The debacle in Greece, a new episode?

The economic and social situation in Greece seems to continue the dangerous turn, as the EU leaders - mainly Germany - are not satisfied with the turn over of the reforms. The most dangerous though in this context is the resurgence of the far right and the increased hate against foreigners. Following an ambiance already heated by the presence of the far-right into the Parliament, the home affairs officials decided a couple of days ago to detain around 6,000 persons, out of them 1,600 will be deported soon, because considered illegal immigrants. On Sunday, supporters of the far-right attacked a car with a Pakistani man accused of murder. 

We should not ask ourselves what could be next. Take your time and look in the history books.

What to do in the case of Greece? Some lessons learned as well

Since a couple of months already, Greece is facing a debt deficit problem. Greece is an EU member and its problems are directly or indirectly affecting the whole European members of the Union. In the same time, the situation, including from the point of view of the history of the relations between Bruxelles and Athens, is offering lots of warnings regarding the future expansions of the European Union.

Trust?

These relations are concerning the trust between the Hellenic national institutions and the European bodies. The politics of expansions are decided on the basis of various factors: from strong lobby - political, individual, economic - from the part of the candidate countries, from political interests - as it was the case after the end of the Cold War, with so many countries once part of the other side of the Iron Curtain reclaiming their right to be "Europeans", or economic interests. The weights of these interests are varying and are not always very clear.

The final decision for entering the EU is took in accordance with the level of fulfillement of the so-called "Copenhagen Criteria", laid down at the June 1993 European Council in Copenhagen. Shortly, these criteria are requiring to the candidates countries: functional democratic governance, respect of the rule of law, respect for human rights and the protection of minorities, fulfilling the criteria for a functional market economy, legislative alignement with the communitarian legislation. More or less, these criteria are imposing various subjective definitions and, probably, should request careful rephrasing on the basis of recent lessons learned. But, by now, there were the main standards followed in deciding the fate of a candidate.

The annual progress of the candidate countries are evaluated in detailed reports, benchmarks for the local political decision makers. The reports are made in accordance with the information provided by local institutions - in the area of judiciary, or economy - as well as non-governmental association and individuals directly involved in the political processes. The key-word for gaining respect is reliability of the sources. Without reliable and transparent information you cannot build policies and, the degree of openness of various public institutions is an important denominator for the free societies, in comparison with the attitudes encountered in totalitarian states.

As for the member states, the need to respect rules and criteria continue, mainly regarding the economic standards. One of the most important set in this respect are those set by the art. 121 (1) of thee European Community Treaty, the so-called Maastricht criteria of convergence. These regulations are available for the EU member states to enter the third stage of the European Economic and Monetary Union (EMU) and to adopt the euro as their currency. Greece wanted among the first to join the EU, hoping to tranfer the responsibility for some internal problems to the European Central Bank. The candidacy was kept in check for two years, but soon after Greece joined the euro, in 2001, it emerged that the Greek government lied about its deficit.

The EU opened its first investigation into Greece’s deficit in 2004 after a revision of data revealed that, contrary to previous indications, the deficit had exceeded the EU ceiling every year since the country adopted the euro. But, at stake it was a more serious matter, one of national pride: the gap reached a euro-area record 7.5 percent that year was swollen by costs for hosting the Olympic Games in Athens.

To-do-lists

A country could adopt euro if:

- The inflation rate should be no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year; Budget deficit: This must generally be below 3% of gross domestic product (GDP)

- The national debt should not exceed 60% of GDP, but a country with a higher level of debt can still adopt the euro provided its debt level are falling steadily

- The long-term rate should be no more than two percentage points above the rate in the three EU countries with the lowest inflation over the previous year

- The national currency's exchange rate should have stayed within certain pre-set margins of fluctuation for two years.

But, as the case of Greece already showed, some serious loopholes could be open by the possibility to alternate the responsibility in terms of separation of monetary and fiscal politicies. Greece enjoyed monetary stability - enforced by the strength of the other EU member countries - but lacked completely a coherent fiscal policy. And, again, the matter of trust intervened: Athens authorites lied again about the budget deficit. Added to a national debt of 113 percent of the GDP, a huge lie of a deficit of 4 percent, instead of the real one, of 12.7 percent of the GDP, in 2009. The limit set is of 3 percent.

What to do?

The question is not so difficult: what EU should do in this respect? Plus: what is to be done in the next future, giving the fact that Greece is not the one and only country facing this kind of problems. In fact, with the exception of the big industrial countries, all of new members - from the Baltic to the last two Eastern European countries members Romania and Bulgaria, plus Spain and Portugal - could be exposed to serious economic risks.

As in the case of Greece it is more about serious system problem, but about accountability, helping Athens in this situation will risk to let unsanctioned a behavior creating serious problem to the economy of the European Union.

On the other side, what consequences to follow at the level of the Union if Greece will not benefit of the required help?

