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March 28, 2018

The real reason for the sanctions against Russia

None of the multiple problems the world is facing have gone away before the Easter break - unlike the journalists and commentators who write about them and who seem to have disappeared for the holiday season. 

If there is one common thread in our stories today, it is wishful thinking. Wishful thinking still characterises the debate about Italian politics, about the future of the euro, and about the chances of a Brexit revocation. But when it comes to Russia, a long period of wishful thinking is drawing to a close. Many politicians in western Europe have invested a great deal of their political capital in good relations with Vladimir Putin. There are still pockets of this, but Putin has pulled off the unlikely feat of unifying a large part of the EU against himself. Last week's coordinated western sanctions were truly impressive in their scope. They won't solve the problem. They might be the start of a new cold war. An end to wishful thinking is usually not comfortable.

Markus Wehner has an excellent commentary in FAZ on the politics behind the orchestrated western sanctions, and its implications. We already reported on the deep splits in the German political system - with the SPD old guard, the AfD, the Left Party, and parts of the FDP opposed. Wehner makes the point that the strong reaction from the west has not so much to do with the actual Skripal affair, or even with the use of chemical agents on European soil. It is an escalation in a new cold war that started some time ago with the annexation of Crimea, the invasion of eastern Ukraine by Russian soldiers; the downing of MH17 over Ukraine; the murder of Boris Nemtsov, Russia's ruthlessness in Syria; and doping cases in international sport. He cites the German foreign ministry as saying that the cyber attacks against IT system of the federal government constituted another reason. Wehner notes that the German government is now ready to hold Russia directly responsible for those attacks, while that had not been the case in 2015 when the Bundestag's IT system were subject to an attack that led to the theft of classified security data.

Wehner concludes with the observation that the most effective sanctions the west could impose on Russia, however, would be to stop the Russian money laundering through the City of London. That has yet to happen.

Another article in FAZ takes a look at the EU countries that are not expelling Russian diplomats. In the case of Malta the official reason is that the Maltese embassy in Moscow is so small that sanctions would lead to the inevitable end of diplomatic relations. But the real reason, the article says, is the lucrative passport trade through which wealthy Russians obtain EU citizenship. Russian influence is also strong in Cyprus. And Austria ("felix Austria") sees a good business opportunity in the sanctions. The country's cocky young chancellor, Sebastian Kurz, portrays himself as the EU's principal interlocutor with Vladimir Putin. The article records that, even at the height of the Ukraine crisis, Putin was met with a ceremonious reception in Vienna. We note that this is the price the EU is paying for accepting member states that have no interest in a common security policy.

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March 28, 2018

Wishful thinking: Brexit edition

Wishful thinking has been a particular characteristic of both sides in the Brexit debate. The Brexiteers are wishful in their dreams of liberation, while the Remainers are deluding themselves over the possibility of a Brexit revocation. We all know about the stages of mourning. We are not quite through the phases of denial and anger, but there are at least some tentative signs of an arrival of the mature stages of acceptance and negotiation. There are some tentative signs that the most ardent Remainers are now willing to contemplate at least the theoretical possibility that Brexit might actually happen. The biggest danger of the revocation campaign is that the Remainers, instead of focusing on the post-Brexit world, will find themselves deprived of their favourite project, and will be stuck with a backward-looking agenda. We have argued before that this is not the time to revoke, but to accept Brexit, shape it differently, and build the foundations of a future return to the EU - with a positive agenda in contrast to the current toxic relationship between the UK and the EU.

One of the most glaring examples of wishful thinking in the Brexit debate is this article by Jean-Claude Piris, a former director general of the EU's legal service. He is one of the most ardent advocates of a Brexit revocation. He writes that there is no way to prevent a calamity except by revocation, which in his view could be done by a simple letter. This is a dishonest statement because there are no provisions for revocation in Article 50. It is possible that in such a case the ECJ would be asked to give an opinion that might be different from his own. The European Commission's legal opinion is different from that of Piris. It says revocation is possible, but only if accepted by the European Council. In other words, it cannot be done unilaterally. 

