Standard & Poor’s decision this week to downgrade the country ratings of France, Italy, Spain and Portugal, not only aggravates the sovereign debt crisis, but it actually divides the EU in two.

The most affected group is made up of the Latin countries bordering the Mediterranean. Their interest bills are going to rise to levels that, in some cases, will make it prohibitive to finance their budget deficits and therefore to continue to provide quality public goods and services to citizens. To make matters worse, this group of countries has to swallow the bitter German pill of budget austerity at a time when long-term economic recession and possibly even stagflation look increasingly likely.

The second group of countries, headed by Germany, has kept their AAA credit rating. It includes Denmark, Sweden, the Netherlands and the UK, for example. Switzerland and Norway also belong to this group, although they are as yet unaffiliated to the EU. The main preoccupation of Germany and its like-minded northern European partners is fighting inflation, not unemployment. This is in sharp contrast with the economic philosophy of the Latin group of countries, which are quite tolerant of higher levels of inflation and budget deficits, provided these are used to significantly bring down unemployment.

Whilst a two-speed Europe might not be in the cards, in a not too distant future we might be faced with the prospect of two separate European unions, built out of the ashes of the current one. Thus, as Angela Merkel herself threatened in 2008, the Germans might be more interested in building a Baltic union, which could conceivably attract Russia as an associate, whereas the Latin countries might wish to explore further a separate Union for the Mediterranean that could potentially integrate Tunisia, Morocco, Libya and Algeria.

As far-fetched as this sounds, such an outcome might, however, prove to be the only solution to having a too-large and dysfunctional union, in which national interests prevail at the expense of the greater good of all existing members. In truth, the provisions of the Maastricht Treaty, the austerity packages and the German insistence on having an European Central Bank solely dedicated to fighting inflation do not work in practice for a majority of EU members, and especially for the first group of countries mentioned above. At this point in time, all good ideas aimed at solving the EU’s woes — such as fiscal union, the emission of eurobonds, a central bank dedicated to fostering employment, a common defence and security policy that works — have been discarded by Germany and some of its closest allies. In these conditions, no expert or responsible politician could be blamed if alternatives to the current union arrangements are actively being considered by them.

At the end of 2011 and the start of this year, I have published 3 eBooks on geopolitics, which I would like to invite you to have a look at (and even read). Here are the links:

“The Peace of 1763 and Great Powers’ Geopolitical Agendas“

“Les enjeux géopolitiques et les principes fondamentaux du Traité de 1763“

“Libya in Geopolitical Context”

“How China Made it to the Top”

I take this opportunity to wish all my readers and fellow bloggers

a Happy and Prosperous 2012 !

 Following this spring’s Arab revolutions, Tunisians and Moroccans have started their own experiments with the democratisation of their societies. In Tunisia, the moderate Ennahda Islamic party has won close to 40 percent of votes in October. Unable to govern on its own, it entered a coalition with a local liberal party and the left-of-centre Ettakatol party. The coalition commands a 139-seat majority out of a 217-seat assembly, which sees as its main task that of re-writing the country’s constitution. The interim president of the country is Moncef Marzouki, a secularist with credentials as a dissident imprisoned by the Ben Ali regime.

In November, the Moroccans gave the electoral victory to the PJD (the Justice and Development Party), considered as moderate Islamic. With only 28 percent of the votes cast, the PJD too was forced into an alliance with the USFP (Socialist Union of Popular Forces) and the traditionalist Istiqlal party. Although the PJD is currently toying with the idea of introducing Islamic-type financial institutions, the new government’s main priority is reassuring big tourism operators that the country is once again safe for Western tourists.

While these political developments seem reassuring enough to Western analysts and observers, the new political tendencies in Libya are not. Thus, in a recent meeting celebrating the victory over the Qaddafi regime, interim president and leader of the CNT, Mustafa Abdel Jalil, has abandoned earlier pledges to modernise the country and called instead for the introduction of the Sharia (or Islamic law), polygamy and Islamic banking models. The proposed changes do not augur well for the embattled country of some 5 million, but they come as no surprise to this observer, if one takes into account the fact that Libya gravitates geopolitically towards Saudi Arabia and the micro-kingdoms of the Gulf.