The EU informal summit from February 11, set a couple of lines concerning the "Greek file". According to the French President Nicolas Sarkozy, the European Union will monitor Greece's fiscal actions on a monthly basis, as the country bids to cut its massive public deficit. The objective set for 2010, according to Sarkozy, is to reduce the deficit by four percentage points of GDP.

A potential aid package might be delivered as well, with a German contribution of almost 20%. In this situation, apparently, a situation was already found. Greece will be saved and, maybe, due to the strict monitoring system announced, it will be able to correct the not-telling-the-truth-attitude in respect with the EU institutions. In the same time, strict and clever mecanisms of control and reporting, mainly in the area of economic parameters, are more than necessary. New countries from the Western Balkans are making small but strong steps to get closer to Bruxelles. Some of them are inheriting serious system disfunctionalities dued to the lack of institutional cultures. Greece could be a start for redefining and reanalysing the general and particular policies. Including regarding building trustworthy relationships among member countries.

What Does Russia Think

The EU's Russia policy cannot succeed as long as it continues to rest on faulty analysis and mistaken assumptions. This is the main conclusion of What does Russia think?, a collection of politically revealing essays by intellectuals whose views influence the Kremlin - many of whom have advised Putin or Medvedev - which the European Council on Foreign Relations has published today. The collection includes essays by Fyodor Lukyanov, Valery Fadeev, Vyacheslav Glazychev, Gleb Pavlovsky and Leonid Polyakov.

Despite a tendency toward insularity, the policy debate in Russia as reflected through these essays is ongoing and lively. As ECFR Russia experts Ivan Krastev, Mark Leonard and Andrew Wilson write in their joint introduction: "If we want to influence and deal with Russia, we need to understand it. But if we want to understand Russia, we should be interested in it. Unfortunately, we are not. Taken together, these essays show that the EU will only be able to develop an effective approach to Moscow if its policy makers rediscover some of the curiosity for Russia's internal debates that they had during the Cold War."

According to the intellectuals:

Russia does not want to be like the EU. The overarching quest for most Russian policy-makers is not to move closer to their Western neighbours, as many in the EU would like to think, but rather to free themselves from the West. Leonid Polyakov is the Chair of General Political Sciences at Moscow State University, and has worked on developing and publicising the controversial "sovereign democracy" concept. In his essay, An Ideological Self-Portrait of the Russian Regime, Polyakov writes: "the task before us is to turn Russia from an imitator of other civilisations into a model to be imitated by others."

There is mounting distrust towards the EU in Russia. Russia fears that its borders are vulnerable, which explains the ongoing drive to surround itself with buffer states. Fyodor Lukyanov is editor of the journal Russia in Global Affairs, which produces the most widely read analysis of Russian foreign policy. As he writes in his essay Rethinking Security in 'Greater Europe', "not a single country in the former Soviet Union, including Russia, can say for certain that its borders are historically justified, natural and, therefore, inviolable".

The West has lost interest in discovering what is really going on in Russia, and relies on obsolete perceptions going back to the end of the Cold War. Gleb Pavlovsky is head of the Russia Institute and is one of the Kremlin's leading strategists. He helped launch Putin as Yeltsin's successor and ran Putin's two election campaigns in 2000 and 2004. In his essay, Two missions in Moscow, Pavlovsky argues that western liberals focus stubbornly on what Russia lacks: "The West persistently repeats, like a mantra, that Russia is "weak". The US refuses to recognise, and the EU refuses to accept, the reality of a global Russia. This is the biggest problem in relations between Russia and the West."

Russian political debate is far more complex than a struggle between democracy supporters and Putin followers. There is an underlying "Putin consensus" in Russia - Putin's approval rating hovers at around 70%, while support for the government he heads is not even a third of this figure. But in denouncing the "Putin consensus" as manifest authoritarianism, the West fails to appreciate its social and political origins. To understand it, one has to look back at the debilitating crisis resulting from the collapse of the Soviet Union and the anarchic democracy that followed. Vyacheslav Glazychev is the Managing Director of the Evropa publishing house which specialises in books on Russian politics, philosophy and history. In his essay The 'Putin consensus' Explained', he argues that "fear of empty space" is the essential reason for Putin's majority support. According to Glazychev, "the Putin phenomenon has only an indirect relationship with the rational. Without a shadow of a doubt, Putin's macho style has an almost magical effect on the majority of Russian citizens."

The economic crisis has strengthened Putin's Russia. Contrary to many predictions, the economic crisis has made the Russian state more powerful at home and abroad. Valery Fadeev is the editor of the influential business weekly Ekspert. In his essay, Has the economic crisis changed the world view of the Russian political crisis, he writes that when the economic crisis hit, "the authorities acted quickly and nearly always correctly. They preserved the financial system at a high level of functionality and prevented panic from entering the banking market."

For the full text of the paper:http://ecfr.eu/page/-/documents/ecfr_what_does_russia_think.pdf

Japan, ready for the elections

to be held August 30, for the lower house of the parliament.

Factobox (Reuters) - policy challenges faced by the new government

Japan announced the beginning of this week, the end of the recession period.

