Well, this sounds like very bad news for the global financial system:
A plan to rescue the tiny European country of Cyprus, assembled overnight in Brussels, has left financial regulators, German politicians, panicked Cypriot leaders and a disgruntled Kremlin with a bailout package that has outraged virtually all the parties.
In the end, a bailout deal that was supposed to calm a financial crisis in an economically insignificant Mediterranean nation spread it wider. Word of the plan unnerved markets across Europe, raised fears of bank instability in Spain and Italy and sent pensioners into the streets of the island’s capital, Nicosia, in protest.
As markets tumbled and the Cypriot Parliament fell into turmoil, salvos of blame were hurled back and forth across the Continent.
Officials scrambled to explain what went wrong and how best to control the damage of what Philip Whyte, a senior research fellow at the Center for European Reform, called a “completely irrational decision” to make bank depositors liable for part of the bailout. The deal flopped so badly that finance ministers who came up with it shortly before dawn on Saturday were on the phone to each other Monday night talking about ways to revise it.
Now, on the one hand, you would be hard-pressed to find anyone who will defend the Cypriot deal as it was announced on Saturday -- but it's pretty easy to find critics of the proposed deal across the political spectrum. So this seems like yet another data point confirming the truly mind-boggling stupidity of European governments and regulators. It's particularly galling that they did this during a time when global capital markets are still fragile from the 2008 financial crisis.
Oh, except, wait a minute, it turns out that those markets aren't as fragile as the perception suggests. If you burrow into the McKinsey Global Institute's latest report on global asset markets, it turns out that, excepting Europe, the rest of global finance has experienced a decent recovery from the 2008 crash. According to MGI:
With the pullback in cross-border lending, foreign direct investment from the world’s multinational companies and sovereign investors has increased to roughly 40 percent of global capital flows. This may bring greater stability, since foreign direct investment has proved to be the least volatile type of capital flow, despite a drop in 2012.
Of course, this was written before the Cypriot stupidity, so now markets are really roiled, right? Well... here's Business Insider's Joe Weisenthal's take early this a.m.:
Markets are down a bit in Europe although not dramatically so yet.
US futures were flat, and Asia was actually up nicely, with Japan gaining 2%.
That seems like a thoroughly appropriate reaction. And over at the New York Times, Andrew Ross Sorkin explains why that's the rational and appropriate reaction:
While the bailout of Cyprus is a fascinating case study and raises interesting theoretical questions about moral hazard for policy wonks and talking heads, here is the reality: It is largely irrelevant to the global economy. Cyprus is tiny; its economy is smaller than Vermont’s. And the bailout is worth a paltry $13 billion, the equivalent of pocket lint for those in the bailout game.
Even the larger issue about bailing out a country by taking money from depositors — which quickly created outrage around the world — seems overblown....
[I]n truth, the smart money knows that the bailout of Cyprus says very little about future actions.
“I would assume that anyone in Spain, Portugal or elsewhere who knows about the taxation of Cypriot depositors also would know that the Cypriot banking system is a very different animal than anywhere else in the euro zone,” Erik Nielsen, chief economist at UniCredit, wrote in a note to clients.
Mr. O’Neill of Goldman also acknowledged: “I am sure it will not set a precedent.”
Cyprus is unique. Besides being tiny, its banking system looks different from those in most other countries. Much of the big money deposited in its banks is from foreign investors, including Russians who have long been suspected of money laundering. Those investors had fair warning that Cypriot banks were troubled. The issue has been simmering for six months. But those investors left their money in the bank, in part because they were gambling that the banks would be bailed out at no cost to them. If the current plan is approved, depositors will have lost that bet.
Now this is a perfectly rational analysis. What's significant is that it seems like markets are making the same calculation. When financial markets are fragile, when there's a fear of financial contagion, they don't make the rational calculation -- they freak out. That hasn't happened with Cyprus.