Professional fear-mongers in the West are unfortunately using the electoral victories of Islamic forces to predict a sweeping Islamisation of politics of the entire Arab world. One should remember, however, that the former Spanish colonies in Latin America also share a common race, religion and culture, but the Bolivarian dream of uniting the post-colonial states into a single entity has never borne fruit. (sources: Le Nouvel Observateur, Foreign Policy magazine, Reuters, The Guardian, Courrier International)

Before the G20 meeting in Cannes, the unthinkable happened. To the utter surprise of EU and G20 leaders alike, Greek prime minister George Papandreou dropped the bombshell announcement about the referendum on the bailout package. Stock prices plummeted, the G20 agenda was undermined, and the leaders who had been working to save Greece from default were left with egg on their faces. This is no small feat for the premier of an insignificant European country, whose EU and euro membership bids were largely based on its achievements of some 2,500 years ago, when politicians like Pericles ruled in Athens and Greek philosophers were trying to decipher the mysteries of the universe.

The reality of Greek politics today is far removed from the country’s ancient roots. Papandreou himself is the third generation of one of the political dynasties which have led Greece since the seventies until the current disaster. If experts dug deeper into Greece’s current predicament, they would conclude that this duopoly of power, with leadership shared among the Karamanlis family on the right and the Papandreous on the left, is largely responsible for the situation the country finds itself in today. Strangely enough, Papandreou’s latest antics are reminiscent of those of George Bush Jr. with his despised unilateralism, who left the United States in a similar situation, gasping for economic survival. Few in PASOK, including the Finance minister, even knew about his intentions to call a referendum on the bailout deal.

The main tasks for the experts advising the EU’s political leadership are figuring out Papandreou’s hidden agenda and explaining why he took the Greek people and the international community for a ride that could end up in financial disaster. The problem with dynastic leaders is that they are largely ignorant of the effects of their political actions. Thus, while the world-class economist Papandreou Sr would have known what credit default swaps were, his son – by his own admission – has found out about them only recently, and the financial damage they can wreak still escapes his comprehension. In a similar fashion, George W unleashed a second war in Iraq without possessing his father’s political talent in winning consensus from US allies. Had George Papandreou been better educated as a politician, he would have found out long ago from the likes of Max Weber that politics is both an art and a profession, and that one should not enter the field unless fully prepared.

To the other EU prime ministers, Papandreou’s referendum call appeared as “bizarre”. That might be, but it is hard to believe that the Greek PM’s stance did not have some backers we are not yet aware of. Problem is, we should find out fast who these backers are and what their objective is.

If Papandreou “does not care” for his own political survival, what then does he care for ? If he is an honest politician, why has he played his EU colleagues for fools ? If he does want to serve Greece, then why is he torpedoing his country’s chances of solving the financial mess it is currently in ? If he is sincere about safeguarding the political stability in Athens, why doesn’t he come clean about abandoning his job in favour of a technocrat who could bring together PASOK and New Democracy in a broadly-based coalition government ? And finally, whose political interest is he really serving : his country’s, the Socialist movement’s he claims to be part of, or maybe that of a small coterie of neoconservative politicians across the Atlantic intent on seeing the EU implode ?

The answers elude us for now, but we should look for them in the right places before it’s too late for Greeks, Europeans and the international community alike. To be sure, Papandreou’s leadership has become toxic and highly unreliable for the Greek nation, as well as for the rest of the EU. The decent thing for him to do is to resign right away, making way for a broadly-based coalition government that can stabilise the country. The “new Greece” cannot truly emerge with a representative of old and discredited dynastic politics at its helm.

The decisions agreed upon by EU leaders during the 26^th of October summit – the leveraging of EFSP, the “voluntary” 50 percent reduction of Greece’s debt, improved coordination of fiscal policies within the eurozone countries, the appointment of a super-commissioner with fiscal oversight responsibilities – have all been judged as steps in the right direction by the financial community. Stock markets have reacted positively and so have a few major rating agencies.

Less enchanted with the outcome are, however, the leaders of the ten EU countries which are not currently part of the eurozone. As a result, the summit was the scene of harsh verbal exchanges between David Cameron and the French president, for example, but tensions were equally evident among the Swedish and Romanian delegations.