Sparks of hope from the economy

France and Germany exit recession.

"Fragile recovery" in the UK case.

Euro, third day of gains against the dollar.

Pros and cons the stimulus package.

The Geography of Recession

Peter Zeihan
Stratfor.com
June 2



Related Link
Special Series: The Recession Revisited
Special Series: The Financial Crisis

The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.
Let’s begin with some simple numbers.
As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)
But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.
The United States and the Free Market
The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.
Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.
The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.
The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)
Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.
Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).
With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.
Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.
Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.
Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.
Russia and the State
If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.
Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.
Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.
Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.
Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.
But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.
China and Separatism
China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.
Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

(click image to enlarge)

With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.
Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.
Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.
China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.
Discordant Europe
Europe faces an imbroglio somewhat similar to China’s.
Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.
These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.
Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.
And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.
Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.
And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.

'I Am Dr. Realist'

The bottom is still a year off, says the economist who warned of the plunge.

Lally Weymouth

Newsweek
April 24

Most other economists rolled their eyes when Nouriel Roubini warned in a September 2006 speech to the International Monetary Fund that the global bubble was going to burst. They nicknamed him "Dr. Doom"—and then the hard times hit. As finance ministers and central bankers from the world's major economic powers gather in Washington this weekend, they might consider listening to what Roubini has to say now. The New York University professor told NEWSWEEK's Lally Weymouth why he sees more trouble ahead and what the recovery will look like. Excerpts:

Weymouth: What do you believe is happening to the economy today?
Roubini: The rate of economic contraction you have seen in the last two quarters—6 percent annualized—is going to slow down. The optimists are already talking about the "green shoots" of spring, about economic activity becoming positive. [They say] we will have positive growth in the third quarter, and in the fourth quarter we will grow 2 percent over the previous quarter. They expect that next year, growth will go back to above 2 percent.

Compared with this optimistic consensus, I believe that the rate of economic contraction is going to slow from minus 6 percent in the last two quarters to minus 2 percent by the fourth quarter. Next year, I believe that the growth rate is going to be 0.5 percent for the U.S. average. Even if we are technically out of a recession, we are going to feel like we are in a recession. The bottom of the economy is not going to be in three months, but rather toward the beginning or middle of next year.

So you are still Dr. Doom?
No, I am not Dr. Doom. I am Dr. Realist. I don't believe we are going to end up in a near depression. Six months ago I was more worried about an L-shaped near depression. Today, after the very aggressive policy actions taken by the U.S. and other countries, the risk of that near-depression L has been reduced from 30 percent to 15 or 20 percent. We are instead in the middle of a U.

You think the Obama administration is on the right track?
I have to give credit to the administration. Within 30 days of coming to power, they did an $800 billion stimulus package, a new program to deal with mortgages and foreclosures, and also a bank plan that when Treasury Secretary Tim Geithner came with details, made the markets rally sharply. Each one of these three programs has some flaws. The fiscal stimulus could have been more front-loaded. For the mortgages, eventually you are going to need a reduction of the face-value principal of the mortgages. And on the banks, I believe after the stress tests it is going to be obvious that even some of the largest banks are so fundamentally in trouble that you cannot buy their toxic assets. You need to take over these banks on a temporary basis, clean them up and then sell them back to the private sector.

You have to nationalize these banks?
Yes. If you do not like the dirty N word, you can call it a "temporary takeover."

How about the deficit the banks are building up?
In the short term I am supportive of it, because if we didn't have these fiscal deficits, the recession would become a depression. On the other side, I do agree that this is not a free lunch. We are going to add trillions of dollars to our public debt, which is going to go from 40 to 80 percent of the GDP. There are only a few ways in which you can finance that extra public debt. If you rule out default and a capital levy on wealth, you either have the "inflation tax" or you have to painfully cut spending or raise taxes, and either one is not going to be politically palatable.

What is going to fuel the next growth cycle?
That is a difficult question. The periods of high growth in the United States in the last 25 years have been characterized by an asset and credit bubble. Whatever the future growth is going to be, this time around it needs to be sustainable and not bubble-prone because we are running out of bubbles to create. We had the real-estate [bubble], tech bubble, housing bubble, hedge-fund bubble, private-equity bubble, commodities bubble, even the art bubble—and they are all bursting.

What makes you different from the other economists?
We think usually that crowds—on average—can be wiser than individuals. In this case, most people got it wrong because whenever we are in an irrational, exuberant bubble, people fail to think correctly.

Do you believe this is a bear-market rally or do you think it is the market anticipating an economic recovery?
As we reach newer lows, we may be closer to a level of the market that is fundamentally right. A year ago we were not as close to a true bottom. Today we are closer to it. As we become closer to the bottom of the economy, the stock market looks ahead and sees the light at the end of the tunnel and rallies. In spite of these caveats, I would argue that even the latest market rally is a bear-market rally.

