Saturday, 25 June 2016

Brexit Was More A Coup d'Etat Than A Revolution

A very bright friend of mine cast his very, very cynical eye over the Brexit vote and, not surprisingly, came to quite different conclusions than the majority of the post-referendum comment. According to him, very little of any great significance will be changed. I give a brief summary of his views.

“Too many people view this vote as a revolt of the so-called underclasses against the domination of the elites. According to this narrative these underclasses felt very ‘hard-done-by’ because they saw the immigrants and the cosmopolitan people of London racing far ahead of them. Rather than make any effort to join the happy new world order they did the only thing they know how to do and threw the whole cart upside down. Worked in Paris in 1789. Should work in the UK in 2016. What these people forget is that sans culottes of 1789 enjoyed a very brief ‘victory’ before the elites re-established themselves. The exact same thing will happen here. This was much more a coup d'etat than a revolution.”

Is Brexit a revolt by the modern sans culottes?

“The usual doom-and-gloom commentators overlook the fact that the Leave movement was led by members of the very elite the underclasses thought they were overthrowing. It is very doubtful that those underclasses by themselves could have pulled off a Leave victory. No, it took the efforts of these highly educated, wealthy, mostly older members of the ruling establishment to accomplish that feat. What’s odd is that most of them have nothing against the hot button of immigration per se. Some of the immigrants, after all, provide very useful functions like serving a good gin-and-tonic at their golf clubs or maintaining their lush gardens. This section of the elite would never want to be associated with the near-racist rants of clowns like Nigel Farage.

“What does annoy them greatly is the urge by many European Union officials for an ever closer political union. They look back on Britain’s long political history and relative stability and shudder when they look across the Channel at the very confused political history and instability of many continental countries. ‘God forbid that ever comes our way!’

“For them, the EU is fine as a trading bloc, but no more. Their faces flush with indignation at every intrusion of EU courts into the long-established and respected British legal system. ‘Who the hell are those buggers to tell us when we can throw some bomb-throwing mullah into jail for the rest of his natural life? Or, better yet, hand him over to the Americans?!

“This class of people enjoys going to the fine watering holes of the continent and going through the faster EU line at passport control. They enjoy loading up their cars and bringing home crates of fine French wines without the nuisance of duties. Many of them are multi-lingual and have homes in the garden spots of France, Italy, or Spain. It would be a major annoyance and inconvenience to them if these privileges were forfeited and they had to go through the longer wogs’ line at passport control.

            “What the assorted pundits are also forgetting is that the long and tedious negotiations with the European Union over the its new relationship with the UK will be led by that very elite the underclass thought it was rejecting. Just look at them. Michael Gove, Boris Johnson, various columnists for the Daily Telegraph. All of them are card-carrying members of the British elite. The out-of-work coal miners in West Yorkshire won’t get within shouting distance of the negotiating table. Maybe they should. But they won’t.

How clever are they?

             “The UK negotiating team will be dealing with like-minded people in the EU who are also nervous as hell about the right-wing mobs snapping at their heels. It is to everyone’s interest, even the bloody-minded Frogs, to get this thing settled with as little fuss and disruption as possible.

“My rough guess is that in the final agreement the UK will retain trading rights but will have to accept the EU principle of free movement of labor. London’s financial center may take a hit, but that would not bother Joe Blogs of Middle England. He never liked those ‘posh toffs’ with their fat bonuses anyway. The UK will not be subject to the EU legal system, and will not be part of the EU decision making process. It will also not be eligible for any EU subsidies for agriculture or clean energy. An interesting point is the UK’s role, if any at all, in a European defense system that is outside NATO. Also, will the French get testy and deny British companies any role in Airbus?”

“In short, there won’t be much in the new deal what will really please those members of tribal England who thought they had completely rejected the EU. The immigrants will still come, the EU will still impose some niggling little rules, and England’s football team will still fail to advance very far in international competition. The British elite really is quite good at negotiating, and the new deal won’t be terribly different from the old deal. The elite is even better at fudging the reality of any deal arrangement to make it seem something it is not. Plus ça change and all that.”

            We can only hope that the self-styled members of this very British elite are half as clever as they think they are and can control the powerful tribal forces they have unleashed.

Friday, 24 June 2016

Can The European Union And The UK Avoid A Complete Train Wreck?

After the UK’s slightly surprising referendum results, the ‘Brexiters’ are gleefully extolling Britain’s new found ‘independence’ from the perfidious European Union while most of the sober main-line newspapers are wringing their hands over the country’s descent into prolonged economic and political confusion. Both reactions are premature, at best.

