Was the Ukraine shambles avoidable?

With Saturday bringing news of police in Kiev brutally breaking up what had been a peaceful pro-EU protest, it’s even clearer now than before the botched partnership summit in Vilnius that things could get out of hand on a large scale. Perhaps what stands out the most about Ukraine is the sense of slow-motion crisis: an indigenous “colour revolution” that was diverted, every economic indicator pointing to an old-style IMF program very soon, and months of signals from Russia that its Eurasian Customs Union would be an offer that its neighbours couldn’t refuse.

The day also brings a fairly toughly worded statement of condemnation of the protest break-up from the European Commission, but what hope it has of generating any momentum is not clear with the world into its weekend (and for the USA, Thanksgiving) distractions. But the question for the EU has to be: what did they expect? The noises were there for months when Armenia wavered at the Eastern Partnership. There was a further message in how aggressively Russia played its cards on Syria, but maybe that was given a pass for having headed off US military action.

Even over the last few days though, the mis-steps mounted. It was clear ahead of the Vilnius Summit that President Yanukovich was boxed in by pressure from Russia. So why maintain the pretense that a deal could be done, why go ahead with the summit theatrics, why release the video of him getting a dressing down by Angela Merkel, and then put a bullseye on Moldova as what a country might get if its plays nicely with the EU?

There were other pitfalls embedded in the EU-Ukraine negotiations process. Writing in the New York Times, Oleh Kotsyuba notes the way that social conservatives in Ukraine used the partnership component on tolerance of sexual orientation against it. For others, it became a polarised personality dispute with the focus on Yulia Tymoshenko ($ link).

Of course, we don’t know the dynamics inside the EU capitals and Brussels about who wanted what (was Iran consuming their attention?). But there seems to be several points at which expectations could have managed and temperatures lowered. Perhaps the bigger question is whether the EU has a full understanding of what kind of Russia it is dealing with. It’s going to be a fun Russian G8 Presidency in 2014!

The FT could not be more wrong about Brazil and the Internet.

The FT is worried about the Internet, and specifically what the Brazilians are up to with it as a result of the Snowden disclosures.

I am not. Details of Brazil’s very successful policy with regard to the development of the Internet are here, in a fine post on the Renesys blog. Basically, we’re seeing the conflation of two things here – the US’s genuine concern for the Internet, and its equally genuine concern for the interests of Silicon Valley, Hollywood, and the spooks.

What is the Internet? You can always start a good row on the NANOG list by asking for a definition. But I don’t think there is much real dispute that it’s fundamentally a set of interconnected autonomous networks. The key protocols overlay diverse media bearers and underlay diverse applications, while the routing system unites Autonomous System numbers, defined as networks having an independent routing policy. It differs from, say, the mobile carriers’ GRX and roaming hub infrastructure, or the older international voice interconnection systems, in that there is no central intermediary or necessary hierarchy. If AS X and AS Y want to interconnect directly, they can do so as long as they can physically reach each other.

As such, more local interconnection is always and everywhere a good thing for the Internet. Back in the 90s, although the rhetoric of radical networking was at its peak, the system was in fact heavily dependent on central intermediaries, the so-called Tier 1 operators. As a very rough generalisation, you could say that the Internet worked like it was meant to among US universities, government users, and research centres, and everyone else was eventually a customer. This had distinct geographical and political consequences – supposedly, the topological centre of the African Internet was the 111 8th Street carrier hotel in New York City, or the LINX in London, depending on who tells the tale. The convenience of this for the NSA should be more than obvious.

Those days are long gone. The Tier-1 operators no longer rule the earth like they once did, and anyway the club of Tier-1s has a very different membership now, with major players including Tata of India, Telecom Italia-Sparkle, and PCCW of Hong Kong where once it was a nearly total American monopoly. What changed? More competition, for a start, but also much more interconnection between customer networks. I mentioned the LINX, the London Internet Exchange. IXen are membership organisations that provide for peering between their members, and their spread has been a major factor in the quantitative growth and qualitative development of the Internet worldwide. Another important issue is the increasing tendency of eyeball networks – consumer ISPs – and content networks to peer directly.

