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Tuesday, February 26, 2013

Italian Election Roils Markets: An Over-Reaction

With no party having gained sufficient seats in the upper house of the Italian state government, analysts warned on February 25, 2013 of a “hung parliament,” which would make it even more difficult for structural and fiscal reforms to be passed. Even though the Democratic Party appeared to have gained a slim victory in the lower house, giving that party the majority of 340 seats out of 630, the upper and lower houses have equal law-making ability.
“It was the worst possible outcome, feared by market participants and European policy-makers alike. Italy is facing Greek-style political gridlock and possibly new elections,” Tobias Blattner said at Daiwa Capital Markets. The Wall Street Journal observed at the time, “Italy’s growth prospects are tepid at best, and the election result demonstrates in spades that its fractious politics has not been masters.” Generally speaking, the parties protesting the fiscal reforms demanded by the E.U. did well, suggesting that Italy could find itself at odds with the federal government in how to resolve the state’s debt crisis.
Italy’s bench market index, the FTSE MIB, traded down 4.62 percent on February 26th and the euro sank close to a seven-week low against the dollar, trading at $1.31. Yields on 10-year Italian bonds jumped 0.45 percentage point to 4.81 percent. Bonds of Spain, Portugal and Greece were hit too. In America, the Dow fell nearly 300 points on February 25th, the market’s worst day in almost four months. Markets in the E.U. were down around 2 percent, but futures indexes there and in the U.S. were up the following day.
Analysis:
The optimistic showing of the futures indexes on the day after the election hints that the market on both sides of the Atlantic over-reacted to the anticipated gridlock and possible new election. To an extent, the results are within the range of what can be expected from a multi-party system of parliamentary democracy. Indeed, the states of Britain and Germany had had to form coalition governments just a few years before, and even the problematic Greek elections ended with a government. In fact, that government ended up ratifying the additional austerity.
Moreover, the immediate reaction of the markets seems antiquated to me in the sense that market participants had not adjusted their mindsets to the contemporary European context. In particular, the participants treated Italy as though it were a sovereign state, rather than a state in the E.U. There being a federal level mitigates the importance of state elections even though the states hold more power in the E.U. than the American states hold in the United States. Put another way, the E.U. would surely pressure Italian officials to end the gridlock. Even if the resulting state government were antagonistic to the austerity approach, negotiations would doubtless occur between the state and federal levels. The result would not be as stark or extreme as perhaps market participants presumed in their immediate reactions to the news.

Sources:

Katy Barnato, “US Stock Futures Rebound; Italy, Bernanke in Focus,” cnbc.com, February 26, 2013.

Charles Forelle, “Italian Election Outcome Sparks Selloff,” The Wall Street Journal, February 26, 2013.

Alessandra Galloni and Giada Zampano, “Messy Italian Election Shakes World Markets,” Febraury 26, 2013.

Monday, February 25, 2013

Ukraine: Between Two Empires

With its Association Agreement with the E.U. effectively suspended due to concerns about the “stark deterioration of democracy and the rule of law” after the imprisonments of Yulia Tymoshenko in 2011 and Yurly Lutsenko in 2012, Ukraine was vacillating between creating a free-trade zone with the E.U. or a customs union with Russia, Belarus and Kazakhstan. Given the European Neighborhood Policy of the E.U. applicable to independent states bordering the E.U., a free-trade zone with the E.U. could be the first step on the road to further economic and even political integration, including perhaps statehood. However, that would mean further democratic reforms that would certainly not be required to join a customs union that includes Belarus. As a precondition to an informed decision, distinguishing between statehood in the E.U. and joining a customs union is vital to the Ukraine. Ideologically-driven jargon can create confusion regarding the qualitative difference.
 