Do you worry about China getting tired of holding our bonds?
In the short run, China has no option but to accumulate more reserves and dollar reserves. Why? Because if they stop doing that, their currency would appreciate sharply while their exports are plunging. So in the short run, they are going to keep on accumulating. But I have seen a huge number of new initiatives in the last month that suggest [the Chinese] are pushing for the yuan to become an international currency and a reserve currency. They are doing bilateral deals with countries like Argentina and half a dozen others in yuan, not in dollars.

They are moving away from the dollar?
Yes, slowly they will. First they have to establish their own currency as an international currency. That will take years, but already in a month they have done more than in the last 10 years.

Early signs of win for Iceland's left-wing parties

Herdis Sigurgrimsdottir

AP

April 25

Iceland's leftist government was headed for a strong victory in the country's general election, according to preliminary results late Saturday.

Early results showed that a left-wing coalition made up of the Social Democratic Alliance and the Left Green Movement has won 35 out of the 63 seats in parliament.

The two parties are part of a caretaker government that took office in February after public protests about Iceland's economic collapse toppled the previous conservative administration. The left-wing coalition is led by interim Prime Minister Johanna Sigurdardottir.

The results are an overwhelming rejection of the conservative, pro-business Independence Party, which headed a coalition government last fall when the banking system failed.

The Social Democratic Alliance has won 22 seats in parliament with 33 percent of the votes counted, while the Left Green Movement has 13 seats with 19.9 percent of votes, early results showed. The Independence Party has 15 seats with 22.5 percent of votes.

The centrist Progressive Party has nine seats with 12.8 percent of votes and the Citizens Movement has four seats with 8.2 percent of the vote. Around 38 percent of all votes have been counted so far.

The global financial crisis washed up hard on the shores of this volcanic island of 320,000 people. After racking up massive debts during years of laissez-faire economic regulation and rapid expansion, the country's three main banks collapsed within the space of a week in October.

The government sought a $10 billion International Monetary Fund-led bailout and the country's currency, the krona, has plummeted.

Unemployment and inflation have spiraled and the IMF has predicted that the economy will shrink by about 10 percent in 2009, which would be Iceland's biggest slump since it won full independence from Denmark in 1944.

Iceland's election commission announced the early results Saturday night shortly after polls closed around the country.

Deflation's back after 50 years: Falling mortgage, transport and fuel prices drive down the RPI

Olinka Koster and Sam Fleming

Mail on-line

April 22

Deflation has returned to Britain for the first time in nearly half a century, official figures show.

Plunging mortgage payments drove down prices by 0.4 per cent in March compared with 12 months earlier.

The figures, from the Retail Price Index, represent the first time deflation has been recorded here since March 1960.

Deflation: The Retail Prices Index has turned negative for the first time since 1960. Prices fell to minus 0.4 per cent in March, official figures show

The news could herald widespread pay freezes or cuts because the RPI is used by many employers to set wages.

It also suggests the deepening recession is forcing firms to slash prices.

Coming on the eve of one of the most difficult Budget statements since the Second World War, the report is a serious concern for Gordon Brown and Chancellor Alistair Darling.

It will also cause alarm at the Bank of England, which is printing at least £75billion of fresh cash to prevent a deflationary spiral.

Prices were driven down by falling fuel and transport costs, mainly as a result of cheaper European air fares.

Even the cost of food – particularly-fresh fruit and vegetables – is finally starting to fall, according to the Office for National Statistics.

But while the slide in the RPI – which stood at zero in February – suggests the cost of living is falling for some families, the report suggested other households are still experiencing painful rises in prices.

The Government’s favoured measure of inflation, the Consumer Prices Index, remains firmly in positive territory, at 2.9 per cent – well above the Bank of England’s target of 2 per cent.

CPI is a measure of the average price of consumer goods and services used by households.

It strips out house prices, so unlike the RPI does not reflect the 21 per cent fall in property prices since their peak.

This means that pensioners, many of whom have lower or non-existent mortgage costs but spend much of their income on fuel bills, may face an actual inflation rate of 12.6 per cent.

The fall in the RPI was attributed to the effects of deep interest rate cuts. In October, the base rate was 5 per cent, but since then it has plunged to an historic low of 0.5 per cent.

More...

• 1960: The year The Beatles formed, a loaf of bread cost 5p and a house £2,530
• Brown pins hopes on £1bn scheme to boost housing market as Darling admits it will take a decade to pay of credit crunch debt
• 5,000 British jobs at risk as desperate General Motors offers to sell Vauxhall 'for a song'
• Confidence returns to housing market as property asking prices rise for third month in a row
• Higher tax rates for wealthiest 1% of population may CUT revenue
• ALEX BRUMMER: This is going to hurt, make no mistake
• What recession? Tesco makes £3.13bn profit as supermarket giant rings up sales of £1bn every week
• A history of inflation (thisismoney.co.uk)
• How inflation affects interest rates (thisismoney.co.uk)
• Global losses from credit crunch hit $4trillion as IMF warns recovery with be 'slow and painful'
• Don't try and stop the housing crash, Bank of England official warns Darling

Analysts pointed out that the RPI is the inflation measure commonly used by employers to determine pay rises. Howard Archer, of the consultancy

IHS Global Insight, said: ‘The decline in March will maintain the downward pressure on wages already coming from soaring unemployment and companies’ deteriorating profitability. As a result, many workers are likely to see wage freezes or even pay cuts.’

