed to hit the 3.0% primary surplus the troika demands for 2015. 

It would seem to me that it would not be terribly hard for the Germans Europeans to relax the austerity targets for this year and next. No need for write-downs or anything that would disturb a cranky German voter. In fact, it would seem to be easy to concede 0.7% of GDP to the Greeks in a way designed to avoid offending German sensibilities. But instead we are in full fire drill mode. Why? Is the answer really only that the Greeks have been too loud about asking?

I am still confused about the Grexit talk

 It appears that the recent attempt at Greek financial diplomacy did not go well. The link is to Wolfgang Münchau writing that the crisis is coming to a head. Münchau lists four options for Greece:

1. Cave in to European demands. Everyone agrees that this will not happen.
2. Demand that the ECB release interest payments and profits from its purchases of Greek government bonds. The problem is that this money will not be “enough.” (Quotes explained below.)
3. Find the money elsewhere.
4. Issue a parallel currency to fund domestic spending.

This all made sense, until I went to the Greek ministry of finance and pulled up monthly data on revenues and expenditures, not including interest or debt repayments. Here you have it, for all levels of the Greek government, including municipalities:

When Münchau writes that the money will not be “enough,” what does he mean? It certainly won’t be enough to make the country’s debt repayments. But the figures graphed above indicate that it should be enough to cover its current spending. 

The solid line is the primary balance. It occasionally goes into the red, but it was positive for all of 2014, to the net tune of €2.2 billion. Greece has a smoothing problem, but unless these numbers are wrong it should be able to cover it easily through short-term borrowing. I have not been able to find data on the Greek government’s cash reserves. All I can tell you is that they went up by  €0.9 billion in 2013 and down by  €2.2 billion in 2014.

Now, the ECB may do what it can to prevent Greece from any short-term borrowing. And it may decide to deliberately wreck the Greek banking system. But from here it seems like Greece will only have to resort to option (4) if the European imperial authorities decide to take deliberate action to force it to do so. 

Even if the parties involved can’t compromise on debt, it would be relatively easy to just let the Greeks default while letting them still have banks that function and a government that can pay its current bills. If that default then crashes the Greek economy, fine. So why all this threatening of additional sanctions that will serve only to push Greece out of the eurozone while costing the European government central bank a boatload of money?

The weird thing is that Greece doesn’t even want more money. It just wants an extension on loans that certainly won’t repay if the Germans Europeans unload on them with both barrels. 

So WTF? 

My initial guess would be that this is just bad public diplomacy on the Greeks’ part. They could have tried to frame the issue in a way that Merkel could accept without enraging the more irrational parts of her electorate. 

But that guess assumes that the Germans would have been willing to make the obvious compromise that leaves everyone better off. I am not sure that assumption is correct. I therefore implore my co-blogger to write a post explaining what in the name of Mary is going on, because this all looks eminently super-easy to resolve to the satisfaction of all parties. Help?

ADDENDUM: One very perspicacious view can be found here. In this view, the Europeans won’t destroy the Greek banking system. Rather, they will inflict just enough pain to make the Greeks suffer for their inevitable default and debt write-down, but not so much that they leave the eurozone. The success of such a plan, of course, depends on Greece being able to pay its current expenditure. It also, if I understand it, involves the Greeks not paying their current debts. So I am still unclear as to what is gained, but it does seem like a plausible strategy. Go click the link. 

He also lays out the obvious compromise here.

So, once again I call upon our co-blogger to explain why the obvious compromise does not seem to have the backing of the imperial leader of Europe chancellor of Germany.

Confused about the Grexit talk

 I am late to the party here, but better late than never.

I am confused as to why there is so much talk of Grexit these days. For example, at the previous link, Tyler Cowen writes,  “So I think Germany will play brinksmanship with Syriza and, when the time comes, simply pull the plug and leave them high and dry.” 

But what does it mean to “pull the plug ”on the Republic of Greece? Let’s say Alexis Tsipras is elected Prime Minister and promptly proceeds to tell all foreign creditors (save the IMF) to get stuffed. He would certainly lose access to foreign credit ... but the Greek government is running a primary budget surplus, so why would he care? 

More concretely, according to the IMF (page 45), in 2015 will Greece run a budget deficit of €3.5 bilion, but it will have to make interest payments on its debts of €9.1 billion. Eliminate those interest payments, and the Greek government will not have to a borrow a dime, save for very-short term expenditure smoothing. Of that €9.1 billion, only €743 million is due the IMF, so as long as the IMF agrees to roll over its debt then Greece can remain in that organization’s good graces while stiffing everyone else, public or private.   

(Our hypothetical radical Tsipras  government, if it were smart, would issue special instruments to the banks to enable them to continue to collect interest on their holdings of government debt.)

So Angela Merkel cannot muscle Greece by threatening to deny new credit. What else? Well, Greek banks need support from the ECB. Well, if I understand these procedures correctly, the governing council of the ECB would need a ⅔rds supermajority to cut off the Greek banks from emergency liquidity assistance. Could the Germans muster a ⅔rds supermajority? I am having trouble seeing how.

Moreover, cutting off the Greek banks would generate huge losses for the ECB. It has lent about €44 billion to Greek banks and the Greek central bank owes the rest of the Eurosystem around €38 billion. Sure, as far as I can tell those losses would have no economic meaning ... but we’ve got ample evidence these days that European policymakers, elected and otherwise, put great stock in avoiding them. 

Add to that the systemic risk of letting the Greek financial system go down the tubes, and it is really hard to imagine that particular plug being pulled.

Note that the Greeks will almost certainly not default in the big bang described here. But even if they did, I do not see what the Germans could do to force them out of the eurozone. The Greek government might choose to leave, of course, but that is a different issue.

So what am I missing? Help! 

Slovakia and Scotland

 Over at Charlie’s place, a fellow named Cdodgson brought up the split between the Czech Republic and Slovakia as an example of a  “peaceful secession from more or less democratic states which the people involved don’t regret and don’t want to reverse.” The context, of course, was Scotland.

The basic description is true. The Velvet Divorce was peaceful and the countries were more-or-less democratic. But the Velvet Divorce holds few lessons for Scotland. 