I know I'm at the risk of pulling a Donald Luskin here, but what's happening in Cyprus right now primarily affects Cypriots, with a small concern about regional effects. It doesn't look like it's triggering the same kind of concerns of either the Lehman collapse or the Greek sovereign debt crisis. And anytime the abject stupidity of European financial statecraft can be confined to Europe, that's a very, very good thing indeed for the global financial system.
Am I missing anything?
So it's the ten-year anniversary of the start of Operation Iraqi Freedom, which means it's time for the obligatory commemorative blog posts and such. Go read Stephen Walt and Peter Feaver for some contrasting takes. Do wait five minutes in between clicking those two, however -- any quicker than that, and intellectual whiplash might result.
This was a Big Deal in American foreign policy, and a single blog post about it will not do it justice. So I think it's worth reflecting on the legacy of the Second Gulf War at three different levels -- the system, the country, and the individual levels. Today's installment: How did Operation Iraqi Freedom affect the international system?
The surprising answer is: not all that much.
I don't come to this conclusion lightly. You'd think that a conflict that cost more than $2.2 trillion and led to 190,000 deaths would have some systemic ramifications. Except that it didn't -- not really.
To understand why, consider what both standard realist, instiitutionalist, and neoconservative accounts predicted would happen.
Realists were convinced that the largely-but-not-completely unilateral act of preemption by the United States should have triggered significant amounts of blowback. The great powers that opposed the invasion should have formed a balancing coalition against a revisionist United States. That did not happen. Furthermore, all the realist yapping about "soft balancing" looks pretty absurd in retrospect. There is no doubt that the United States suffered a few years of some serious unpopularity -- but that temporary dent ended very quickly after the 2008 election.
Some realists fond of the "imperial overstretch" argument might try to posit that the costs of the Iraq war led to America's parlous fiscal state. Any serious look at the numbers, however, says this is not true -- the war didn't help, but the principal causes of U.S. budget deficits over the past decade were the Bush tax cuts, the rise in entitlement spending, and the decline in tax revenues caused by the Great Recession. The Iraq war played a supporting role -- not a leading one.
The institutionalists would focus on the U.S. defection from international regimes and international institutions. In the end, the U.S.-led coalition invaded without an imprimatur from the United Nations. In the run-up to the war, the IAEA was particularly scornful of U.S. claims. Institutionalists would also have predicted some kind of punishment of the United States for its defection from the rules of the game. Absent that punishment, institutionalists would predict a weakening of global governance more generally, given the toothless nature of enforcement.
Except that none of these things happened. Both the U.S. and the U.N. Security Council suffered minimal costs in the aftermath of the invasion. Within a few years, however, it was the United States leading the U.N.S.C. to successive rounds of sanctions against Iran and North Korea for doing things that had been used as a pretext for invading Iraq. A decade later, it turns out that global governance did a decent job in the wake of the 2008 financial crisis.
As for the neoconservatives, well, their predictions were straightforward. The invasion of Iraq was supposed to set of a tectonic shift in the politics of the Middle East. States contemplating the development of WMD should have been cowed by the might of American power. The creation of a stable democracy in Iraq was supposed to trigger a massive wave of democratic regime change across the Middle East.
Now, to be fair to the neocons, Libya did give up its WMD program, and there has been a wave of regime change across the Middle East. But let's be clear about a few things. The Iraq invasion played a supporting and not a primary role in Qaddafi's decision. And anyone who tries to connect the regime change in Iraq with the Arab Spring needs to read Harry Frankfurt again and again and again. The fact that no one judges Iraq to be a real democracy suggests the hollowness of the neoconservative argument.
At the systemic level, the Iraq invasion did not matter. Maybe one could argue that there was a mild acceleration of relative U.S. decline. The thing is, a lot of the metrics that people use to discuss relative power were shifting away from the United States regardless of Iraq. None of the major predictions of standard realist, institutionalist, or neoconservative models hold up terribly well a decade later.