Brendan Barber, general secretary of the TUC, said: ‘This shouldn’t be the signal for employers across the country to seek wage freezes or cuts in pay.

‘Although in some workplaces unions have agreed to put pay increases on hold or take cuts in wages to save jobs, many companies are still profitable and able to afford decent pay rises.

‘Widespread wage freezes would prompt families to cut back on their spending, which would be the last thing the UK’s struggling economy needs right now.’

While the CPI remained elevated, many economists expect it to slide into negative territory later this

year. This could herald the onset of full-blown deflation, which is defined as a sustained, generalised fall in prices across the economy.

Deflation cripples an economy when coupled with sinking output. It can prompt consumers to postpone spending as they wait for goods to become even cheaper.

Firms are then left battling for business, unemployment will soar higher, and it will become harder for Britain to prise itself out of recession.

If prices keep falling, it also means money will be worth more, imposing a larger burden on those with debts.

David Kern, chief economist at the British Chambers of Commerce, said: ‘Deflationary pressures could make the recession worse in the short term, despite quantitative easing and the huge budget deficit posing inflationary pressures over the medium term.

‘The Chancellor must address both these conflicting risks in his Budget. He must support business and administer targeted fiscal stimulus for the year ahead.

‘But he also has to present a credible medium-term plan for restoring the public finances back to health.’

... but for the elderly, inflation leaps to 12.6%

The elderly are facing a much higher rate of inflation than the official figures suggest, experts say.

While the Retail Price Index fell to -0.4 per cent for March, pensioners are facing an inflation rate of 12.6 per cent, according to the analysts Capital Economics.

This is because pensioners spend their money in a different way to the average consumer.

Much more of their income goes on fuel bills and less on mortgages, which many have paid off entirely.

‘Falling headline inflation masks the fact that many older people’s real rate of inflation remains far higher than the average,’ said Michelle Mitchell, of the charity Help the Aged and Age Concern.

‘Most older people aren’t benefiting from falling mortgage interest rates, which are driving down inflation, and are still struggling with high food and fuel bills.

‘In addition, many have seen the income they relied on from savings reduced to almost zero, leaving many more pensioners facing difficulty affording anything more than the basics.’

Pensioners are being particularly badly stung by rising utility bills and the cost of everyday household essentials.

Costs of food and non-alcoholic drinks also rose rapidly, with a 10.5 per cent annual gain.

The price of meat was up 14.6 per cent, while vegetable costs rose 15.8 per cent and the price of tea, coffee and cocoa increased 14.1 per cent.

New Government in Israel

A list, by party, of the Israeli government ministers

LIKUD:

Prime Minister: Benjamin Netanyahu
Vice Premier and Regional Cooperation Minister: Silvan Shalom
Vice Premier and Minister of Strategic Affairs: Moshe Ya'alon
Finance: Yuval Steinitz
Education: Gideon Sa'ar
Justice: Yaakov Neeman (Likud-appointed)
Transportation: Yisrael Katz
Diaspora Affairs and National Public Relations: Yuli Edelstein
Communications: Moshe Kahlon
Environmental Protection and Ministerial Liaison to Knesset: Gilad Erdan
Science, Culture and Sport: Limor Livnat
Minister without portfolio (for citizens' services, computerization and Internet): Michael Eitan
Strategic Affairs: Moshe Ya'alon
Minister without portfolio (for intelligence agencies): Dan Meridor
Minister without portfolio: Benny Begin
Minister without portfolio: Yossi Peled

Yisrael Beiteinu:

Foreign Affairs: Avigdor Lieberman
Public Security: Yitzhak Aharonovitch
National Infrastructures: Uzi Landau
Tourism: Stas Meseznikov
Immigrant Absorption: Sofa Landver

Labor:

Defense: Ehud Barak
Industry, Trade and Labor: Benjamin Ben-Eliezer
Welfare and Social Services: Isaac Herzog
Agriculture: Shalom Simhon
Minister without portfolio (for minorities): Avishay Braverman

Shas:
Interior: Eli Yishai
Construction and Housing: Ariel Atias
Religious Affairs: Ya'acov Margi
Minister without portfolio in Prime Minister's Office: Meshulam Nahari

Habayit Hayehudi:
Science and Technology: Daniel Herschkowitz

Other:
Health: no appointment, Netanyahu will oversee a deputy minister
(Ehud Barak, Avigdor Lieberman, Eli Yishai, Dan Meridor are deputy prime ministers.)

