3/4/09

Today UK Prime Minister addressed a joint session of Congress with a forceful call for international action around a “Global New Deal” to bring the world economy out of the economic crisis.  The need for action right now is most urgent in Europe, where fear is growing of an economic crash that could threaten the Euro and the Union itself. The picture across Europe is mixed, but some states – from large countries such as Ukraine to well-established EU members like Ireland and Greece, to emerging economies such as Latvia and Hungary – and in danger of economic or even political meltdown.  Sunday’s EU summit produced mixed results, with conflicting interpretations in the press and a commitment to provide case-by-case assistance to states in crisis, but no new initiatives. It did result in a recommitment among EU members to reject protectionism within the European Union – a significant development considering the EU is based on creating a single integrated economic space. 

However, the current steps are very incremental and insufficient to a threat of this magnitude -- with ramifications for the US economy, the future of the EU, and the economic and political stability of many developing countries which depend on trade with Europe. Bolder action in support of the vision Brown laid out is needed by Germany as well as other EU institutions, such as the European Central Bank. This crisis requires a European response and Europe has the economic clout to address the challenge.  With the US, where the crisis originated, working to get its own house in order, the action should shift to Europe and Washington should ask European leaders to join in extending themselves to address the crisis boldly.

Europe’s economic and political stability is at risk. The economic crisis is deeply affecting European countries of all stripes: EU countries in the Euro-zone like Ireland and Greece; EU countries outside of the Euro-zone like Latvia and Hungary; and European countries outside of the EU but tied to the EU’s economy such as Ukraine and Serbia. Deepening economic downturns in Eastern Europe have raised fears that a default in one country could spread throughout the region much like the 1997 East Asian crisis. This would have serious ramifications for Western European banks which are highly invested in Eastern Europe and could lead to a deep down turn throughout the euro-zone, leading to great strain on the EU’s political union. The Economist summarizes the crisis and the implications, “Tumbling exchange rates, gaping current-account deficits, fearsome foreign-currency borrowings and nasty recessions: these sound like the ingredients of a distant third-world-debt crisis from the 1980s and 1990s. Yet in Europe the mess has been cooked up closer to home, in east European countries, many of them now members of the European Union. One consequence is that older EU countries will find themselves footing the bill for clearing it up... if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer. Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shrivelled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market... Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilise the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.” [Economist, 2/26/09]

The EU Summit meeting produces mixed results – commitments made on preventing protectionism, but limited action taken in addressing economic crisis.  Commenters agree on the risks, but disagree on the prospects for help.  The EU rejected a bailout for Eastern Europe, proposed by Hungary. The Washington Post writes, “Germany, Europe's largest economy, led opposition to the Hungarian proposal. German Chancellor Angela Merkel said a broad, regional rescue plan was ill-conceived, though she did not offer specific alternatives.”  The Financial Times quotes Merkel saying, “We help countries in need and we will do so further, particularly through international institutions.” Additionally, both Merkel and Luxembourg Prime Minister Jean-Claude Juncker, were quoted saying they would look at expediting membership in the Euro for certain countries in Eastern Europe. Mark Mardell of the BBC asks “did the summit fail the East?…I am puzzled by much of the reporting of the summit. Many focused on the accurate fact that the EU did not come up with a rescue plan for Eastern Europe and its banks. It's fair enough, and obviously true. But a casual reader could be forgiven for thinking that this was the rejection of a long-awaited plan, a further confirmation that the EU dithers in the face of a crisis, and exceptionally bad news for the East. For me, the main story was the row over protectionism. But, as far as the East goes, I feel only the Pink-un [Financial Times] got it right with the rather opposite story that help was promised, just not at once.” But Paul Krugman counters, “In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide 'case-by-case' support. That means a slow dribble of funds, with no chance of reversing the downward spiral.” The Guardian concludes that “With national priorities resulting in European disarray, the risk is that the deepening crisis could undermine some of Europe's main achievements of the past 30 years - the establishment of the single market, the birth of the single currency and the integration of the two halves of Europe after the fall of the Berlin Wall...The summit concluded with common affirmation that the EU's single market was part of the solution to the economic crisis sweeping Europe.” [Times Online, 2/11/09. Guardian, 3/2/09. Washington Post, 3/2/09. Reuters, 3/2/09. Reuters, 3/1/09. BBC, 3/3/09]