The non-members of the eurozone feel that the Union is heading towards a two-speed Europe. In other words, its core is made up by the 17 eurozone member countries, headed by Germany and France, whilst the rest are relegated to the periphery, geographically as well as economically. The UK’s chief concern, as the leading financial centre of the Union, is the insistence of eurozone member countries on introducing a financial services tax which could cripple the activity of the City of London. Romania, on the other hand, has expressed reservations about the measure to recapitalise EU banks with large exposure to the Greek, Italian or Spanish debts. As most of its banks are foreign-owned, that might lead to a drastic reduction in lending to local companies. All the other leaders feel already excluded from the important decision-making process, which will take place in the first instance within the euro-club and only afterwards discussed with the rest of the EU’s political representatives.

The emergence of the two-speed Europe could have been avoided by the northern kingdoms if they had agreed to join the eurozone from day one. At the time, countries like the UK and Sweden, for example, sported healthy finances and a fiscal discipline which were in accordance with the criteria established at Maastricht. All is not lost, however. Membership of the eurozone is still open to them in the future, if only they could overcome their reluctance to join. The newer EU members, such as the Czech Republic, Poland, Romania and even Bulgaria are all making strenuous efforts to reduce their budget deficits, improve tax collection and prepare their economies for becoming full members of the eurozone in the years to come.

Viewed in this light, the existence of a eurozone core that could act as a catalyst for change upon the “periphery” is not altogether as negative a development as some EU political leaders wish to present it to their electorates. (sources: Der Spiegel, Reuters, Le Monde, The Economist, The Guardian)

On the 19^th of October, the European Commission has announced in a press release that it will invest 31.7 billion euros into the transport infrastructure of member countries in need. Until now, as the document states, rail and road networks have been developed within the EU on a national basis. Opportunities for interconnectivity have thus been lost and that has severely restricted the free flow of goods and people across the continent.

Mediterranean countries such as Spain,for example, stand to benefit most from such investments. According to La Vanguardia, a rail link along the coast from the Franco-Spanish border to Algeciras in the south will finally be built in the next few years, at a cost of some 19 billion euros. The railway will bypass Madrid altogether. This development is also in line with the measures advocated in a recent Project Syndicate op-ed (“Mediterranean Reborn”) by Javier Solana. According to him, the building of new rail links connecting southern Europe with the centre of the continent will reduce costs as well as pollution levels and help rebalance the current trade flows from the Pacific region to Europe. Since northern European countries have far better-equipped harbour and rail networks than the south, merchandise from the Far East or India that comes via the Suez Canal into the Mediterranean currently bypasses ports like Venice, Marseilles or Barcelona in favour of Amsterdam, Rotterdam or Hamburg, even though the trip is three days longer.

The Commission will allocate money for the upgrading and linking of oil and gas pipelines, as well, in an effort to streamline energy distribution across the continent.

Taken together, these projects have the potential of creating tens of thousands of low-level jobs across southern Europe, at a time when unemployment in Spain, for example, has reached alarming levels. (sources: Presseurop, European Commission press release, La Vanguardia, Project Syndicate).

According to the laws of aerodynamics, the honey bee is too heavy and its wing shape cannot support it in the air. This, nevertheless, does not prevent it from flying and tirelessly collecting pollen every day, which is the essential raw ingredient in the production of honey.

The sovereign debt crisis has provided fodder to critics of the EU’s institutional arrangements, at home or abroad. According to them, the European project is about to implode. Why, George Soros even compared the situation to that of the defunct Soviet Union ! The euro is described as “the most dangerous currency in the world”(Der Spiegel), the lack of a central government in Brussels is given as a liability, the EU’s soft power approach to foreign policy is being dismissed as less than impressive. From Joschka Fischer to the parties of the Left, many believe that the moment has come to rebuild the Union into a federal superstate, with a central government, a treasury and uniform taxation laws. This overhaul from the ground up of the EU is supposed to solve, almost overnight, all the problems confronting member countries, regardless of gaps between their different levels of economic performance, productivity, labour laws or even attachment to common European values.

