Tuesday, 3 June 2014

The reign in Spain is plainly on the wane

As it prepares to welcome a new King to the throne, Spain is facing a difficult decade ahead. But with many of its issues recurring from previous generations, surely it is time for the nation to drop its ‘forgive and forget’ policy and to study its recent history in detail. Otherwise, what’s to stop the same things from happening again?

'The best cure for a civil war is to forget it ever happened'  Seneca the Elder

On Monday, King Juan Carlos I of Spain announced that he would abdicate from his position in favour of his son, Felipe. While 60% of Spain’s population voted in favour of such a move earlier this year, the 48-year-old Crown Prince is coming to the throne at a troubled moment for Spain. Time will tell whether Felipe can reconstruct the image of the monarchy in his country, or if he will find that the institution was ultimately built on sand, foundations fatally weakened by the misdeeds of his ancestors in preceding centuries. Either way, Spain’s current national policy of forgetting its recent history must surely be re-considered, since such ignorance could open the door to a repeat of previous mistakes.

In December 1931 Castilblanco, a Spanish village situated near the Portuguese border in the province of Badajoz, went on strike. At this time strikes were fairly common due to the bitter ongoing feuds between latifundistas (landed gentry), and the peasants who tilled the land. A new Republican government had introduced agrarian reforms, but these were being regularly ignored by the landowners, who were often supported by the church, the army and the Civil Guard (La Guardia Civil) - an armed police force with bases around the country; this was the force that was selected to deal with the striking villagers. When the detachment arrived, a confrontation ensued between the guardsmen and the villagers, and one overeager guardsman opened fire, killing a local man. The infuriated peasants then fell on the soldiers, lynching four of them. Not long afterwards, on the other side of Spain in the province of La Rioja, the Guardia Civil killed eleven local people and wounded thirty more, supposedly to avenge their brothers in Badajoz. Four and a half years before the outbreak of the Civil War, the divisions in Spanish society were already deeply apparent, as was the willingness on both sides to take life.

Mention this story to a Spaniard today, and it is likely that it will not be familiar to them. What’s more, their brow will furrow, and they might glance around furtively to check that you are not being overheard. The Civil War and the ensuing 35 years of rule by victorious General Franco is a controversial subject in Spain. The agonies of civil war, and the relatively painless transition after Franco's death in 1975, have convinced Spaniards that it is better to let sleeping dogs lie than to risk rekindling old tensions. The majority of the academic writing on the period has been done by British historians such as Paul Pressman, who are often denounced in the Spanish press as being biased or sensationalist. While forgive and forget has indeed been a successful policy in the post-Franco transition, the situation on the ground is now beginning to change. The latest financial crisis has left half of Spain's young generation unemployed and living with their parents, while the monarchy and the government have been wounded by scandals. A time may soon come when the country has to once again ask itself what kind of government it wants, and with today's Spain sharing many concerns with that of its 1931 ancestor, it is hard not to think that a population well-schooled in its recent history might be better prepared to make the decision wisely.

The two sides
There were many causes of the Spanish Civil War, and the roots stretch back several centuries. When the Nationalist generals struck in 1936 they were broadly supported by the landowners, the church, and the Guardia Civil; they also received significant military support from Hitler's Germany and Mussolini's Italy. The Republicans opposing them largely represented the peasant population, with anarchists, democrats and communists all squashed together into an uncomfortable alliance. The British and French awkwardly looked the other way while idealists, writers and poets from all over the world flocked to fight under the Republican banner; while the little support there was came from outside was provided by Stalin's Soviet Republic. As in the example of Castilblanco and in a later episode at Casas Viejas, the core source of tension was the friction between landowner and peasant, a reflection of the severe inequality in the system which often left rural peasants starving. With the monarchy and the republican government discredited, each having shown themselves unable to manage the collapsing country, Spain was facing its ever-present nightmare – regions slipping towards independence.

A country divided
In contrast to most of its European peers, Spain in 1930 was still a largely agrarian economy. With the exception of Catalonia and the Basque Country around Bilbao, where a thriving manufacturing base had been established, the majority of the country was living off the land in a manner akin to pre-industrial Britain. As a result of this, power still lay in the hands of the wealthy landowners who could make sweeping decisions about who they hired to bring in the harvest, keeping wages low. Meanwhile the use of antique equipment on difficult terrain resulted in a variable harvest output. Tensions between landowner and peasant racked the country, and stories abound of aristocrats letting their land go fallow in order to spite their workers. Starving peasants gathering acorns in Extremadura were thwarted by landowners driving their pigs over the area in order to deprive them. In short the atmosphere was deeply poisonous, mainly as a result of the inherent inequality in society.

Spanish Monarchs – diminishing returns
Issues with the Spanish Monarchy stretch back even further. The current ruling House of Bourbon has had a chequered past, particularly when placed alongside the glittering successes of the previous Habsurg dynasty. Great Habsburg rulers such as the unifying Ferdinand and Isabella, Holy Roman Emperor Charles V, and the Armada-launching Philip II, were followed by a steadily decreasing quality of monarch, particularly from 1701 onwards when the Bourbons took over. On March 18th 1808, with Napoleon encroaching into Spain, the feckless Crown Prince Ferdinand led a revolt against his father Carlos IV, who was forced to abdicate in his favour. Two months later, with French troops occupying most of Spain, Fernando abdicated the throne and returned it to his father, who himself abdicated in favour of Napoleon after only two days; a sorry sequence of events which did not stop Fernando reclaiming the throne after the French had been driven out in 1814 (largely thanks to the courageous efforts of Spanish partisan guerrillas). He was a truly terrible king, first renouncing the liberal constitution of 1812 that had been signed in his absence, then accepting parts of it and offending religious rightists who subsequently gathered around the banner of his brother, Carlos. These so-called 'Carlists' ripped Spain apart in a series of civil wars throughout the nineteenth century, and were still a recognisable force in the Spanish Civil War. Ferdinand's daughter, Isabel II, was promiscuous and hypocritical, and although the monarchy was now only constitutional her indiscretions dealt still more blows to its image. Isabel's son Alfonso XII took the throne in 1875, before dying in 1885 and being replaced by his own baby son, Alfonso XIII. By 1916, King Alfonso had lost faith in constitutional monarchy as a system, and was building closer ties to the military. In 1923, he asked a General, Primo de Rivera, to become military dictator, effectively doing himself out of a job. When Primo resigned in 1930, the Second Republic was formed, and this was the shaky polity that would take Spain into Civil War. Alfonso was the grandfather to Monday’s departing king, Juan Carlos I.