While there are clear winners -- Vladimir Putin and real estate agents in Frankfurt and Dublin for example– and some likely losers such as Prime Minister David Cameron and London’s financial district, the full impact will take months if not years to become apparent.

The biggest loser of the UK's referendum
If, and I do realize it is an enormous If, both the UK and European Union officials exercise just a bit of imagination and some flexibility both sides could emerge from this mess with a semblance of order. There is precedent for the EU forging a new type of relationship with the UK, but other EU countries would first have to get over their collective anger and pique that someone could reject their over-engineered structure.

That precedent, something like a privileged partnership, has been on the table for several years with Turkey. While most of the EU countries reject the very idea of a country as large and autocratic as Turkey becoming a full member they have from time to time offered the idea of this privileged partnership. Essentially, such a partner would enjoy most of the benefits of the trade privileges of the EU, but would not be part of the decision making process. Turkey, with its exaggerated amour proper, always rejected this compromise as being beneath its dignity. What the Turks so indignantly rejected could be very usefully be offered to the UK.

While the exact nature of this partnership would take long and tortuous negotiations to hammer out it is far better that both sides work out a compromise rather than storm off in a huff of injured pride. Broadly speaking the UK would have to recognize that a complete rupture could do serious damage to the Western European economic and geopolitical structure that – while imperfect – has provided an unparalleled level of political and material security to its citizens since the end World War II.

It would be idiotic beyond belief to put this at risk just because of injured pride. A look at Vladimir Putin rubbing his hands in glee at the self-immolation of the EU should reinforce this point. How long does anyone think he would take to increase the pressure on the Baltic states or countries like Romania and Bulgaria to return to the ‘true’ fold?

The EU would have to realize that such a complete rupture would not be in its best interests. Free trade between the UK and the EU benefits both sides enormously. The ‘Brexiters’ in the UK will also soon find out that trade with the rest of the world without the EU behind it could be very difficult with all the new treaties that would have to be negotiated.

Most likely the cost of this trade relationship is the continued free movement of labor within the EU and the UK. Again, while the ‘Brexiters’ loudly condemned this free movement, it is very difficult to see how this free movement within the EU has hurt the UK. Quite the contrary, with the UK’s unemployment rate hovering around 5% it is clear this movement of labor has supported the UK’s growth.

In this new relationship, it is difficult to see the City of London retaining its pre-eminent position. Yes, London, even outside, the EU, offers much deeper financial services than any other place on the continent. But the EU may well insist as part of any deal that UK financial service firms can operate in the EU only if they are based in the EU. The only two EU cities that have any of the required financial infrastructure to handle such an influx of business are Dublin and Frankfurt.

In short, there is plenty of room for both sides to reach a compromise that does not threaten the geopolitical structure of Western Europe. But first, EU officials must recognize that the common perception of them as elitist, dogmatic, undemocratic technocrats out of touch with real citizens has led to this impasse. It is well past time for them to do a little soul-searching about their constant over-reach and intrusion into the life styles of member states.

It would also be nice if the ‘Brexiters’, for their part, recognized that no country has the absolute sovereignty they loudly proclaim. The world is simply too interconnected these days. A wrong word in London, Beijing, New York, Tokyo, or Berlin can have an instant economic and political impact. We will soon see if both sides are mature enough to step back from the abyss they have opened to reach a reasonable compromise.

          Then again, maybe nothing much has changed Britain's view of the European Union since the days of the famous comedy series Yes Minister.

Thursday, 9 June 2016

The President of Turkey Is Angry -- Again

Turkish president Tayyip Erdoğan is unhappy and angry – again. What upset him this time was the German Bundestag vote labelling the massacre of Armenians in Ottoman Turkey in 1915 genocide. But this anger and unhappiness are pretty much his default position when dealing with any criticism from Western countries.

By now governments in Europe and the United States should be familiar with the outrage and shock, shock of the ‘hypocrisy’ and ‘double standards’ he accuses the West of applying to Turkey. They should also pay absolutely no attention to this act – designed as it is for home consumption to ‘prove’ once again that Turkey is the victim of dastardly, perfidious outside influences. This might play well in Sivas, but not so well in Berlin.

When confronted with demands that Turkey stick to the original terms of the migrant deal allowing visa-free access for Turks to most of the European Union, Erdoğan’s henchman respond with real or feigned umbrage, loudly proclaiming that Turkey has ‘other options’ than the EU. Such as??