I have no way of knowing how many of my fellow commentators have paid 1,700 pounds sterling from their own pocket – as I have in 1997 – to attend international conferences on the monetary union, back when the euro was still a project. As the owner of a small FMCG import business based in Romania, I had considered it my duty to be among the first to learn what the project entailed. Naturally, I would have been happy to be able to use a single currency in order to reduce my transaction fees on every load of goods imported from the UK, and wrote so in a position paper I spread in London among the participants at the conference. During lunch, I was seated at the same table with Russian bankers and an Italian central banker. At the time, I routinely assumed that the Italians, like myself, were interested in learning more about the common currency project as observers, without however hoping to join it as members…

In 1997, I believed that the euro would include initially only EU members with solid finances, high productivity and strong economic performance. Alas, kingdoms like Denmark, Sweden or the UK refused to become part of it. Instead, who would have thought at the time that Mediterranean countries like Greece, Portugal, Spain or Italy would be included in the first wave ? This should have happened, in my view, a decade or two later, only after the euro had been tested by international markets and after southern countries would have significantly improved their economic performance, in a bid to qualify for membership. The fact that the euro’s introduction happened the way it did lends credibility to the theories according to which the planners knew about the flaws, but hoped to use an eventual future crisis to align the EU to the US federal model. Whilst by 1997 the need for another solid reserve currency was more than evident, it made little sense, if any, to draw so many EU members into the project at once, as it has now become clear to all.

And yet, the solutions to the current crisis – be it the shrinking of the euro or even the dismantling of the common currency area – would not, in my view, irreversibly damage the European Union. The proverbial prosperity and stability the continent enjoyed for the past sixty years would not be shattered because the planners went the wrong way about the euro. Both China and the United States, as well as Japan – not to mention weaker EU member states and surrounding neighbours – have become reliant to a high degree on the world’s equivalent of the honey bee, our very own EU. As much as we like to criticise it, or on occasion dismiss it as a cumbersome non-state actor, the European Union is here to stay, even if – and probably just because – it is not simply a version of American-type federalism on the European continent.

 In an op-ed recently published on Project Syndicate (“Mubarak’s Odious Debts”), Saifedean Ammous, an economics lecturer from Beirut University, calls for the repudiation of the debt accumulated by Egypt during Mubarak’s 30-year rule. He makes a compelling case on behalf of a country experiencing severe social and political problems. Thus, according to Ammous, the public debt servicing costs eat up a full 22 percent of the Egyptian government’s total expenditure, a share that is bigger than the budget for education, healthcare and housing combined. In an impoverished country like Egypt, this is a huge burden imposed on its population by the former dictator, one which could nip in the bud any economic recovery prospects.

The doctrine of odious debt has been formalised by Russian law scholar Alexander Sack in 1927 and accepted since. According to Sack, “an odious debt is one that was contracted against the interests of the population of a State without their consent and with full awareness of the creditor”. The first case of debt repudiation happened in 1898, when the USA refused to assume Cuba’s debt to Spain because “the country had not consented to the debt and because some of the money was used to suppress popular uprisings, with the knowledge of the creditors”. More recently, the US Congress initiated the cancellation of Iraq’s odious debt in 2003, after the overthrow of the Hussein regime, although it invoked debt sustainability instead.

The best-known paper on the subject was written by law professor Robert Howse, namely “The Concept of Odious Debt in Public International Law”, published by UNCTAD in 2007. He concludes that the refusal by some states to repay an odious debt is more or less established in practice in international law and could be invoked as a strong bargaining chip in renegotiating a country’s public debt with its creditors.

Less forthcoming on the issue is, unfortunately, the World Bank, which in a 2008 paper has claimed that the concept of odious debt is fuzzy and the practice of refusing payment by invoking it does not have a sound legal basis. This, to be sure, is to be expected from an organisation that has been known to lend money to various dictatorships in Latin America and elsewhere in the past, all in the name of economic development or for so-called “structural adjustment purposes”.

Egypt’s difficult economic situation warrants such an approach to debt relief and EU officials should take the lead in lending a hand. After all, EU aid had also contributed to priming the pump of Mubarak’s dictatorial machine, a fact that aggravated the living conditions of ordinary Egyptians over the past two decades. In so doing, EU decisionmakers could also make a positive contribution towards deterring international creditors from lending large amounts of money to dictatorial regimes in the future (sources: Project Syndicate, UNCTAD and World Bank papers)

In an unprecedented development, on the 8^th of October the three most important business associations in Europe – the French MEDEF, the German BDI and the Italian Confindustria – have launched a joint appeal calling for a deepening of political and economic integration among EU member countries.