United States of Hispania
Spanish regionalism, meanwhile, stems from the manner in which the country was formed. On 9 July 711, Tariq ibn-Ziyad landed in Gibraltar at the head of 7,000 North Africans. With this paltry force, and aided by a native population fed up with its Visigothic overlords, he galloped through Spain, conquering all but a narrow Asturian strip in the Northern extremity by 720 CE. But by 1000, this narrow strip had expanded to the extent that it stretched down into modern Portugal in the West, and to the East it had reached as far south as Barcelona. This 'reconquista' of spreading Christian force was not a unified effort however, and as the Arab curtain rolled back it revealed ever-lengthening separate kingdoms. Galicia and Leon were growing to the west, the former would eventually give birth to Portugal, while Castile and Pamplona (Navarra) were advancing through the centre. The French were reclaiming the East in what would eventually become Aragon (Catalonia and Valencia). This process continued and by 1200 Portugal, Leon, Castile, Navarra and Aragon between them controlled two thirds of the peninsula; in 1249 the Arabs had been contained in the small but highly defensible Emirate of Granada on the southern tip of Spain, and this would hold out until 1492. On that date, when Ferdinand of Aragon and Isabela of Castile finally rode into Granada as husband and wife to unify Spain, all of these separate regions had enjoyed long centuries of autonomy which allowed each to develop their own languages and proud cultures. Galicia in the northwest spoke Gallego, the father of modern Portuguese, the Catalans of the northeast spoke a language highly influenced by France, while even the region of Valencia had its own language. The Basques of Navarra meanwhile represent a unique case - an ancient race mentioned by Pliny and Strabo, it has been genetically proven that they were a formed society as early as 7,000 years ago, and their language predates the Indo-European roots of all the other languages on the continent. This history of division has created a regional desire for independence that has haunted Spain throughout its past.

The uprising
On 17th July 1936, General Franco received a telegram at his post in Gran Canaria. The telegram confirmed that the Army of Africa had risen in his support, and was now ready to be transported across the straits and onto the mainland (from where it was stationed in Morocco). Various towns and military and Guardia Civil bases around Spain itself had also risen, but the support was shaky, and without immediate reinforcement it would soon be mopped up by Republican forces. Unfortunately for Franco, the navy had not risen*, so his army could not cross according to its original plan. The rebellion would have been finished before it had begun, were it not for the intervention of Adolf Hitler, who sent German transport planes to effect a giant airlift operation, along with a pocket battleship to provide cover. Over the course of three years, the nationalists won battle after battle, constantly supported by the German and Italian navies and air forces. The Luftwaffe's obliteration by carpet bombing of the Basque village of Guernica is well known, but less famous is the naval bombardment of a refugee column numbering 200,000 unarmed men, women and children on the coastal road from Malaga to Almeria.
*The officers had actually rebelled as previously agreed with Franco, but the lower decks refused to follow orders. The only seaworthy battleship in the Spanish fleet, the Jaime I, was won back by its sailors after a struggle, resulting in a now famous radio exchange with the mainland: 'Crew of Jaime I to ministry of marine. We have had serious resistance from the commanders and officers on board and have subdued them by force...Urgently request instructions as to bodies.' 'Ministry of marine to crew Jaime I. Lower bodies overboard with respectful solemnity. What is your present position?'

Meanwhile, the Regulares of the Nationalist Army were gaining a terrible reputation for cruelty and ruthlessness. The soldiers had been de-sensitized by a bitter colonial war in Morocco the decade before, and they were soon committing similar atrocities against their own countrymen. Whipped on by General Queipo de Llano's murderous nightly radio broadcasts from Seville ('I want you to kill like a dog any queer or pervert who criticizes this glorious national movement'), standard practise upon arrival in a town was to kill a number of unarmed leftists, rape and shave the heads of the town's women and then force-feed them castor oil, to make them suffer the shame of publicly soiling themselves in agony. Paul Preston's 2012 weighty tome 'The Spanish Holocaust', itemises in some detail the various atrocities committed by both sides. Preston estimates the numbers of executions and disappearances at around 150,000 committed by the Nationalists, and around 50,000 by the Republicans, with the difference being that the Nationalist killings usually happened under orders, while Republican atrocities were usually committed when commanders had lost control of their men.

Franco’s Spain
The war came to an end on the 1st April 1939, when General Franco made a public radio broadcast proclaiming victory, and he soon set about creating a new Spain in his own image. The retribution and executions of leftists continued for many years, as did a guerrilla resistance in some mountainous parts of the country. Although Spain was in dire economic straits immediately after the war, Franco gradually managed to modernize the country, reinvigorating the old industrial heartlands around Barcelona and Bilbao with the help of a capital injection from the United States; this was in return for accepting US military bases on Spanish soil. Meanwhile, the dictator set about increasing a sense of Spanish unity in both positive and negative ways. Spanish traditions such as bullfighting were encouraged, and when the great Manolete was killed at by a bull in Linares in 1947, Franco ordered three days of national mourning, where only funeral dirges could be played on the radio. Regional identities were frowned upon, and the speaking of local languages such as Catalan, Basque and Gallego (Franco's own regional language) was outlawed. These actions were met with dismay in the regions, but received support from some centrists, notably in Madrid.

Viva el Rey!
In 1969, Franco seems to have become aware of his own mortality, since he began making arrangements for what was to follow him. He wanted to install a successor who would continue the work he had started, who would keep Spain unified and traditional, and he still believed in the institution of the monarchy. Alfonso XIII's son Juan, the self-styled 'Count of Barcelona', he perceived to be too liberal, but he saw potential in the Count’s young son Juan Carlos. For six years until his death in 1975, Franco trained Juan Carlos in how to be an efficient dictator to the repressed country. But, like the Emperor Claudius, Juan Carlos's true colours only became evident once he had taken power, and as soon as he was on the throne he set about liberalising his kingdom. He selected as his first prime minister the young Adolfo Suarez, another liberal who was hiding in plain sight within Franco's government (Suarez recently passed away in March 2014). Together the pair ushered in a period of liberation and freedom which is referred to as 'La Movida', bringing Spain some of the way towards catching up with its liberated Western European peers.

But the path to liberty was not without its obstacles, and on February 23rd 1981 the fledgling democracy survived a significant test of its mettle. At 6.30pm, 200 armed members of the Guardia Civil stormed into the the Palace of Congress firing submachine guns into the air, led by a Lieutenant-Colonel Antonio Tejero. Tejero shouted for everyone to be silent, and all but three deputies fell to the floor. The Minister of Defence and Adolfo Suarez, now outgoing President of Government, remained seated and instructed Tejero to desist, while the head of the Communist Party calmly lit a cigarette. The attempted coup was masterminded by old Francoist veterans, disappointed by the liberal direction the country had taken since the death of the Generalisimo, but they had underestimated the King. On hearing of the attack, Juan Carlos telephoned military leaders to ensure their support in resisting the coup, he then went on national television shortly after midnight to assure the population that the coup would not succeed. Tejero stood down, releasing the Cortes, and the crisis was averted. In the aftermath the King met with leaders of all Spain's parties and told them that a future coup would only happen over his dead body. Since that day, the hardiness of the Spanish democracy has never been in doubt.

