Saturday, April 18, 2015

Putin's nuclear remarks in the Crimea documentary

There are several fully (2 1/2 hours) subtitled versions of the documentary "Crimea: the way back home" on the internet: This seems to be the official version.

Putin made some comments about nuclear readiness at about 1:30:00 in the documentary and its context is a report about the US destroyer that set course towards Crimea, had the whole of Crimea within its firing range and that reversed its course when Russia installed Bastion missiles on the Crimea coast as defenses. What the documentary doesn't say is that the Donald Cook only entered the Black Sea on 10 april - long after Russian control over the peninsula had been established. However, the context is still relevant as this was the point where the threat of a confrontation between the US and Russia was most acute.

Here a transcript of the relevant section. This is from the Liveleak version and not the official translation so it may be wrong on some details:

Q: When you talked with Western leaders was it clear to you right away that there wouldn't be any military interference from their side?
A: Of course not. This couldn't be clear right away. That's why, at the first stage, I had to give certain directions to our armed forces - not only directions but direct orders - about the possible actions of Russia and our armed forces in any possible events.
Q: Do your words imply that our nuclear forces were also put on standby?
A: We were prepared to do that. I talked to the colleages, and I was open with them, as I am with you now. This is our historic territory. There live Russian people. They are in danger now. We can't leave them alone. It was not us who staged the coup.It was done by the nationalist and the people with far-right views.
You supported them. But where do you live. Thousands of miles away.
But we live here - this is our land. What do want to fight for there? You don't know, do you? But we do know, and we are ready for it. This is an honest and open position. That's the way it is.
So I don't believe anyone wanted to fan some world conflict out of it. But we were not looking for a fight. There simply forced us to take these actions. And I repeat, we were ready for the worst case scenario. But I presumed that it wouldn't happen. It was unnecessary to aggravate the situation too much.

Commentator: Later, in the Ministry of Defense, we were told that at that time some military experts has suggested Vladimir Putin as Commander-in-Chief to use all available means to demonstrate that Russia was ready to protect its national interests. The president replied: although the situation is complex and dramatic, the Cold War is over, and we don't need international crises like Caribbean. Moreover, the circumstances do not require such actions and it would run contrary to our own interests.
As for our nuclear deterrence forces - added the president - they are always on standby anyway.

Tuesday, April 14, 2015

The Neocon idea of conflict resolution

Few people still believe that the Minsk-2 agreement will hold. When the government in Kiev declared that it only would grant autonomy to the Donbass after elections had been held according to its laws it effectively killed the agreement.

In the Minsk-2 agreement Kiev had to make more concessions than in Minsk-1. But as neither the population of the Donbass nor Putin is enthusiastic about continuing the conflict it is still in a strong position. As long as it doesn't go too extreme it has a good chance to more or less imposing how the peace will look like. The main limitation is that it has to look like a compromise – without revenge against those who fought on the “Novorussian” side. So Kiev has very little to win from its confrontational stance while it has a lot to lose: new fighting will bring more death and more destruction.

The real push to undermine Minsk-2 comes from Washington that uses its influence as an ally of the government in Kiev to push it to these decisions. But what does Washington win by obstructing peace?

For the neocons peace is not an important value. They are always pushing for new wars. They see continuing conflicts at Russia's borders - both frozen and hot - as in their interests. They keep Russia busy, cost it a lot of money and help to turn Russia's neighbors against it. It is a familiar pattern that we have seen before in former Yugoslavia and South-Ossetia, Abkhazia and Transdniester. The only kind of conflict resolution that is acceptable to the neocons is victory.

In the early 1990 nationalist Georgian militias committed massive ethnic cleansings among the local minorities. It was against that background that Russia sent in peacekeepers. At that time it made sense and had widespread support within the Caucasus.

The logical next step would have been that Georgia made up with its minorities and some compromise was reached. But it never happened. The US often accuses Russia from obstructing solutions in order to make life hard for its former fellow Soviet Republics. But in fact it has been the Georgian side that has consistently taken extremist positions that made a solution impossible.

Expelled minorities, such as Ossetians who used to live south of Gori, have in theory the opportunity to go back. But in reality bureaucratic red tape makes it nearly impossible. And instead of dialog Georgia has concentrated on intimidation to win its lost territories back: with road blocks, economic sanctions and – in the case of Abkhazia – even terrorist attacks. Predictably this has only antagonized these areas. The political discourse in Georgia doesn't help either: it is very hostile towards Ossetians and Abkhazians.