The history of the Velvet Divorce does however hold lessons for the Velvet Divorce: namely that it was a sleazy breakup of a perfectly functioning country that benefitted no one save the two politicians who arranged it and forced it through: Vaclav Klaus and Vladimir Mečiar. Neither of them did their country any good, before or after the split.

Did the January 1, 1993, division of Czechoslovakia reflect popular opinion? Of course, the answer has no bearing on the benefit of small states or the morality of breaking up democratic polities, but it is interesting ... because it didn't! In 1991, polls showed only 9% of Czechs and 15% of Slovaks favored a split. (Page 252.) By December 1992, support had risen ... to only 36% of Czechs and 37% of Slovaks. 

Moreover, Czechoslovakia already showed a rather impressive level of decentralization: in 1992, the federal government controlled only 22% of public spending. (See Table 6.1.) An additional 0.5% of spending went through the federal government to the two states via federal grants. (Table 6.5.) It is true that fiscal grants from the federal government had dried up as an almost accidental response to de-communization. That might have annoyed some Slovaks ... only the polls didn't show it.

The deal was hashed out between Klaus and Mečiar with no popular input. Neither politico was a particularly admirable person. Both leaders refused to hold a referendum because they believed that they would lose.

A continuing federation would have eventually led to more fiscal transfers. It also would have ended Mečiar's ambitions. So Klaus threw out the poorer chunk of the country and Mečiar escaped the limits of the federal system. Win-win for them.

Did the split leave anyone else better off politically or economically? On the Slovak side, the answer is pretty clearly “no,” although the country managed to survive the Mečiar years. It came close to some ugly outcomes, though. (See Hungary for a bad but-still-not-worst-case example of the bullet that Slovakia dodged.)

Lose-lose for everyone else. Trade collapsed despite a customs union, and both countries went through a painful adjustment. (Page 60.) It worked out OK in the end, but at grave risk to democracy and the gratuitous sundering of a political community. The Czechs and the Slovaks certainly seem to feel that it was pointless: two decades later, only 41% of Czechs and 29% of Slovaks think the Velvet Divorce was the right thing to do. Given status-quo bias, those numbers are astoundingly low.

There is a value in democratic political communities. They bind people through something more than impersonal market exchanges. It is hard to see why they should be broken up unless they are turning undemocratic (which would include systematized ethnic discrimination) or have such histories of intercommunal hatred that they cannot be made to work without violence.

It may be the case that some members of a democratic community have so soured on the others that they wish to share none of the responsibilities of being in a community. But that is parochial and cramped.

To return to Scotland: the breakup of Czechoslovakia was nothing like the proposed breakup of the United Kingdom. It had no popular support (unlike Scottish independence), led to great economic dislocation for both new countries (unlike Scottish independence, which will likely have no impact on England), occurred in a situation of low fiscal transfers (unlike Scottish independence), led to a near-breakdown of democracy in one of the countries (unlike Scottish independence), and did not occur after several decades of divergent policy preferences (unlike Scottish independence). 

Comparisons between Scotland and Slovakia are best avoided, I think, unless the discussion is solely focused on short-term economic effects.

If Scotland leaves the U.K., then the U.K. will not leave Europe

 If Scotland votes to leave the U.K., then Brussels has made it clear that it will also leave the European Union. Scotland would need to apply like any other potential member state.

But what about the rest of the U.K.? Would it vote to leave the E.U. without Scotland? Many observers are worried.

I do not think that they should be. 

The Tories will be up for reelection in 2015, unless there is a vote-of-no-confidence. That election will be weird. The Scottish government wants to wrap up the independence negotiations by March 2016, so Scots might still be able to vote in the U.K. election. 

That said, it would entirely reasonable for Parliament to disenfranchise Scottish voters before then. Would that swing the 2015 election to the Tories?

Probably not. I played with the crosstabs from this poll. Here are the results:

	Weight	Weight w/o Scotland	% Tory	% Labor	% UKIP
London	13%	14%	37%	36%	9%
South	32%	36%	35%	28%	21%
Midlands/Wales	21%	23%	37%	33%	15%
North	25%	27%	29%	48%	13%
Scotland	9%	--	18%	34%	4%
Total U.K.			33%	36%	15%
Without Scotland			34%	36%	16%

My general impression from the literature is that the district boundaries in England (I mean England England) generally favor Labor, even after the recent redistricting. So Labor is likely to win. Labor opposes holding a referendum on the European Union. That would make Brexit moot.

Moreover, my gut feeling, which could be entirely wrong, is that allowing Scotland to secede will kill Cameron and hurt the Tories at the election. After all, Cameron allowed the election to happen and Cameron took off the option of giving Scotland the powers of your typical Canadian province. So he really will be to blame.

Absent some sort of black swan, Labor will be more likely to win, and Brexit will be moot.

This analysis fails if the Tories pick someone popular to replace Cameron. But I have no idea who such a person would be.  

On the other hand, if the Tories pull off reelection, then Britain is likely out of the E.U. The above analysis, from this poll:

	Weight	Weight w/o Scotland	% Brexit	% E.U.
London	13%	14%	34%	50%
South	32%	35%	42%	37%
Midlands/Wales	21%	23%	45%	37%
North	24%	26%	39%	40%
Scotland	9%		30%	65%
Total U.K.			39%	41%
Without Scotland			40%	39%

Any Cameron-replacement is likely to demagogue the Europe issue and the voters south-of-the-border will be pissed. The momentum will be towards withdrawal and the polls will likely move that way.

But I would bet against a Tory election victory in the wake of Scottish secession, and thus against Brexit. Investors and bankers relax! The Labor Party will save you.

On the other hand, I think that the Spanish government is going to be much bolshier about letting Scotland in than I did a few months ago … they won’t veto, but they will drag things out, and Scotland is going to hurt. 

I will still bet against Scottish secession

 There was that shock poll, yes. But we saw something similar in the Mexican presidential campaign. The official stance of this blog is unchanged. Although the gap is closing, we would still strongly bet against a Yes vote for secession. 

Calling Sam Wang!