Flash forward
To a modern visitor to Spain, particularly one on a beach in Mallorca or in a San Sebastián restaurant, it is easy to forget that Spain’s old men will have lived the first half of their lives under a repressive dictatorship. The fourth most visited country in the world exudes an aura of relaxed hedonism, and destinations such as Ibiza and Marbella have become a mecca for easyjetting Northern Europeans. But spend enough time in the less touristic parts of the country and it becomes clear that many of the old issues still remain, while others appear to be returning.

1981 to 2011, the King basked in the adoration of the Spanish public; though he was known to be conducting many extra-marital affairs, his misbehaviour received little more than an indulgent shake of the head in most corners of his country. Cracks started to appear in 2011 when the King’s son-in-law, a former Olympic handballer named Iñaki Urdangarin, was found to have evaded taxes totalling €240,000. The next year, the King himself was the subject of public disapproval for embarking on a hunting trip to Africa while his people struggled with mid-crisis austerity. The Crown Prince, Felipe, 48, has thus far managed to keep his nose clean but he has also never come through a challenge like his father did. With the people so divided on the merits of monarchy in the first place, Felipe’s popularity could fluctuate much more wildly than his father’s did, and calls for a republic might well be taken more seriously. The government, meanwhile, has recently faced a massive scandal of its own, with its treasurer of 20 years currently awaiting trial on a charge of embezzlement of €48m. Current Prime Minister Mariano Rajoy appears to have escaped unscathed thus far, but with monarchy and government both facing corruption charges, and the opposition party consistently underwhelming voters, it might be an opportunity for a new entrant to the political scene offering alternative solutions.

Meanwhile regionalism has been enjoying something of a resurgence. In Europe's most recent elections, France and Britain dominated headlines, as their anti-Europe parties (FN and UKIP respectively) achieved great gains in the polls. Less discussed was the fact that 55 per cent of Catalan voters took the opportunity to vote for parties committed to an independent Catalonia. Scotland's imminent referendum and Venice's secessionary attempts have brought regional independence to the front of mind in various parts of Europe, and the Catalans smell an opportunity to win the freedom they have sought for so long. The Basque Country, seeing the progress made by the Catalans, has abandoned its militant wing ETA and is now striving to pursue an escape through political means. In the Spanish nightmare, Catalonia will be followed out of the door by the Basque Country, Galicia and ultimately Valencia, leaving just a central stump remaining. This perennial fear pulls hard on the Spanish imagination. A powerful centralising figure who promised cohesion at the expense of new-found liberties might achieve some political traction in this climate.

Economic woes
But there is a key ingredient from the situation in 1936 that is still missing, and that is the poisonous atmosphere and desperation caused by internal divisions and inequality within the population. Spain's economy has now changed almost beyond recognition, with agriculture only making up 3% of GDP, and services contributing 70%, and this has eliminated many of the issues inherent in a landowner and peasant society. A new economy, however, brings with it new problems, in this case a construction boom and bust. In the last decade with construction soaring, immigrants were flooding into the country, while the demand for labour was such that building sites were recruiting 16-year-olds straight from school. Flash forward to the present day, and unemployment is over 25%, while youth unemployment has hovered around the 50% mark for several years. Many of those who are currently under 30 will have their careers permanently scarred by this period, as they fall behind their peer groups in other countries. Fifty percent of twenty somethings live with their parents, while friend networks have absorbed much of the financial impact by supporting the unemployed. Spain has also seen a great exodus of its youth to Germany and the UK, braving the dreary weather in search of employment. Though the Spanish economy has been sprouting some green shoots of late, the consensus is that current employment conditions will persist for many years. As the members of this generation all choose their different methods of coping with the crisis, divisions may emerge between those who had a job during this period and the largely uneducated group who were left unemployed; returning emigrés could stir the pot yet further. Intra-societal tension is an animal that has been kept under control for many decades, but that is not to say that it cannot ever return. In the shorter term, the country has been largely supporting its unemployed off private savings, but these must ultimately be finite; nobody knows what will happen when these funds are expended. Finally it should be noted a total Spanish economic collapse was only headed off in 2012 ECB Head Mario Draghi’s assertion that he would do ‘whatever it takes’, a backstop which provided financial markets with the assurance they needed to buy Spanish bonds again. Europe itself is a polity that is currently under attack from its own voters, and in the event that Europe did break up, Spain would again find itself deeply exposed.

What lies ahead
For Spain, a great many dangers lurk in the coming decade. Private savings could run out, leaving the many Spanish unemployed living entirely off an already-stretched welfare state. Spain, point of origin of the Occupy movement, could see civil unrest and frustration rising as its young unemployed take to the streets. Catalonia's independence campaign could reach a level of cohesion where it becomes impossible to ignore, as the centrists of Madrid clamour for not an inch of ground to be given. The government, already weakened by scandal, would be facing a country filled with conflict and might struggle to present adequate solutions. Felipe, a new king in charge of a shaky monarchy, would be badly positioned to provide the stabilising force his country needed. At this point a populist leader might find themselves in a position to seize power. A leftist in the mould of Hugo Chavez could arrive offering solutions to the employment crisis, or perhaps a centrist would rekindle old Francoist policies around unifying Spain by force. Both idealisms have of course been shown to be flawed, but the global historic failures of communism did not stop United Left (IU), a conglomeration of former communist parties, from coming third in the 2011 general elections.

The reason these possibilities are not often discussed is that they are deeply unlikely. Spain is now a modern Western European state with a liberal ethos that extends throughout its population. Though the country remains religious and extremely traditional, a peaceful accommodation appears to have been reached between church and liberals. The path to a violent leader seizing control of the country again would require an unlikely sequence of events with many opportunities for diversion, and an educated public should be capable of making the necessary judgements to prevent it. But a population ignorant of its own history is ill-equipped to avoid repeating its mistakes. It is hard to imagine 2014 Germany falling for an Adolf Hitler figure, partly because the circumstances of his rise and its repercussions are so well understood. With the difficult transition complete and Spain currently sheltering in Europe’s embrace, now would be a good moment to consolidate on the gains it has made and bring its dark past under the national microscope.

Wednesday, 7 May 2014

QE or not QE? – German nightmares haunt the ECB as it tries to create growth

In 1922, a German couple decided that the new government of the Weimar Republic was not creating the right environment in which to bring up their children, and that they would move the family to America. So they sold their house and set off with all their worldly possessions. But when they arrived at the port town of Hamburg, they were told that the money from the sale of their house would not be enough to cover the cost of the voyage to America, and in fact it would no longer even be enough to get them back home. Such was the speed with which money depreciated in the hyperinflationary environment of Germany in 1922-23. This period of German history has haunted the national consciousness of Europe’s dominant nation ever since, leading to an exceptionally cautious monetary ethos. But recent low growth has led economists to speculate that a more urgent danger is of the Eurozone slipping into deflation, pointing at the cautionary example of Japan after 1990.