To understand why this is a good thing, I recommend another Renesys post. Shorter paths equal lower latency, and more diverse paths equal greater resilience to disruption.

Latin America was rather late to this development. It exhibits the traits of the 1990s Internet to an extreme degree, with both nearly all its traffic to and from the wider world and enormous amounts of intra-regional traffic passing via Terremark’s NAP of the Americas in Miami. The politics of this, again, ought to be obvious, especially from a Latin point of view informed by their distinctive intellectual tradition. The economics and engineering of it are not good either. Locating hosting, applications, or content delivery infrastructure in a country that reaches its neighbours via a 5,000 mile submarine cable round trip is asking for trouble, and a structural barrier to scaling up an Internet company anywhere in the region.

Hence Brazil’s effort to create local IXen and ISPs and to build more regional fibre links, which has been a great success (check out the numbers in the post!). Not only do they want better connectivity, they also want participation in the Internet rather than just consumption of Google searches and lolcats. A good measure of this is AS numbers per capita. Theirs are rocketing.

latam-asn

(If you find this interesting, a more detailed technical report on it has just appeared here)

So, to summarise so far: there is nothing natural, open, or free about sending traffic from Sao Paulo to Rio via Miami. And the Internet founders did not intend and do not want this. It is bad economics and bad engineering, and the rest of the world left it behind years ago. Brazil is right to do everything possible to get rid of it, and its efforts are already bearing fruit. I think they are also right to identify it as a form of underdevelopment imposed on them by the rich. IETF and ISOC are very clear that peering and local interconnection are nothing but good.

We have an excellent counter-example to Brazil in the Renesys data set – Mexico, which had until very recently a private monopoly of telecoms, no regulator, and no IX. Mexico has far fewer AS numbers per capita and far less growth in this metric.

The FT is confusing the entirely healthy development of the Internet as it was intended to work, and indeed does in Europe, with the Great Firewall of China or the lesser firewalls of Saudi Arabia, the UAE, or Iran. In doing so, it is letting the US get away with using the rhetoric of free speech to maintain an exorbitant commercial privilege, and of course to tap Dilma Rousseff’s phone whenever this seems expedient. This agenda permits freedom in a negative sense, but at a real economic price and at the cost of giving up participation and control.

And it serves, probably unintentionally, another agenda – the Chinese or Iranian approach, in which free speech on the Internet is a political threat that must be censored and an open door for US competitors that must be closed by censorship in its secondary function as a non-tariff barrier. This one can work economically – note the huge Chinese Web 2.0 companies like QQ and Sina Weibo, or the roaring growth in AS numbers within Iran – but it is deeply illiberal and anti-democratic.

There is an alternative to this unattractive pair of options. That is real Internet development, like the Brazilians are doing, like Kenya is doing, or like Europe did in the 2000s. It must not be demonised by conflation with Chinese opinion management.

Let’s get structural

EU_structural

 

European Central Bank’s Financial Stability Review November 2013, page 19. The left chart is output gaps (blue 2007, red 2013) i.e. differences between current and estimated potential or “full employment” GDP. Most eurozone countries have output gaps below 2.5 percent, including some with extremely high unemployment, like Ireland. Output gaps were large and positive in 2007. Current unemployment rates associated with these small output gaps can be surmised from the right-hand chart — many are in double digits. Among the many implicit assumptions of the typical analysis that accompanies such charts is that if two extreme points have been attained, then somewhere in between must be feasible.

A bit of export blogging

The Commission has taken an interest in the German trade surplus. As you know, Bob, they took an interest in the government deficit in the early 2000s as well. This isn’t mere snark, though. Here’s a really interesting chart from Jared Bernstein‘s blog.

ULC_us_germ

Germans haven’t had much of a pay-rise for years, but neither have Americans. To put it another way, German export success isn’t driven by cheap labour or indeed cheap anything. Bernstein is swinging off a post of Paul Krugman’s about intra-eurozone trade issues, but because he’s a nonrespectable palaeokeynesian like me, he looks at this from an industrial policy point of view.

