Atlantic Sentinel

Tag: Southern Europe

  • Fortress Under Siege? Gibraltan Sovereignty in Jeopardy

    In Foreign Policy this month, it was hinted that, along with the Falkland Islands, the tiny peninsular of Gibraltar, located on the southernmost tip of the Iberian Peninsula, may become a high-profile case for sovereignty discussion between Britain and a foreign power, in this case, Spain.

    This comes in tandem with a recent increase in tension concerning the aforementioned Falklands and the bid by the Argentine government to take the matter of their sovereignty to the United Nations.

    Gibraltar, nicknamed “The Rock” after the imposing mountain which overlooks its Mediterranean and Atlantic bays, was captured in the early eighteenth century by an Anglo-Dutch force and has been a British naval base ever since. Its position was further codified in the 1713 Treaty of Utrecht which ended British involvement in the War of the Spanish Succession, along with formally declaring that a number of territories be ceded to Britain, including several French colonies in North America along with Gibraltar.

    The import of “Gib” in British strategic history was of high order, allowing a base from which to exercise command of the mid Atlantic, plague France and Spain and control the Western Mediterranean. It was a vital post during Britain’s expansion and later dominance of world affairs in the eighteenth and nineteenth centuries.

    The recently elected Spanish conservative government under Mariano Rajoy has made an official stance to the effect of a new vitality in the Spanish claim to Gibraltar, stating that it will abandon tripartite talks and ignore Gibraltan input on the issue. Instead, Madrid seeks only to deal with the British government directly, perhaps hoping for a more favorable course. (more…)

  • Portuguese Foreign Minister Conducts Economic Diplomacy

    After taking power in June of last year, Portugal’s center-right coalition government announced that the country would adopt “a new national strategic priority: a very strong economic diplomacy.” Since then, Portugal’s foreign minister, Paulo Portas, has made it abundantly clear that the “economic diplomacy is the first institutional priority of the Ministry of Foreign Affairs.”

    The primacy given to economic diplomacy is also perceived as “a countercyclical policy, which gives resistance to the Portuguese economy.” The top four exporting markets of the last ten years — Spain, Germany, France and the United Kingdom — are all European countries, and they are the destiny of more than 50 percent of the Portuguese exports — and the overall exports to the European Union account for 70 to 75 percent. (more…)

  • Portugal’s Despondency Likely to Endure

    Portuguese politics can be called “traditional”, but the term is used pejoratively.

    As is the case in many Mediterranean countries, Portugal’s lack of a political culture and strong civil society have driven it to mismanage the political freedoms it acquired during the 1970s when the authoritarian government was replaced by a democratic one.

    Similarly, it failed to properly manage the financial backing it gained by joining the European single currency in the early 2000s. (more…)

  • Eurozone Crisis Enters New Phase

    The last two weeks have proven interesting for people who follow the unfolding situation in Europe for two separate events.

    On July 15, the European Banking Authority released reports on the health of the European banking system. These “stress tests” measured the stability of banks by evaluating their ability to hold a minimum amount of core capital when set against economic situations similar to a prolonged recession. Another function for these tests was to establish which banks were exposed to Greek sovereign debt and thus enhance trust among financial institutions, as banks are wary of lending to each other if the extent of exposure is unknown.

    On July 21, eurozone leaders came together and agreed on far-reaching measures that were the most convincing for rescuing Greece to date.

    Although these two events have provided transparency, time and confidence, a number of issues remain unresolved. Indeed, the reason that a relatively weak compromise on averting bankruptcy for Greece could be met with great relief in financial markets may be a lack of clear political direction within the singly currency area. There are crucial questions still unanswered and there is real risk that the framework may be the seed of an unfavorable outcome.

    The larger outlines of the deal are well known by now. Greece has been alleviated of the burden of relying on the market for funds for a considerable time. This was achieved by a combination of support from the European Union and the International Monetary Fund and a voluntary, private-sector rollover and debt swap.

    After much controversy, private-sector involvement was introduced partly to make the resolution feasible in Germany to continue providing funds for Greece. Although this solution entails writing off a share of the original value due to investors, for the time being it effectively removes the fear of a disorderly default that would lead to contagion. Fear of a “Lehman Brothers” moment has disappeared for banks exposed to Greek debt.

    Important was also the lowering of the interest rate of Greece’s debt to 3.5 percent which will apply to Ireland and Portugal as well, in the hopes that this relief can keep them safe from further intervention. Lastly, the summit saw a widening of the powers of the European Financial Stability Facility, a financial vehicle that was granted the power to intervene if a country in the eurozone is under financial duress. This “European IMF” may prove to avert the dangers of a self-fulfilling crisis for the countries that are still deemed to be at risk.