In order to understand European monetary policy it is necessary to look at the history of money in the region. Until the advent of the First World War, the currencies of Western Europe were tied to the price of gold; this provided very little scope for inflation. As the costs rose in the great war of attrition, the various nations ran up massive debts in their attempts to pay them. One by one they turned to the printing press for a solution to their financial needs, abandoning the gold standard and printing large quantities of money, sending inflation soaring; this was particularly true in Germany and France. As Thomas Picketty writes in Capital in the Twenty First Century, “between 1913 and 1950 inflation in France exceeded 13% per year....inflation in Germany exceeded 17% per year so that prices rose by a factor of more than 300”. This experience created in France and particularly Germany a deep aversion to inflation and ‘racier’ monetary instruments, and the Deutschmark subsequently became a bastion of stability after it was established in 1948. When Germany and France created the Eurozone in 1999, it was, according to Picketty, based almost entirely on the principle of combating inflation”.

Up until the present day, the ECB has been following traditional policies to stimulate growth. Interest rates have dropped to almost zero (0.25%), and the central bank has been resisting temptation to join its Anglo-Saxon peers on the quantitative easing bandwagon. But inflation rates in March were just 0.5%, substantially below the target of 2%, and even though April’s minimal rise to 0.7% has taken the pressure off slightly, another drop in May and storm clouds will begin to gather again.

So what are ECB Head Mario Draghi’s options? He could choose to bluff, to undertake QE, or to experiment with negative interest rates:

1)      The Bluff – in this course of action, Draghi makes the market believe that he intends to implement QE, whether or not he actually does intend to. Last month, Draghi made a show of publicly discussing the possible ways in which QE could work. As we have seen in the Eurozone over the past five years, sentiment can be just as important as fact, and the belief that QE is imminent could be almost as effective at changing behavior as actually implementing it. Rather like a sheepdog, he manipulates the flock merely by his positioning. One problem with this course, however, is that Draghi has already done it once before – his claim back in 2012 that the ECB would do “whatever it takes” to prevent the Eurozone from collapse meant that the fraught situation resolved itself without him having to spend a cent. The question is whether words will always be enough, or if the market will one day call his bluff. Even the most effective sheepdogs sometimes have to nip the odd leg to be taken seriously.

2)      Undertake QE – This course is littered with obstacles:
a)      Germany. As explained above, Germany has a longstanding mistrust of racy financial instruments, especially ones which involve printing money. In addition, recent crises in the European periphery have hardened the German position against any kind of financial re-distribution. A German court recently took the controversial step of analyzing whether a 2012 ECB bond-buying policy (named OMT) had been illegal under Eurozone rules; it ultimately returned a disputed verdict and referred the case to the European Court of Justice. Though the head of the ECB is Italian, the Germans command a great deal of influence due to their political and financial clout in the Union.

b)      How to do it? The US, UK and EU economies are all differently structured. Before you decide to implement QE, you must first work out how it will be done.  In order to stimulate growth you want to place money into the hands of companies themselves, which they will then be able to invest into their own development. The most obvious way to do this, buying shares or bonds in the companies, is unsatisfactory since it leaves the state holding a direct stake in a proportion of its own market. Thus the location of the money injection becomes key.
In the US, companies receive their funding largely from the open market in the form of corporate bonds, so the American challenge was to drive investors into buying these. This was achieved by buying US government bonds which thus drove down their yields, and had the double effect of lightening the government debt repayment burden and driving investors out of the now unprofitable sovereign bonds. Starved of yield in their safe havens they were forced to buy the riskier corporate bonds.

The ECB would struggle to copy the US’s QE policy, in the first place because there would not be one clear sovereign bond to buy, since the eurozone is made up of many different sovereigns. Additionally, if the ECB did start buying sovereign bonds in the periphery it would alleviate some of the financial pressure on those governments; this would be counter-productive since it is that very pressure which has been driving reform in Portugal, Spain and Greece.  The European economy is dominated by small and medium-sized companies (SMEs), which are often too inconsequential to have a corporate bond underwritten by their assets. The debt of several of these companies can however be pulled together into a tradable ‘Asset-Backed Security’ (ABS), which would be an ideal market for the ECB to invest in if it wanted to stimulate SMEs. Unfortunately, the ABS market is much smaller in Europe than in the US, and lacks the prerequisite depth to be able to have a significant effect on the bigger picture. In fact, EU companies actually tend to receive their funding from banks, and this is where the added complication comes in. After the crisis it was decided that Europe’s banks were undercapitalized; that is, they did not have enough money held in reserve in case of disaster. New regulations require that banks raise their capital levels, which is a process that is currently under way, and is partly responsible for the lack of loans to the SMEs which caused the low growth in the first place. If money were to be given to banks to encourage them to lend more, there is a danger that it would just be absorbed into their new larger pools of capital, and would never make it through to the companies themselves.

For these reasons it remains very unclear as to how the ECB would be able to efficiently undertake quantitative easing. When this is taken alongside German resistance to experimentation, it becomes an extremely unlikely course of action given the current circumstances.

3)      Negative Interest Rates – With interest rates currently at 0.25% and the deposit rate at 0%, there is not much further the ECB can go within conventional monetary policy, but continuing through zero and into the minus figures is a course of action which does have a precedent. A negative rate on the Deposit Facility would mean that banks would find themselves actually paying interest for the privilege of keeping money with the central bank, the aim being to incentivize them to do something more productive with it. This policy was adopted in the 1970s by Switzerland, when it was trying to reverse a surge in its currency price in the wake of the OPEC Oil Crisis, and by Denmark in 2012 under similar circumstances, but it has never been attempted by a major global economy. One worry is that banks will simply pass this extra cost onto their customers, providing the complete opposite effect to that which was intended. Once more, if there is to be a pioneering maneouvre in monetary policy, it is unlikely to come from a central bank that is heavily influenced by Germany.

The German-dominated ECB remains unlikely to pursue any course which might be considered reckless or untested, with the Euro being treated very much like the Deutschmark that preceded it. The difference of course is that the Deutschmark represented the finances of one relatively homogenous country, while the Euro is the currency of an experimental union of widely varying economies. Are the tried and tested methods sufficient to maintain a successful Eurozone? Time will tell. But the example of stagnant Japan between 1990-2012 confirms that the dangers of deflation should not be taken lightly.

