Economic Interests

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Archive for the month “June, 2013”

Democracy struggles in the global recovery


Democracy has never been so popular. The Arab summer saw dictatorships overthrown and replaced with democratic intentions while in Africa the percentage of democratic countries has increased from 7% in 1990 to nearly 40% last year. The two giants in South America; Brazil and Argentina, have even managed to elect female leaders, something the USA has still yet to achieve. In the world as a whole, democracies roughly account for 60% of the world’s 196 countries, nearly doubling in the last two decades.

So the public should be happy right?

Wrong. The definition of a democracy is vague and the differences between elections in one continent to the next can be staggering. Some “democratic” countries are rather misleading as well; for example Hugo Chavez won consecutive elections, but was an autocratic dictator in all but name, widely considered to have rigged elections and bought votes. Russia as well holds elections, but the chances of President Putin losing an election are slim to none, with the Kremlin wielding a tight fist over the polling system.  That lowers the level of truly democratic countries to a less impressive 25% according to some statistics.

The Financial Times graph shows the election results that awarded the presidency to Vladimir Putin were controversial to say the least. 

Even those countries are now facing troubles. The global recession sprouted protest movements like “Occupy Wall Street” and started a trend that has culminated in the widespread trouble many countries are now experiencing. Brazil angered their people by overspending on the world cup, which has vastly trumped the costs for the South African World Cup, while neglecting the public services that will be so key to the a successful tournament. Turkey’s suppressive leader, Prime Minister Erdogan, has pushed his people too far, putting into law tight rules on alcohol and arresting journalists at a higher rate than that of China. Egypt meanwhile democratically elected the Muslim Brotherhoods front man Mohammed Morsi, who promptly handed himself dictator like powers and refused to listen to the secular opposition.

The world cup stadiums have come at too high a cost for most Brazilians, when the quality of living is nowhere near to that of the stadiums.

In the last two examples there can be seen a link, with both the Turkish and Egyptian leaders exploiting the lack of important institutions and constitutions to grant themselves greater control of the country. Winning majorities in the elections seemed to suggest a remit to do as they liked, without consulting the public, especially the percentage that didn’t vote for them. It’s not a coincidence that Brazil has seen the least hostile protests, with President Dilma Rousseff agreeing with the public’s right to peaceful protests (while quite rightly criticizing the small minority that turned violent).

Yet even the Western countries with stable democracies have seen unrest. Southern Europeans have become frustrated with the levels of austerity being enforced upon them by Brussels and Berlin. Greece has been the main recipient, but even the likes of France are starting to feel the tension, with the approval rating of President Hollande diving to a lowly 24%. Britain suffered more in 2011, when riots in London spread across the country and caused national panic. Though the origin was most likely the austerity the coalition was embracing to cut Britain’s large budget deficit, racial tensions were a common thread, with the London Met still dominated by the white British (around 80%) in a city where that is now considered a minority.

The British riots caused major panic, as some feared the country was spiraling out of control.

The USA however managed to largely bypass these protests, mainly by keeping up their spending levels and kicking the austerity can down the road. Only this year has Barack Obama actually looked to cut down the trillion dollar deficit he had been running consecutively in his first term, with the automatic sequester cutting budgets by $85 billion in 2013. Yet democracy hasn’t looked too rosy for the USA either. The deadlock between the president and congress has become a serious problem, with a polarised government failing to put policies through. A small tightening of the gun laws this year was rejected by the republican dominated congress mostly out of spite, while a recent farming bill (consisting of subsidies for farmers and food stamps) was rejected for the second year running despite holding policies both sides have traditionally liked. Even worse, both sides nearly forced each other to walk off the fiscal cliff at the start of the year, with the president reluctant to cut spending and the congress incessant on not raising taxes. Luckily both sides managed to reach a bipartisan agreement, though if anything this has emboldened both parties beliefs that their way is the only way.

