#71 Europe’s Unequal Siblings: Monetary Economics in Central Europe

The great experiment that is Europe still needs to overcome a number of obstacles until it truly becomes an economic entity. Especially when looking at the integration of new member states to the economic, political and cultural entity that Europe seeks to be. Central Europe can be seen as a collection of younger siblings in the family of European states. In many ways states such as Hungary, Poland, Slovakia and the Czech Republic are like restless teenagers on their way to adulthood.

Current president of the Czech Republic, Mr. Václav Klaus, is known to be a vivid enthusiast of Milton Friedman and his dogmatic free markets. You might therefore think it would only be natural for this liberal economic fervor to wash over to the lower political echelons. But this is not the case, because these badly needed fiscal reforms hurt those people in the economy who need government protection the most. Leftist and Populist parties make good use of this and find great support from the disadvantaged, disenfranchised and elderly sections of the electoral masses. In "old" Europe these type of factions do not enjoy the same level of support because the West has already gone through many of these transitions over the last several decades, albeit one small step at a time.

Europe’s Central European siblings want to take larger steps on the road to economic prosperity and future European economic integration. Fiscal discipline is an important prerequisite, but Central Europe's budget deficits are not heading in the direction of 2-3% of GDP. In fact, they are actually showing a widening trend. This, coupled with inflation, is not going to strengthen currencies and reduce the purchasing power parity gap. Yet, there are some unique forces at work. Skilled labor is much more mobile in Europe than unskilled labor. Wages of highly skilled laborers are even on a road to parity, while if they work abroad they are often already in parity. But for the majority of laborers in Central European countries such as Hungary, the Czech Republic, Poland and Slovakia, the question remains how long it will take until there is a true convergence of per capita income.

The good news is that there is actually downward wage pressure in countries such as Germany and Austria as a result of this imbalance between per capita income differentials. This is inherently a good thing because it makes the rest of Europe more competitive.

When visiting the capitals of Central Europe such as Budapest and Prague, one can definitely observe a boom. Low interest rates, economic vitality, wage growth and speculation are driving new real estate development and pushing property prices up. This boom is to a large extent a local driven phenomenon, at least when looking at the residential market. Most of residential housing stems from large Communist residential development; giant, dated and somewhat drab apartment complexes still form the mainstay of housing of Central European residents. But with a growing segment of the population being upwardly mobile and flush with cash, they are driving a residential building boom. People want to move out of their dated Socialist housing arrangements into new housing and apartments. An increase in interest rates could bring some much needed revaluation into the property market and blow off some steam.

This seems unlikely to happen in the short term as central banks are keen to keep the economy going. Inflation doesn’t appear to be at the forefront of their worries. Economists and central bankers should keep their eyes on the horizon because there are some worrisome circumstances. Some of the currencies such as the Hungarian Fórint have been quite volatile compared to the relative stability of the Euro and the Swiss Frank. Additionally, many Central European Economies have fallen behind in their fiscal reforms and will find pushing painful reforms through in the various parliaments a difficult task to say the least. Sure, bumps on the road to maturity are imminent and even unavoidable for the Central European teenagers. Some central bankers also argue that the type of inflation we are witnessing is completely natural and to a certain extent outside of their influence.

EU taxes on regulated goods such as alcohol and tobacco is an important inflationary presence, especially is Central Europe, where alcohol and tobacco consumption tends to be larger. My final worry lies in the close correlation between Central European currencies, which tend to move fairly together, even though political and economic circumstances are rather different between Poland, Hungary and Slovakia. There is the fear that we could be oversimplifying those dynamics, assuming too much and questioning far too little. Undeniably the dissimilarity of growth is as much an opportunity as it is a threat to the economic entity of Europe as a whole. Nonetheless, if Central European governments do manage to get their fiscal responsibilities together, there is little to fear besides a few bubble bumps on the road. Projected rate increases in Euroland should inspire the central banks in Central Europe to do the same.

#70 A Three State Solution?

It has become customary to hear bad news emanating from the Palestinian Territories (mainly from Gaza) and the saying "it can't possibly get any worse than this" is frequently applied to the situation on the ground there. Sadly, it has now really gotten a worse. A lot worse, believe it or not. We now find ourselves in a situation where a week of factional fighting has left at least 100 people dead and Gaza is effectively under Hamas control. To make this point clear, Hamas militants took over a number of key Fatah positions and security headquarters, including one of President Mahmoud Abbas' offices, went through his personal belongings in his bedroom and spray painted "This was the house of the murderer Dahlan that was cleansed by the holy warriors" on the home of Fatah strongman Mohammed Dahlan, thereafter allowing his property to be looted. Hamas supporters even went so far as to loot the home of deceased leader Yasser Arafat, taking his furniture, wall tiles and personal belongings.

In his first serious response to the tumult in Gaza, Palestinian President Mahmood Abbas (a leading Fatah politician) dissolved the Hamas-led unity government and fired Prime Minister Ismail Haniyeh (a prominent Hamas figure), appointing former Finance Minister Salam Fayyad in his place. There is also word of revenge attacks on Hamas loyalists in the West Bank by Fatah members in the wake of some brutal executions of their members in Gaza. While Hamas has cemented its control in Gaza, Palestinian Authority security forces, accompanied by Fatah members, have continued the wave of arrests of Hamas members in the West Bank, where Fatah clearly has the upper hand. In the most significant counter-action, Fatah gunmen stormed the Hamas-controlled Palestinian parliament building in Ramallah. An - at least temporary - split between Gaza and the West Bank now appears to have become irreversible.

It is highly likely that Western governments and donors, as well as a number of Arab nations such as Egypt, Jordan and Saudi Arabia will respond by doing all they can to shore up the influence of Abbas, including the resumption of financial aid. Officials in the Israeli government have already suggested Israel will work with President Abbas and a Fatah government in the West Bank, possibly handing over hundreds of millions of dollars in tax revenues to Fatah which it collects on behalf of the Palestinian Authority (these had been withheld since Hamas came into power early 2006). Meanwhile, senior Bush administration officials pledged to work quickly to convince the Quartet to remove the restrictions on the Palestinian government now that the unity government had been dissolved and allow a direct transfer of emergency aid to the West Bank. They further stated that the US will continue humanitarian aid to Gaza, but in terms of diplomacy, there is a complete separation between Gaza and the West Bank.

Hamas' dream of establishing an Islamic state in the territories and what is now Israel has taken root with their takeover of Gaza; a very worrying prospect indeed. Israel, which completely withdrew from Gaza last year, now finds itself bordering a re-arming Hezbollah in the North and a free-reigning Hamas in the south. A result of increasing Iranian influence? Perhaps. On the other hand, the good news is that, given a separation between the more radical Gaza and more liberal West Bank, the latter territory will stand a much better chance of prospering. Similarly, if the lives of Gaza residents fail to advance under Hamas rule while their compatriots in the West Bank prosper, a backlash against Hamas is likely. Whether all this means an end to the Palestinian dream of statehood (with Gaza and the West Bank united), nothing more than a delay, or perhaps even the beginning of a three state solution, only time will tell.

#69 Climate Change as Political Dogma

Contrary to the last few G8 summits, one of the main subjects of the recent meeting between the world’s top leaders in Heiligendamm, Germany, was Climate Change. In fact, it was the only environmental issue handled during the summit. In the summary of the summit it is stated that the leaders recognised that global warming is largely the result of human activity and only by limiting CO2 emissions will it be possible to stop global warming, concluding that “it is absolutely essential that global warming be limited to 1.5 to 2.5°C.” This is certainly a strong statement and it implies that we (humanity) know exactly what needs to be done. But do we really know? Do we really understand why the climate is changing? Do we understand the consequences of the change? And do we understand the consequences of channelling large amounts of resources towards curbing CO2 emissions?

If one were to trust politics and the press, then these would be rhetorical questions. After all, according to them, everybody knows the facts, discussion is closed and it is now time to act! But things are never that simple. Sure, the fact that there is global warming is known and agreed upon. But this is the only statement that enjoys consensus. The reasons behind the warming and its consequences are far from agreed upon. Roughly speaking, there are two camps. One camp is a believer in the conclusions of the Intergovernmental Panel on Climate Change (IPCC) that have been adopted by mainstream politics and states that global warming is man-made and, unless urgent action is taken to reduce the increase of CO2 in the air, the world is heading towards a horrible catastrophe. The other camp believes that science is still far from able to understand global warming and its likely effects. The warming could be nothing more than a normal phenomenon caused by the same natural forces that make climate to be volatile and has nothing - or at least insignificantly little - to do with the additional emission of CO2 by humans. Moreover, the effect of warming is not necessarily negative. The picture of the calamity that the mainstream camp is painting is not based on any facts. So, if this is the case, spending so many resources to fight CO2 emissions cannot be justified.

The discussion between the two camps has passed from a pure factual discussion to a stage of dogma. Those in the camp that opposes the official opinion of the IPCC are called deniers, having even been compared to Holocaust deniers (though they prefer the label sceptics). It is true that there are more scientists on the side of the official camp, but that on its own is not so strange, given that it is the mainstream opinion. However, there are sufficient scientists on the other side as well and enough facts exist in order not to dispose of the opinion of the sceptics. Both sides have very convincing arguments and special sites to spread the word and defend their faith while combating the opponents (If you are interested, here are two sites to start you on your quest:
mainstream - environment.newscientist.com/channel/earth/climate-change/dn11462 & deniers - www.friendsofscience.org/). And, as is appropriate for a faith, each has their followers that fight each other with, very often, quite offending words.

Based on the existing knowledge, it is very difficult to claim that there is a scientific consensus on this issue. Nevertheless, politics decided that it is worthwhile to follow the advice of IPCC and elevate the climate change issue to the top of the agenda. The real question is why? It is difficult to believe that suddenly all members of the G8 decided to save the world. Politics in the modern world has a short term horizon. What will happen 100 years from now is not usually a relevant factor in political decisions. It seems more reasonable that this fits other goals they may have.

One reason could be that combating climate change is a way in which the various ‘green’ parties and pressure groups could be pacified without the need for handling less convenient problems. But the main reason is probably the painful dependence of the G8 countries on oil. Pushing the industry to find other energy sources could ease this dependency and by forcing all countries to participate, none of them should be too severely handicapped. If the money is used appropriately, we could perhaps see a breakthrough in alternative energy generation; which would be a major milestone in human development. What it most probably will not achieve, however, is a slowing of the temperature increase in a significant manner.

- This article was written for and provided to the Weekend Economist by Tamara Fai

#68 China Playing in America's Backyard

China has managed to use its increasing economic muscle - and thereby global clout - to persuade yet another country to recognize it over Taiwan. Costa Rican President Oscar Arias announced on June 6 that his country has broken diplomatic ties with Taiwan and established relations with China, pointing out that Costa Rica needed to strengthen ties with China in order to attract foreign investment. This follows a string of successes for China, who refuse to have diplomatic ties with nations that recognize Taiwan, regarding it as a breakaway republic. During the late 1960s, Taiwan had full relations with 67 countries, but Chinese pressure has led to this figure dropping almost threefold to just 24 states today.

China's success does not really come as a huge surprise, given the fact that China is now the Central American nation's top trading partner, buying more than $1 billion worth of Costa Rican exports in 2006. The fear is that after Costa Rica's decision, other nations such as Nicaragua, Panama and Paraguay will follow suit, leaving Taiwan practically abandoned in Latin America. After the Dominican Republic, Haiti, St. Kitts and Nevis and St. Vincent and the Grenadines switched diplomatic recognition from Taiwan to China in 2004 and Costa Rica did the same on Wednesday, today only Paraguay, Panama, Nicaragua, El Salvador, Honduras and Guatemala officially recognize Taiwan.

In the last couple of years, China has been particularly active in Latin America, not only to shore up its political influence, but also to secure natural resources that are crucial to sustain the country's red hot economy. Venezuela is particularly keen to court the Chinese with oil, seeing the country as the perfect escape from the grip of the "evil American empire." Brazil, Ecuador, Bolivia, Argentina, Chile, Peru and even Mexico are also seeing large increases in trade and deals (particularly in oil and gas exploration) with China. According to the Inter-American Dialogue, Chinese imports from Latin America have grown more than sixfold, at a pace of some 60% per year, to an estimated $50 billion in 2005. What's more, Chinese investment in Latin America represents half of the country's foreign investment overseas, promising to increase it from $6.5 billion in 2004 to $100 billion by 2014.

US trade with Latin America is still almost 10 times larger, but given the growth of Chinese trade with the region and the severe hostility the Americans encounter in a number of Latin American countries, this is certainly an issue that the need to monitor closely. China is rapidly encroaching upon America's backyard. China's dealings in the region are not limited to securing energy needs, other natural resources and isolating Taiwan. The business of selling of arms and technology to the region (with Venezuela being a key buyer) is also flourishing, while cooperative aerospace deals are being forged with Brazil and possibly key intelligence-gathering facilities in Cuba are being used by the Chinese to intercept U.S. communications.

#67 The Higher Standard

With a slip and a fall the American representative of the 2007 Miss Universe Pageant, taking place in Mexico City, unknowingly revealed the true colors of her Mexican audience. Fighting boos and cat calls during the question and answer session, Rachel Smith absorbed the full torrent of abuse hurled at her. Her appearance further conveyed the malice held by the majority of Mexicans toward the United States. While 12 million of their compatriots were getting a free pass to American citizenship, the underlying animosities of their misguided political beliefs were exposed.

Imagine for the briefest moment that the pageant had been held in the United States and the victim of those four inch heels was a young Mexican woman. Would the International community, never mind the Mexicans, stand for an American audience that jeered the contestant? The mechanisms of “political correctness” would come out in full swing and this would be yet another example of an America the world can hate. Are the same standards held for the Mexicans? Is the International Community insisting on an apology? Nope.

Flashback to the 2004/2005 World Cup qualifiers; Mexican nationals booed the American team and some even chanted “Osama.” Was there an International outcry? Most certainly there was not. When millions of illegal Mexicans took to the streets in defiance of American law, demanding recognition, did the International community come to the defense of America? Quite the contrary; they sided with the Mexicans. You would be hard-pressed to find another country in the world that faces an International Community that argues for the rights of those who are knowingly breaking the law everyday they spend on American soil.

To briefly compare the mass hypocrisy facing America today, one only has to look as far as the Mexicans themselves. Specifically the Mexican laws concerning non-Mexican immigrants seeking residence in Mexico. To begin with, you must speak the native language and you must be a professional worker. Sorry, no unskilled workers allowed. There are no bilingual government programs and as a foreigner you will not have the right to vote or hold office. You are not eligible to receive any government sponsored welfare and if you want to take to the streets and protest unfair treatment, that too is illegal. You are not allowed to wave the flag of a foreign nation, form a political party, or criticize the government. And I almost forgot, if you come to Mexico illegally you will be arrested and jailed.

The true question concerning Mexican-American relations is why there is so much anti-Americanism in Mexico? Are Mexicans upset at their inability to sustain their economy without the massive remittances provided by their compatriots working in the United States? Or is it a deeper national character flaw that prohibits them from accepting that their neighbor to the North has simply managed to be more successful in most every sense of the word? The livelihood of the Mexican economy depends heavily on the engine of the American economy and the rampant anti-Americanism contaminating the Mexican political and social environment can only lead to a negative outcome.

Does America abide by a higher standard? Well, if current polls are any indication of the anti-Americanism sweeping Mexico, then America is indeed abiding by a higher standard. The majority of Mexicans have an unfavorable view of both Americans and the United States government. Furthermore, a recent Zogby poll showed that 75% of Mexicans think Americans are racist and only 17% think that Americans are tolerant. Yet aside from merely talking about building a wall, the United States has done nothing to warrant this animosity. Thousands of illegal immigrants continue to flood the border and the United States continues to accommodate them. The gap between Mexico and the United States continues to expand and the increase in the hatred felt by the Mexicans will almost inevitably rise as well.

- This article was written for and provided to the Weekend Economist by Westbrook Sullivan

#66 Vietnam Positions Herself as a Global Oil Player

As does any other rapid growth country not blessed (or cursed; depends on who you ask) with oil, Vietnam needs to find her black gold elsewhere. While China and India have been roaming the world - particularly Africa - for oil contracts for a while now, it is now Vietnam's time to follow suit. Vietnam Oil and Gas Corp., or PetroVietnam, pledged to expand its overseas oil exploration venture with two contracts this year, one in Cuba and the other in Nigeria. Oil agreements in Libya and Sudan are also on the cards, but rank lower in priority due to difficulties encountered such as lack of regulatory structure.

During a recent visit to Cuba by Vietnamese Communist Party chief Nong Duc Manh, the first of the two promises has now been honoured. Cuban and Vietnamese officials signed an agreement last Friday, 1 June, between state oil companies Cuba Petroleos and Petrovietnam calling for a partnership for exploration and drilling both in the Gulf of Mexico and on shore (photo courtesy of AP). PetroVietnam follows in the footsteps of other international oil companies such as Spain’s Repsol YPF S.A., Norway’s Norsk Hydro ASA and India’s Oil & Natural Gas Corp. Cuba divided its offshore area into 59 exploration blocks in 2000, of which just over 20 blocks have been leased to international companies.

The drilling in Cuba is not without financial risk, as it is not certain that they will find anything near the amount they might have access to in their other target partner country, Nigeria. Cuba currently produces about 80,000 barrels of crude oil a day, compared to Nigeria's whopping 2.2 million barrels per day in 2001. Nevertheless, oil exploration in Cuba is bound to be a safer bet for Vietnam, given that just 1 day after the agreement signed in Cuba, the umpteenth abduction occurred overnight at the U.S.-based oil-services firm Schlumberger Ltd. in Port Harcourt, Nigeria. One Dutch, one British and one Pakistani citizen, as well as another captive were taken hostage according to Rivers State Police Commissioner Felix Ogbaudu.

In other news, for the first time in ten months (when emergency surgery forced him to hand over power to his brother Raul Castro), Cuban leader Fidel Castro was shown standing and talking in video footage that aired on state-run Cuban TV. Castro was seen on Sunday, 3 June in a meeting with Vietnamese Communist Party chief Nong Duc Manh (picture on the right courtesy of Cuba's Juventud Rebelde newspaper).