There was a time when the ‘other option’  claim might have been true. But under Erdoğan’s bizarre foreign policy and over-heated rhetoric Turkey is left with no other options at all. The Arab League does not want Turkey. The other Islamic countries are not about to submit to Turkish leadership. The so-called Shanghai Five group of Russia, China and various Central Asian autocracies might once have been a natural home for Erdoğan. But, given the rift with Russia, even that loose alliance is out of the question. Ever persistent, Erdoğan has turned his attention Central African countries in hopes of boosting economic and political ties. Well, who knows, that might just work. And then he can claim close alliances with Uganda, Kenya, Burundi, et. al. to fill the gap left by the European Union.

Erdoğan's lack of international influence was hammered home at the recent funeral of boxing great Muhammad Ali in Louisville, Kentucky. Erdoğan gathered together a plane load of flunkies and hustled off to Louisville in an attempt to show the world what a major player he was. Instead, he wound up looking like a completely out-of-place yokel who was told in no uncertain terms that he would not  speak at the funeral and would not be allowed to place a cloth from the Kaaba over Muhammad Ali's coffin. The humiliation only deepened when Bill Clinton and Arnold Schwarzenegger were seen greeting people at the funeral while Erdoğan was ignored. Miffed at this treatment Erdoğan packed up his entourage and returned to Turkey a day early.

Does anyone recognize this man??
This impotence in the face of the EU and U.S. infuriates Erdoğan. But, for the time being at least, there is nothing he can really do about it. He has never learned the first lesson of problem solving – ‘when you’re in a hole stop digging.’ The lesson for the EU leaders should be that they can afford to ignore Erdogan’s tirades when they remind him that brutal force against all real and perceived domestic opponents has severe negative consequences for Turkey.

All the trade and investment data show conclusively that Turkey is economically bound hand and foot to the European Union and North America. The EU countries and United States dominate trade with Turkey. The lion’s share of the dwindling foreign investment originates within the EU. Turkey depends almost entirely on funding from Western sources to close its current account deficit. None of this reality, however, stops Erdoğan from slamming the so-called ‘interest rate lobby’ for all of Turkey’s financial frailties.

The economic costs of Erdoğan’s  approach can best be seen in the numbers for direct foreign investment.

Since the banner years of 2006 and 2007 when direct foreign investment totalled almost $20 billion each year, the numbers have been falling sharply. In 2014, foreign direct investment tumbled to $8.5 billion. Last year in bounced up slightly to $11.8 billion, but in the first three months of 2016 it dropped to $1 billion compared with $3.3 billion in the first three months of 2015. One of the interesting points of this data collected by the Turkish Central Bank is that more than 80% of the direct foreign investment originates from Europe and North America – the very countries that bear the brunt of Erdoğan’s rants.

Meanwhile, the level of investment spending by Turkish companies outside Turkey continues to grow. In 2014 and 2015 it was more than $5 billion, and figures for the first three months of 2016 show a similar trend. This trend was reinforced by a comment from a senior officer of a large Turkish company who said he had more than $100 million to invest, and that every dollar of this amount was going outside Turkey. “There is much less risk outside Turkey than inside these days,” he commented.

A logical person might conclude that it is time for Erdoğan to recognize a few economic home truths and tone down is vitriolic anti-Western rhetoric. But then, one is not quite sure just how big a role logic plays in his foreign relations.

The problem is not limited to foreign relations. Domestically, the country is sharply polarized and violence has increased sharply. Previously the armed clashes were limited to the south-eastern part of the country. No longer. Now those bombs and clashes have migrated to the nation’s largest cities. One immediate effect of this trend is on the once-strong tourism sector. Tourists are staying away in droves, and one tour operator told me hotel occupancy around the country has fallen below 50%.
The latest car bomb in Istanbul killed 11 people
Of course Erdoğan and his henchmen blame foreign forces rather than look to anything they themselves may be doing wrong. Favorite targets are the Crusaders, the Mongol invaders, the Sevres Treaty, of course the Germans, and now even the hapless Zoroastrians are being blamed for car bombs in Istanbul. The government media overlook the wonderful irony of blaming the Crusaders while dressed up in warrior costumes of the Ottoman Empire – a far more successful crusading enterprise than the Crusaders ever were.
Ah, the good old days when people listened to the Sultan

A decade ago Turkey was considered a rising star among the so-called emerging markets. Leaders praised it as an example the combination of democratic values and ‘moderate’ Islam, a country that could be a shining example to the struggling nations of the Middle East. Sadly, those days are long gone.