A look at key members of Israel's new government

AP

BENJAMIN NETANYAHU: The new prime minister became the country's youngest leader in 1996 before being driven out of office three years later by Ehud Barak, who will now answer to him as defense minister. Netanyahu's swearing-in Tuesday crowns a decade-long comeback.

Long a hawkish opponent of territorial withdrawal, which he says only emboldens Israel's enemies, Netanyahu has been taking a notably conciliatory line since the February election. He now says he will continue peace talks, though he has still not uttered the words "Palestinian state."

Netanyahu, 59, comes from a prominent Israeli family — he's the son of a well-known historian and the brother of a war hero who died in Israel's daring 1976 hostage rescue in Entebbe, Uganda.

He spent years in the U.S., holds two degrees from the Massachusetts Institute of Technology, and speaks fluent, American-accented English, a background that could play an important role as he works to maintain Israel's vital strategic relationship with Washington.

EHUD BARAK: Defense minister in the outgoing government, the Labor Party chief will retain his job in the new administration after leading the venerable but ailing centrist movement into a coalition with Netanyahu.

The son of Eastern European immigrants, he was born on a communal farm in 1942 and spent 36 years in the army, becoming Israel's most-decorated soldier and the military chief of staff. He joined the government under Prime Minister Yitzhak Rabin, and in May 1999, he ousted Netanyahu as prime minister.

Barak boosted his image with the recent Gaza campaign, but saw his party's support slip to a historic low — just 13 seats in Parliament.

AVIGDOR LIEBERMAN: An immigrant from Moldova who was once a marginal political player, he will serve as foreign minister and Israel's face abroad — an almost unthinkable proposition just a few months ago for a polarizing politician widely criticized as a racist.

Lieberman's election platform has drawn allegations of racism for a proposal that could end up stripping Israeli Arabs of their citizenship unless they declare their loyalty to the Jewish state.

But Lieberman's policies are not those of traditionally hard-line parties like Netanyahu's Likud, and he says he supports the creation of a Palestinian state.

Instead, his focus has on Israel, particularly on the perceived disloyalty of the country's Arab minority, which he sees as a fifth column. He supports redrawing Israel's borders and pushing areas with heavy concentrations of Arabs out of the country and into Palestinian jurisdiction.

MOSHE YAALON: A political newcomer, Yaalon will serve as deputy prime minister and a minister in charge of strategic affairs. That will give him a voice in important decisions about Israeli actions toward its archenemy, Iran, which Israel says is building a nuclear weapon that could pose an existential threat.

Yaalon served as the military chief of staff between 2002 and 2005, leading operations in the West Bank that helped crush armed Palestinian opposition to Israel there.

He was critical of Israel's unilateral withdrawal from Gaza in 2005, and has taken a hard line on security issues. Widely seen as a straight shooter not tainted by politics, he spent time at a think tank in Jerusalem before joining the Likud ahead of the elections.

Netanyahu's policy plans

Reuters

Benjamin Netanyahu had previously the job from 1996 to 1999 and took a tough line on the Palestinians and the economy.

This year he led the right-wing Likud party back to power by promising a new approach to peace efforts and ways to stimulate the economy. Here are some of Netanyahu's ideas, and clues to their implementation:

* The U.S.-backed peace process has gone around in circles. Israel should instead focus on creating a generation of Palestinians with a real stake in peace, by actively building up the Palestinian economy.

* Creating a genuine "peace partnership" based on mutual economic interest, and avoiding the deadlock over territorial disputes, will enhance Israel's security.

* Creating a Palestinian state is not a priority now, and maybe never. Netanyahu refuses to reaffirm publicly an Israeli commitment to the basic, Western-backed acceptance that there can be no alternative to a "two-state solution."

* He will not try to back out on past treaties. The coalition deal states that "Israel is committed to all the diplomatic and international agreements that Israeli governments have signed throughout the years."

* He has a "strategic goal" of toppling Islamist Hamas from its power base in the Gaza Strip, since Iranian-armed Hamas says it will never recognize Israel in any case.

* Netanyahu -- who quit the Ariel Sharon government in 2005 in protest at its decision to withdraw from Gaza -- says the outgoing government's January offensive to tame Hamas militants stopped too soon and failed to improve Israel's security.

* He regards Iran's suspected drive to build an atomic bomb as a clear and present danger to Israel's survival which cannot be left to fester if Western diplomatic efforts fail. Like his centrist opponents he refuses to rule out an Israeli strike.

* With its ties to Iran, Syria seems an unlikely peace partner for Netanyahu any time soon in his premiership -- unless opening a channel to Damascus promises to pay off diplomatically.

* He will not begin his premiership by ordering any stop to the expansion of certain Israeli settlements on occupied West Bank land, despite the likelihood of United States and European Union criticism of these towns as obstacles to peace.

* His coalition promises to "enforce the law" on unauthorized settler outposts in the West Bank which the previous government promised to evacuate but mostly left untouched.

* His chosen foreign minister, coalition partner Avigdor Lierberman, looks on Israeli Arabs as a fifth column who should be invited to leave Israel and live with the Palestinians if they cannot commit to full loyalty to the Jewish state.