Anyway, there is another discussion to be had about whether Scotland should secede. Charlie Stross tries to draw some conclusions about the general desirability of small states here; I show incredulity and confusion about his argument here and here. 

Sadly, Charlie has disabled Livejournal commenting, but I would encourage more participation, if only to help me understand what it is exactly that he is arguing.

This girl won the World Cup

 Courtesy of Gabe Aguilera comes a great work of art courtesy of the Mexican loss to Holland in the World Cup. Great art can come from defeat.

NSFW. Seriously: very Not Safe For Work.

Why Albania will get no money from the Trans-Adriatic Pipeline

 The Trans-Adriatic Pipeline (TAP) is a project that will connect Azeri natural gas with Italian markets. The gas from the Shah Deniz field will pass through the Trans-Anatolian Pipeline (a different project) and then connect into the Trans-Adriatic at Kipoi, on the Greco-Turkish border. The pipeline will then go through Greece and Albania before plunging under the sea to end in Brindisi, Italy.

Press accounts have made much of the transit fees that will go to countries like Greece.* From the link: “With the economic crisis in Greece, TAP promises the added benefit of funneling billions of euros from transit fees into the Greek economy.” Moreover, Montenegro expects to earn €30 million per year from a possible northern extension of the pipeline.

We fully expected that Albania would be earning fees., although we had heard credible rumors that they would be paid in molecules of gas rather than currency. In fact, we came up with a business plan to attract investment into thermal generation based on the idea. 

So we were stunned when the CEO of the national generator, Kesh, told us that Albania was getting nothing but the option to buy some of the gas at market prices. He said that when the Albanian negotiators raised the issue, the pipeline consortium threatened to go through Greece. That seemed like an amazing failure of diplomacy. After all, Greece had nothing to gain by denying the Albanians their fees. Greece would not get them either; why screw over your poorer neighbor?

But then we learned that there was a wrinkle: Greece will get no transit fees either.

Why not? Well, a member of the European parliament asked that very question. The answer: European Union rules prohibit governments from charging transit fees. The reason for that makes sense: special transit fees above-and-beyond those charged commercially would be a restraint on trade.  

And that is why Albania won’t get any fees. It is true that the Greek government might stiff Albania out of spite. (The two governments are involved in a spat over their exclusive economic zones in the Adriatic. And place names. And the Chams. See here for more.)

But it is also true that Albania wants into the European Union. And that means complying with E.U. rules even if they don’t have to. So no transit fees, no free gas. Just a commercial operation on Albanian soil.

In other words, a nice thing for Albania, but not a panacea for its energy problems. Oh well. Back to work!

Is the decline in entrepreneurship a bad thing? Yes, probably

 Much has been made of this Brookings Institution report showing that Americans are starting new businesses at a much slower rate than before. 

The reason for the decline? We don’t know for sure, but the consensus seems to be the rise of the chains and the Internet. (Actually, that should be chains or the Internet; one might be more important than the other ... and the pre-Great Recession timing strongly suggests a late-1980s victory of the franchise.) 

It would be reasonable to assume that this is a bad thing, in the sense of maximizing the general welfare, or at least that of near-median citizens. Slate, unsurprisingly, makes the opposite case.

It isn’t a bad case. Here is the gist:

1. Chains are good. They innovate more, provide things more cheaply, and grow faster. 
2. There has been no decline in the number of small companies that grow large. The fall has been concentrated in startups that do not grow much after their foundation.

These are reasonable points. But they have to overcome one piece of evidence:

(Data from here.)

Incomes really haven’t budged for anybody in the lower 95% since 1987, save for a brief period in the late 1990s. If the triumph of the chains really were all that, then one would expect to see the opposite, no? Ditto if the growth of winner start-ups trickled down to the average American in any sort of direct fashion.

Sadly, however, all we see is stagnation. This puts the burden of proof back on Jordan Weissmann; an unsubstantiated dig at Italy for combining economic failure with lots of mom-and-pop shops doesn’t convince, because it is not clear to me either that Italy has lots of mom-and-pop shops or that they are the cause of the country’s recent stagnation.

Still, it is possible that the rise of the chains prevented the stagnation in American living standards from being even worse. Perhaps they increased labor demand, paying above-median wages and only following other establishments down after their wages dropped. Or perhaps they offered cheaper goods on a large-enough scale to cushion income declines.

That should be testable. Has anyone tested it?  

The Russian energy weapon is aimed at Ukraine, not Europe, and it is about the money

I have to admit that my first thought upon reading this heading, “Putin Aims His Energy Weapon At Ukraine,” was not “lasers!” That was my second thought.

Anyway, if the article had stopped there, with that sentence, I would not be writing this. Unfortunately it went to argue that Russian gas price hikes against Ukraine might not work because winter is ending and Europe is more resilient than it used to be. Note how the author dropped any discussion of the effect of a price hike on Ukraine.

I humbly submit that the fact that Europe is relatively invulnerable to a gas cut-off right now is a feature, not a bug. It means that the Russians can extract rents from Ukraine and cut them off if they don’t pay without worrying about European public opinion. (In the short-run, Gazprom’s contracts mean that in the absence of official sanctions Western customers will pay even if they cannot take possession of the gas.)

If Ukraine pays, it will hurt. The rise is from $8.38 per MMBTU to $15.18. In 2012, Ukraine imported 1.2 billion MMBTUs ... putting the additional cost in the order of $9 billion. That will hurt. Even if Ukraine can keep reducing its gas consumption, that will hurt. And if the taps are shut off because Ukraine doesn’t pay, that will hurt more. As the above-linked article points out, E.U. countries can ship enough gas to Ukraine to meet about 25 percent of its summertime demand, but that’s it ... and we don’t know at what price. (There is more pipeline capacity to Ukraine, but Gazprom controls them. Which means that it won’t allow gas to flow eastwards unless European governments expropriate the Russian company.)

In short, I have no idea why the article was subtitled, “Moscow is jacking up gas prices to cow Kiev and scare Europe. It may not work this time.” It may not scare Europe and it may not cow Kiev, but neither is the point.

Last point: you have to love the fact that Moscow is justifying the price hike by saying that the Ukrainian rebate was compensation for the use of Sevastopol, and now that Sevastopol is Russian territory they no longer need to grant it. Wait ... what?

