Saturday 22 November 2014

Ukrainian president abandoning its own people in the East

The crisis in Ukraine defies simple explanations. The country does not suffer a lack of powerful and destructive personalities, pulling it into different directions. On top of that, her affairs with its menacing neighbour Russia are at breaking point which leaves little time to attend to the rampant corruption and nepotism that has plagued Ukraine ever since it has plied herself loose from the former Soviet Union. As the eastern provinces of the country move away further from the government in Kiev, the Ukrainian president has now embarked on a high risk policy of cutting Eastern Provinces off from government aid and support. Proshenko has ended pension and wage payments as well as ordered the central bank to cease money transfers to local banks in the irredentist areas.

This can only lead to more disenchantment there and drive more people into the arms of rebels. Why the president decided to practically withdraw government authority from the rebel areas is difficult to understand. In effect, Poroshenko thus acknowledges that Ukraine is now a divided country with little chance to be reunited in the near future. The logic behind this step is obscure to say the least. It may just be another nail in the coffin of Ukraine.

Obama on collision course with Congress

After years of denying that he would have the authority to introduce immigration reform without Congress, Obama has now changed his mind. He signed an executive order giving about 5 million illegal immigrants in the US the right to work.

His change of mind has raised eyebrows even amongst supporters of the move. Commentators have pointed out that Obama's decision is rash to say the least, given that some Republicans in the Congress have privately indicated to be ready to talk about immigration reform. Whilst Obama's executive order is a gift to the Democrats in the short term, in the long run it may well be Republicans who benefit most from it. Many of them recognised that increasing their vote share amongst Latinos was conditional on getting immigration reform passed. However, the Republican Party was deeply split on the issue. By introducing the reforms bypassing Congress, Obama has moved the issue out of the way.

Yet, deep reservations remain about the way in which Obama has temporarily solved the issue. First, as some commentators noted, executive orders were never supposed to be used to enact laws that affect millions of Americans. Those who point out that Obama has used this vehicle on fewer occasions than his predecessors are missing a point. The magnitude of immigration reform is something that would have stopped any other president from using executive order in this context.

On top of this, there is the temporal character of this reform. Obama might have solved a problem for some immigrants for now, but the executive order can be revoked by his successor and, given how his unilateral action has poisoned the atmosphere between Congress and President, any future compromise is now less likely than ever.

So, in the end, the legacy of Obama's decision is ambiguous. He managed to remove an obstacle to work for some people for about two years, but in all likelihood, equally closed off any avenue for future compromise with Congress. As before, Obama, who wanted to change all, has probably done more than any other president to cement the status quo.

Sunday 16 November 2014

Germany balancing its budget

The German economy has been buffeted by a perfect storm recently. Neighbouring European countries have grown only little or not at all, which depresses Germany's exports. Russia has decided to meddle in a bitter fratricidal war in Ukraine which raises questions about energy security and gas supplies. Plus, the World economy has run out of steam, with China, Brazil and the US doing less well than anticipated. This should spell impending disaster not just for the German economy but also for tax revenues and ultimately, the German budget. However, it was only this week that the German finance minister presented the first balanced budget to parliament in more than 50 years. If things work out as planned, the German government will not go to the financial markets in the next years to borrow money. In fact, it plans to make a start on paying back the enormous sums that have accumulated since the heydays of 1960s profligacy. So how come Germany eliminated its deficit when France and Italy struggle to meet even the (admittedly) lax deficit rules of the Euro zone?

There are two major factors that have contributed to this success story. The first one are rock bottom interest rates for older debt which allows Germany to reduce its liabilities. This is bound to continue with a European Central Bank that is unlikely to raise interest rates as long as other European economies are still struggling to exit the recession. Low interest rates lead to a weak Euro which in turn favours German exports. So, the German balanced budget looks more like the product of a serendipitous confluence of external conditions than self-made. Nothing could be further from the truth however.

The second factor reveals how much of the German balanced budget is down to laborious homework. Germany has escaped the recession of 2008 relatively unscathed. The reason is that it went into the economic crisis with a flexible labour market and a reformed welfare state. Both things that have been pushed through by a Social Democratic Chancellor after 2004. Labour market 'flexibility' however is not tantamount to 'hire and fire'. In Germany it is based on strong negotiating positions of trade unions on the board of companies which gives them a stake in the success of their firm. Unions were thus willing to make deals companies' directors to protect the workforce whilst companies went through the recession. It's this stakeholder model that creates the room for labour market flexibility.

None of this means that everything is honky dory in Germany. Infrastructure is in dire need of further investment and health care costs are still running away, requiring a long term funding solution and significant reforms to increase efficiency. Yet, remarkably, it's been the Social Democrats who pushed for welfare and labour market reforms under their Chancellor Schroeder and who are now in a coalition with the centre-right CDU and approved a balanced budget. It's this long term vision that is so painfully missing from British Labour.