    Positive news as this is, the foundation which this solution relies upon is fragile. Although Greece will have funds at its disposal for the time being, it does little to increase the competitiveness of the Greek economy. Even with the latest package, debt-to-GDP ratios will still be higher than those of Italy at 120 percent. If Greece’s economy is not reformed in the coming years, it could need another bailout in the future.

    A worry with wider implications is found in the words of the summit’s communiqué (PDF) which states that,

    As far as our general approach to private-sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.

    All other euro countries solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms…

    This is currently the only guarantee that private investor debt in countries with similar problems will not face a similar write off as was the case with Greece.

    For the market this will create uncertainty as the promise comes from the same leaders whose credibility is in shatters. What market uncertainty implies is hard to say at present yet when Moody’s recently further downgraded Spanish sovereign debt, it cited the possibility of future private-sector involvement as one of the main concerns. Also worrying is that since Greece’s write off will be voluntary, it does not trigger credit default swaps. The trigger may have the effect of raising borrowing costs for other highly indebted economies as investors shift to the CDSs of their debt, thus leading to higher volatility in debt spreads and increased market jitters.

    What emerges from the past weeks is that no scenario is impossible. Although many important steps were taken in bringing clarity to the situation, we have yet to see the final outcome. Many saw these resolutions as a step toward further integration of the eurozone however it is unclear how strong the popular mandate is for such a development. The short-term outcome will likely entail more last-minute compromises, high stress put forth by the markets and a new financing plan for Greece. The depth of last week’s political efforts does offer some optimism for a more coherent path forward.

  • Liberal Wrongheadness on Greece

    In his column yesterday, New York Times columnist Paul Krugman demonstrates how wrongheaded liberal thinking on economics can be.

    Pointing to the fiscal problems being experienced by Greece, Krugman correctly points to the core of the problem: excessive spending and borrowing by the Greek government. Although he doesn’t point out that all that spending and debt is to pay for the ever growing expenditures of Greece’s welfare state, at least he recognizes that a government can spend and borrow too much. Indeed, he even recognizes that the situation can become so dire that investors don’t want to invest anymore in a government’s bonds because they fear a default, which is precisely what is now happening in Greece.

    But then Krugman goes awry, finding another culprit to blame for Greece’s debacle: deflation or even “excessively low inflation.”

    What he’s alluding to is that because Greece doesn’t have control over its money supply, the Greek government cannot do what the American government and other governments do to pay off excessive debt — simply print the money and paying off creditors in debased dollars.

    Krugman says that one possible solution to Greece’s problems is to slash spending and raise taxes. But of course slashing spending would involve major reductions in welfare benefits for the Greek citizenry, who are, by the way, protesting against any reductions in their dole. They take the same position as American dole recipients: that they have a right to their dole, come hell or high water, even if the government doesn’t have the money to continue paying them their dole. As Krugman observes, raising taxes will put more businesses out of business, raising unemployment and thereby aggravating the overall problem.

    Krugman suggests that another possible solution is to have other European countries guarantee Greece’s bonds. But as he suggests, German taxpayers are not excited about having their money taken from them so that Greek taxpayers can continue receiving their “free” welfare state dole.

    So, the obvious solution to his quandary, one that the American government’s Federal Reserve has long used, is simply to crank up the printing presses and pay off all that debt in depreciated, debased currency.

    But there’s one big problem, one that Krugman deeply laments: Since Greece is part of the eurozone, it doesn’t have the power to crank up the printing presses without the approval of the other EU countries, which are not likely to want to debase the euro for the sake of saving the welfare state dole for Greek citizens.

    That leaves Greece with the option of withdrawing from the eurozone and resorting to its own monetary system. But as Krugman points out, that might not be successful given that would likely be a rush of people to get their money out of the banks, along with a refusal by investors to buy bonds issued in the new currency.

    Needless to say, Krugman deeply laments the inability of the Greek government to inflate itself out of the crisis. Never mind that paying off creditors in debased currency constitutes an intentional default. That doesn’t seem to bother Krugman one whit. All that matters, obviously, is that the Greek welfare state be saved from collapse.

    Unfortunately, by not surprisingly, Krugman draws the wrong lesson for America from this Greek tragedy. He says that while the American government needs to be “fiscally responsible,” it should also “steer clear of deflation, or even excessively low inflation.”

    In the final analysis, Krugman gets it wrong. What has collapsed in Greece is the welfare state, and hanging on to this anchor is what is sending Greece to the bottom of the ocean.

    Americans need to take what has happened in Greece as a warning: Get off the dole road before it’s too late. Dismantle and repeal (that is, don’t reform or reduce) all welfare (and warfare) programs and departments, along with the taxes that support them.

    Moreover, don’t do what the Federal Reserve has done for decades — that is, don’t inflate. In fact, abolish the Fed, America’s engine of inflation, and restore sound money to America.

    This story first appeared on Hornberger’s Blog, The Future of Freedom Foundation, April 9, 2010.