There ought to be some room for manoeuvre here, and this is the sort of thing that the UK Labour policy community is obsessed with. How does the industrial machine work? If it wasn’t low, low prices, what happened? It’s not an abstract saveyness of pure virtue, either, because savings rates aren’t what you might think they are.

save

It’s not a timeless truth, either, as Mark Schieritz charts.

LBS_BIP_DE_1950-2013

A quick reconnaissance over German politics

So you might think this blog ought to have written much, much more about the German elections and the coalition process that came after. Mea culpa, but the truth is that it just wasn’t interesting or new and the reasons are well defined here, with the notion of the post-political situation. Germany had an election as post-political as anything you might get in Italy. The biggest row was about the idea of having a compulsory vegetarian day in schools. The opening of talks between the parties is well satirised here as a vacuous media pseudo-event.

Even now, in the coalition process, the SPD has been essentially competing with Angela Merkel to agree with her own policy, by ruling out any European funding for bank resolution that doesn’t come with a troika programme and the concomitant 25% reduction in GDP. Perhaps the only genuinely political moments were the periodic Snowden eruptions (apparently the biggest clown over this, Roland Pofalla, wants to be a cabinet minister. we’ll see).

The original reading of the election was that it was an awe-inspiring triumph for the Right. The evidence of this was that they did well in Bavaria, demonstrating only that a lot of journalists don’t read their own newspapers, and that the CDU had a historically high score. On the other hand, the parties of the Left actually ended up with more seats, through the moderately countermajoritarian voting system and most of all because of the crash of the German liberals, the FDP, who lost all their seats. Merkel had to pick between an unstable rightwing coalition beholden to Bavarian pols who are unelectable in the rest of Germany, which would be vulnerable to the parties of the Left picking off individual centrists, and something else.

The something else is a new version of the grand coalition of 2005, with the CDU and the SPD in government together. This is much more stable, and importantly permits the chancellor to have an independent political role. In a government that has to tack to the hard right to please the rightmost Bavarian MP and then back to the centre, Merkel is a weathervane. In one that’s spread right over the range of German politics it declares to be respectable, she’s the boss.

On the other hand, viewing it from either flank, it’s utterly vacuous. If you don’t like the EU, or even if you don’t like the current macroeconomic settlement of it, there is nothing for you here. It is deeply post-political, in the sense that the SPD and the Greens get to compete for the role of second coalition partner so long as they don’t propose anything new or interesting.

It should also give pause to everyone who likes the idea of breaking up the great social democratic parties. This project is further ahead in Germany than anywhere else, and the result seems to be a Left party that doesn’t achieve much or increase its vote much, a SPD whose main argument is that the Left are all commies and wasn’t it that lot who cooperated with the Nazis in 1932 to kill the Prussian SPD government*, and a Green party that’s not much better on its key issue than everyone else but doesn’t seem to know or care that wage-earners exist as such.

It’s because the SPD and the Left party loathe each other so much, and the Greens are as ECB-minded as anyone, that the numerical majority of the left in the Bundestag is not a political majority and the numerical minority of the Right is a political majority.

SPD members’ experience of grand coalition was basically horrible, and the effort to sell the project to the 470,000 members seems to rely heavily on pompous old men telling the base off. Like so.

In France, the push to the left from Mélénchon is at best like one of those solar sails – it might be just perceptible over 30 years – and at worst immeasurable. And the reality of post-politics is that however many votes SYRIZA or Grillo gets, does anyone really imagine it will matter?

That said, that said, German politics may be post-political but it is not yet post-democratic. The SPD’s biggest outstanding issue in the coalition talks is a €8.50/hour national minimum wage, which is more impressive when you realise that about 40% of German workers (including part-timers) earn less than that. There is a Billiglohnland inside Germany that is rarely discussed. Gesamtmetall is already on board.

This is largely because low wages in Germany are mostly in the non-tradable bits of the economy. IG Metall and Gesamtmetall can agree on this because it’s not their problem. As I often point out, nobody buys a Mercedes because they’re cheap. But if the services workers get a coup de pouvoir d’achat, it ought to provide at least some additional aggregate demand and suck in some imports.