So does this mean Operation Iraqi Freedom doesn't matter? Of course not. Affecting the international system is a really high bar. World wars, economic depressions, industrial revolutions -- these things matter at the systemic level. It's rare that a conflict smaller than that would have systemic implications (though the Soviet invasion of Afghanistan does come to mind). Rather, the conflict's primary effects were at the national level. Iraq did have a profound effect on American foreign policy thinking. Which is the subject I'll tackle in my next blog post.
Am I missing anything?
Your humble blogger has been too hard at work
trashing his diminished reputation for seriousness working on other projects to blog about North Korea as of late. Now, the situation on the Korean Peninsula has been such a predictable cycle of DPRK provocative action, measured response, and more provocative action that I've been tempted to automate these posts the same way I have with Iran.
Still, as one reviews recent behavior, it's necessary to acknowledge that this cycle looks a little different. When Nick Kristof tweets that "I've been covering North Korean pugnacity and brinksmanship for 25 years, and I'm nervous about what might happen," the rest of us snap to attention.
1) There was the novel threat from a North Korean general to launch a pre-emptive nuclear strike against the United States, causing Washington to "be engulfed in a sea of fire."
2) North Korea has also declared that the 1953 armistice with South Korea is now "invalid," cutting off the direct phone link with South Korea at Panmunjom.
3) North Korea's propaganda machine has ramped up against new South Korean leader Park Geun-hye in a rather sexist fashion, decrying the "venomous swish of skirt" coming from the Blue House. In Korean, this language implies an "overly aggressive" woman.
4) Something something Dennis Rodman inanity something.
5) North Korea has dramatically ramped up the number of air force sorties, from 100 a day last summer to at least 550 a day now -- a number that comes close to matching the South Korean daily number.
So, seriously, WTF, Kim Jong Un? Is this simply a more severe version of typical DPRK brinkmanship, or is this something altogether new and destabilizing?
Well … I think it's the former. First, let's just ignore the DPRK's rhetoric, because it's always over the top -- or, as with Rodman, completely disingenuous. Let's look at the DPRK's actions. Here, even the cancellation of the armistice doesn't necessarily mean much, as McClatchy's Tom Lasseter points out:
Pyongyang is infamous for issuing dramatic but empty threats, like turning its enemies into an apocalyptic "sea of fire." The North has also announced on several previous occasions that it was pulling out from the armistice, most recently in 2009.…
The last time North Korea disconnected the hotline, in 2010, was a year when the North killed four South Koreans when it shelled an island and was accused of torpedoing a South Korean naval ship, killing 46 sailors.
But Yonhap also reported that the North had not severed another North-South communication line, this one related to a North Korean industrial zone where South Korean companies operate.
So … nothing much new here. Beyond that there's the ramping up of air sorties, which does seem like a more powerful signal, if for no other reason than that it's actually a costly act. And beyond that … a lot of hot air.
So does that mean I can automate my North Korea posts? Well, Fareed Zakaria has a different spin:
No one knows for sure what is going on. It is highly unlikely that these moves are being conceived and directed by Kim Jong Un, the young leader who succeeded his father, Kim Jong Il. North Korea’s military dictatorship has wedded itself to the third generation of the Kim dynasty, which now seems to serve mostly as a unifying symbol for its people. But it is unlikely that a 28-year-old with almost no background in politics or experience in government is conceiving and directing these policies. (He does appear to have free rein on basketball policy in the hermit kingdom.)
The most likely explanation for North Korea’s actions is that it is trying to get attention. In the past, its provocations usually led to international (especially American) efforts to defuse tensions. Then came negotiations, which led to an agreement of sorts, which the North soon cheated on, which led to sanctions, isolation and, finally, North Korean provocation again.
The pattern may be repeating — but it’s a high-stakes game, with nuclear weapons, brinkmanship and hyper-nationalism all interacting. Things could go wrong. The most important new development, however, is China’s attitude change. In a remarkable shift, China — which sustains its neighbor North Korea economically — helped draft and then voted last week for U.N. sanctions against Pyongyang.