A bold response is required from Europe’s largest economies, but has yet to materialize.  Brown suggested, as part of his “Global New Deal,” that “every continent injects resources into its economy.”  Leaders in Europe need to do just that.  As The Economist writes, “The bill will indeed be huge, but in truth western Europe cannot afford not to pay it. The meltdown of any EU country in the region, let alone the break-up of the euro or the single market, would be catastrophic for all of Europe... It is certainly not too late to rescue the east; but politicians need to start making the case for it now.” As Brown said in Washington Wednesday, "There is no old Europe, no new Europe, there is only your friend Europe." The EU’s pledge “Tuesday to bail out any struggling member of the euro-zone before they were forced to turn to the International Monetary Fund” and the commitment to help Eastern European countries on a case by case basis is a start.  The European Central Bank’s attachment to tight monetary policy has made matters all the more difficult.  President of the European Central Bank Jean-Claude Trichet told the European Parliament that “There is presently no threat of deflation,” leading Paul Krugman to say, “Oh, and Jean-Claude Trichet says that there is no deflation threat in Europe. What’s the weather like on his planet?” Charles Grant, director of the Center for European Reform, a research group in London, said, “My expectation is that the euro zone countries, out of pure self-interest, will bail each other out... For Central and Eastern Europe it is too early to say there won’t be solidarity. But non-E.U. countries in the east — particularly Ukraine — seem to be the No. 1 worry.” [Gordon Brown, Times of London, 3/01/09.  The Economist, 2/26/09. Gordon Brown, 3/4/09. IHT, 3/3/09. Paul Krugman, 3/2/09. Paul Krugman, 3/1/09. NY Times, 3/1/09]

U.S. must push EU leaders for bolder action, because how Europe handles this crisis is hugely important to the global economy and to U.S. geopolitical interests. The Obama administration should push EU leaders to take bolder action to addressing the economic crisis. The EU is the world’s largest trading bloc and largest economy in the world and is an essential market for U.S. goods. If Europe were to fall deeper into recession it would have severe implications for America’s economic recovery and could push the U.S. deeper into recession. Furthermore, an even greater economic crash could have tremendous geopolitical ramifications. Europe is the world’s largest foreign assistance provider and an essential market for developing-country products as well.  Additionally, economic difficulties are already undermining support for future EU enlargement efforts, which could undercut stability in the Balkans. The Economist warns, “Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilise the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union. The political consequences of letting eastern Europe go could be graver still. One of Europe’s greatest feats in the past 20 years was peacefully to reunify the continent after the end of the Soviet empire. Russia is itself in serious economic trouble, but its leaders remain keen to exploit any chance to reassert their influence in the region. Moreover, if the people of eastern Europe felt they had been cut adrift by western Europe, they could fall for populists or nationalists of a kind who have come to power far too often in Europe’s history.” [Economist, 2/26/09]

What We’re Reading

The ICC issued an arrest warrant for Sudanese President Omar al-Bashir for crimes against humanity in Darfur.

While in the West Bank, Secretary of State Clinton affirms U.S. support for the Palestinian Authority.  She also criticized Israeli demolition of Palestinian homes in Jerusalem as “unhelpful.”

Russia welcomed President Obama’s willingness to step back from missile defense plans, but dismissed the idea of linking it to Russian support for the U.S. against Iran.

Iranian Supreme Leader Ayatollah Ali Khamenei said that Middle East peace is doomed to fail.

A car bomb outside the Bagram air base in Afghanistan wounded several.  The Afghan election commission rejected President Hamid Karzai’s plan for earlier elections, which are now scheduled for August.

Pakistan arrested suspects, but none of the attackers, in the attack on the Sri Lankan cricket team.

A new poll finds that President Obama is more popular than ever.

Small, remote outposts are the lynchpin of U.S. strategy in Afghanistan.

Chinese party elders press for transparency in the government’s stimulus package.

As the economic crisis continues, public outrage swells in Latvia.

A suicide bombing in Baghdad kills three.

Fidel Castro comments on Cuba’s government shakeup.

Senator Ted Kennedy will receive an honorary knighthood from the U.K.

The DR Congo recovers from war.

Venezuela will cut oil contracts as prices continue to fall.

Commentary of the Day

The Washington Post examines the “scary, post 9/11 thinking” of President Bush’s legal team. In light of the memo, the NY  Times says the American people deserve truth and accountability about the actions of President Bush’s administration.

The Economist looks at the economic crisis’ consequences for foreign aid to the world’s poor.

Pakistani President Asif Ali Zardari defends Pakistan’s counterterrorism policies and the truce with the Swat valley Taliban.

LA Times columnist Tim Rutten advocates for a citizens commission to investigate the Bush administration’s possible abuse of executive power.