Sunday, 15 May 2016

The Unhurried Charm Of Ireland Provides A Truly Relaxing Break

In addition to natural beauty and hospitality of the people a visit to Ireland offers a striking contrast to many mass tourism destinations that dominate the Mediterranean and Aegean coasts. For one thing, as you drive away from Shannon Airport you can’t help notice the absence of anything to interrupt your view of the deep, rich green valleys and rugged hills. There is none of the hideous over-building or intrusive bill-boards that have obliterated so much natural beauty in Spain and Turkey.

But we found something even more unique and precious these days – a real break from the pressures and angry confrontations that seem to afflict so much of continental Europe and the Mediterranean tourist destinations.

We spend a lot of time in Greece and Turkey where right now the national blood pressure is in the red zone and the medications don’t seem to be working very well. Both countries are wracked with serious social and political tensions that can catch unwary tourists in a wave of demonstrations, strikes or worse. Turkey also faces serious internal threats from Kurdish guerrillas and external threats from the Syrian conflict spreading across the border. Major cities like Istanbul, Ankara, and Diyarbakir have been hit with several bombings in the last few months that have claimed hundreds of innocent lives, including some tourists caught in the wrong place at the wrong time.

Ireland, like Greece, was caught in the great financial downdraft of 2008/09. But, unlike Greece, it is working its way out of that hole. Unemployment has been dropping steadily and is now just over 8%. The economy is growing, debt is shrinking, and the banks are once more reducing mortgage rates. Perhaps the main difference between the two countries is that where the Irish crisis was primarily financial the Greek crisis was, and remains, a toxic mix of deeply rooted political, administrative, and economic problems that are far more resistant to solutions.

Ireland, to be sure, has its own sad and bloody history, highlighted by its complicated history with Great Britain. But one gets the real sense that bitter events like the Great Famine, the waves of emigration that denuded so much of the countryside, the Easter Uprising, the War of Independence are memorialized more in music and literature than in daily life. Even the deadly sectarian violence in Northern Ireland has diminished greatly in the last few years. People may never forget. Some may never forgive. But, unlike much of south-eastern Europe, the angst of that history does not block forward motion.

In any event, none of that history intruded on our long weekend in County Clare on Ireland’s stunning west coast. Much of the county is dominated by the massive Burren, 250 square kilometres of limestone hills and cliffs that were formed more than 300 million years ago, scraped clean by successive glaciers, and eroded by rain and streams into fantastic shapes. Evidence of 3,000-year-old human settlements can be found throughout the region and several limestone tombs remain in place. Abandoned houses, churches and abbeys are poignant reminders of more recent human movements.
Ancient tomb on the Burren  in County Clare

No trip to County Clare would be complete without a visit to the Aran islands protecting the mouth of Galway Bay from pounding North Atlantic storms. The ticket agent advised us to go to the island of Inishmaan because she said it would be quieter than the busier, more touristic Inishmore. Quiet didn’t fully describe it. Silent would have been more accurate. The other passengers looked at us a little strangely because we were the only people to get off the boat at Inishmaan. Undeterred, we trudged up a narrow lane flanked with high stone walls to the very small village and encountered our first human contact in the tiny general store/post office. No, he wasn’t sure when the island’s only pub would open, but we were welcome to see for ourselves. The pub was indeed closed – with uncertain opening hours –but we were saved by a Dutch woman who ran a small tea room and served excellent homemade soup and sandwiches. It would have been interesting to learn exactly how or why this nice woman wound up on a craggy rock in the middle of the Atlantic Ocean, but we didn’t want to risk our sanctuary from the wind and rain by asking intrusive questions.
We weren't the only ones seeking shelter on Inishmaan

Back on the mainland we ate in good, unpretentious restaurants specializing in fresh local seafood, including the clams, mussels, crabs and lobsters from Galway Bay. There were meat dishes on the menu, but when you’re in one of the centers of great shellfish it seemed a waste not to take advantage of the opportunity.
Part of a long-abandoned Cistercian  abbey

If you are used to short, simple, straightforward answers to routine questions you might get a bit frustrated in Ireland. Once we pulled off the road to ask a passer-by for the shortest route to a certain site. “Well now, that’s an interesting question . . .” he began. We turned off the engine and settled in for a leisurely description of local life, history, ecology, and food that surpassed anything to be found in a guide book. Somewhere in there was a description of which road to take. It took a while. But then, that’s part of the unhurried charm of Ireland

Thursday, 5 May 2016

Turkey Illustrates The Real Risk Of Emerging Markets

The current political turmoil in Turkey illustrates with startling clarity the real risk in the so-called Emerging Markets.  Commonly used economic indicators such as GDP growth, debt, deficits, corporate profits, etc. tell only part – the superficial part -- of the story.