               Ukraine, pictured here in orange, would be a large state in the E.U., and would push the border significantly eastward yet still in Europe.     source" wikipedia
Although the Association Agreement does not contain language referring to possible statehood, Ukraine is referred to as “a European country with European identity.” This expression can be interpreted as suggesting that Ukraine could in principle gain statehood in the European Union. At least it places Ukraine in a closer category than that which Turkey could obtain (90% of that state lies in Asia rather than Europe). It is reasonable to assume that a “deep and comprehensive free trade area” and separate negotiations for a visa-free regime could result in E.U. statehood for Ukraine. Even so, considerable political distance exists between a free-trade zone and statehood in the E.U.
In referring to Russia’s customs union as an “economic union” having “member states,” Deutsche Welle implies that the E.U. is the same kind of thing as a free-trade zone. After all, the E.U. is regularly referred to (erroneously) as an economic union, as if the European Parliament were an economic organization rather than a legislature of elected representatives. The E.U. states are typically referred to as “member states,” as if they were not really states (because it is apparently demeaning to be an American state). Our Member States are not like their states because they are not countries. Apparently Singapore and China are comparable because they are both countries. That France is semi-sovereign in the E.U., just as Texas is semi-sovereign in the U.S., can safely be relegated or dismissed altogether.
As a “member state” in Russia’s custom union, Ukraine would continue to be a sovereign state. As a state in the E.U., Ukraine would have to cede some of its governmental sovereignty. As officials in E.U. state governments know, “Brussels” is not without authority. There is no such federal power in Russia’s customs union. Russia itself, like the E.U., is a federal empire in itself (i.e., in having republics) even if the “Russian Federation” is nearly consolidated while the European Union risks dissolution for want of sufficient federal power to keep the Union together in times of turmoil.  Both of these empire-scale federal systems are qualitatively different than a customs union or free-trade zone that they may offer to exogenous countries. Using language that conflates the E.U. with a customs union belies this vital different in kind, and is thus unhelpful to Ukrainians as they discern whether to adopt a trajectory toward statehood or simply join a customs union. The difference here should not be minimized, given the substantial differences.

Source:
Eugen Theise, “At a Crossroads Between Moscow and the EU,” Deutsche Welle, January 7, 2013.

Sunday, February 24, 2013

Solidarity as a Shared Value in European Identity

Speaking at the Schloss Bellevue palace in Berlin, President Joachim Gauck used a televised speech in February 2013 to make the case for more European integration. At the time, calling for “more Europe” in terms of shifting still more governmental sovereignty from the state governments to that of the Union was not a very popular task. Further limiting the power of his message is the fact that the German presidency is largely ceremonial , unlike the office of governor in an American state. Nevertheless, Gauck was determined to put the contemporary condition of the “European project” in favorable perspective. The most striking—and even effective—aspect of his speech is his repeated references to “European citizens.” Had he used “Germans” instead, he would have subtly undercut his own message.
 
                                       President of the state of Germany in the E.U., Joachim Gauck urges "more Europe."  dailyme.com
 
Acknowledging the fiscal and structural imbalances that gave rise to the debt crisis in several E.U. states  and the problems entailed in “patching up” the problems by emergency measures, Gauck nonetheless pointed to non-economic elements of the European project that were also in crisis. “It is also a crisis of confidence in Europe as a political project. This is not just a struggle for our currency; we are struggling with an internal quandary too.” This problem is predicated on the point that the strengthening of a European identity comes out of a recognition of shared values, rather than in differentiation from other cultures outside of Europe.
Too often, Europeans artificially delimit their values to their particular state. Typically, Europeans will preface a self-referential remark with, “In my country,” only to describe a custom or value that is by no means limited to, distinctive in, one particular state. Even in saying “more Europe means a European Germany,” Gauck risked falling into this trap, at least in terms of keeping Europe as secondary. More in line with his thesis would have been the expression, more Europe means more European. More European in turn means more of a consciousness of values that European citizens (and residents) share, whether or not people in Africa, Asia, or America happen to esteem those values too. So the question facing European citizens is this: What values do you share?
From an American perspective, I notice the salience of the value of solidarity held by Europeans because it is such a recessive value in America. Ironically, World War II was perhaps the last time solidarity in terms of “we’re all in it together” was explicitly pushed and acknowledged in America. Even then, the value was more in terms of sacrificing for a common purpose rather than seeing to it that the most vulnerable among us do not fall through the cracks in terms of sustenance. In Europe, solidarity has more of a social welfare quality.
Moreover, whereas Americans tend to apply human rights only to the harm caused by tyrants abroad, Europeans tend naturally to extend to the value to covering the basic sustenance rights of one’s own fellow citizens as well. The shift needed for a stronger European identity involves becoming aware of the duty to apply the value domestically to other Europeans rather than merely to people in one’s own state, or “country.” So “European Germans” would feel solidarity with starving “European Greeks,” for example. This is the element that was largely missing from the austerity response of E.U. finance ministers to the debt crisis from 2010 to 2012. Accordingly, “more Europe” involves not only a stronger value-fueled-identity, but also more fiscal redistribution at the federal, or E.U., level. Put another way, Europeans surely have more shared values than that of austerity.

Source: