A Turkish turnaround?

Most reasonable people would agree that the administration of Turkish President Recep Tayyip Erdoğan has been heading, alarmingly, towards authoritarianism. Erdoğan has been accused of imprisoning journalists, censoring the media, attempting to exert political influence over the courts, and using the security services for his own purposes. He has pushed through revisions to the country’s constitution, arguably in his favor. He served as Turkey’s prime minister for more than a decade before becoming president. But there is one fact that is difficult to reconcile with this chain of events. Included as part of Turkey’s recent agreement with the EU on Syrian refugees was a little-noticed, and even less-discussed, provision: resumption of Turkey’s EU accession negotiations. On the face of it, it is a paradox. If Turkey is becoming increasingly authoritarian, why on earth is Erdoğan attempting to re-open accession negotiations? After all, part and parcel of EU accession negotiations is an intrusive and meticulously verified set of requirements for democratic reforms. Is Erdoğan schizophrenic? Was the measure adopted by the Turkish government despite Erdoğan’s opposition? Or, just possibly, is Erdoğan misunderstood? I would argue the latter – and that there is a distinct possibility of a Turkish turnaround. It is undeniable that Erdoğan has shown authoritarian tendencies. But he has also been misunderstood, for two reasons. First, his rhetoric is worse than the reality; and second, he has been pushed by circumstances into his authoritarian role. On the topic of Erdoğan’s rhetoric, he suffers the problem of any politician who relies on pious supporters: he’s scary when playing to his base. Of course, it is not only Erdoğan who...

The Eurozone’s (and Japan’s) deflation problem

I tend to be bullish on Europe – partly as a corrective to the mass of commentators who too early wrote off the crisis in the Eurozone as irresolvable. This optimism has been justified by the recent run-up in European equities, with developed European countries (Germany, Ireland, Finland…) constituting four of the five best-performing stock markets of 2013, when measured in US dollar terms. That said, a spectre is now haunting Europe – the spectre of deflation. The problem with deflation is that it makes the value of savings grow, which encourages people to spend less. If prices are falling, a penny saved is more than a penny earned, because, if you do not buy that TV set (for instance), not only will you have saved your penny, but the TV set will be cheaper in a few months, so you are actually getting a return on your patience. Hence deflation encourages people to save, which reduces demand. The TV shops in response reduce the prices of TVs even further, in an effort to get you to buy. Which implies yet more deflation. A few rounds of this, and you have the dreaded “deflationary spiral”, producing not only deflation but a serious contraction in consumer spending and hence real economic activity. Scenarios run by Oxford Economics on the potential impact of sustained deflation in the Eurozone are not pretty, suggesting the economic bloc would be pushed back into recession. In response to such concerns, Germany’s Bundesbank has recently softened its opposition to quantitative easing, suggesting that radical measures to combat the threat of deflation may be forthcoming. This announcement has widely...

Ukraine is Europe’s struggle, and it is likely to win

There has been a great deal of commentary regarding alleged blunders that have led us to the current position in Ukraine (as I write this, the Ukrainian province of Crimea has voted to join Russia, and Russia has recognized Crimea’s independence, which could be a prelude to annexation). In reality, the only serious blunder was committed by the new, interim government of Ukraine immediately after taking power, when it declared that Russian would no longer be an official language of the country. This gave Putin to a pretext to act. Chalk it up to inexperience. The old hands at the table – Russia, the EU, and the US – have played their positions well. First Russia. Many say Putin is a reckless gambler; and indeed that is true. But he has had no choice but to gamble. Losing Ukraine so soon after asserting Russia’s position on the world stage via the Sochi Olympics was a humiliating blow. Invading Crimea while pretending the troops involved are not Russian and offering Crimea a referendum on secession are awkward ways to cover up a violation of international law. (Perhaps he will next offer Chechnya a referendum on secession from Russia? This is the kind of precedent Putin presumably would rather not have established.) That said, it appears that Putin may succeed in turning his humiliating loss in Ukraine into a partial victory, by gaining Crimea in some form, with little blood on Russian hands. Once the government of Yanukovych had fallen, that is probably the best outcome Putin could have hoped for. It is thus a bad hand played well, although Crimea...

Ukraine crisis reveals Europe’s strengths

Things in Europe do not seem to be going so well these days. The Eurozone crisis is a recent memory. European politicians bicker over bailouts or make reckless threats. Unemployment is high. The Swiss are voting out the immigrants and in many European countries right-wing parties are on the rise. But the European model remains appealing. So appealing, in fact, that people in Ukraine are willing to risk their lives for it. Demonstrators in Kiev, picking a moment when the world’s eyes are on the region, have marched on their government, resulting in harrowing scenes of violence. Admittedly, there are many different factions involved in the protests now. But the starting point, about three months ago, was the Ukrainian government’s debate over a trade agreement with the EU. And the protests escalated dramatically when the government instead accepted a deal with Russia. Make no mistake: the violence is not just about trade agreements. Or rather, much of it is, but these are no ordinary trade agreements. As the intensity of the protesters’ commitment suggests, this is one of the most important struggles taking place in the world today. It is, in the phrase promoted by the European Union and taken up by numerous Ukrainian politicians, a “civilizational choice”. The trade agreement Ukraine signs will shape the country’s destiny. To see why this is so, take a look at the below graph. This shows the incomes of countries joining the EU compared to one of the EU’s richest members (Denmark). What is striking is that the rising lines of incomes in Eastern Europe are almost parallel – despite great differences...

The crisis that made the Eurozone

Most economists have been too pessimistic about the Eurozone crisis. The famous names who forecast a Eurozone breakup – Martin Wolf, Niall Ferguson – were generally guilty of confusing “broken” with “cannot be fixed”. There were good reasons for this confusion. Politicians in European countries engaged in repeated games of brinkmanship in an effort to obtain more attractive bailout packages. The winning strategy in brinkmanship is, of course, to convince the other side that one is willing to go over the brink, while disregarding the increasingly extreme threats from one’s negotiating partner. To this end, politicians in bailout recipient countries make a lot of threats that they did not, in fact, intend to carry out – e.g., “we will leave the Eurozone if you do not offer a better bailout package”. AAA-rated countries made equally empty threats – e.g., “if you do not undertake reforms, we will not give you a bailout”. Economists tended to take these negotiating-strategy pronouncements at face value. Moreover, a necessary measure of bargaining power in these games of brinkmanship was the impact on financial markets. German bank stocks would plummet when the Greeks threatened to leave. Interest rates on Greek debt would soar when the AAA-rated countries threatened to throw the Greeks out. Economists are accustomed to interpreting market distress as a sign of economic distress. In this case, these market movements meant that both Northern Europe and Southern Europe had leverage, and the bailout packages were relatively equitable. The last such attempt at brinkmanship (so far) was Cyprus, whose disingenuous claims to be on the verge of leaving the Eurozone produced almost no...