Russia uses debt as a weapon

Here is the transcript of a meeting between Russian Prime Minister Dmitry Medvedev and Alexey Miller, the chair of Gazprom’s Management Committee Chairman Alexey Miller.

Dmitry Medvedev: What is the situation with Ukraine? Do we have any new issues or everything stands where it was?

Alexey Miller: Ukraine hasn’t settled the gas debt of the last year and today the county's outstanding debt for current gas supplies is increasing. Gazprom hasn't received any payments for the gas supplied in January, and our Ukrainian partners informed us yesterday that they would not be able to pay in full for the gas supplied in February. At the end of the last year it was agreed that Gazprom would give Ukraine a discount price for gas, provided that Ukraine would ultimately clear the debts accumulated over the last year and would pay in full for current gas supplies. Unfortunately, I have to state that Ukraine hasn't paid off for the gas supplied last year.

Dmitry Medvedev: How much in total have they managed to repay?

Alexey Miller: Speaking of the last year’s indebtedness, they have repaid USD 1.300 billion.

Dmitry Medvedev: Which means 50 per cent of the debt?

Alexey Miller: A little less than 50 per cent. The total gas indebtedness of Ukraine makes up USD 1.529 billion now. Given that Ukraine is not fulfilling its obligations or complying with the agreements reached when signing the contractual addendum providing a gas discount, Gazprom resolved to remove the discount starting from this April.

Dmitry Medvedev: I see. The one who fails to pay for the supplied goods should be aware that it is fraught with adverse consequences, including those related to the revocation of previously reached agreements on beneficial terms of supplies. Nevertheless, what is your opinion of the measures that should be taken to have this debt repaid?

Alexey Miller: Of course, the amount of Ukraine’s debt to Gazprom is considerable. The last year’s debt was reflected in Gazprom's budget for this year, and this amount is included into our investment program. Indeed, it is a big sum of money. Therefore, the easiest and efficient way for Gazprom would be to provide Ukraine with a loan in the amount of USD 2 or 3 billion so that it could settle its indebtedness accrued from the last year and pay for current gas supplies.

Dmitry Medvedev: It's no secret that those 50 per cent they paid came from the sovereign loan we had given them. Of course, this is a possible way of resolving this problem. I will entrust the Ministry of Finance to consider all the current possibilities and obstacles as well as all the contradictions related to the extremely low credit rating of Ukraine now, in addition to other aspects of the Russian-Ukrainian cooperation in this area. Firstly, Gazprom anyway should insist on the full coverage of the debt owed by the Ukrainian partner. Secondly, your decision to terminate the beneficial terms of supplies looks completely justified.

The gas price increase will be a hit. Ukraine was paying $7.60 per MMBTU under a deal negotiated in December 2013, down from $11.33 and compared to a price for delivery to Germany of $10.83.

Of course, it was the previous government what refused to pay off its debt. You know, the one under the Russian-backed president.

Problem is, the damage to Ukraine likely won’t end there. Gazprom could sue for its arrears under the Ukraine-Russia BIT. That could be a complete disaster for Ukraine; it could lead to all new funds being attached to pay off the Russians for their gas.

In fact, it gets worse. Russia loaned Ukraine $3 billion in the run-up to the crisis. Russia could transfer those bonds to private owners ... at which point the new bondholders could sue Ukraine!

In theory, the U.K. could stop that from happening since the bonds were issued under English law. Anna Gelpern suggests that the British parliament should move now to remove the enforceability of those contracts. That would be a good idea! But I don’t think it will effect the Gazprom debt. And Felix Salmon thinks that the Russians could trigger cross-default provisions in other Ukrainian bond issues. Boom boom boom and a legal nightmare for a Ukrainian government desperately in need of foreign financing to keep its economy afloat.

In short, it will be real mess for the Ukrainians, on top of all its other problems. Unless, of course, Kiev uses Western money to repay the Russians. For money advanced by them to the previous puppet government.

And as far as I know, there really is nothing that can be done via courts against the Russian Federation, despite crossing a border and forcibly annexing a region of a neighboring state.

The new legal international property rights infrastructure that we have built is pretty impressive. But man, sometimes it has perverse results.

Another tear-out-your-hair moment from the Economist

Maybe I should not have recommended the essay on democracy. I read it while playing with my boy. I am re-reading it now. And it has this:

“Plato’s great worry about democracy, that citizens would ‘live from day to day, indulging the pleasure of the moment,’ has proved prescient. Democratic governments got into the habit of running big structural deficits as a matter of course, borrowing to give voters what they wanted in the short term, while neglecting long-term investment. France and Italy have not balanced their budgets for more than 30 years. The financial crisis starkly exposed the unsustainability of such debt-financed democracy.”

WTF? No no no no no it has not! Both countries have entirely sustainable debt loads. Even given that they have abandoned their own currencies they have sustainable debt loads.

What in the name of God is the author talking about? The essay is a weird mash. Lots of good points, some subtle, with the occasional bizarroland statement that reads like it was tossed out there to make sure the Tories (and Republicans) keep reading.

By the way, Alex Harrowell, we still need you.

The Monkey Cage goes slatepitchy on political polarization

The Monkey Cage was an awesome group blog. It brought serious political science research into the mainstream. It was all good.

And then it became part of the Washington Post.

Which gets us to an odd series of posts that attempts to convince the reader that American political polarization ain’t so bad. We can start with a post entitled “Gridlock is bad. The alternative is worse,” by Morris Fiorina of Stanford. Great scholar, great work ... but the argument is strange.

First, it assumes that the political parties would behave as they currently do under a more parliamentary-like electoral system. That makes no sense. One overreach followed by electoral disaster and that would be the end of that.

Second, to make his case that the parties left unfettered would do crazy things he writes, “The 2012 Republican platform plank stated essentially: never, no exceptions. The Democratic platform plank stated the opposite: any time, for any reason.”