The US often accuses Russia of maintaining their support for those secessionist provinces as a way to pressure and blackmail Georgia and other former Soviet states. More likely it is the other way around: it is the US that has encouraged Georgia to take an uncompromising and aggressive position. Here too the only acceptable solution for the neocons seems humiliation of Russia – as was tried to achieve in the 2008 war.

Recently Putin has taken some steps to integrate those provinces into Russia. It looks like he has given up on a solution that includes Georgia.

In former Yugoslavia we already saw a similar patterns. In the early 1990s Croatia was more or less forbidden to consider border changes that would do more justice to ethnic interests. After 1999 the same happened with Kosovo.

In Bosnia the Republika Srpska is held in a semi-pariah status. The logical step forward for Bosnia would be a kind of federation with regions in each of which one of the ethnic groups has a great majority. By giving veto power to those regions the explicit veto powers for ethnic groups could be removed from the constitution and a big step towards normalization could be set. This solution has some problems but it looks like these could be overcome. But here too the West – under guidance from the US – has decided that they prefer to let the situation fester. They want their preferred reform – centralization: what would mean defeat for the Serbs – or else nothing.

This brings me back to Ukraine. Just like the Georgian, Moldovan, Croat and Bosnian leaders the Ukrainian leaders have been steady encouraged by the US to take extremist positions. And just like those other leaders they have believed the propaganda and acted accordingly - to the detriment of themselves and their countries.

The pattern of rejecting dialogue and trying to impose solutions with violence that we see now in Ukraine is very familiar to what happened in Georgia.

Recently there are some signals that the EU politicians are becoming somewhat aware of the game that is being played. However, there is still a long way to go before this becomes the dominant story in the Western press.

Monday, April 13, 2015

What US politicians really think about the Ukraine crisis

The article below is a translation of the article Was US-Politiker WIRKLICH ├╝ber die Deutschen in der Ukraine-Krise denken. This article was also quoted in the Spiegel article Victoria Nuland: Amerikas Krawall-Diplomatin.

What US politicians really think about the Ukraine crisis

Munich - 2 februari 2015 - While a bloody war rages, at a security conference in Munich the next dangerous conflict is started. A diplomatic nerve war on the question whether the West should arm the government in Kiev. The adversaries are actually allies: the US against Europe, specially Germany.

Behind the sound proof doors of the conference rooms in Hotel „Bayerischer Hof“ the Americans speak straightly unfavorable about the Germans.

Friday evening, shortly after 19:00 hour. According to BILD-information at the sixth floor in the luxury hotel American four-star-generals, diplomats and high ranking US politicians meet for a confidential conversation in the „Briefing Room“ and vent their mood on the Germans.

• „Defeatist“ a US-Senator calls Minister of Defense Ursula von der Leyen (56, CDU), because she doesn't believe any more in a victory of the Ukrainians. The word „German defeatist“ can - according to BILD information - be heard several times in this round.

• Obamas top-diplomat for Europa, Victoria Nuland, characterizes the journey of the Chancellor to Putin as „Merkels Moscow-thing“, another US foreign politician speaks about the „Moscow-bullshit“ of the European.

• ANd US-Senator John McCain talks himself into a rage: „History shows us, that dictators will keep taking more if you let them. They will not be dissuaded from their brutal behavior, when you fly to them in Moscow - just as one flew once into this town.“ [a reference to the 1939 Munich conference that is nowadays seen as ineffective appeasement of Hitler - translator].

Merkels diplomatisc initiative in the Ukraine-crisis stands at the center of the American anger. The reason"the Americans don't believe that Putin can be moved to an agreement without massive pressure. But the Europeans don't want to further increase the pressure.

„They fear damage for their economy and counter-sanctions from the Russians“, says Nuland. „It is painful to see that our NATO-partner are getting cold feet“, says another US-politiciancaccording to BILD-information.