And, after all, it was the FDP’s Lambsdorff paper back in 1982 that introduced neoliberalism to Germany, or rather reintroduced it if you believe the Freiburg school was its originator.

It’s something. It’s not much, but it’s something. Of course, the SPD membership could still vote it down, in which case we get the Right with veggie days.

*well, it was, and I’ve said this to people I know on the extreme left, but it’s depressing to see that Sigmar Gabriel has nothing better to offer as an argument.
**ok, Siggab has worse to offer.
***as a general theme, Steinbruck, then Siggab, what is it with the tiresome Sir Mucho Pomposo types?

Send the envoy

There could only be one song for this post*. I had “Iran follow-up post” on my to-do list, but I wasn’t expecting the follow-up to be basically “dealio!”. The US statement is here, which carefully emphasises that the sanctions infrastructure remains in place, and the document itself is here, via Fars News Agency.

As far as the nuclear content goes, it addresses the build-up of more centrifuges and requires the mixdown of the existing 20% enriched uranium or its conversion to reactor fuel. It freezes work on the Arak plutonium reactor, and importantly asserts that Iran will be able to enrich up to reactor levels in the future. It seems to be stronger than expected in terms of verification and monitoring, providing for a lot of new inspections and a joint commission on monitoring. I’ll wait for Arms Control Wonk, but Mark Hibbs seems to think it’s sound.

In the light of this now-classic post, it doesn’t get rid of the isotope program with the Tehran research reactor but it does provide guarantees that it’s not acting as a cover for work on a bomb. If the 20% HEU is converted into fuel for the reactor, and the IAEA inspectors verify that, it can’t also be further enriched for use in a bomb. That’s the key issue in their model and the deal addresses it.

It also provides for a year-long process towards winding up the whole issue and ending the UNSC involvement, as well as for future cooperation on getting Iran some proliferation-resistant nuclear power stations. The AFOE official view is nicely summed up by this tweet from Conor Friedersdorf:

and also this one from Chris Bryant MP:

As far back as 2009, we made the choice to stand out against the conventional wisdom on this particular point. Hey, the conventional wisdom was represented by a horrible bunch of kéké clowns, it wasn’t hard. Further, the main challenge then was getting the EEAS set up and functioning and she did actually come from setting up a substantial new institution in the UK. We came back on this one last year. Anyway, here’s the victory roll, in the Grauniad. Rod Liddle, your boys took a hell of a beating.

Catherine Ashton

*The Wikipedia page for Philip Habib is a strong case that whether Warren Zevon intended the song sincerely or satirically in 1982, he certainly meant it after 1987.

Secular Stagnation: Greed is Good

As you’ll know if you’ve been near any economics-oriented blogs, secular stagnation is the hot topic i.e. that advanced economies are prone to needing negative real interest rates to achieve full employment and in the inability to achieve that at low inflation, bubbles might be helpful. One surprising thing about the debate is that given the Cambridge Mass. lineage of those involved in it, the concept of “dynamic inefficiency” has not been raised in tandem.

This was something that emerged in the  modeling of overlapping generations economies by Paul Samuelson and Peter Diamond, and referred in particular to the possibility of the economy where “the” interest rate was less than the growth rate and thus in a sense the economy’s saving vehicles were less efficient at transferring wealth to the future than its growth process. The intuition was that such an economy had accumulated too much capital and driven down its return, while the saving needed to maintain the capital at that level (due to depreciation) was squeezing current consumption.

Such an economy has the possibility that weird stuff — like bubbles, paper money, and unfunded social security — can make everyone better off. Also, the government can pile up debt, and seemingly dubious investments like land are good for everyone.

Indeed, such an economy is essentially a long-term version of the liquidity trap, where the standard instincts about good and bad policy don’t work very well. It’s also mathematically interesting, which perhaps is why it’s such a staple of graduate level textbooks.

So why is no one talking about it, at least not explicitly? Is it that the intuition of overinvestment doesn’t sound right for economies seemingly short of infrastructure, like the USA and Germany? Or correspondingly that the high saving part doesn’t sound right, at least for the USA? Perhaps it’s the fact that various means of increasing current consumption at the non-expense of future generations — like selfish tax cuts! — are helpful.