The inability to agree with the more popular President Obama has seen Congress’s approval rating fall sharply to record lows. 

In the last 5 years democracy has taken a bashing, that much is easy to see. For every success like Myanmar, there is a monumental failure like Syria to counter balance it. Yet, many countries still strive for the democracy that the west has enfamed. Giving the public the ability to choose its leaders is a right many in the west take for granted, but something many societies go without. The protests are simply another form of democracy, giving a voice to a cause that the government might be ignoring or missing. In the three biggest protests right now, you can rank Brazil as the most democratic and Egypt as the least. Egypt could have stopped the protests that started last year by listening to the public and engaging them, rather than trying to stamp them down. Turkey started off in a similar vein, but has now tried negotiating with the protesters, especially with the Kurds, who threatened to take the protests to another scale. Brazil however, have largely allowed the protests to take place, and allowing for some violent episodes have seen the least chaos. The government is also opening up a dialogue with the protesters, agreeing to some of their demands for increased funding to the public services. The country still has a long way to go, and could have foreseen the public out roar that was building, but have so far acted in the most democratic fashion.

The protests might be shocking to see, but they are easily trumped by the actions of say the Chinese government in Tiananmen Square, or the conditions of the North Korean people who are denied any access to the outside world. Such dictatorship allows for such short term protests to be stamped down on quickly, but encourages longer term distrust and anger toward the controlling governments. The answer for the countries facing public unrest is for more democracy not less. Allowing the public to voice its frustrations can let off steam and negate anger building up and people acting out in frustration.  In the USA’s situation, more democratic bipartisan talks between the two parties would result in much higher success rate for important policies. The immigration reform coming through shows signs of this much needed bipartisan agreement, but party politics could still derail negotiations.

It must be remembered that there are much worse scenario’s than the current protests hitting democracy.

As Winston Churchill famously said “It has been said that democracy is the worst form of government except all the others that have been tried”.

The next EU Bailout?


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The Euro Crisis has died down in 2013 after a turbulent 2012. This was not because of a lack of effort by Europe’s trouble makers; Italy ground to a halt when trying to decide a government, while Cyrpus were the latest government to need a bailout. Yet the cost of borrowing for many EU countries has been decreasing gradually regardless. This has mainly been down to the statement made last year by the head of the European Central Bank to “do whatever it takes” to save the euro, hinting at the bank finally becoming a lender of last resort to the rest of the eurozone.

But tricky times lie ahead for Europe. The Euro area declined on averaged by 1% in the first quarter of the year and unemployment has reached a record 12.1%. Protests and riots have been more common in recent years (with even Sweden now experiencing public unrest) leading to many extreme parties getting more public attention, campaigning largely on their respective countries leaving the EU.

So a big question remains; who will be the next country to request a bailout?

One likely candidate is Slovenia. With a budget deficit over 5% of their GDP, their finances are in disarray. The economy retracted by over 15% in 2008/09 and is not set to return to growth until at least 2015. The largely state owned banking sector, saddled with debt, has grown to 140% of GDP, with an estimated 20% of loans considered non-performing (extremely late repayments). The public debt is still rather low at around 60% of GDP compared to much of Europe, but the interest levels Slovenia have to pay for borrowing are rather high at near 6%, if that rises much higher in the coming months they may lose access to the international markets and require external help (i.e. a bailout). Much of Slovenia’s problems come down to the credit crunch, where easy credit fuelled a construction boom similar to that in Spain that promptly burst. Another problem was the size of the state, which kept a tight grip on the bigger markets, crowding out private competition and stopping innovation. With the government now employing austerity measures, the growth of these industries have stalled, with potential buyers now a lot harder to find in a recession hit EU.

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Slovenia’s prime minister has announced a brave rejection of any bailout talks, instead talking of important reforms to the banking sector (a creation of a bad bank for the worst debts) and budget balancing austerity measures including: cuts to school subsidies, a recent 5% cut in nominal public sector wages and a new higher marginal personal income tax. Their crisis resembles more Ireland’s than Cyprus and some strong leadership is giving the country a fighting chance of avoiding an international bailout.