It is Obamas close confident Victoria Nuland, who at this kick-off evening whips up her American colleagues: „We can fight against the European, fight them rhetorically ...“

Several US-politicians seem to hesitate about arming Kiev. One asks whether this is "just a tactic", a "false promise" to get the Europeans to put more pressure on Putin. „No, it is not a tactic to prod the Eurpeans“, Nuland answers dryly. „We will also not send four divisions in Ukraine, as the Europeans fear. This is about a rather moderate supply of anti-tank arms.“

„But what will we tell the Europeans, when we really decide in favor of arms deliveries?“, asks a US member of Congress. „What is then our story?“

► Nato-Commandant General Philip Breedlove is also present at the meeting. He answers: „We would not be able to deliver so many weapons that Ukraine can defeat Russia. This is not our goal. But we must try to raise the price for Putin at the battle field and delay this whole problem so that sanctions and other measures can do their work.“

Again chips in Nuland, who is fuent in Russian and served Dick Cheney as security advisor: „I must fervently ask you to use the expression defensive arms, that we will supply against Putin's offensive arms.“

► General Breedlove explains the US-Politicians, how such arms deliveries could look in reality: „Russian artillery kills by far the most Ukrainian soldiers. So they need systems with which they can locate this artillery and quickly return fire. The communication of the Ukrainians become either disrupted or completely intercepted. So they need interception-proof communication devices. Then I am not going to talk about some anti-tank missiles, but we see massive supply movements from Russia to Ukraine. The Ukrainians need the ability to stop these transports. And then I would add a few small, tactical drones. "

Brisant: The planned weapons and systems are technically so demanding that US troops would probably need to train the Ukrainian army. Thus, the United States would intervene with their own troops in the conflict.

The last time there was so much disagreement between Europeans and Americans at the Munich security conference was in 2003 - shortly before the Iraq War. Tomorrow Chancellor Angela Merkel travels to US-president Barack Obama in Washington. They have much to discuss ...

Tuesday, March 24, 2015

Setting Yemen up for civil war

The crime of the year of the "international community" was the recent departure of all the Western diplomats from Sanaa in Yemen. The official argument was safety. But Sanaa was at that moment still quite safe, so everybody could understand that in reality it was a public rejection of the Houthi's and the announcement that the West would take steps to undermine their government. Once again the West had subscribed to the agenda of the hatred of the Saudi regime.

And indeed we saw soon an increase of Al Qaeda attacks. Former president Hadi escaped mysteriously from Sanaa and - after having moved to Aden - renewed his claim to the presidency. Most likely the Saudi's had spent a lot of money to bribe his guards to let him escape. Hadi's most recent move has been to call for a military intervention by the Gulf States.

I believe it was fundamental mistake to turn on the Houthi's. Like it or like it not: they had conquered the power. So challenging them is interference in the internal affairs of Yemen and setting the country up for a civil war.

Thursday, March 19, 2015

How Netanyahu won the elections

One of the basic principles of discussions is that for winning it is important that you are the one who frames the questions. We see this in elections times and again.

A good example were the economic policies of Reagan and Thatcher. They had some luck that the end of a recession seemed to confirm their policies. But much of their success was due to pure bluff. It also helped that after two decades of leftish policies people were ready for something new. But one thing is certain: they changed the political dialogue. Since then leftish demands like equality and fairness are taboo and rightish issues like lower taxes and privatisations are the norm. And we see that even successful leftish politicians like Clinton and Blair are following those norms. Interestingly they typically show a split personality: in their talks they question those norms but in their actions they are often even more fanatic than their right-wing colleagues.

However, people prefer the real stuff. If rightish policies are the norm they will show a preference for rightish politicians.

That brings me to Israel. In Israel establishing settlements has been the norm for several decades now. And leftish politicians have often done that even more enthusiastically than their rightish colleagues. So when Netanyahu rejected the two-state solution and when he denounced Arab participation in the elections he stated things that implicitly have been accepted as the norm by all sides for decades. He just showed the courage to say it explicitly.

Doing that he brought the parties on the left in a difficult position. They could denounce him. But if someone would challenge them they wouldn't have an argument as they had de facto supported similar policies in the past. They are incapable of bringing an alternative. Think of it as something similar to Bush sr's "Read my lips, no new taxes". It was an irresponsible statement and Bush had to swallow his words later on. But during those elections it was something that his Democratic colleague couldn't beat.

The controversial nature of the statement focuses the attention on this issue - at the expense of other issues. So Netanyahu could draw the attention away from the economy and inequality - where he is weak - to security issues where he is strong.