Appendix – Japanese example

To some, the Japanese experience might not seem that bad. The so-called ´lost decade´, which began in 1990 and has ultimately stretched to over twenty years, has been a period of low growth and stagnation (an economist´s nightmare), but to the man on the street the idea of getting richer every day, as prices decrease, might actually sound quite appealing. Japan has not been hit by famine, disease, or any other side-effects associated with poverty, it is still the world´s third largest economy and quality of living is high. The problems, such as they are, bubble under the surface, and have been growing continuously. Over the last twenty years Japan has been steadily accruing government debt, to the point that it is now the most indebted country in the world (when viewed as a percentage of GDP). The reason it has not suffered greatly from this growing burden is that it has been paying very low levels of interest on the debt, as a result of strong investor confidence and high demand for its bonds. The end to this benevolent arrangement comes when faith starts to waver, and investors begin to sell their government bonds; at that point Japan finds itself paying a rising yield on a giant debt pile, and the subsequent financial problems undermine the confidence of remaining investors, creating a self-perpetuating downward spiral. Something had to change before this tipping point was reached, and President Shinzo Abe has emerged with a risky plan. His ´three arrows´ strategy involves stimulating the dormant Japanese economy with quantitative easing, and making structural changes to create the growth which can begin to shrink the Japanese debt. If this strategy succeeds, Abe will have hauled Japan out of its ever deepening hole; if it fails, he might have created the low-confidence tipping point he was trying to avoid, or perhaps inflation will career out of control, the risks are very significant. This strategy is uncharacteristically reckless, but the Japanese have been driven to it by their earlier complacency.

Tuesday, 22 April 2014

Daniel Luque y Manuel Escribano, ´mano a mano´ en Sevilla, 20 Abril 2014

"Cinco Euros" he says, eyeing the €5 note I have proferred expecting change. A brief pause and stare before I relent, never having been to La Maestranza before and not knowing local prices. He hands me a thick cushion, different to the skinny ones that are being wielded by the rest of the crowd. These, I later discover, cost €1.50, which is much more like it. With a slightly clouded mood I enter the Plaza de Toros.

The event is a 'mano a mano' involving two local fighters, Manuel Escribano and Daniel Luque. Bullfights normally have three fighters for six bulls, so the mano a mano is a special occasion designed as a kind of "bull-off", where the two matadors compete directly against one another. In this case the dramatic tension is defused by the fact that everyone is keen to show that they're all jolly good friends, so there's endless back-slapping, thumbs-upping and general mutual appreciation. The bulls will be Miura. Miura is the best breed. They have always been the best. The biggest. The bravest. The people have come to this fight to see the bulls, today the fighters are merely the backing dancers. Escribano did well here last year, Luque is quite up and coming, both are from Sevilla, but really its all about the bulls.

So we're underway and Manuel Escribano is up first. Though he is 30 and experienced, he seems young, with a tall, amiable, sandy-haired Australian look to him. He makes his intentions clear by preparing to greet the first charge on his knees, a crowd-pleaser. The gambit doesn't quite work, and the swirl of the cape lacks the elegant flourish that it should have had. The matador scrambles up, and he and his team move the animal around with their capes, but it is rushed and lacks control; they all seem rather green. We push through the next two rounds and its time to place the banderilleros. Rather than letting his team do it, Escribano steps forward with the two hooked sticks in his own hands. He raises the sticks like horns, a signal the bull cannot misunderstand, and, on receiving the desired charge, begins to run at right angles away from the bull, causing it to swerve its run. At the moment of contact, the sticks are placed haphazardly into its back, he is not facing the bull straight on with his armpits over its horns, his feet do not leave the ground and land proudly on their heels, it is not an imperious display. The second pair follow in similar fashion. For his third pair he goes to meet the bull by the side of the ring. He sits on the narrow bannister, knee-height on the wall of the ring, about 10 feet from the bull, which is a little further round, and he shouts. 'Toro!'. The bull glances at him, but chooses to ignore him, looking back at the banderillero behind the barrier who had been keeping it in place with teasing flashes of cape. 'Toro!' he shouts again from his seated position, vainly holding up his sticks. Suddenly he is an indignant child in its high chair, stripped of power and grace, and the crowd begin to mutter darkly. Few sins are greater than a matador losing his dignity. He gives up, and delivers the banderilleros in standard manner; we move on, unimpressed. It is time for the faena, the great dance of death where a fighter makes his name. Just him and his red cape and his sword. But he never gains control of the bull. He moves it all around the ring, and begins to take greater and greater risks, standing close to the horns and with the cape behind his body. But his arrogant gestures of defiance fail to convince, and we watch uneasily, wary as to what might happen. Finally it is time for the kill; if this is done well he will probably receive an ovation from the notoriously miserly Sevilla crowd. He places the bull and assumes the pose. One knee cocked, head to one side, eye looking along the horizontal sword towards its target, left hand holding the cape low to keep the animal's head down. A swift movement and the crowd groans; the sword has only entered halfway, the upper half protrudes from between the shoulders. The banderilleros move in and begin to move the bull sharply from left to right with their capes, but it is hopeless, there is no way the sword has penetrated deep enough to reach the heart. Escribano fetches another sword and approaches the bull again, but the trumpet sounds and his time is up, he must now execute the bull as quickly as possible, all hope of an ovation now extinguished. The bull is no longer interested in the cape, so its team of executioners are now following it slowly around the ring, sword still standing out of its back. Finally it turns, and the capes are used to keep its head low while Escribano chooses his spot towards the back of its head. He tries to sever the spinal chord once, the bull jerks away after the blow, twice, a third time. The crowd are losing patience. Finally it is done, and Escribano glances up and pulls a face at the nearby crowd, 'fuerte eh?'. The bull receives boos and whistles as it is dragged away by the horses. Escribano departs to a sullen silence and we are onto the next.

Daniel Luque, 25, cuts a more traditional and serious figure. His name is familiar, though he is not yet a member of the top order of fighters. He indulges in the old matador superstition by removing his hat and dropping it over his shoulder; but it lands headside up, and the crowd sighs with disappointment, he stoops to turn it over. He allows his banderilleros to greet the bull, and performs some steady capework himself. The bull is barrel-chested, with a scrabbling, stubby-legged running action rather like a jack russell; it is not agile. Luque is confident and practised, though he takes many tiny steps to get into position, like a squash player or breakdancer. This aids his technique but it is not in the tradition of the great Belmonte, who created the modern method by forcing the bull to pass him on his terms, rather than moving himself around it. The picadores complete their work and Luque lets his team plant the banderillas, everything is conducted with clockwork efficiency and much confidence, but very little flair. For the faena, Luque again demonstrates strong technique, moving the cape well in windy conditions, a difficult feat, but he is not tempted by any Escribano-esque stunts or risks. It is time for the killing, and Luque dispatches his bull swiftly and efficiently in one attempt. The crowd is left slightly nonplussed, but it has been smooth work. The bull is booed. Luque receives a half-hearted ovation.