The business leaders signing the appeal are thus taking the lead for further EU integration from politicians- the traditional promoters of European unity up until now. In a desire to restore economic growth within the Union, the authors of the appeal consider that a new EU treaty should replace the current one. The work on the new treaty should start in parallel with current efforts to replace the European financial stability facility (EFSF) by 2013. It should provide for further political and fiscal integration, with a view to improve stability and growth, as envisaged by the Maastricht Treaty. The aim of the proposal is to render the EU economically prosperous and politically strong, by improving the performance of all member countries.

The new permanent mechanism due to replace the EFSF by 2013 should, in the authors’ view, be an independent institution capable of assisting EU countries, subject to strict conditions. The competitiveness of EU economies would be improved by a thorough process of economic reforms, avoiding the piecemeal approach that has been the norm so far in countries from southern Europe.

By pointing out that the real world economy is actually intact, the business leaders are convinced that there is no reason to let it slide into another bout of recession, or worse, if only corrective action is taken by politicians in a timely and resolute fashion. Judging by the fact that unemployment in Germany dropped to 6,5 %, the lowest level since reunification, they might have a point (source: Reuters France).

As a general rule, with the exception of Russia and China, few developed countries have a geo-economic agenda of their own. This, after all, is the task of multinational or global corporations. The latter can benefit from logistical state support, but to a much more limited extent than in the past.

The situation is somewhat different for weaker southern members of the EU, like Greece or Spain. The core businesses there have been known to act in concert and expand in geographical areas of the world in which competitive pressures are mitigated by the pre-existence of religious, cultural and/or historical ties. Thus, since the 1990′s, Spanish banking conglomerates and telecommunication operators have been aggressively pursuing an expansion strategy in Latin America, where a common language and former political ties has given them an edge over their North American counterparts.

Up until the debt crisis derailed the country, Greek businessmen were similarly following a geo-economic agenda in the Balkans, which enjoyed the full support of the Greek state, and even that of the Greek Orthodox Church. Accordingly, Greek expansion took place in weaker markets that were undercapitalised, new to competition rules and fairly corrupt. The target countries all happened to be Orthodox, as well, and Greek diplomacy has attempted over the past ten years to become this group’s spokesman and leader within the EU.

To be sure, the minuscule size of Greece’s home market had made such economic expansion plans imperative. Like Spain in Latin America, Greek banks and telecommunication operator OTE / Cosmote opened offices and acquired stakes in companies in Romania, Bulgaria, Serbia or Albania. Until 2010, Piraeus, Alpha or the National Bank of Greece became household names in the Balkans, and attracted a large share of deposits in the region. Their market share increased steadily, sometimes at the expense of better-capitalised Central European competitors with similar expansion plans, notably from Austria. OTE’s purchase of Romtelecom in Romania, for example, and the expansion of Cosmote mobile phone operator could be considered a regional success story.

Alas, the Greek economic expansion bonanza came to an abrupt halt once the true situation of Greece’s state finances became known. It is not that the geo-economic strategy was wrong, or that Greek companies operating abroad were poorly managed. Nothing of the sort. Rather, their carefully laid out expansion plans were first torpedoed, and then thwarted, by the doings of their home government. In some respects, the dire situation of Greek businesses operating abroad is similar to that of profitable Japanese companies operating globally, whose credit rating, public image and economic performance started being affected, at the turn of the millennium, by the Japanese government’s huge sovereign debt, which now stands at 225 % of GDP. In an effort to escape being overtaxed by a Tokyo administration desperate for cash, companies like Toyota, Sony and others had at one point even considered shifting most taxable assets overseas.

Nowadays, most Greek banks operating in Romania, for example, are posting losses, as depositors are fleeing them for safer banking operators Although relatively small in size, Greek banks are considered by financial analysts as conservative and well-managed, but, at the same time, saddled with quite a big chunk of the country’s treasury bonds. In the months and years to come, this might lead to some bank failures, as a result of the Greek state’s inability to honour its debts. Lending to Greek businesses operating abroad has also diminished considerably, further jeopardizing Greece’s expansion strategy adopted some fifteen years ago. Thus, deleveraging in Greece will not only affect the country’s public servants, but also its business community with operations abroad.