Hmm. The GOP platform wrote:

1. We oppose using public revenues to promote or perform abortion or fund organizations which perform or advocate it and will not fund or subsidize health care which includes abortion coverage (page 14);
2. Prohibit the barbaric practice of partial-birth abortion;
3. Criminal penalties on healthcare providers who fail to provide treatment and care to an infant who survives an abortion;
4. Ban sex-selective abortions;
5. Protect from abortion unborn children who are capable of feeling pain;
6. We urge enactment of pending legislation that would require parental consent to transport girls
   across state lines for abortions (page 34);
7. We oppose school-based clinics that provide referrals, counseling, and related services for abortion and contraception (page 36).

Not a platform that I would support! And I would agree that point (5) effectively bans all abortions. But I would, no? Read objectively, this is to the right of median public opinion, but it is not off the charts. Of course I believe that it’s folderol, given the enthusiastic anti-abortion and anti-contraception actions of GOP-controlled state legislatures. But it sure is a sign that the national party understands the dangers of getting too far out in front of public opinion.

And the Democrats? Even less:

1. The Democratic Party strongly and unequivocally supports Roe v. Wade and a woman's right to make decisions regarding her pregnancy, including a safe and legal abortion, regardless of ability to pay;
2. President Obama overturned the “global gag rule,” a ban on federal funds to foreign family planning organizations that provided information about, counseling on, or offered abortions;

And that’s all she wrote.

So where does Fiorina’s characterization of the party platforms come from? You got me. He is a great scholar with a great book on polarization. But this was not written as a serious post. It has a slatepitchy feel: let’s devil’s advocate against the conventional wisdom. That has a place, I have been known to do it myself ... but it belongs not on the Monkey Cage that I used to love.

A worse post is Rob Ford’s “In America, polarization is a problem. In Britain, it could be a solution.” (This is the Rob Ford of the University of Manchester, not the other guy.) I have much to say about this, but I would rather make a public call for Alex Harrowell to come over here and fisk it for us. I will say simply that even if Ford is correct (Alex, we need you!), then I am not convinced that you have a problem if the only by-products are falling voter turnout and the rise of a rather silly buy aggressively anti-racist bunch of twits.

Now, as befits that great nation, the Canadian entry into the series is sober and serious. Richard Johnson of UBC limits himself to pointing out something that non-Canadians may not have realized: Canadian parties have become more polarized, whereas Canadian voters have not. That is the Monkey Cage I used to love: rigorously confirming the conventional wisdom (as AFAIK the above is the conventional wisdom in Canada) is a worthwhile initiative, Canadian or otherwise.

Anyway, earlier posts in the series are not slatepitchy, and some in fact argue against the American and British arguments mentioned above. And I do not want anyone to take this as a criticism of Fiorina or Ford. Like I said, I have done the same thing. And many counterintuitive pitches are indeed correct. But these two are odd.

The E.U. just put the nail in the coffin of Scottish independence

I have been bemused at the debates over Scottish independence at Crooked Timber. I mean, uh, well, there is this:

So it isn’t likely to happen.

And now it is less likely to happen with E.U. Commission President José Manuel Barroso saying what we all knew already, which is that an independent Scotland would have to apply for E.U. membership, just like Iceland or Norway. The negotiations will not be easy, even through Madrid will likely agree to allow the application.

I am opposed to Scottish (or Catalan or Texan or Québécois or Regiomontano or Camba or whatever) independence because I am opposed in-general to secession from democratic states. First, secessionism generally requires a cramped nationalism that is too close to tribalism for comfort. Second, it smacks of democratic failure: you don’t like national policies, but instead of trying to build a majority to change them you pack up your marbles and leave. Finally, it is (albeit probably not the Scottish case) selfish, a way for richer people to dissolve their historic bonds of community with poorer ones.

I read the Crooked Timber thread. The positive arguments for smaller states boiled down to (1) We do not like the way that the U.K. votes as a whole, so screw it; or (2) nationalism, just because. (By that definition, I should be a huge proponent for the Republic of New York and New Jersey Only with the Annoying Bit of New York Removed and Maybe Horse Country Too.)

If there are unreconciliable historical wrongs in play, then I could be persuaded to support the partition of a notionally-democratic state. For concrete examples, see Ireland circa 1922, Algeria circa 1961, or Kosovo circa 2008. But those are extraordinary cases that involved a horrible combination of long-standing ethnic discrimination and very recent bloodshed. Moreover, electoral democracy in the modern sense was a recent arrival to all three mother states: the U.K. in 1918, France in 1958, and Serbia in 2000.*

Absent that, however, I say no. Secession should be off the table.

But I might be wrong to say no! Counterarguments very welcome.

* The Fourth Reform Act of 1918 introduced more-or-less universal suffrage to the U.K., although female suffrage remained limited until 1928. The French Constitution of 1958 granted full voting rights to all Muslim residents of the Algerian departments. Slobodan Milošević fell in 2000, after which Serbia (which remained notionally united with Montenegro until 2006) has held basically free elections.

Recommended reading on migration

Three recommendations. First, for those of you with a casual interest in the topic, there is a very brief review paper by Joseph Ferrie (Northwestern) and Timothy Hatton (Essex) on the last two centuries of international migration. (The paper actually covers the last four centuries, although it moves quickly over the 17th and 18th centuries.)

Second, Paul Collier’s new book, Exodus. It is a very well-written and thought-provoking brief in favor of immigration restrictions. If you click the link, it will take you to multiple reviews of the book. Most of the negative ones are tendentious and a little strange. This fellow here argues that countries should abandon all income redistribution in order to facilitate open borders. In that, he concedes Collier’s main argument, which is precisely that unlimited immigration could destroy the national sentiments that underpin liberal democracies. (Collier has a fascinating discussion of the theoretical circumstances under which this might happen; it is not a blanket argument. A blanket argument would obviously be stupid.) Nathan Smith at Open Borders starts by conceding Collier’s main point and calling for countries to impose special taxes on migrants instead of preventing their entry. (As an American, I recoil at that idea: differential taxation based on birthplace is contrary to the 14th Amendment. It is an odd suggestion for a proponent of open borders.) He follows up by saying that democracy is bad as part of an attack on Why Nations Fail, by Jim Robinson and Daron Acemoglu.To be fair, I am not sure that he realizes that he is arguing that democracy is bad. (I should mention that Jim Robinson is a friend.) Kenan Malik argues against a caricature of the book. One of the best parts about Exodus is how Collier lays down the conditions under which a diaspora will grow indefinitely and those under which it will not. Malik, however, writes, “A key argument in Exodus is that the levels both of migration and of problems created by it are linked to the size of diasporas.” Well, sometimes! But not always. I was left unclear what troubled Malik, other than that Collier is wrong about Great Britain. (Not being British, I can’t say, although Collier explicitly gives large shout-outs to the U.S. and Canada for our ability to assimilate immigrants.)