We see the same principle now also in the US. Except for Obamacare Obama has been very unsuccessful in reframing the public discussion. In his foreign policy he has been completely unable to get rid of the neocon influence with its absurd demand that the US should always stay the absolute ruler of the world. The end result may well be that one day the US may suddenly find itself in the same position as Britain: rotten at the core. In finance he has similarly failed to confront the "rulers of the universe". Only now, in his last two years, do we see some timid efforts to change the discourse.

On the left side of the political spectrum president Roosevelt is probably the person who did most to change the norms. It probably helped that he came from a wealthy establishment family. He didn't feel a revolutionary: he just did what needed to be done. In contrast we see in Obama someone who is in awe of the establishment and afraid that he will do something wrong. It is what made me have a preference for Romney in the last US presidential elections. He might be more conservative, but he looked also more of a man who would follow his own conscience than Obama.

Friday, March 06, 2015

Monday, March 02, 2015

The EU rules that undid South Stream

It would go too far to repeat the whole drama that led to the cancelling of the South Stream oil pipeline project by Russia. One thing however stands out: the EU objected against the pipeline on the basis of its "energy competition" rules that separate the ownership of the pipes from the ownership of the gas.

The EU adopts here the cloak of protecting the interests of the EU consumer. However, in fact it is doing the opposite. These rules look like designed by lobbyists for LNG suppliers.

Pipelines are a much cheaper way to transport gas than LNG ships. However, the investment for pipelines is more fixed. Russia needs to spend many billions of euro's to build a pipeline just to arrive at the border of the EU. That piece of pipe is useless at the moment the EU decides to buy elsewhere. So if Russia builds the pipeline to the EU border without control over the following pipes it becomes dependent on the pipeline owners. That dependency can easily be abused. Russia makes itself also vulnerable to political blackmail.

The official rationale of the EU for these rules is that Europe shouldn't become too dependent on one supplier. However, they clearly favor LNG suppliers that are mostly based in the Persian Gulf. This suggests that a lobby from the Gulf and from the US - that hopes to become a LNG exporter in the future - has achieved a big victory in Brussels.

The EU has now declared that it wants to be informed on gas deals of its member states and that it wants to introduce standard contract clauses “to ensure that the EU speaks with one voice in negotiations” for energy contracts.

It seems to me the fox guarding the chickens.

Friday, February 13, 2015

How to dissolve the Eurozone

Some time ago (in 2012) I wrote "How to dissolve the eurozone". My conclusion was that it was much easier to have the strongest countries leave the eurozone then to have the weakest leave. So it doesn't look good that a grexit is once more seriously discussed.

Below I reprint it:

The EU likes to see itself as an organization that helps its members to become rich. Thanks to this reputation poor European countries are eager to become members. From this point of view it was very happy to see countries like Greece, Spain and Ireland showing fast economic growth.

But the EU has been a bit too enthusiastic about signs of growth and ignored signals that the Southern European countries lived above their means. Those countries enjoyed a consumption boom thanks to foreign investment in real estate and easy credit. But these are not sustainable sources of growth and when they stopped Southern Europe suddenly found itself living far above its means.

Normally a country would devalue its currency to get out of such a situation but with the euro that road is cut off. So instead those countries have no alternative for government budget cuts and wage cuts. The problem is that this is a very painful way to cut expenses and that it tends to put economies in a negative tailspin that causes serious harm.

So we have seen a quite a lot of discussion of a breakup of the euro recently. One popular scenario is a North-South division of the eurozone – resulting in a “neuro” and “seuro”. Another scenario is the dropout of the weakest links: Greece and maybe one or two other countries. The problem in both cases is what to do with the many financial links – contacts and loans – that would be broken by such a currency split. Mismanagement of the transition can lead to panic and chaos. As the Lehman collapse in 2008 has learned such a chaos can be much more economically damaging than the direct damage itself.

Unfortunately quite a few European politicians seem convinced that an orderly transition is impossible. As a consequence they are determined to defend the euro at all costs. Yet history has known quite a few currency unions that were dissolved. Most recently the dissolution of the Soviet Union and Yugoslavia also meant that the common currencies were dissolved. Their transitions were rather chaotic but we can learn from them how such a process can be managed. Unfortunately Western countries were in both cases instrumental in pushing the dissolution of those countries. Analyzing what went wrong means also taking responsibility for what we did wrong. Many of the Western leaders and academics involved would rather avoid such a disgrace. But such an attitude is harming us now.