In any event, much of the secular stagnation discussion has been conducted in terms of the static relationship between saving and investment. The dynamic inefficiency tradition has the merit of looking at the cumulative impact over time of all that excess saving. In the secular stagnation world, where is all that capital going?

Premature evaluation: when local relationship banking attacks!

Following up on the last post, here’s a quick review of Simon Carswell’s Anglo Republic: The Bank that Broke Ireland.

Anglo Irish Bank was the biggest, noisiest, brashest, and most extreme representative of the financial crisis in Ireland, and Anglo Republic is a carefully reported history of the bank and how it got that way. One of the real standout points in it is that Anglo was the relationship bank par excellence.

Relationship banking is often seen as a good thing that we need more of, counterpoised to faceless trading-floor turbo-finance. But relationship banking was precisely what Anglo did. Anglo tended to keep clients for many years, to involve itself deeply in their businesses, and to go to extraordinary lengths to serve them. It would also take risks to win or retain them. Its unique selling point was that it would do anything to get your deal done, and it would do it quickly. They frequently closed property transactions up to a billion euros within the week. In exchange for this, its clients put up with interest rate spreads and fees that were much higher than its competitors’.

This raises a second point, which is that you know it’s a bubble when capital gains come in so fast that changing the interest rate is irrelevant.

The relationships it served so fanatically were, to the exclusion of almost all else, with property developers. Anglo bankers may have thought they were something like a local German or Italian bank serving the local speciality industry. From the outside, though, the bank was a ferociously geared-up bet on property in general, and Irish residential and UK commercial property in particular.

There was also another kind of relationship they carefully cultivated, specifically, corrupt ones. There is just an endless flow of people whose relatives turned up on the other side of the table, or in politics, or in the regulator or the central bank. Carswell tackles this with understated sarcasm and careful inquiry. He also deals with the political, class, and sectarian issues involved with delicacy and good prose. I liked the remark about the bank’s brand, in which he notes that although Anglo’s advertising sometimes implied it was an Anglo-Irish, and therefore aristocratic, company, “Anglo Irish in fact never used the hyphen”.

Its CEO, Sean Fitzpatrick, may have resisted selling the bank to Bank of Ireland because BoI was, in fact, an Anglo-Irish or at least Protestant company. However, the source for this is the same guy who suggested guaranteeing the whole liabilities of the banks, so take it as you will.

Carswell is also good on the financial guts, for example, on the key relationship with Sean Quinn, property developer and their whale client. Quinn was a huge borrower from the bank, under several different company names, a major depositor in the bank, and a shareholder in the bank. After his disastrous speculation in contracts for difference on the bank’s shares went wrong, Anglo was lending him money to meet margin calls, while at the same time worrying that he might no longer be good for the property loans, and also that if his broker had to sell him out, the stock overhang was so monumental that it might finish off the company.

Another detail that sticks out was that their private client operation largely existed to recycle some of the property capital gains into the bank’s funding, in essence juicing it with even more leverage, as most of its clients were themselves Irish property developers. If they weren’t the bank’s own executives, that is. The bank often structured property transactions so that some of its private clients could take some of the equity, somewhere between an investment banking and a brokered deposit model. This helped set up some of the transactions for tax purposes, but it mostly created an opportunity for Anglo executives to buy in. Inevitably, they tended to do so by borrowing from the bank.

Golf plays a special role in the book. Anglo was dedicated to the belief that nothing built relationships like golf, and it constantly took borrowers, depositors, competitors, regulators, analysts, journalists, and random members of Westlife* golfing. It took Irish-American clients and investors to Ireland to play golf, on courses owned by other clients, and then took its Irish clients to meet them while golfing. It gave away as much as €200,000 worth of golf balls a year. Carswell includes a table of spending on hospitality by type. Golf even surpasses drink in it, and there was plenty of that too – one banker recalls deciding to drink only bottled beer at Anglo events in order to stay relatively sober, and being told that “This is Anglo and you drink pints.” That said, at least Sean Fitz didn’t prepare for an appearance before parliament by following a vapour trail of meth and crack all the way around Grindr, like the CEO of the Co-Operative Bank, or if he did we don’t know.