What Piris is doing is to abuse his own expertise in the quest for a political goal - which is to prevent Brexit from happening. We find it utterly dishonest for experts to dress up personal political views as some form of technical truth. Economists made the dreadful mistake of making exaggerated forecasts about the economic impact of Brexit. And some lawyers are now trying to do the same.

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March 28, 2018

Wishful thinking: Future of euro edition

The debate about the future of the eurozone is also subject to the fallacy of wishful thinking. There are those who peddle their pet projects, such as securitised safe bonds. There are those who ask for politically unrealistic treaty change. And then there are those, like Jean Pisani-Ferry, who argue in the name of what they perceive to be realism: the ultimate acceptance that Germany's liquidationist version of the eurozone must prevail, with softer edges. His entire explanation for this position is that the eurozone's classic dilemma - no default, no bail-out, no exit - remains unresolved and constitutes a potentially fatal flaw. He spends some time to argue how a eurozone exit is potentially fatal for the eurozone, and recommends debt restructuring instead - in line with the recommendations take by the group of French and German economists of which he was part. He says that the French president is ardently against semiautomatic debt restructuring. That is also our understanding of Emmanuel Macron's red line in the upcoming talks with Germany. This is the crucial section in what Pisani-Ferry proposes:

"But the French must confront the new reality. While the euro survived the financial disruption of 2010-2012, it is now confronted by a potentially more challenging political disruption. This threat must be faced. Absent a shared consensus on the sanctity of rules, there are not many possibilities. One is a euro without an anchor, something Northern Europe would not want to remain part of for long. Another is a euro with a wide-open exit door, something that would quickly lead to another financial crisis. And still another is a euro with defined and predictable internal debt-resolution mechanisms. The latter option is, admittedly, not without risks, but it is certainly safer than the exit threat. France, and Europe, should choose the lesser evil."

For a man who devoted large parts of his professional life to the eurozone, we find the lack of ambition shocking. The goal can surely not be to maintain the eurozone at all costs, come what may. The goal is surely to create a strong economic framework for the people in the EU to prosper. The eurozone has failed to deliver that, and it is far from clear how debt restructuring could solve this. The observation that it is better than euro exit is like arguing that pestilence is better than cholera. If you are stuck in a unresolvable dilemma, as we clearly are in the eurozone, the alternatives are starker: you can resolve the problems through a strong degree of centralisation like a single safe asset, a policy Pisani-Ferry himself once advocated before it became expedient no longer to do so; or, if that is not possible, it might be better to realise that the eurozone has failed its citizens. But another fix without any hope of stabilising the eurozone economy is delusional.

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March 28, 2018

Wishful thinking: Italy edition

And finally, we noted a comment by Angelo Panebianco on the front page of Corriere della Sera this morning - a comment that in our view is typical for the delusions of Italy's political establishment. As Five Star and Lega are moving slowly towards a possible government, he notes that Italian history suggest it is impossible for a bi-partisan political system to exist without the representation of the centre. During the cold war the political confrontation in Italy was between the Christian Democrats in the centre, and the Communists and Socialists on the left. Since 1990s, Italy has been dominated by two centrist parties. His conclusion is that there can be no bipolar system based on the Lega and Five Star.

It is possible, indeed likely, that Lega and Five Star will mess things up. But we think this type of historicist argument is not valid. Political events often do not happen until they do. There are no rules that always apply. The reason why the Italian political scene has shifted so dramatically are related to the country's disastrous experience as a member of the eurozone. Italy's political centre is pro-European in that it got Italy to join the eurozone, but without creating the necessary conditions which would have involved political and social reforms. European history is littered with examples of a disappearance of the political centre. Lega and Five Star are not in the same league as the fascists and the communists of the early 20th century, but their election victory clearly marks a break with the centrist political consensus. We are noting this time and again in discussion about Italian politics: the political establishment finds it hard to accept that they are no longer in charge. It is very similar to the mental displacement process that it is going in the Brexit debate. Change is hard to accept.

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