It should be noted that the fact that there are many variables involved also means that there is a lot of space for creative solutions.

A departure of Greece won’t work
It would not be a good idea for Greece to leave the euro in the present situation. The weak competitive position of the Greek economy and the semi-insolvency of its government will combine to produce a sharp fall of the new Greek currency – let’s call it drachme. Those who have assets in euro’s or debts in drachmes will be favored while those with assets in drachmes or debts in euro’s will be disadvantaged. This is not a fair solution and it doesn’t provide the kind of continuity that people expect under the rule of law. It will lead to capital flight and chaotic circumstances that might do more harm than the transition itself.

On itself these damages might be taken for granted. In the past numerous countries have suddenly applied major devaluations to their currencies. The unjust effects are seen as just bad luck for those concerned. However, separating a country from the eurozone will take weeks or even months. Banknotes and coins will have to be created and distributed and that takes time. This is a problem. A devaluation happens in a split second and that means there is no opportunity to exploit the gap in valuation. In contrast the long time needed for splitting a country from the eurozone offers ample opportunity to exploit this gap. So one should expect effects like a major capital flight. And given the level of connectedness of the European economies it will be impossible to stop such transactions.

One might think up measures to counter this movement. Greece might manage to secretly create new money and distribute it very fast or the EU might have some general emergency money that could be used if a country left the euro. But even if it would be possible that way to stop the damage caused by the capital flight the effect on the next domino’s (most probably Spain and Portugal) would still be there. They would see a major capital flight in anticipation of being the next to leave. And even if the ECB would counter that effect with monetary infusions these countries would still see sinking investment – what would hurt their economies in the longer term.

Another consequence will be that the European banks will be hurt. This might happen directly – when their loans to Greek companies and people are converted in drachmes - or indirectly – when the loans stay in euros but those Greek companies and people are no longer able to repay euro loans with their devalued drachmes – but the effect is the same. It is very likely that as a consequence some banks will need government support. Greece itself might need support from the EU too to bridge the transition period. The eurozone governments will likely react to those extra expenses with budget cuts elsewhere. This restrictive economic policy will make it harder for Greece to export to the eurozone and cause the drachme to sink even lower.

It is important to realize that the expected sharp drop is nearly the only reason why a breakup of the euro by the departure of Greece is problematic. If there was the expectation that the drachme would keep approximately the same value as the euro after the breakup there wouldn’t be much of a problem. A breakup would still be a lot of work for many people but it would be manageable.

So to put it bluntly: the very reason why we are under pressure to break up the eurozone is also the reason why it is so hard to do so. And the longer we wait the bigger that reason is likely to become.

What if the north left?
These problems wouldn’t occur if instead the strongest economies left the euro. They would have the freedom to temporarily follow an expansive economic policy after the transition so that their currency wouldn’t rise too fast. And the block that they leave behind will be strong enough not to see the kind of melt-down that Greece alone would face. Also all the countries that might devalue would do so at the same time so that there wouldn't be a domino effect.

The leavers would be at least Germany and the Netherlands: the two countries with the biggest trade surpluses. As these trade surpluses are – specially in the case of Germany – the product of an economic policy aiming to increase their competitiveness that was out-of-synch with the rest of the eurozone this would also be a logical consequence.

Some of the smaller countries like Finland, Austria and Slovakia might choose to follow Germany because their economy is strongly connected with it, but the majority would stay with the euro. I won’t address the issue of whether these countries should adopt a common currency – what would result in a neuro-seuro configuration or that they would each re-introduce their own currency. Convenience will probably dictate the former option.

As the seceding countries are the stronger ones there would be a much better possibility to manage the transition. Yet it still would need to be managed. Preferably there should be an initial period in which there is a fixed rate while everyone is free to exchange his euro’s for the new currency. This would require a considerable commitment from Germany that might include a promise to keep interest low for the first year and to - initially - follow an expansionist monetary policy.

France – with a huge trade deficit – and Italy – with its budgets problems – would stay inside the euro. With those countries the remaining eurozone would be strong enough not to see the kind of disaster that would face Greece if it gave up the euro alone. Yet it would be weak enough to see its currency gradually weaken and its competitive position improve.