The third bull promises to be something special. It weighs 607 kilograms where its predecessors were 555 and 539. Now surely we will see a truly great Miura bull. The ever eager Escribano is unfazed by the prospect, and again settles on his knees to await the Minotaur. The gate opens, and it is indeed a fine animal, with power and agility in equal measure, the crowd gasp, and then applaud. The momentarily forgotten Escribano suddenly seems to realize his plight, finding himself on his knees facing the real deal, and his flourishing cape turns into a panicked abort. He rolls over and over, cape flailing, as the bull charges in, horns down, like a dog chasing a rolling cigar. After what seems an age the banderilleros arrive on the scene and provide distraction, and Escribano is helped up and attempts to recover some dignity. The trumpets sound rather wobbly as they announce the next round, is everyone afraid of this bull? The picadores are soon in attendance, and the crowd murmurs its approval as the great Miura proceeds to push the padded horse and man sideways for ten yards in a long rolling mall which is barely ever seen in the ring. In the next tercio, as Escribano prepares to place his banderillos, one spectator has seen enough. A flicker of activity and a long-haired, topless Spaniard is leaping into the ring, waving his flapping shirt as he charges towards the rear of the distracted bull. The day he fought a great Miura will be an anecdote for his grandchildren, if he survives to tell it. But the banderilleros are too quick for him, and emerge from every corner of the ring, while the bull, transfixed by the man behind the nearest barrier, remains completely unaware of the tussle for his attention that is underway behind him. The invader is wrestled to the side, and pulled over the wall by the neck, into a gang of waiting policia. His remonstrations continue as he is frog-marched to the exit in front of a conflicted crowd, dismayed by his uncouthness but pleased by his bravery, he receives a mix of cheers and boos, his remonstrations become targeted towards the crowd. Escribano's banderillo work this time is impressive, and includes the move from a seated position which had so exposed him in the previous fight. But something has happened to the bull between entry and faena, and when Escribano steps up to dance the final act it refuses to play its part. Escribano is left with an almost docile lump of beef, and the crowd soon tires of his attempts to engage with it. He is ordered to 'kill it' by voices from around the auditorium, and his attempts to do so are again botched, though not as badly as in the first. The bull is booed, and Escribano receives some applause.

But now specks of rain are beginning to fall, and there are few sights more miserable than that of a wet Spaniard. Umbrellas appear at once, and the next fight will be watched between the widescreen frames of one's own umbrella and that of the spectator in front. It lashes down as Luque's team goes through the gears as before, and the young matador efficiently applies the finishing touch with his first attempt. A large group of tourists decides to leave between fourth and fifth fights, but they are too late, and they are left stranded by two lines of Spaniards at the front who are convinced that such a manouevre should have taken place sooner. The first tercio of the fifth fight is spent with this vertical column of about 15 spectators standing helpless while a Spanish white knight near the bottom remonstrates with the stolid traditionalists that refuse to move. Finally a security guard's attention is piqued, and he arrives to tell the immovable objects that they will move, and the dam is broken. This type of confrontation is a typical occurrence at the bullring.

The fifth and the sixth pass much as their predecessors. Undeterred by previous failures, Escribano begins on his knees for a third time, and finally he is able to successfully complete the move as he would like. Again the kill is not clean and yet again the bull is jeered. Luque's final bull is 625 kg but lacks the majesty of the third. Nevertheless he extracts a good fight from it and receives the warmest ovation of the day when he successfully dispatches it. The crowd, attracted by the Miura name, has seen six bad bulls, all of which were booed, and two sons of Sevilla, neither of whom achieved greatness. The night rain fills lightweight shoes as subdued Sevillanos trudge back to their bodegas, hoping that the Feria beginning on the 1st May will yield more satisfactory entertainment.

Sunday, 30 March 2014

The End of the Line - Why Turkey is entering a period of unrest and what might emerge on the other side

On Wednesday 12th March, renewed violence broke out on the streets of several Turkish cities. Running battles raged between the police and civilians protesting against the continuing premiership of Recep Tayyip Erdogan. The confrontations were sparked by the funeral of Berkin Elvan, a 15-year old who had been struck from close range by a tear gas canister allegedly while walking to get bread during the last major protests in Istanbul in June; he has spent the intervening nine months in a coma, and his death takes the overall toll to eight. A crowd of 100,000 attended his funeral in Istanbul, the majority of whom then went home immediately afterwards. Those who remained escorted his coffin to the graveyard across town, as per tradition, and the burial was completed at 1pm local time. Four hours later, a large group was intercepted by police heading for Taksim Square, the gathering point for June's protests and location of 30-40 deaths under similar circumstances in the 1977 Taksim Square Massacre. 

The Turkish protest movement is passionate but fragmented. With intellectual capital Istanbul at its epicentre, the multi-generational movement has successfully used humour and mockery to lampoon President Erdogan, who has aided this portrayal of himself as pantomime villain by banning Twitter and Youtube in the country. On one side stands a police force which has proven itself very comfortable with the extensive use of tear gas and water cannon, on the other stands Communists, revolutionaries and separatist Kurds, along with Kemalists who canonize the secular values of Mustafa Kemal Ataturk, the father of Modern Turkey. The protestors are united by one clear goal: the removal of Mr Erdogan from power. The problem comes, as is so often the case, when the question is asked of what should follow ‘Tayyip’ - Erdogan’s disrespectful nickname. Evening street meetings are held by each sub-group, where Erdogan's latest crimes are deplored and grievances are nursed, but no figure has yet emerged from the streets with a coherent answer to Turkey's problems, let alone with the potential to replace him.

From Ataturk to Erdogan
Turkey has enjoyed mixed fortunes since Ataturk dragged the new nation from the ruins of the old Ottoman Empire following defeat in the First World War. In 1922 Ataturk abolished the Ottoman Sultanate and the Caliphate followed in 1924; he founded the Republic of Turkey in 1923. Ataturk envisioned a truly secular republic, and as part of the secularising process he banned the ever-divisive headscarf so characteristic of muslim women. Ataturk's one party state endured until 1946, when the end of World War Two brought a multi-party system with it. But removing religion from government left a power vacuum, and Ataturk chose to fill this void by resting his new country on the shoulders of the military. This decision would come back to haunt Turkey for much of the 20th century, with military coups in 1960, 1980 (followed by a period of martial law), and a forced deposition in 1997 hamstringing any attempts at concerted Turkish growth. The periods of true democracy were not much better, with Bulent Ecevit’s democratic government earning global opprobrium by invading Cyprus in 1974, and a shambolic succession of short-lived prime ministers bumbling through the 1990s.

In 2002, an attempt to reform Turkey's economy to bring it into line with EU accession requirements led to severe economic turbulence, and a dissatisfied populace demanded a general election. The newly formed AK Party, led by then mayor of Istanbul Recep Tayyip Erdogan, won by a significant margin, and the current regime was born. During the election and afterwards, Erdogan and his party were aided by the support of a religious figure named Fethullah Gulen, who had emigrated to the United States in 1999 but retained an extensive network of supporters in various positions of influence. The newly-installed Prime Minister Erdogan set about galvanising Turkey's economy with EU integration still very much in his sights. A period of explosive growth has been the result, and Turkey's GDP has risen from $232bn to $789bn since 2002.