* He avoided forming a government relying too heavily on Lieberman and, after winning more time, secured the alliance of Ehud Barak's Labor party for a balanced "unity" government as he calls it -- a sign he will not be hostage to the far-right.

* Netanyahu impressed investors with free-market policies that took Israel out of recession a few years ago, and he aims to re-inject confidence into the market place by keeping a tight hand on the finance ministry.

* Netanyahu says he will cut taxes to stimulate the flagging economy, which could make the tight control of state spending his toughest task, having to say 'No' to coalition partners. There is already speculation about big defense and education budget cuts.

Quotes from the investment speech

-- "The government will work to bolster national security and achieve personal security for Israel's citizens through a determined struggle against violence and terror."

-- "The government will move the diplomatic process forward and work for the advancement of peace with all our neighbors, while protecting the historic and national security interests of Israel."

-- "The government will promote a plan to deal with the economic crisis and work toward the creation of the economic conditions that will enable sustainable growth, while creating and protecting jobs."

-- "The government will maintain the Jewish character of the state and Jewish tradition, and also respect the religions and traditions of the country's ethnic communities."

The past present of a Minister of Foreign Affairs

Reuters

Israel's incoming foreign minister, Avigdor Lieberman, has stirred controversy over the years with comments about Arabs, notably Arab Israeli citizens and also Egypt. He once suggested Egypt's Aswan Dam might be bombed and last year he said the president of Israel's Arab peace partner could "go to hell."

Following is a selection of quotes from Lieberman, head of the Yisrael Beitenu party:

2009 - "No loyalty, no citizenship" -- Lieberman's election slogan calling for legislation to require Israelis, including Arab citizens, to swear loyalty to the Jewish state.

"What we state unequivocally is that we are completely opposed to what has been and still is the guiding principle of Israel's foreign policy: 'land for peace' ... There is either 'peace for peace' or the exchange of territory and populations."

(Referring to his proposal to trade Arab-populated parts of Israel to a Palestinian state in exchange for Israel annexing Jewish settlements in the occupied West Bank)

"You have to be generous to your friends and cruel to your enemies. We are simply a society of wimps."

2008 - "Time and time again our leaders go to Egypt to meet (President Hosni) Mubarak and he has never agreed to make an official visit here as president. If he wants to talk to us, he should come here. If he doesn't want to come here, he can go to hell."

2007 - (To an Israeli Arab fellow member of Parliament:) "You are an ally in the Knesset of terrorists. I hope that Hamas will take care of you and all the rest once and for all. Don't worry, your day will come."

"If Israel has to deal with the Iranian threat by itself, it can do so."

2006 - Speaking of Israeli Arab legislators who support the Palestinian cause: "The fate of the collaborators in the Knesset will be identical to that of those who collaborated with the Nazis. Collaborators, as well as criminals, were executed after the Nuremberg trials at the end of the World War Two. I hope that will be the fate of collaborators in this house."

2001 - "Mubarak continues to act against us and to travel for consultations with Saddam Hussein. If he carries out his threat and puts forces into the Sinai, it would be an example of a (crossing) of the red line to which we would have to respond strongly, including by bombing the Aswan Dam."

Facts and figures
The composition of the ruling coalition

Benjamin Netanyahu presented the new Israeli government later on Tuesday made up of right- and left-leaning parties with differing views on how to resolve the Israeli-Palestinian conflict.

Following are the political parties that form the coalition government, the number of seats they hold in the 120-member parliament and positions their leaders hold on main issues.

LIKUD - 27. Netanyahu, who leads the right-wing party, wants to shift the focus of stalled peace negotiations with the Palestinians away from territorial issues, which he says have blocked progress towards a deal, to shoring up the economy in the West Bank. He has shied away from declaring support for a Palestinian state. Any Palestinian entity, Netanyahu says, must have limited powers of sovereignty and no military. He has pledged to seek a broad regional peace agreement. Curbing Iran's nuclear programme, which Israel calls a threat to the existence of the Jewish state, will be high on the agenda, Netanyahu says.

YISRAEL BEITENU - 15. Avigdor Lieberman's Russian-accented Hebrew has been music to the ears of many of the million Israelis who came from the former Soviet Union since the 1980s. The incoming foreign minister's policies towards Arabs, which some critics call racist, have won him a wider electorate. Lieberman does not oppose in principle the establishment of a Palestinian state. But he says land where many of Israel's 1.5 million Arabs live should be "swapped" for West Bank Jewish settlements in a peace deal with the Palestinians. He also wants Israelis, including Arab citizens, to swear allegiance to the Jewish state.

LABOUR - 13. Having ruled for the first half of Israel's 60 years, Labour spearheaded interim peace accords with the Palestinians in the 1990s. The centre-left party is now led by Defence Minister Ehud Barak, who served as prime minister from 1999 to 2001. Labour backs the creation of a Palestinian state. However, the party signed a coalition deal that did not mention statehood. Instead, the political pact contained a promise the new government would respect Israel's existing international agreements -- accords that envisage a Palestinian state. Barak is to stay on as defence minister under Netanyahu. Some of Labour's legislators opposed to the coalition deal may opt not to support the government.