If Greece would leave the euro alone most bonds and financial obligations would stay in euros and that would hurt Greece. But if Germany leaves the euro most contractual obligations will stay in the weaker currency. Only when both parties are German should contracts be converted. That would mean that the stronger instead of the weaker party bears most of the pain.

An eurozone with a weaker currency will also benefit Eastern and South-Eastern Europe where many companies and private people have debts nominated in euro’s.

Having an expansionist economic policy will not be popular in Germany. But in this scenario it would have to happen only for a short time while if Germany stays in the euro it might have to be implemented for a very long time. It will also be stimulated to do so by the fact that not doing so will lead to the rise of its new currency what has as a consequence that the value of its bonds to the eurozone sinks and its competitive position towards that zone deteriorates.

In the end Greece might even be too weak for the reduced eurozone. But the EU would be in a much better position to handle it. The chance of a domino effect would be much smaller and competitiveness gap between it and the remaining eurozone members would be much smaller as the present gap.

What if the north doesn’t want to leave?
Germany was reluctant to join the euro and to give up its own strong currency. So a return to the mark or a neuro will not be unpopular in Germany. What might make it reluctant is the cost of the transition, both financial and in decreased competitiveness for its exporters when its new currency rises compared to the euro.

Germany’s politicians are now at the crossroads. Leaving the euro will have costs and risks and its risk-averse politicians would rather avoid that. But the longer they wait the higher the cost will become. They made that mistake before with Greece when they preferred band aid above real solutions for so long that a departure of Greece from the eurozone is no longer a realistic option. If they make the same mistake regarding a partition of the eurozone an anarchic breakdown may become unavoidable.

France has the key position in the future of the eurozone. Without it a southern euro zone would be too weak, both economically and in the negotiations about the conditions under which the euro should be split up. It will certainly take some swallowing for the French to choose to be grouped with the weaker economies. On the other hand: France would be able to play a leading role in the new eurozone while at the moment it is just acting as a servant of Germany. If France would make this choice it would leave Germany virtually alone and with little choice but to comply. The present trade deficit of France justifies a grouping with the South too.

We might see an intermediary step. In that phase Germany would be condemned for having a large trade surplus with the rest of the EU and for following policies that aim to even further enlarge this surplus. Germany might be ordered to lessen this surplus and be fined if it didn’t succeed with this. It would be the logical mirror image of the fines for countries with a too large budget deficit. The consequence of such a rule would be that Germany is forced to choose between two unattractive scenarios.

No country can permanently have a large trade surplus that isn’t supported by sustainable flows of money in the other direction. Germany has abused the EU to keep such an extra large trade surplus where a normally a rising currency would have countered it. It has no choice but to end this policy as it is untenable.

Psychological effects
The present setup of the eurozone offers Germany the wrong kind of incentives. It makes it feel that it would be better off with a restrictive fiscal policy than with an expansive fiscal policy. It allows it to blame others and have others partially pay for the resulting deficits in the South of the eurozone. And being a payer itself gives it a power position that allows it to continue this policy. When it has a separate currency it will no longer be able to do that as such actions will result in a rising currency. So psychologically a separate currency will make it more attractive for German politicians to follow a policy that also benefits the South of Europe.

The present configuration offers also the wrong incentives to the South. The monetary union makes it unattractive to follow a restrictive fiscal policy as it leads to a downward spiral – a spiral that would be less worse with separate currencies. On the other side it decreases the unattractiveness of nearly going broke as that is also the problem of the richer member states. The close connectedness of the economies in the currency zone makes that the Northern countries will be heavily harmed too if one of the Southern countries goes broke. And that makes them more prepared to pay for some kind of support.

Yet although the North has incentives not to let the South go broke it does not have incentives to let flourish. On the contrary: it would like to keep it as a willing market for its products.

As the EU primarily aims to keep its member states happy it doesn't have an incentive to change the situation either.

What should be converted?
Only those contracts where both parties are German (or member of the new neuro zone) should be converted to the currency. This could be explained as harming the creditors in favor of the debtors. However, as the new configuration will be more stable as a whole it already contains an element that favors the creditors.

Existing German government debt would stay in euro’s too. The market already has taken into account the difference of solvency of the different countries by awarding different interest rates. Converting debts into the new currency would be an unexpected and undeserved bonus for those having German bonds. This is money that can be better invested to keep the currencies on par for some time.