For decades, Beijing saw Pyongyang as a historical ally. But now, a senior Obama administration official told me Wednesday, “We are clearly hearing increasingly levels of frustration and concern” from Beijing about North Korea.
Zakaria is correct to point out Beijing's growing disenchantment with Pyongyang. But I tend to share Jennifer Lind's assessment that this disenchantment won't necessarily lead to any dramatic changes:
One shouldn't exaggerate the significance of these recent developments. After all, in the U.N. negotiations over sanctions -- this time as before -- the Chinese have consistently played the role of watering down the degree of punishment imposed against Pyongyang. And in the past Chinese firms have helped North Koreans evade sanctions. It remains to be seen whether Beijing intends to enforce the new measures.…
Because the specter of North Korea's collapse could potentially destabilize the Korea peninsula, Beijing may continue to shield Pyongyang. But the two country's [sic] increasingly divergent interests suggest that China's dissatisfaction with North Korea is only likely to grow.
I'd be even more skeptical. Obviously, China's leadership would prefer North Korea to act in a less provocative manner -- but they really don't want a disintegrating North Korean state. So even if they're disenchanted, they won't apply the necessary pressure to foment regime change or regime collapse. Which means that Pyongyang will still have carte blanche to provoke everyone else.
So my take is … not much has changed. I suspect that the reason for all of the amping up has to do with domestic politics on all sides. On the one hand, Kim Jong Un is playing to his own military base. On the other hand, North Korea is also trying to suss out the policy preferences and resolve of the new leadership in both South Korea and China.
Unless and until Beijing gets fed up enough to desire a strategic shift on the Korean Peninsula, I'm dubious that anything will change.
Am I missing anything?
One of the lasting effects of the 2008 financial crisis was the belief that the distribution of economic power had radically shifted. China rising, West fading, yadda, yadda, yadda. A minor key in this argument has been the notion that a new and important measure of economic power is the size of a country's official reserves. This has led to the occasional panicked article that "China is buying gold!!" or "Russia is hoarding gold!!" or "Germany is moving gold!!" as a first step towards pushing the dollar out as the world's reserve currency.
Which is just so much horses**t.
Here are three facts to remember whenever you read any story about a BRIC economy hoarding gold:
1) Buying gold would have been extremely savvy in 2008. Now it's just silly. The price of gold peaked at over $1900 in September 2011 -- and despite massive amounts of quantitative easing and numerous reports about central bank hoarding, it's fallen by $300 since and trending downward.
2) The BRIC economies did not have a lot of gold to begin with. As Bloomberg notes, "Russia’s total cache of about 958 tons is only the eighth largest [in the world]."
1. The United States (8,134 tons)
2. Germany (3,391 tons)
3. The International Monetary Fund (2,814 tons)
4. Italy (2,451 tons)
5. France (2,435 tons)
So, to sum up: To believe that gold holdings really matter in the global political economy, you have to be willing to assert that Italy is a great power in global finance. I, for one, am not going there.
Over at the Guardian, Ed Pilkington notes a rather curious silence from a powerful American interest group:
The National Rifle Association is so tied up fighting new gun restrictions in the wake of the Newtown shooting that it has failed so far to mount its expected lobbying blitz against a new international arms control control treaty.
With just a few weeks to go until the world's first Arms Trade Treaty (ATT) is put to a final vote at a UN conference in New York campaigners have voiced surprise at the NRA's relative silence on the issue. Until the Newtown tragedy, in which 20 young children died in their classrooms on 14 December, the UN's attempt to contain the loosely regulated international trade in weapons had been one of the gun lobby's biggest targets....
[A]head of the final ATT conference, which opens on 18 March, the NRA has been notable by its absence. Though the organisation continues to vow that it will do all in its power to prevent the arms trade coming into effect – arguing that it is a "ticking time-bomb" and "the most serious threat to American gun owners in decades" – it has not been applying the same strong-arm tactics as it did in 2012.
