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.

Monday, February 09, 2015

The Ukrainian conflict is not about Ukraine

The big question of the Ukrainian conflict is: what do we want? Peace in Ukraine or teaching Putin a lesson? In the latter case the demands on Russia and the rebels will be much stronger and the preparedness to make concession much weaker.

All sign are that the US wants the latter. Russia is not respecting the rules of the post-Cold War world as the West - and specially the US - understands them. And implementing the logical solutions in Ukraine would mean accepting this Russian behavior. Russia interfering with a treaty between the EU and Ukraine, Russia occupying and annexing Crimea, Russia supporting an uprising in East Ukraine, Russia demanding that Ukraine doesn't become a NATO member: it is all unacceptable. It doesn't matter that the US tends to do similar things. It doesn't matter that Russia is reacting to a US sponsored "coup" (as they see it) in Kiev. It doesn't matter whether Russia's complaints about the authoritarian nature of the government in Kiev are true. For much of the Russian population these are circumstances that justify its policies in Ukraine. But many in the West see only an interference that they consider unacceptable. As a consequence we see in response Western policies that don't take the local circumstances in Ukraine in account but make it a kind of principle that what Russia does is wrong.

A good illustration is when General Breedlove talks about his reasons for wanting to arm Ukraine. He acknowledges that the government can't win no matter how many arms it would receive. "But", he says "we must try to raise the price on the battlefield for Putin to slow this whole problem down so sanctions and other measures have time to work". Freely translated this means that Breedlove is prepared to sacrifice many thousands of Ukrainians at a time when opinion polls show that 70% of the population wants to stop the war. His expectation that in the end Putin will give in under the pressure of sanctions is controversial. In the likely case that he doesn't thousands will have died in vain. The only people benefitting will be some hardliners who can claim that they have done all they could to rein in Russia.

The logical solution for the Ukrainian problem is autonomy for Donbass. Even before the conflict started there were demands for autonomy from both the Eastern and Western ends of Ukraine. It was also part of the Minsk agreement in September and the Ukrainian parliament adopted then a law to implement it. Unfortunately Ukraine's government blocked the law, claiming that it would create yet another Russian supported enclave like South-Ossetia, Abkhazia and Transdniester. That claim is not very credible: unlike those areas Donbass is not ethnically different from the rest of the country. Ukraine is just a very big country where the Western extreme of the country has grabbed the power at the moment and the Eastern extreme doesn't agree. Given time they will find a solution to live together again when power returns to the center.

But just like the demand of the government that the rebels return the land that they conquered since september the rejection of autonomy is in fact an excuse to say no. The same applies to the rejection of the Russian demand that Ukraine shouldn't become a NATO member. NATO membership was - until people got swept up in the heated rhetoric of the war - unpopular and most Ukrainians would happily give up on it if that could bring peace. The Ukrainian government isn't bothered about any of those points as such. It is aiming to win the war and is just grabbing the most credible sounding excuse to reject any peace initiative. It does so both under pressure of Washington - that sees the conflict in Cold War terms - and as it depends for its power primarily on right extremist militias and oligarchs and not on popular support it is afraid that some kind of recognition for Donbass would shift the balance of power.

The Ukrainian government has tried to turn the argument around by claiming that the rebels don't adhere to the Minsk agreement. They like to point to the clause that gives the government control of the borders. However, you cannot see that clause separate from the rest. The idea of Minsk is a situation where Donbass is an autonomous part of Ukraine. In that context it is logical that Kiev controls the borders. However, the clause does not mean that Kiev has the right to encircle and suffocate Donbass.

Merkel and Hollande have now proposed strong autonomy and a 50-70km demilitarised zone.
This proposal faces the risk to be rejected in the same way as Minsk was. The question is how Russia and the rebels will react. It looks like they see this initiative as the last chance. That if this doesn't work it doesn't make sense to once more conclude a truce that will only enable Kiev to rearm and attack once more. Instead they may launch a full scale attack in the hope that a massive loss of territory will bring Kiev to its senses. Given that the Ukrainian army just suffered a major blow at Debaltsevo that might go rather easy and bring less humanitarian costs than waiting.

Merkel and Hollande are supporters of the Maidan revolution and their sudden interest in peace comes mainly from the fact that Ukraine's army is in serious trouble in Debaltsevo. This raises some doubt whether they are really prepared to accept a peace where Russia and the rebels get some of their demands fulfilled. Their proposal contains basic elements like autonomy, but the devil is the details and those haven't been published. One rumor claims that they have set Putin a deadline and threatened with sanctions. Already one can see in pro-Russian media speculation that they may be cooperating with Obama in a good cop bad cop act.

The big question of the Ukrainian conflict is: what do we want. Peace in Ukraine or teaching Putin a lesson?