Finally, here is an incredible bit of investigative reporting into a Nigerian human trafficking ring. It is horrifying ... and quite amazing how the reporters made their escape.

The Eurozone is not in the Rose data set

Currency unions are a hot topic, for obvious reasons. The Eurozone has gone spectacularly off the rails. There is some evidence that currency unions boost trade (see Andy Rose here and here and this post) but considering the rolling disaster that is southern Europe many would consider that a small gain.

Therefore, a recent paper from Andy Rose has attracted a lot of interest: he finds that currency regimes have no systematic effect on macroeconomic performance. That is quite a find! It implies that the southern European countries would have been in trouble anyway. I found it via Tyler Cowen, who led me to comments by Paul Krugman and Antonio Fatas.

Except there is one thing about the paper. Page 3: “I exclude from the sample the five systematically important economies of China, the Eurozone, Japan, the UK, and the USA.”

Neither Krugman, Cowen, nor Fatas mentioned that the Eurozone countries are not in the data set; perhaps it is too obvious? It is still a great paper. And Tyler Cowen provides a solid explanation of the results.

But I am not sure that it tells us anything about the effect of the euro.

The real meaning of Sky City

A Chinese company wants to build the world’s tallest skyscraper. As a result, there has been a lot of discussion about the “skyscraper index.” Does the groundbreaking on Sky City mean that the Chinese economy is about collapse? Is the world economy at risk?

Maybe. It could. I am on-record as a medium-term China bear. But that is really not what Sky City means. No, the real meaning of Sky City is the same as the meaning of the locks on the Panama Canal expansion: China’s manufacturing model has reached its limits.

What do the Panama Canal expansion locks have to do with Chinese manufacturing. Well, below you can see a video of the Panama locks being loaded onto the ships that will take them to Panama; they should arrive next month.

You got it: the locks are being built in Italy. Not China. In fact, very little of the equipment for the expansion is coming from China. Engineers on the project told me that Chinese work was cheaper, but they judged it too shoddy and unreliable.

And ... the developers of the Sky City project refuse to use Chinese steel because it is not safe. They will get the steel from Luxembourg instead. (I bet few readers knew that Luxembourg is a historic center of steel production.)

Moreover, the building looks to be mightily unpleasant inside. (I cannot help but think of this great movie.) I also cannot help but think of the infamous skyscraper slum of Caracas.

The upshot is that something is broken at the heart of China’s manufacturing model, at least as it concerns high-performance large-scale capital goods. If nothing else, Sky City exemplifies that concern.

Senatus delenda est

The news from Europe today concerns the birth of the new British royal heir. I actually don’t think the news is that big: the only place my wife and I have heard it discussed is on television. That’s it. None of the nurses in her hospital have mentioned it. None of the cops I meet in the morning could care less. Ditto the gym, the coffeehouse, the sports bar. Zero zip nada except for Chris Matthews.

More important political news from Italy has been obscured. It seems as though the current Italian government wants to neuter the Senate.

The official position of this blog is that Senates are a bad thing. Of the ones reviewed here, the U.S. and the Philippines have the worst; Argentina’s and Brazil’s are pretty bad; Canada’s is redeemed only by its relative lack of authority. Only Mexico and Colombia have halfway-decent upper houses, and even those are still halfway-indecent.

On paper, the Italian senate is not terrible. Each region gets a number of seats proportional to its population. The coalition with the most votes (even if not a majority) in the region then gets 55% of the seats from that region. Bizarrely, the national voting age is 18, but for the Senate it is 25.

But in practice, it’s a problem. In the lower house the coalition with a plurality of votes automatically gets at least 55% of the seats. The government therefore has an automatic majority. (In most parliamentary systems the government usually gets a majority, although not always. Minority governments are generally considered a problem and usually short-lived.) In the Senate, however, the government is not guaranteed a majority. Unless a coalition can be cobbled together, you run the risk of having the government collapse. Moreover, even when a government is formed, bicameralism slows down decision-making.

So now the current Italian government is trying to neuter the upper house! I approve. How can they do that, might one ask? Well, simply, if the Senators believe that replacing the Senate with a weaker body is in the interest of their party, then they will vote for the reform.

Nonetheless, success is unlikely ... but it sure beats the way the Canadian government wants to strengthen its Senate.

How important are property rights?

It is a bit of a truism that property rights are key to economic development. An efficient system, runs the logic, needs to be transparent, transferable, excludable, and enforceable. In a bit more detail:

1. Transparent means that it is cheap and easy to find out who owns what.
2. Transferable means that it is cheap and easy to sell or transfer property rights from one entity to another.
3. Excludable means that if you own the rights to a piece of property, then the law allows you to exclude others from enjoying those rights.
4. Enforceable means what it says.

Without those characteristics, runs the logic, you get underinvestment and confusion and commons-tragedies and all that. And the logic has some empirical backing. For example, in 1986 the Buenos Aires provincial government offered a group of landowners compensation for land that had been seized by a group of squatters. Some landowners took the offer, and the province then transferred title to the squatters. Others did not. On the assumption that the squatters had no way to know whether the landowner from whom they had seized the land would take the provincial offer, Sebastian Galiani and Ernesto Schargrodsky found that the squatters who received titles invested more in their homes and the education of their children.

Here comes the New York Times with an article about terrible land titles in Greece:

“In this age of satellite imagery, digital records and the instantaneous exchange of information, most of Greece’s land transaction records are still handwritten in ledgers, logged in by last names. No lot numbers. No clarity on boundaries or zoning. No obvious way to tell whether two people, or 10, have registered ownership of the same property.”