So what's up? Pilkington suggests that the NRA is so distracted fighting against domestic gun control measures that it's taken its eye off the ball of this treaty -- particlarly since, according to the American Bar Association, there's nothing in the ATT to infringe on Second Amendment rights.
That might be true, but let me suggest an alternative hypothesis based on LaPierre's own rhetoric. The standard NRA defense against gun control has been concern about a Leviathan stripping citizens of their right to bear arms. Based on LaPierre's recent Daily Caller essay, however, I think they've switched arguments. The concern is no longer about creeping totalitarianism; it's creeping anarchy:
Hurricanes. Tornadoes. Riots. Terrorists. Gangs. Lone criminals. These are perils we are sure to face—not just maybe. It’s not paranoia to buy a gun. It’s survival. It’s responsible behavior, and it’s time we encourage law-abiding Americans to do just that....
Responsible Americans realize that the world as we know it has changed. We, the American people, clearly see the daunting forces we will undoubtedly face: terrorists, crime, drug gangs, the possibility of Euro-style debt riots, civil unrest or natural disaster.
Gun owners are not buying firearms because they anticipate a confrontation with the government. Rather, we anticipate confrontations where the government isn’t there—or simply doesn’t show up in time.
To preserve the inalienable, individual human right to keep and bear arms—to withstand the siege that is coming—the NRA is building a four-year communications and resistance movement (emphasis added).
They say "communications and resistance movement," I say "doomsday preppers."
I'm hardly the only one to notice this kind of doomsday prepper rhetoric from LaPierre. What's interesting is that the NRA's allies in Congress are talking the same way. Gail Collins offers up the following Lindsey Graham quote:
The senator from South Carolina wanted to know what people were supposed to do with a lousy two-shell shotgun “in an environment where the law and order has broken down, whether it’s a hurricane, national disaster, earthquake, terrorist attack, cyberattack where the power goes down and the dam’s broken and chemicals have been released into the air and law enforcement is really not able to respond and people take advantage of that lawless environment.”
Do you think Graham spends a lot of time watching old episodes of “Doomsday Preppers?” Does he worry about zombies? That definitely would require a lot of firepower (emphasis added).
I don't know if Graham worries about zombies, but I've given this matter some thought, and I do wonder if there's a fusion of various apocalyptic fears going on in some political quarters.
To get back to the Arms Trade Treaty, since Newtown the NRA appears to have shifted tactics in its arguments about the necessity to bear arms. But the fear of state collapse is a very different logic from a fear of an overpowering state. If you believe that governments will simply crumble at the first sign of a threat, then you're not gonna bother lobbying against some silly international treaty. It's not like the ATT will make a difference when the s**t hits the fan. Rather, groups like the NRA should be more concerned with declining gun ownership rates in the United States.
In the argot of international relations theory, a leader or organization that finds itself trapped by its political rhetoric is suffering from "blowback." In an irony of ironies, I wonder if the NRA's shift in rhetoric has hamstrung its lobbying efforts on the Arms Trade Treaty.
The passing of Hugo Chavez has prompted the usual 21st century cycle of news coverage and commentary that follows the death of a polarizing figure: the breaking news on Twitter, followed by the news obits, followed by the hosannahs from supporters, followed by denunciations of the figure, followed by official statements, followed by mealy-mouthed op-eds, followed by hysterical, unhinged criticism of standard diplomatic language.
Now that the first news cycle has passed, we can get to the more interesting question of assessing Venezuela's future. There was always a fundamental irony to Hugo Chavez's foreign policy. Despite his best efforts to chart a course at odds with the United States, he could never escape a fundamental geopolitical fact of life: Venezuela's economic engine was based on exporting a kind of oil that could pretty much only be refined in the United States.