            Much more important for anyone seduced by the theoretical growth potential of these markets are issues like the underlying political stability, existence of ‘crony’ capitalism, competence of government institutions, level of systemic corruption, and -- most important of all – respect for the rule of law.

            A brilliant young Turkish financial analyst, who needs to remain anonymous given the poisonous climate in Turkey, emphasized this contradiction in a recent email about Turkey and cautioned against a headlong rush into emerging markets in general.

“The key issue is to understand that a growing population, rich natural resources, or a large manufacturing (assembly) base do not in themselves make a good long term story. In fact, three common denominators of emerging markets are lack of the ‘rule of law’, an economic system of ‘crony capitalism’, and a poor education system. These, in turn, create a system of constant corruption and regular boom/bust cycles. In emerging markets corruption is the grease that turns the wheels of the economic system – where politicians, bureaucrats and businessmen benefit at the expense of productivity and innovation. This system is usually supported by a political system that plays on social/political divisions along different ethnic, religious or political lines.”

            Turkey, thanks mainly to the work of former economic minister Ali Babacan, doesn’t score too badly on the raw numbers. Unfortunately, the country scores at or near the bottom of any league table on the second set of issues – the ones that can really make or break any investment. President Tayyip Erdoğan has gone out of his way to show that he recognizes no constitution and no law except the law of sheer power.

            The dramatic events yesterday that saw the dismissal of the prime minister only confirm this trend. It is well known that Erdoğan does not tolerate any dissent from his narrow, parochial world view – particularly his ambition to transform the office of president into an untouchable, unaccountable power center. Prime Minister Ahmet Davutoglu was seen as the softer, more reasonable side of Turkey’s unequal power balance. Despite his frequent avowals of undying loyalty, he apparently infuriated the president with his lack of enthusiasm for several issues key to Erdoğan’s megalomania: 1) the change to an unchecked presidential system, 2) his reluctance to throw people in jail before a trial, and 3) his willingness to use professionals like Babacan as economic advisers rather than rely on the sycophants who surround Erdoğan.

            In some ways Davutoğlu was the architect of his own downfall. His deeply flawed foreign policy only succeeded in completely isolating Turkey. Arab countries don’t really trust Turkey, Russia openly loathes and mocks Erdoğan, and the Europeans would really like to keep Turkey in some sort of ante-room to be seen and not heard. The Americans look on in despair at the rapid polarisation in Turkey and the deterioration of the country’s political discourse. But then they grit their teeth and think of Turkey’s geopolitical importance. Perhaps Davutoğlu’s main foreign policy problem as far as Erdoğan is concerned was to be perceived as mildly pro-Western. Erdoğan despises the West. He reacts furiously when Western politicians, journalists, NGOs, etc. scold him for his miserable record on human rights, press freedom, or judicial independence. His only response is loud bravado that ‘Turkey was great once and will be great again’.

            The name of the non-entity who takes over as prime minister is completely irrelevant because his only job will be to enact whatever Erdoğan wants. Cabinet meetings will have the same vibrant discussion, bright ideas, and independent thought as Stalin’s politburo meetings.

The only sliver of good news is that Erdoğan’s Turkey has absolutely no ability to project power beyond its own borders. Erdoğan would love to act like Putin throwing his weight around. But he can’t. He is hemmed in on all sides – if not militarily then politically. The Turkish army is large, but so far has shown no interest at all in moving one meter beyond its borders. From time to time the Air Force chases Kurdish guerrillas into northern Iraq and makes the boulders bounce with a few bombs, but that’s about it.

In the long run Erdoğan will fail because he is making the same major mistake as his arch-enemy the old Kemalist regime that ruled the Republic with an iron hand for more than 70 years. By alienating a large part of the population the Kemalist regime created fertile recruiting ground for Erdoğan. Erdoğan, too, is alienating a large part of the population. He is trying to force all Turks into his narrow mold of what he thinks a Turk should be. The trouble is, Turks don’t do ‘should’. The country is too diverse, too heterogeneous to fit into anyone’s mold. Erdoğan’s mold, like that of the Kemalist regime’s, will one day break. The only question is ‘How long is the long run?’