So if not Slovenia, who then?

Two countries that resemble Cyprus (the latest bailout victim) more closely are Malta and Luxembourg. Both are small countries with massively outsized banking sectors. Malta’s banking sector is nearly 800% of its GDP making it impossible for the government to bailout out the sector by itself if needed, while the government already has high public debt of around 70% of GDP. But Malta has relatively low unemployment and a controllable budget. Its banking sector is rather different in nature to Cyprus’s as well; instead of two big local banks full of dodgy russian money and heavily exposed to the volatile Greek economy, Malta banks are actually subsidiaries of foreign banks, with high capital ratios and profits. Luxembourg also has a large banking sector, roughly 23 times its GDP. But once again the banks are large foreign owned, differentiating it from Cyprus. The economy is also very strong; experiencing low growth in 2012 when the surrounding countries were in deep recession, holding low public debt and unemployment and possessing one of the large current account surpluses in the region. If that weren’t enough, the small country has the highest GDP per capita ratio in Europe, meaning its people enjoy a very high standard of living. Both countries are over reliant upon their financial sectors and are very exposed to shocks in the market, but neither are realistically on the brink of a bailout.

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Rather more worryingly, a much bigger economy is at risk, one which has already had to accept a bailout for its banking sector. Spain withdrew around €40 billion from European Stability Mechanism to help recapitalize their banks (a EU organism set up to offer up to €100 billion in bailout funds to member states). Yet many believe this wasn’t enough and that problems remain in the troubled Spanish banking system. Spain has had to nationalise one of its largest banks Bankia, while most others have had to make large cuts to their balance sheets. If this wasn’t enough, the economy is in serious trouble. Spaniards are seeing a deep decline in their national output, likely to fall for an eighth consecutive quarter and unlikely to see growth until after 2015. Unemployment is at a record high of 27% of the population, nearly 60% for the young. The budget remains heavily unbalanced, with a deficit of 7% of GDP, leaving public debt high (though not as high as private debt). A construction crash has lost many young spaniard an entry into the work force and has caused a lot of bad debts in the banking sector. When times were bad for the EU, Spain and Italy have faced some of the highest borrowing costs. Many see Spain as the weakest member of the big club, and any serious bailout of the economy would cause massive fractures in the EU and could possibly cause a domino effect on the likes of Italy and so forth. Fortunately, the political scene is stable, with the government in power for the foreseeable future and elected on a mandate of budget balancing and reform. Such reforms and austerity are already under way, with labours cost having dropped in contrast to rises in Frances and Germanys and a 4% drop having been achieved in the budget deficit since 2009. Progress is being made, but it needs a stable environment and a strong recovery in europe wide demand for Spain to really recover and see of the need for a bailout. That is a big ask in a continent that has become synonymous with the word crisis. A bailout for Spain is largely not talked of, precisely because of the implications it could have for the future of the EU. Yet it probably remains more likely than a bailout for Luxembourg and Malta.

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The reality is that many member states could require a bailout if matters turned for the worst, with Portugal another possibility after the rejection of austerity measures by the national courts. The lack of a proper system in place and the reluctance by the ECB to really put its money wheres it mouth is, means rich and stable countries like Germany will continue to fund the mistakes of poorer economies. A more united Europe could solve this, with the spreading of some of the debt between the member states an attractive idea, ending the vicious circle of national debts being inflated by bailouts and increasing the need for further bailouts. Politically it remains a tough sell, especially for Germany, but it would also show a strong and united Europe, something most national leaders would secretly like to see.

Slovenia are the strongest possibility for a next bailout, with markets lacking confidence in the economy and increasing the costs of borrowing to perhaps unstable levels. But a spreading of at least some of the debt  through Euro Bonds could greatly decrease the need for this guessing game.

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