Recep Tayyip Erdogan – a power corrupted

Mr Erdogan’s first moves as Turkey’s premier were exactly what the country needed. While he was setting the economy on track for expansion and growth, he was simultaneously defanging the Turkish military. One by one the influential generals were put on trial, until the once-dominant army had been politically neutered; this is an impressive achievement. Under Erdogan’s stewardship, Turkey has grown to be the sixth largest European economy and is a member of Jim O’Neil’s “MINT” group of countries to watch, alongside Mexico, Indonesia and Nigeria. Turkey’s performance is even more impressive when compared with that of its immediate neighbours: Greece and Cyprus have both required EU bailouts, Syria is mired in civil war, Iran is an international pariah crippled by sanctions and Iraq is still struggling in the aftermath of US occupation. In his second election in 2007, Erdogan’s support was increased from an already dominant position to 47% of the vote, and this dominance was sustained in 2011.


As time has worn on, however, Mr Erdogan has begun to undermine some of Turkey’s secular traditions. Although a former mayor of Istanbul, the prime minister’s main powerbase is in the rural expanse of Anatolia, which is traditionally less well-educated and more Islamic than the more Western-facing Istanbul. This has allowed Mr Erdogan to quietly pursue the gradual introduction of more traditionalist attitudes, most clearly evidenced by the headscarf issue; Turkey has seen a return of headscarves into its culture, most famously on the first lady herself. There was much furore over a move to make Turkish Airlines’ cabin deck uniforms more traditional, while the protests of June 2013 were sparked by a proposal to bulldoze a park in the centre of Istanbul and replace it with a shopping centre built in the style of a traditional Ottoman army barracks. Istanbul’s liberal population is appalled by the prospect of regression in its womens’ rights, and every step in an Islamic direction is met with great outcry.

Meanwhile Mr Erdogan’s behaviour becomes increasingly autocratic. His ill-judged split with former ally Gulen has led to a soft civil war ta
g place between the two parties. As part of this struggle, the forces of Gulen have released recordings containing Mr Erdogan advising his son on how to hide large sums of money, and one in which Mr Erdogan appears to dictate the news to the press. Erdogan has responded in extremely un-democratic ways, reassigning hundreds of law enforcers who had been investigating these cases, and personally banning Twitter and Youtube in a manner which has since been described as illegal by members of the Turkish parliament. In his speeches, Mr Erdogan refers to these tapes as an attack on the state, betraying his own personal perspective that he and the state are now one and the same. It is still unclear whether he will succeed in his current goal of increasing the power of the presidency, ready for him to take the Putin-esque move of assuming that role in advance of the end of his third term as prime minister. Failing that, it is suspected that he will abolish the AK Party’s internal rule against running for a fourth consecutive term, leaving him almost certain to remain in power unless forcibly dislodged.

A growth economy in peril
Turkey under Erdogan swiftly developed a powerful presence in various global markets. Due to a winning combination of low wages and a close proximity to European, Russian and Middle Eastern markets, Turkey found that it was able to compete strongly in white goods (largely through manufacturer Beko), textiles, furniture and car-making.This competitiveness has stimulated foreign investment, and these investors have been rewarded with astronomical returns.

During this period of sustained success however, a problem has been growing under the surface. As so often happens in economics, Turkey has become a victim of its own success. The vast inflows of external capital into the economy have caused the lira to rise in value, which, along with the higher wages of the average Turk, has decreased Turkey’s competitiveness. This decrease has led to a rising current account deficit. What this means is that every year, Turkey is importing (machinery, chemicals, semi-finished goods, fuels and transport equipment) more than it is exporting. In order to bring in all these products from abroad, Turkey needs money, and it is the aforementioned foreign investors who have been providing it. The reason this situation is coming to a head, having been sustaining itself quite comfortably for several years, is that the United States has recently started shutting down its quantitative easing policy. At various intervals since November 2008, the Federal Reserve has been pumping money into the markets, meaning that there was plenty to be allocated to economies like Turkey’s; but now the gravy train is coming to a halt. Many emerging economies find themselves in a predicament similar to Turkey, but none to quite the same extent.

What does this all mean? It means that it is very likely that Turkey is about to enter a period of quite severe economic turbulence; considering the fact Mr Erdogan is finding it hard to keep his people onside even in the current climate, it is hard to imagine how he will be able to survive it without resorting to drastic measures.

The strategic outlook
Russia’s recent indiscretions at the other end of the Black Sea have improved Turkey’s strategic position in two ways. If the US decides to use a strategy of encirclement to contain the newly assertive Russian Federation, Turkey’s position at the gateway to the Black Sea makes it a key building block for such a strategy. As a member of NATO, Turkey’s aid can probably be relied upon as long as the current regime remains in place; this leaves the US with a strategic incentive to support Erdogan through his difficult period. Meanwhile, Europe suddenly finds itself in the market for alternative suppliers of oil and gas, with Turkey an obvious transit state for new pipelines stretching up from Kurdistan. Again, this leaves the Europeans with a stake in keeping Turkey stable and friendly. US and EU support could be sorely tested, however, if Mr Erdogan’s crackdowns were to become significantly bloodier than they have been thus far.

If it is able to overcome its short term financial problems, Turkey could well become the dominant power in its region. With the largest economy by some margin it could be a powerful counterbalance for Balkan countries that are still eyeing EU accession, while shared Turkic ethnicity with many of the states of the Caucasus and Central Asia could be a basis for lasting economic relationships. With its Islamic credentials making it a potential leader to the fractured Middle East, and with a secular government still appealing to the post-religious Europe, Turkey could be capable of achieving that rare goal: being all things to all men.

Next steps
In order to realise this bright future, Turkey needs to do two things. It must find a way to rid itself of Mr Erdogan, a giant personality that has tipped over the edge from being powerful and effective to being self-serving and faintly maniacal. The Turkish people are unlikely to receive help in achieving this from outside Turkey (with the exception of Mr Gulen in Pennsylvania), and Mr Erdogan’s mandate remains assured for as long as he has the majority from Anatolia. A worsening economic situation and Mr Gulen’s revelations might go some of the way to eroding the latter, while a serious political challenge from within his party would help Turkey to begin to imagine a post-Erdogan world. The enigmatic Fethullah Gulen’s is not a name sung by those on the streets, so he would face an uphill struggle should he decide to try to seize control for himself, though he has already proven himself a shrewd string-puller, so this state of affairs may change. To many, the situation with Gulen brings back memories of Iran before the revolution of 1979, but today’s Turkey is considerably less susceptible to that kind of Islamic revolution than Iran was at that point. Sitting President Abdullah Gul is generally viewed from the street as Erdogan’s patsy, so he would probably not be a viable alternative to the current Prime Minister.

The second urgent requirement is a restructuring of the economy. Turkey must build a roadmap for how it will achieve the next stage in its development, possibly using a combination of education and retraining to become a service economy in the manner of South Korea. It will become more adept at using its growing regional clout to shape its surroundings to its benefit, and this will provide plenty of opportunities to enrich itself further, but first it must escape the trap it has built for itself. A difficult period is beginning, but if the ensuing unrest creates the circumstances for the removal of Mr Erdogan and a reshaping of the economy, then this crisis could come to be viewed as the greatest opportunity that Ataturk’s nation has seen since the fall of the Ottoman Empire.