The article goes on to say that even the former Yugoslav states have better land rights.

One reasonable conclusion would be that bad property rights are a drag on economic recovery. “Many experts cite the lack of a proper land registry as one of the biggest impediments to progress. It scares off foreign investors; makes it hard for the state to privatize its assets, as it has promised to do in exchange for bailout money; and makes it virtually impossible to collect property taxes.”

But another reasonable conclusion would be that the evidence about the importance of clear property rights is wrong ... or at least oversimplified.

There is no getting around that fact that Greece became a rich country despite terrible property rights. The above chart tracks GDP per worker in 2005 dollars (adjusted for purchasing power) for four countries from 1950 to 2011. (The data through 2010 is from the Penn World Tables 7.1; the 2011 data comes from the OECD.) In 1950, Greek workers produced as much as Colombian ones; they were significantly less productive than in Mexico. Over the next three decades, Greece far outdistanced its Latin American counterparts. The current depression has not eliminated that gap.

Greece, of course, had many advantages that Colombia and Mexico did not, but poor property rights did not stop the country from taking advantage of them.

It has to make you wonder. Despite the micro evidence from places like Argentina, are efficient property rights really as important as we think they are?

Why Cyprus won’t leave the eurozone

If I were the president of Cyprus, knowing the little that I know right now, I would take the country out of the Eurozone. But that is not a no-brainer. There would be a lot of losers. Cyprus should leave the euro, but it won’t, because the losers outweigh the winners in the short run.

Who would be the losers from leaving the euro?

1. Savers with less than €100,000. Right now, their savings are untouched. True, they can’t move those savings off the island, but the chances are good that they will eventually. And the banks have reopened, even if cash withdrawals are limited.
2. Creditors. They would either be repaid in devalued Cypriot pounds or face the possibility of huge write-offs under a new super-lenient bankruptcy law.
3. The employed. “Say what?” you ask? Well, consider. My grandfather kept his job during the Great Depression. As a result, he made enough money to move from Crown Heights to the then suburban-paradise of Jamaica, Queens, plus a second house in Miami Beach. The reason was that deflation drove up the value of wages and assets for those who managed to hold on to them. I doubt that Cyprus is in for as punishing a deflation, but deflation it will be. Moreover, the Mexican and Argentine experience shows that one of the ways in which devaluation works its recovery magic is by falls in real wages. Argentine wages fell by almost a fifth in the two years after the devaluation. Cyprus imported 47% of its GDP in 2010, compared to only 12% in Argentina in 2000, the year before it left the American monetary union. It’s even higher than in Mexico, which imported 22% in 1994, before its big (and devastating) devaluation. Given the scale of imports, the fall in Cypriot real wages from devaluation is likely to be rather worse than in Argentina or Mexico.
4. Debtors to foreigners … possibly. There would be a legal nightmare if Cyprus reintroduced the pound. Locally-owed debts could be poundified, but foreign debts could not. Any attempt to do so would lead to a rash of lawsuits. I would not worry that reintroducing the pound would lead to Brussels throwing Cyprus out of the E.U. … but I would worry that forced poundification of foreign debts just might.

OK, so who wins?

1. The unemployed. Of course, the unemployed will have to grow to a rather large number for them to provide a big enough interest group to matter. There’s a reason Argentina didn’t devalue until 2001, despite three years of depression.
2. The soon-to-be-unemployed. OK … but the woman whose wages collapse and can no longer afford to send her daughter to the U.K. for university is not going to vote based on what would have happened. In a world like that, President Obama would have won re-election with LBJ-like margins. We do not live in that world.
3. Bankers. Yes, bankers! Both their debts and the liabilities will be poundified, at least if the Cypriots are a little bit smarter about it than the Argentines. (And even in Argentina, the courts plus politics eventually helped the banks out.) They will have a bigger problem with their non-deposit liabilities, but they are going to have that problem as the Cypriot economy collapses regardless. More importantly, the new Cypriot central bank will be able to print pounds in order to help the banks out.
4. The tourism industry. Cyprus has a population that’s barely twice that of Barbados; there’s no question that tourism could sustain a high-wage developed economy. The problem is that they would be betting on tourism in an environment in which the rest of Europe is either in or sliding into recession. The tourism boom could take rather longer to get going than the post-1994 manufacturing boom in Mexico or the post-2001 agricultural boom in Argentina.
5. Debtors to foreigners … possibly. If the Cypriot government is willing to protect them from creditors (all creditors, foreign and domestic, in order to remain in the E.U.) or bail them out via cheap pound loans, then they could do surprisingly well out of a situation that one would otherwise expect should be disastrous;
6. Other debtors: inflation is good for debtors.

How will this political logic look by the 2018 election? Well, I’m pretty sure that it will look like staying in the euro was a bad decision. In that sense, I would advise President Anastasiades to leave the euro now and bet on re-election on the wave of a giant economic boom by the time the next presidential election rolls around.

The problem is that it is not at all clear that such a move will look great by the time of the next legislative election in 2016. There are a lot of short-term losers, and they are politically powerful.

In fact, given the opposition, a new currency may be impossible. The president of Cyprus is powerful, but he cannot unilaterally introduce a new currency. There would have to be wide support for such a move. The problem is that most of the soon-to-be-unemployed won’t give it, the bankers are unlikely to act in their self-interest (this is oddly true of American bankers, I should add), and those who owe debts to foreigners can only be appeased by radical changes in Cypriot bankruptcy law. (It is currently very strict; e.g., creditor-friendly.)

While leaving the euro looks like a clear decision at first glance — two-thirds of Cypriots support it! — the politics rapidly gets blurry by the second and third look. Argentina left the American monetary union after a punishing depression had reduced the economy to barter; Mexico’s president could unilaterally devalue (and pretty much had no other option by that point). Leaving the euro would almost certainly lead to a richer and stabler Cyprus by 2018 … but the above analysis, superficial as it is, makes me think that you can’t get there from here.

Cyprus will have a long and grinding depression, but it will not (unlike Argentina) be reduced to barter because the ECB will provide just enough liquidity to insure that does not happen. Things will get awful, but probably never quite awful enough to get the government to take the logical step. It’s a tragedy for the Cypriot people, but an entirely understandable one.

