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Saturday, February 9, 2013

ECB’s Draghi Resists Pressure to Devalue Euro and Stimulate Growth

Despite pressures from the appreciation of the euro, which had hit a 15-month peak of $1.3711 on February 1, 2013, Mario Draghi of the European Central Bank announced four days later that the benchmark financing rate would be on hold at the record-low 0.75 percent. In making the announcement, he stressed that the worst was over for the Eurozone and that the uncertainties would be gone by midyear. “The economic weakness in the euro area is expected to prevail in the early part of this year. But later in 2013, economic activity should gradually recover, supported by our accommodative monetary policy stance and the improvement in financial market confidence.” Draghi was tacitly undercutting Francois Hollande’s earlier statement that the euro should depreciate so as not to hurt economic competitiveness. A higher euro means more expensive euro-based exports abroad. The relationships between monetary policy, a currency, and economic growth are complex. It would thus be worthwhile to unpack the scenario facing Draghi and Hollande in early 2013.
                         Mario Draghi addressing the World Economic Forum. In resisting pressure to lower the benchmark rate, he increased his financial stature abroad. 
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Thursday, February 7, 2013

S. & P. Sued for $5 Billion: Breaking a Conflict of Interest?

In sending a message to S & P as well as Wall Street more generally regarding the excesses in the securitization of subprime mortgages that contributed materially to the financial crisis of 2008, the U.S. Government and several state governments announced in early 2013 that they would sue S & P for $5 billion as a penalty and to cover damages to state pension funds and federally-insured banks and credit unions.  The operative assumption was that such a monetary figure would have considerable force as a disincentive to profit by means of fraud.  Would $5 billion be sufficient for the message to be delivered not only S. & P. but also to Wall Street? 

The full essay is at "Essays on the Financial Crisis, and
 Institutional Conflicts of Interest, both available in print and as an ebook at Amazon.

Wednesday, February 6, 2013

Is a Stronger Euro in Europe’s Interest? In America’s?

Speaking at the European Parliament in early February 2013, Francois Hollande of France castigated the floating exchange rate of the euro. “The euro should not fluctuate according to the mood of the markets. A monetary zone must have an exchange rate policy. If not it will be subjected to an exchange rate that does not reflect the real state of the economy.”  The week before, the euro was at $1.37, a 15-month high. The euro was at its strongest rate against the Japanese yen since April 2010. Behind the rise in the currency’s value was a surge in investor interest in the euro from assessments that the worst of the debt crisis had passed. Hollande’s statement can be critiqued on a number of points.

Was the upswing in the value of the euro just the beginning of the currency's rise as a reserve currency around the world?

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Tuesday, February 5, 2013

Is the E.U. More Than the Sum of Its Parts?

In the wake of David Cameron’s announcement that he would try to renegotiate Britain’s obligations in the E.U. then have an “in or out” referendum in his state on whether it should secede from the Union, Francois Hollande of France warned that state interests were in the process of usurping “the European interest.” According to the French president, Cameron was heading the E.U. down the path in which each state “looks for what is good for itself and only itself.” As such, the Union would simply be an aggregation of state interests. The question is perhaps the old one of whether the whole is more than the sum of the parts. In proffering different answers, the European federalists and anti-federalists (or Euro-skeptics) have fundamentally different conceptions of what the E.U. is.

The complete essay is at Essays on Two Federal Empires.

Is the E.U. simply an aggregation of all of its states? Or is there a European whole that is distinct?               (source: mapperywordpress.com)

Monday, February 4, 2013

Fixing the Foreclosing Banks: A Hidden Conflict of Interest in Regulatory Compliance

After the financial crisis of 2008, regulators in the U.S. ordered banks to hire consultants to implement more than 130 “enforcement actions,” which represent 15% of the cases. In 2011 alone, regulators mandated that eleven banks hire consultants to determine whether mortgage borrowers had been wrongfully evicted. The consultants collected about $2 billion in fees, which amount to more than half of what homeowners were to receive under the $8.5 billion settlement that ended the consultants’ work. According to regulators, the consultants’ work was plagued with inefficiencies. This is probably the least of it, for virtually any expectations for “an industry that is paid billions of dollars by the same banks it is expected to police” are bound to be chimerical in nature.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Sunday, February 3, 2013