NB there are several charts and graphics that complement this piece but which are not supported by blogspot. For a complete version please contact me

Saturday, 22 March 2014

The Crimean Crisis - and why it’s not really a crisis at all

February 21st 2014. That is the key date in the recent Ukrainian crisis.

It’s not the 21st of November 2013, the date that President Viktor Yanukovich turned down a deal with the European Union in favour of stronger ties with Russia, leading to the first street protests. It’s not December 8th, when 800,000 people demonstrated on the streets of Kiev. It’s not January 16th, when parliament passed anti-demonstration laws that were subsequently repealed. Nor was it two days later, when policemen were shot by protesters as the demonstration escalated. On February 20th, a day that will live long in the Ukrainian collective memory, 77 protestors were killed by riot police. February 22nd was the day that Yanukovich was removed by an extra-legal vote from the Ukrainian parliament. On 28th February, pro-Russian troops seized control of Crimea. On March 16th that region held a referendum, with Russia recognizing the independent country the next day, the first step to integrating it into the Russian Federation. 
None of the above are the most important date of the whole affair. That dubious honour goes to the 21st February, which was the day a meeting was held in Kiev between the foreign ministers of France, Germany and Poland, a Russian negotiator, President Yanukovich, protest leaders from the streets, and the political opposition. At this meeting it was agreed among other things that:

a)      Ukraine would return to its 2004 constitution by September 2014;
b)      Presidential elections would be held the same year;
c)       “The Foreign Ministers of France, Germany, Poland and the Special Representative of the President of the Russian Federation called for an immediate end to all violence and confrontation”.

This was a compromise which suited all concerned. The protestors achieved a reverse of Yanukovich’s oppressive political reforms and an election date, the Europeans achieved an end to the violence as well as the likelihood that the next president would be pro-Europe, while the Russians kept their man in power for a while longer and saved any face that was previously being lost by the undermining of President Yanukovich’s position.

The next day, Yanukovich had fallen. With the ceasefire broken by the protestors, and with parliament voting for his impeachment on extremely questionable legal grounds, he disappeared, surfacing in Russia five days later. The only side that lost out due to this turn of events was the Russians (and Yanukovich himself, which bothered nobody). Putin found himself locked out of the new Ukraine that was now forming, and saw himself as the victim of what was at best a broken promise and at worst outright skulduggery; everybody, including the ever-sanctimonious Europeans, had given their support to the previous day’s agreement. At the very least Europe’s foreign ministers could have criticized the coup, considering it was extra-legal and undemocratic. Instead he saw the Europeans welcoming the new leaders, as the Western press presented the triumphant speech from the newly-freed Yulia Tymoshenko as something similar to Nelson Mandela’s release. With this hypocrisy, along with his new strategic position meaning that he now held no cards, Putin the poker player had to act, and Crimea was the result.

February 21st symbolizes a turning point in the crisis. It is the last day before events occurred which changed the roles of all the antagonists. Before the 21st, protestors were still protestors, Yanukovich was president and Russia and Europe were applying predictable pressure in either direction. After the 21st, the protestors and opposition had become an illegitimate government, Europe had hypocritically sacrificed its values for the sake of a positive result, and Russia was forced to take extreme measures to achieve its goals. Tellingly, in a meeting in Madrid on March 4th, after the occupation of Crimea, Russian Foreign Minister Sergei Lavrov told EU Foreign Policy Chief Baroness Ashton that the only way Russia’s actions could be reversed would be on the basis of a return to the February 21st agreement, presumably with a different president since Yanukovich was by that stage heavily discredited. 

In itself, seizing Crimea did not advance Putin’s position a great deal. It was already the location of a Russian naval base (the lease was due to expire in 2017, although this would probably have been renewed after some negotiations which might have caused Russia to make some concessions). The GDP of Crimea is only $4bn, which is 0.05% of Russia’s GDP in 2012, hardly a significant addition. There are undersea oil reserves off Crimea which are estimated to produce about 7 million tons of oil per year, Russia produced 494 million tons of crude oil in 2009, again the gain is neglible. The fact there were insignia-less uniforms to hand at such short notice suggests that this is a play that has been available to Russia’s leader for some time. The manoeuvre, which was carried out perfectly and with very little bloodshed, including a rather stylish move to box in the Ukrainian navy, was a very effective way for Putin to achieve his aims. These were threefold: 
1)      Bring the Europeans back to the negotiating table over Ukraine, ultimately keeping Russia involved in that country’s future;
2)      Save face both externally and internally - a great deal of Putin’s ability to manoeuvre comes from the illusion that he commands much greater power than he actually does;
3)      Apply more financial pressure on Ukraine at a time when it is already facing deep economic problems. $4bn is 2% of Ukraine’s 2012 GDP, while the 7 million tons of oil will now have to be imported, possibly from Russia.

Predictably, the Western world has been thrown into a flap by these events. Rhetoric has abounded that this is “the start of a new Cold War” and “the most dangerous moment for Europe since the collapse of the Soviet Union”. In truth very little has happened, Russia has taken control of a region that should probably have been Russian in the first place without firing a shot (bloodshed during recent seizures of Ukrainian bases in Crimea is somewhat smoothed by the fact that it is post-referendum), and to great celebrations within that region. Once begun, the annexation process would have been extremely hard to reverse, but now with the referendum having taken place it would be virtually impossible to revert to the status quo ante, considering the attitude of the Crimean population.

Looking ahead
Fears that Putin will now set his sights on Russian populations in Eastern Ukraine, before then taking over the Baltic states under similar pretexts are nothing more than fear-mongering. Crimea represented a unique situation in that it is almost an island, already contained a sizable Russian base which made an invasion unnecessary, and had a clear ethnic Russian majority. Taking the Eastern areas of Ukraine would be much messier, as it would be unclear where new lines should be drawn. Putin also knows that an invasion of the Baltic states would bring a robust military response from the West, since they are part of NATO. That is not to say that he will not threaten to do these things, Putin's actions in Crimea have given his threats a new credibility which he will take full advantage of at the negotiating table. 

As such, what will happen is probably exactly as Mr Putin foresaw before making his move. The West will take a long look at Crimea and realise that there is little to be gained from causing themselves intense economic discomfort by imposing significant sanctions, when the ultimate aim would be the liberation of a region of Russians who are currently enthusiastically celebrating their imprisonment. Red lines will be drawn around the rest of Ukraine, with stern repercussions spelt out for what would happen in the event of Russia crossing them, and a period of diplomatic frost will follow. This will pervade until an American president needs Russian help in Iran, Syria, or somewhere similar, at which point there will be a rapprochement. Meanwhile both sides will return to the long-term struggle for Ukraine, with the West trying to find the money to consolidate the new government’s independence and Putin hard at work undermining it. In the great game that is taking place in Eastern Europe, the score currently stands at about 4-1 to the West.