So, with Chavez's passing, it would seem like a no-brainer for his successor to tamp down hostility with the United States. After all, Chavez's "Bolivarian" foreign policy was rather expensive -- energy subsidies to Cuba alone were equal to U.S. foreign aid to Israel, for example. With U.S. oil multinationals looking hopefully at Venezuela and Caracas in desperate need of foreign investment, could Chavez's successor re-align foreign relations closer to the U.S.A.?
I'm not betting on it, however, for one simple reason: Venezuela might be the most primed country in the world for anti-American conspiracy theories.
International relations theory doesn't talk a lot about conspiracy thinking, but I've read up a bit on it, and I'd say post-Chavez Venezuela is the perfect breeding ground. Indeed, the day of Chavez's death his vice president/anointed successor was already accusing the United States of giving Chavez his cancer.
Besides that, here's a recipe for creating a political climate that is just itching to believe any wild-ass theory involving a malevolent United States:
1) Pick a country that possesses very high levels of national self-regard.
2) Make sure that the country's economic performance fails to match expectations.
3) Create political institutions within the country that are semi-authoritarian or authoritarian.
4) Select a nation with a past history of U.S. interventions in the domestic body politic.
5) Have the United States play a minor supporting role in a recent coup attempt.
8) Finally, create a political transition in which the new leader is desperate to appropriate any popular tropes used by the previous leader.
Venezuela is the perfect breeding ground for populist, anti-American conspiracy theories. And once a conspiratorial, anti-American culture is fomented, it sets like concrete. Only genuine political reform in Venezuela will cure it, and I don't expect that anytime soon.
Oh, and by the way: Those commentators anticipating a post-Castro shift by Cuba toward the U.S., should run through the checklist above veeeery carefully.
Am I missing anything?
A little more than two years ago I wrote a blog post entitled "The End of Power?" After riffing on the subject for a spell, I closed with:
So... we live in a world in which more actors have vetoes over systemic change but no actor has the ability to truly compel change. This leads to lots of talk about "G-zero worlds" and so forth.
Just to be provocative, however, I wonder if what's truly changed is the extinction of compellence power as we know it. The primary, ne plus ultra tools of compellence require a willingness to kill, jail, or starve a lot of people. Recent flare-ups like Iran in 2009 and Egypt right now suggest that such actions are possible at the domestic level but pretty damn costly; even authoritarian countries flinch at using brute force on a domestic population. Cross-border efforts are even more expensive in terms of both material and reputational costs.
This isn't the end of power, but it might be the end of one particular dimension of power. I'm not entirely convinced that this supposition is true and am willing/eager to hear counterarguments. That said, I still hereby claim The End of Power as my title, so everyone else just back off, OK?
Well, so much for my claim. Former FP head honcho Moisés Naim has a new book out called... The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being In Charge Isn't What It Used to Be. His argument:
Power is shifting -- from large, stable armies to loose bands of insurgents, from corporate leviathans to nimble start-ups, and from presidential palaces to public squares. But power is also changing, becoming harder to use and easier to lose. As a result, argues award-winning columnist and former Foreign Policy editor Moisés Naím, all leaders have less power than their predecessors, and the potential for upheaval is unprecedented. In The End of Power, Naím illuminates the struggle between once-dominant megaplayers and the new micropowers challenging them in every field of human endeavor. The antiestablishment drive of micropowers can topple tyrants, dislodge monopolies, and open remarkable new opportunities, but it can also lead to chaos and paralysis. Drawing on provocative, original research and a lifetime of experience in global affairs, Naím explains how the end of power is reconfiguring our world.
The originality of the argument -- along with the subtitle -- saves Moisés from some serious legal retribution!! Well, that and he asked me to moderate a panel on the topic with him and Fareed Zakaria at the Council on Foreign Relations. Here's the video. Enjoy!
Your humble blogger gave a talk at the "Sex, Tech and Rock & Roll" TEDx event at Binghamton University last month. My talk was entitled "Metaphor of the Living Dead" and was in part prompted by my prior work on zombies, as well as this blog post from last December.
Here's the TED talk:
I look forward to The Onion trying to satirize that talk.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.