Very often, the business discussed on the golf course was the creation of further golf courses. Not rarely, the clients who golfed their way to a giant loan to build a golf course got the loan because they also played golf with Bertie Ahern and could therefore help Anglo with other issues, for example, getting planning permission for golf courses. One wonders if the point of golf, anthropologically speaking, is to demonstrate that you have well-watered land to waste on totally unproductive activity.

Another interesting point is the role of good old Rabobank, famously the safest and most conservative financial institution in Europe and possibly the world, and all savey and nearly German to boot. Except when it spent ages and millions of money trying to buy not just Anglo but other gamey Irish property lenders as well, and in retrospect only avoided pulling an RBS by good fortune.

*Not actually random at all, but you’ll have to read the book.

Weihnachtsmarktwirtschaft

After soziale Marktwirtschaft, the social market economy, and freie Marktwirtschaft, the free market economy, what about Weihnachtsmarktwirtschaft, the Christmas market economy?

So there’s one of those packaged German Christmas markets outside the Royal Festival Hall at the moment. I was down there last night having a bratwurst and I thought: That’s like Europe! This does remind me a bit of both Thomas “Airmiles” Friedman’s vast collection of highly informative cab drivers and also the vicar in my home village who one Christmas night preached that “Have you ever been at the airport, waiting for your luggage, watching all those strange bags come around, when suddenly, there’s yours? Well, that’s like Jesus“, but I do have an actual point here.

And after all, England Rugby League legends Sam and George Burgess were hitting the bratwurst about the same time and you know they’re right:

Obviously the beer was imported. So were the sausages. But even the bread rolls came out of a box from “Der Heimatbäcker” that promised 80 Stück of Turbobrötchen. All the cooking gear had German brand names on it. The only local contribution was labour, either British, Portuguese, or Polish. It reminded me of a post on my own blog about the introduction of Passivhaus building standards into the UK, and the problem that for a long time this is likely to be a drag on the economy because until the supply chain builds up, it’s basically importing houses.

However, this has much wider applicability. As I keep blogging, ever since 2009 or thereabouts, the core of the EU’s economic problem is trade. It’s not just me; the official line on Spain and Italy’s problems is that they’ve got to move their current accounts towards balance or indeed surplus. That is why they’re ordered to wreck as many generations as it takes to achieve internal devaluation.

The problem, though, or rather one of the many problems, is the Christmas market economy. Getting final products out that compete with the world’s top exporter depends on intermediate products out of the supply chain. And one thing we know is that a hell of a lot of small industrial companies have died the death in southern Europe over the last few years.

One of the worst things about deflations is that they kill the rich ecosystem, the so-called industrial commons, that supports the tall trees of the industrial canopy. This happened in the UK in the 1980s and 1990s, and it’s one of the reasons why trying to reduce the UK’s trade deficit has been so difficult. In the 1970s, the Treasury was astonished by how much of industry was in “Engineering: Not otherwise classified” and concluded that the statistics were useless. But I think an important lesson since then was that the losses to those everything-is-miscellaneous small manufacturers in the 80s permanently weakened the economy.

So, Spain, Italy, and UK “rebalancing”: même combat. Of course, the UK has options that aren’t available to the others here – like devaluation, reflation, and QE.

Update: Another example of the Weihnachtsmarktwirtschaft is Apple’s iGadget production in China. It used to be widely believed that only design lived in Cupertino and all the work was done in China, and this was either disgraceful or brilliant depending on partisanship. In fact, Apple owns and sometimes even invents the tools, both at the Foxconn final assembly line and in the German, Japanese, Korean, and British suppliers. A corroborating lesson is that the other behemoth of mobile to survive the shakeout is Samsung, which produces components on an enormous scale and is of course a key supplier to Apple. As a result, very little of the value content in an iPhone is actually Chinese.

The fact that cheap final assembly elsewhere in Europe with the high value intermediate manufacturing as well as the design work staying in Germany would suit German manufacturers as much as it does Apple should be too obvious to need saying. This is of course largely what the German auto industry does in Poland, Slovakia, and the Czech Republic.