It is desirable that the German government takes effort to keep the new German currency at the same level as the euro for at least half a year so that most short term contracts can expire and there will be time to convert longer term contracts. This will mean low interest rates, increased government spending and maybe some fine that has to be paid to a stability fund if the mark rises too much.

If the currencies start to differentiate too soon those most vulnerable would be funds with obligations in the new mark – like pension funds. This might cause the need for legislation that binds their payout partially to the euro.

Of course the long term goal of the whole currency operation is to devalue the Southern currency with some 10 to 20% compared to the Northern so that its competitiveness improves. However, the EU countries should keep control of the pace of that devaluation, keep it gradual to diminish the damage and be prepared to crush speculators who want to force a faster devaluation. The transition period might take some two years. In that period the EU would have exchange rate targets comparable to the “Snake” that connected the European currencies before the euro.

The new configuration will contain two strong currencies instead of one. The new currencies will not have the standing of the present euro and may be less used as international reserve currencies. But that is the price we will have to pay for renewed stability.

A fiscal union?
One option that has been mentioned is a fiscal union. That will not really work.

The idea behind a fiscal union is that if everyone pays taxes to Brussels and Brussels distributes it over the countries no one will complain when it spends more on the poor member states than they bring in in taxes. Germany might still end up as a net payer and Greece a net receiver but it will be hidden by layers of obscure bureaucracy. So basically it is a trick to deceive the public.

This might be defensible if it would work but that is questionable. It looks more likely that the receivers will permanently become dependent on the richer countries, just like Southern Italy has been dependent on its North for over a century now.

The discussion is very similar to that about development aid to Third World countries. With them there is nowadays a near consensus that money transfers only create dependency and corruption and that only the opportunity to export agricultural and industrial products really helps their economy.

The EU is very proud about how much its poorer members have grown and likes to think that its money transfers have been an important contribution to that. But while certain investments – like in highways – may have helped much of the money did nothing to make its recipients more competitive. It may actually have made these countries less competitive by driving up their wages. The main reason the older countries paid for this was that it also created new markets for their companies.

This policy is quite comparable in both its motives and effects to the way Western countries for a long time looked at development aid. We not only gave aid but also pushed the developing countries to buy as much from us as possible – often things they didn’t need – and when they overspent we sent in the IMF to force them to have more “responsible” economic policies. If one considers Germany’s refusal to cancel Greek defense orders while it pushes at the same time for budget cuts in Greece it is hard to ignore the similarity.

Advocates of a fiscal union often mention the example of the US. But the US is one nation while Europe consists of many different nations and migration between their areas faces considerable resistance at both sides. Treating them as one nation would be a violation of the principle of self-determination of nations and will very probably backfire. In addition one should remember that the American civil war settled the principle that the states of the US are not allowed to secede and that they will be confronted with violence if they try. Do we really want German soldiers in Greece to prevent it from leaving the EU?

Budget control
Another idea is now being introduced: stronger control by the EU over the budgets of the member states. It is an illustration of the dysfunctionality of the European decision making process where every proposal that promises a tighter integration is adopted while proposals that results in decentralization become a priori rejected. The ever closer union is looking more and more like a tightrope.

In fact budget problems have played only a minor problem in the creation of the present situation and if the proposed rules had been in force they would have made no difference. Spain and Ireland had very healthy budgets until their real estate market collapsed and Greece seemed to be healthy with its forged figures. If the true figures of Greece had been widely known it would have been corrected by the bond markets. When the problems of those countries became apparent they were too deep for simple solutions and a fine from Brussels would only have made the financial position of those countries worse.

Forcing all countries to have a restrictive budget makes it harder for the Southern countries to bridge the competitiveness gap with the North. If anything, the Northern countries with a trade balance surplus should be forced to have an expansive economic policy.

The future of Europe
The growth in power and size of the EU in the past decades has not been driven by rational arguments or popular support. Instead we have the irrational call in the Treaty of Rome for an “ever closer union” and continuous reminders of the threat of war between European states. As our last war is fading from the memory of most Europeans advocates of the European Union have added new fears to advocate their cause. We are now told about the risk of a “loss of momentum” in building the EU and the risk of Europe “becoming irrelevant” in the face of the US and a rising China.