Making Egypt More Democratic: Interiorizing Protests

How a democratic system is designed can be as important as whether the government officials have been elected or appointed. In constructing a democracy, it is not sufficient to simply hold elections. While the victors may have democratic legitimacy, the government itself may still not. Egypt amid the violent protests in early 2013 may be a case in point. Even though unlike in 2012 the sitting president had been democratically elected, it is too simplistic to say that the Egyptian government and constitution had democratic legitimacy.
In January 2013 following an Egyptian court sentencing 21 residents in Port Said to death for their roles in the stadium disaster, the chief of the army said that the ongoing violence could bring about the collapse of Morsi’s government. The opposition demanded that the president establish a nationally unified government and rewrite controversial parts of the constitution that had recently been passed. That the constitution had been pushed by religionists amid an increasingly polarized citizenry left even the democratically elected government vulnerable. It was not enough that Morsi had been democratically elected.
Particularly in a highly polarized country, simply holding elections is not sufficient to usher in a sustainable democracy. If a partisan party holds virtually all of the power in the government of a highly polarized country, the opposition will have no recourse but to resort to protests and even violence. Put another way, democratic legitimacy requires more where a citizenry is polarized in the sense of operating under very different, and thus highly conflicting, assumptions and prescriptions. In such a context, a democratic system that hands virtually all the power over to one “side” is insufficiently democratic.
This is not to say that a “unity government” is the answer. Given the polarization, any unity would be illusory. More realistically, Morsi could have viewed the sheer intensity of the violence in the protests as an indication that the new democratic system was being monopolized by one party at the expense of others. Providing them with their own bases of power within the government and democratically elected would bring in the external political strife—replacing violence on the streets with debate and negotiation between governmental institutions. The latter is not predicated on unity. Even any resulting compromise in legislative terms would not necessarily imply unity.

                                    Can such intense violence be "interiorized" as debate and politics in a legislature?  Government itself can be viewed as civic violence "redacted" and "refined."   Source: thestar.com
Interiorizing the conflict on the streets by permitting it with some political power within the government could be accomplished through a bicameral legislature, the chambers of which having very different bases of membership, or a qualified majority vote mechanism in a single chamber. The separation of powers could also be by government branch, with one party controlling one branch and the opposition controlling at least part of another branch.
In the U.S., for example, a Democrat controlled the White House at the time, while the Republicans controlled the U.S. House. The opposition did not have to have a share of the power in the House because the minority there had another power base within the government. Were the government completely dominated by even democratically elected Republicans, such was the case in Wisconsin after the election of 2010, activist Democrats would head for the streets. That the legitimacy of such a government can quickly become suspect in spite of its democratic basis is illustrated by the thirteen senators from Wisconsin who literally fled to Illinois so Wisconsin’s senate could not function with a quorum. Democracy involves the design of a government as much as that crucial offices are elected rather than appointed. To be legitimate democratically, the government’s design should interiorize political strife by providing a power base to more than one party.
In short, it is not sufficient for the Egyptian president and even its parliament to be democratically elected, such that one party can dominate both simply due to the numbers. Given the extent of polarization among the citizenry, such domination is doomed to failure even if the dominated party is in no hurry to differentiate power-bases within the government. Particularly in cases such as Egypt where the parties are “not on the same page,” the opposition must have some basis within the government to act as a check and thus balance out the otherwise excess possible in one-party rule. In a polarized citizenry, such excess quickly pushes the other side to extreme reactions on the street.
The task in the construction of a viable government in Egypt would seem to be providing opposition groups with enough ownership within the government without thereby providing a veto on any legislative output. As of early 2013 at least, Egypt might have to go a couple of rounds before a design is adopted that effectively interiorizes the violence.  Otherwise, splitting the country into two—one secular and the other a theocracy—might be the only viable solution (other than federalism and the sort of democratic design discussed here).  It is notoriously difficult to relocate people, however, so as to have truly distinct secular and religionist societies. Given the daylight between the two camps, however, partition, such as that which had occurred between Pakistan and India in 1947 might simply reflect the fact that two distinct nations had already come to exist in Egypt. If so, it is the fossilized nature of a defined country that may be the underlying obstacle to Egypt catching up with itself.

Egypt Political Factions Condemn Violence, Urge Dialogue,” Deutsche Welle, January 31, 2013.