I was wrong about the euro ... but that turns out to be a bad thing for Europe

I while back I wagered that the euro would not make it to May of this year. I am now conceding defeat. Why? Not because the clock ran out. No, because Cyprus is staying in.

Back then, I worried that things would get so bad that a country would have no reason not to ditch the euro. If the banks closed, I argued, then the costs of switching would no longer apply. At that point no rational government that wanted to win re-election would stay in; everything would be upside.

Well, Cyprus has reached that point. The banks are closed, capital controls are imposed, the and the debt-GDP ratio is set to explode since the Germans insisted, insanely, that the E.U. bailout be channeled through the island’s government. So there is no worry about bank runs and no worries about driving banks to insolvency. And there should not be a worry about sovereign default: Cyprus is now going to have to default or raise taxes to truly eye-popping levels.

Yet the Cypriot government shows no sign of abandoning the single currency.

OK, then. Past performance does not predict future results: should Spain reach that point their government might behave differently. But it might not. I am given pause by the sight of Cyprus happily plunging right into a depression with no promise of aid from the rest of Europe and a very easy out right there.

And so, I proclaim error ... but stand astounded that European governments are willing to sacrifice their people to an E.U. that seems so unwilling to do anything in return.

The flowback from fracking, European edition

Gavin Wright is one of the best economic historians of the United States. In a seminal article, he advanced two findings. First, early American industrial success was due to access to cheap abundant natural resources. Second, there was nothing special about America’s geological endowment that caused it to enjoy cheaper and more abundant natural resources. Rather, Americans were particularly innovative in figuring out ways to turn their geological endowments into usable economic resources. In a 1995 paper with Paul David, the authors cheekily called American resource abundance “socially constructed.”

American industrial dominance faded as the technologies developed in the United States spread to other places. (Lower transportation costs helped: cheap Australian iron could power Japanese industrial exports, for example.) Over time, some countries also developed the ability to indigenously develop new natural resources (an article by Wright and Jesse Czelusta mentions various South American nations, in addition to Australia, Canada and Norway) but it really was not until the second half of the 20th century.

History is repeating itself. The technologies allowing for the development of shale gas and tight oil have originated in the United States. (There has got to be a paper in why.) But there is nothing particularly special about America’s geology. There is likely a lot of shale gas in Europe, among other places.

The question is how fast can the technologies invented in the United States be deployed overseas? The Economist points out that even if you can get past the political barriers, it will still likely take a decade for exploration and development. I am not so sure that it has to take that long, but there is a very serious obstacle to developing European shale ... the flowback.

Basically, when you dig a shale well it produces a lot of wastewater: the flowback (e.g., the fluid that you pumped down there to fracture the rock) and other water liberated during the drilling. That water is nasty stuff, regardless of what you pumped down there in the first place. It contains heavy metals, icky long-chain hydrocarbons, and is slightly radioactive. (The link goes to a USGS report.) In most U.S. plays, you get about 600,000 gallons of flowback and other water in the first ten days. You then get another 200 to 1,000 gallons per thousand cubic feet (MCF) of natural gas. (An EPA study is here.)

So what do you do with the toxic and salty and mildly radioactive flowback? Well, in the United States we pump it into Class II disposal wells: lightly regulated abandoned old wells, mostly owned and run by small mom-and-pop operations. (And I do mean lightly regulated. Click the link and be horrified.) We truck the stuff thousands of miles (in an exercise with some of my students, we estimated a minimum flowback disposal cost of 25¢ per MCF) or recycle it for use in other fracks. Chesapeake, for example, reuses about 6% of its water and aims to up that to 20% in some plays. But that will still leave 80% of the sludgy briny glowing water to be dumped somewhere.

And most of Europe does not have a century of oil and gas drilling behind it. The U.S. has literally hundreds of thousands of Class II wells lying around. Britain and Poland do not. So where are they going to dump the wastewater?

I would go so far as to call this a dealbreaker for most European countries (Ukraine excepted) save for one caveat: there is a huge opportunity for companies that can invent ways to better reuse the flowback. The DOE has already put some (rather small) monies towards this purpose. But this is a place where the case for subsidies is weak. There are huge incentives for anyone who can figure out a way to substantially cut the amount of flowback from fracking to make a lot of money.

In fact, some have started. So get moving! Europe awaits.

Internal devaluation does not work very well

So I read in the New York Times that Greek private sector salaries fell a punishing 22.5% in 2011 in real terms.  That stunned me. So I went to Eurostat. Their figures for nominal labor costs were slightly less impressive, but still shocking. (2008 = 100.)

Internal devaluation at work! Sure, Greece is still working off earlier excessive wage gains, but that should presage an export boom, right? Cheaper workers, cheaper vacations for foreigners, more tourism, more exports.

Except ... well, according to OECD data, output is declining along with wages. (See below; 2005 = 100.) Unit labor costs are down, but not when seasonally adjusted, and really not relative to Germany or the rest of the Eurozone. Maybe that’s not relevant. After all, as long as output per worker in potential export sectors isn’t falling, then economy-wide unit labor costs should not matter ... but only for those industries. They will matter a lot in other industries, which are seeing demand (foreign and domestic, as proxied by the value of output) drop as fast as their wage bill.

Add to that (1) rising debt burdens for Greek workers, since debts aren’t indexed to wages; (2) rising taxes on Greek workers; (3) people’s desire to save in euros (outside Greece or in cash) in the face of a possible Grexit; and (4) the awful awful feeling that comes with people as they watch their nominal incomes plummet.

Put it together, and it isn’t clear to me that the rather surprising unstickiness of Greek wages is going to produce much of a quick recovery even if wages fall substantially more. (There have been a lot of reforms to Greek labor law in the last few years.) Of course, the Argentine experience implies that a Grexit won’t be better ... Argentine GDP plunged 15% in the year after the devaluation, and recovery took place in the context of strong external demand.

I am not optimistic.

Postscript: see “Is Increased Price Flexibility Destabilizing?” by Brad Delong and Larry Summers. (Also found here.) See also “The Barber of Buenos Aires.”