Sunday, February 08, 2015

Competing visions on Ukraine

Reading “pro-Russian” and “pro-Western” articles about the conflict in East Ukraine and hearing politicians on both sides talk about it one gets the impression of two different realities. The “conversation” below gives a good impression of the arguments used.

About the Maidan revolution

The Maidan revolution came from the desire of the Ukrainian people for more freedom and democracy.

The Maidan revolution was an US sponsored coup. It was a classical color revolution. See the leaked conversation between Victoria Nuland and US ambassador Pyatt as evidence.

Pro-Western: Opinion polls show that support for Yanukovich was very low at the time of the revolution.

Opinion polls show that only about 50% supported the “coup”. Most of the rest didn’t like Yanukovich but they believed that the constitution should have been respected and that Yanukovich should have been allowed to serve the rest of his term.

The new government will finally liberate Ukraine from the oligarchs and reform its economy.

Oligarchs control the new government. Since the revolution there have been almost no reforms. Very likely Yanukovich would have introduced more reforms. Not because he liked it, but because he would have been forced by the IMF. Since the revolution the Western countries have played sugar daddy for Ukraine, taking away the need to reform.

Ukraine is now democratic and free.

 Pro-Russian: Since the massacre of protesters in Odessa on 2 May and the farcical investigation of that disaster adversaries of the Maidan have become very careful about protesting. The coming lustration with very general criteria further adds to their fear.

Pro-Western: Russia is violating Ukraine’s independence by supporting the uprising in the East.

Pro-Russian: The US violated Ukraine’s independence by installing a puppet regime in Kiev.


Pro-Western: Poroshenko was democratically chosen.

There was no level playing field: a pro-Russian candidate was beaten up by protesters. Also Poroshenko betrayed his voters. Before he was chosen he promised that he would immediately start peace talks. After the election he increased the hostilities, claiming that true peace could only come through a total victory.

Pro-Western: The parliamentary elections showed that support for right extremist groups is low. Neither Right Sektor nor Svoboda passed the 5% threshold.

The power of right extremists in Ukraine is not rooted in their popularity but in the threat coming from their militias and in their occupation of key positions in the army and police.  Since the revolution the mainstream parties have copied much of their agenda.

The violence in the East

Pro-Western: The Russians and the rebels started the violence.

Pro-Russian: The violence started with Right Sektor and other Maidan militia harassing local administrators who didn’t support the Maidan and disturbing anti-Maidan protests.

Pro-Western: Without support from Russia the uprising would never have come from the ground. The rebels are armed from Russia. And without the influx of Russian soldiers in September the government could have ended the uprising.

Putin has said many times that he considers a defeat of the rebellion not acceptable. He wants a negotiated solution.


Pro-Western: The rebels shot the plane. There are lots of indications that the plane was shot by a BUK missile and that the rebels had such a missile at the time of the disaster.

Ukrainian government: Russian troops shot the plane. Only they had the knowledge and technology.

Pro-Russian: The plane was shot by an Ukrainian BUK or by an Ukrainian war plane. The Ukrainian government keeps refusing to disclose information such as the conversation with the cockpit and the radar images.

The Minsk Peace Process

Autonomy for the Donbass was at the core of the Minsk Protocol. But Ukraine refuses to give it.

Pro-Western: Autonomy for the Donbass would create yet another Russian “protected” enclave like South Ossetia, Abkhazia and Transdniester.

Pro-Russian: South Ossetia, Abkhazia and Transdniester have remained problems because the US has encouraged the regimes in Georgia and Moldova to be uncompromising. It is not only Russia’s fault. Also, those are ethnic conflicts in a sense that Donbass isn’t.

Autonomy is a standard solution shortly after conflicts when there isn’t trust between the parties. When trust comes back it can be gradually reduced. By refusing autonomy the West implicitly states that the conflict can only be solved by surrender of the rebels.

Pro-Western: The goal of the present rebel offensive is to increase the economic viability of their enclave. It is against the spirit of Minsk. They want to conquer Shchastya for its power plant, Andiivka for its coke factory and Mariupol for its steel mills. They want Donetsk airport because it blocks their northern expansion. They want Mariupol because it would open the road to a land
bridge towards Crimea. And they want Debaltsevo because that would make it easier to import weapons by rail from Russia and so enable an offensive elsewhere.

Pro-Russian: The goal of the present rebel offensive is to make the Donbass less
vulnerable for shelling by the government army and for sudden attacks. The reason why the government has so many troops in Debaltsevo is because they planned another attack from there.

Russia wants to control Ukraine’s foreign policy. They have made many demands in that direction for peace in Ukraine.

Russia’s demands are rather limited and are shared by a large segment of the Ukrainian population. It was the EU that tried to force Ukraine to a foreign policy that it didn’t want when it forced it to choose between the EU and Russia – instead of allowing it to maintain its traditional role as bridge between the two.