But fear is not a good adviser and it has prevented the EU from taking rational steps towards solving the present financial conundrum. Its eagerness to promote the euro has proven to be a bridge too far. But instead of making a tactical retreat the EU seems only prepared to accept solutions that increase the power of Brussels. Although it is clear that a common coin for counties that are at a different level of development creates a risky situation the EU hasn’t even withdrawn its requirement that new member states join the euro as soon as possible.

In the face of mega-units like the US and China a common EU market is a very rational choice. Most individual countries are simply too small to play any significant role on the world stage. Our common interest is what binds the European countries more than anything. In that light it is frightening to see that the EU has done nothing to retort claims that Greece might be thrown out of the EU if it leaves the euro. This is a denial of the common interest. No matter the merits of a punishment of Greece in this case we will have to consider that once pushing countries out of the free trade zone becomes a possibility every country will have to consider that it might be targeted for a similar measure in the future. And so they will take measures in order not to become too dependent on the EU. This strikes at the heart of the EU.

How the Ukrainian conflict resembles the Yugoslav one

Nearly 25 years after the breakup of Yugoslavia another country in the periphery of the EU is burning. Again there is a fight between pro-Western and pro-Russian forces mixed with local ethnic antagonisms. It could be a coincidence. But there are many similarities that seem to indicate that the EU plays an active role in the destruction of its neighborhood.

The problems started in periods when those countries were paralyzed politically and simultaneously suffered serious economic problems. Yugoslavia had failed to find a replacement for the party to tie the country together. Such a things takes time and it wasn’t granted that. Ukraine still hasn’t managed to restrict the power of the oligarchs.

In this situation of a weak state the West started to promote “pro-Western” forces. In Yugoslavia Slovenia and Croatia were encouraged to secede. In Ukraine a color revolution was organized. Vague promises of EU membership – seen by many as a promise of wealth - were used to attack supporters among the population.

In the process international law was violated. The secession of Slovenia and Croatia went not according to the Helsinki Declaration and the Yugoslav constitution, which both prescribed mutual agreement. The encouragement of the protesters on the Maidan by Western political leaders was a clear violation of the principle of non-interference in the internal affairs of other countries.

In the next step the West presented the results of these actions as the new reality. But the losers in the situation didn’t accept that. This made communication difficult. It didn’t help that the West refused to accept compromises. In Bosnia and Croatia their independence was presented as a new reality and from that it was concluded that those countries were now free to deal with their minorities as they wished. In the meantime their Serb minorities believed that their position was unsettled and needed to be negotiated first.

Such obstacles, like the Croatian Serbs who demanded autonomy or the Ukrainians who rejected the Maidan revolution, form a problem for the West. It doesn’t sound very democratic to demonize a whole segment of the population. And so their actions are attributed to the influence of some evil genius like Milosevic or Putin. Of course this is denigrating for those people, but most observers in the West won’t notice.

Role Play
Different segments of the “West” play different roles in those tragedies:

- Germany is inclined to ham-handed power politics. In the case of Yugoslavia it was its early recognition of Croatia. In Ukraine it was its refusal to let the EU pay attention to Ukraine’s relationship with Russia when it was negotiating a trade treaty with the EU.

- The EU is inclined to jump to conclusions when faced with problems in its neighborhood. This is due to a mix of feelings of responsibility, fear of irrelevance and US pressure. Unfortunately its bureaucratic nature makes it very difficult later to change its position. In the case of Yugoslavia it became stuck when it adopted the legalistic excuses of the Badinter Commission to ignore international law. In the case of Ukraine It was its adaptation of the Maidan protests.

- For the US the Cold War has never ended and every excuse is grabbed to reenact it. It is the US that helps “pro-Western” forces with training, arms or whatever they need. In the neocon view that is dominant in the US every compromise is a partial victory for Putin and for that reason repugnant. When Croatia and Kosovo seemed ready to talk about border changes this was blocked by the US. In Ukraine too they have pushed the government to be uncompromising.

In this constellation the West still regularly triest to achieve peace but it never succeeds. Every agreement is soon violated by both sides. And although both sides carry guilt only the “anti-Western” forces are sanctioned. When things go badly on the battle field for the “pro-Western” side you see a push for an armistice. But that truce is only an opportunity to rearm, not to achieve peace. Occasionally European politicians become hesitant. Then Washington sends in some high ranking guys like Biden or Kerry to put them under pressure. With help from friends from the Baltics and Poland they often achieve what they want.