SHAS - 11. A fixture in successive governments, the Union of Sephardic Torah Observers, or Shas, draws most of its supporters from low-income, religious Jews of Middle Eastern origin whose spiritual leader is the 88-year-old, Iraqi-born rabbi Ovadia Yosef. Its deal with Netanyahu focused on maintaining welfare benefits. The party, led in parliament by Eli Yishai, is hawkish on Palestinian affairs but does not oppose the principle of giving up land for peace with a future Palestinian state. It does, however, oppose negotiations over Jerusalem.

JEWISH HOME - 3. A small ultra-right religious party opposed to giving up territory for peace. It believes that Jordan, which already has a large Palestinian population, should be the homeland for Palestinians. In signing with Netanyahu, the party said it would focus primarily on education and social issues.

For blogs and links on Israeli politics and other Israeli and Palestinian news, go to blogs.reuters.com/axismundi

Hungary's Ruling Party Picks Premier

Edith Balasz, Charles Forelle

The Wall Street Journal

March 30

Hungary's ruling Socialist Party nominated economy minister Gordon Bajnai to become the country's next prime minister, a step that would put him in charge of pressing tough spending cuts to pull Hungary from the brink of fiscal crisis.

Reuters

Gordon Bajnai was picked by the ruling Socialists to replace Prime Minister Ferenc Gyurcsány.

Mr. Bajnai, a close associate of outgoing Prime Minister Ferenc Gyurcsány, said at a news conference on Monday that the reforms needed would "have an impact on all Hungarian families and every Hungarian."

The economy "has no extra months to waste before implementing measures that radically change the way the government works," said the 41-year-old former businessman.

The main task for the prime minister-designate, who would take office April 14, will be to cut public spending, particularly on state employees and on social programs such as pensions. Crisis struck in October when Hungary was unable to sell bonds to finance those deficits.

An emergency lifeline from the International Monetary Fund and other bodies has helped the country pay its bills for the time being. But those failures eventually felled Mr. Gyurcsány.

On Monday, rating agency Standard & Poor's cut Hungary's debt to triple-B-minus, its lowest investment-grade rating, saying that the IMF support was "significant yet finite" and that Hungary still faced deeply entrenched problems. The agency predicted a 6% decline in Hungary's gross domestic product this year.

After S&P's move, buyers fled the government-bond market and the forint weakened against the euro, to 311.25 forint to the euro in afternoon trading, up 2.15% on the day.

Mr. Bajnai's nomination ends a week of scrambling to find a new prime minister and avoid early elections. The ruling Socialist Party and the liberal SZDSZ party had trouble agreeing on a successor after Mr. Gyurcsány offered his resignation March 21. Under Hungarian law, Mr. Bajnai would become prime minister if a no-confidence vote against Mr. Gyurcsány succeeds in Parliament.

Write to Edith Balazs at edith.balazs@dowjones.com and Charles Forelle at charles.forelle@wsj.com

See also:

Gordon Bajnai's CV

The United States, Germany and Beyond

George Friedman
Stratfor
March 30

Three major meetings will take place in Europe over the next nine days: a meeting of the G-20, a NATO summit and a meeting of the European Union with U.S. President Barack Obama. The week will define the relationship between the United States and Europe and reveal some intra-European relationships. If not a defining moment, the week will certainly be a critical moment in dealing with economic, political and military questions. To be more precise, the meeting will be about U.S.-German relations. Not only is Germany the engine of continental Europe, its policies diverge the most sharply from those of the United States. In some ways, U.S.-German relations have been the core of the U.S.-European relationship, so this marathon of summits will focus on the United States and Germany.

Although the meetings deal with a range of issues — the economy and Afghanistan chief among them — the core question on the table will be the relationship between Europe and the United States following the departure of George W. Bush and the arrival of Barack Obama. This is not a trivial question. The European Union and the United States together account for more than half of global gross domestic product. How the two interact and cooperate is thus a matter of global significance. Of particular importance will be the U.S. relationship with Germany, since the German economy drives the Continental dynamic. This will be the first significant opportunity to measure the state of that relationship along the entire range of issues requiring cooperation.

Relations under Bush between the United States and the two major European countries, Germany and France, were unpleasant to say the least. There was tremendous enthusiasm throughout most of Europe surrounding Obama’s election. Obama ran a campaign partly based on the assertion that one of Bush’s greatest mistakes was his failure to align the United States more closely with its European allies, and he said he would change the dynamic of that relationship.

There is no question that Obama and the major European powers want to have a closer relationship. But there is a serious question about expectations. From the European point of view, the problem with Bush was that he did not consult them enough and demanded too much from them. They are looking forward to a relationship with Obama that contains more consultation and fewer demands. But while Obama wants more consultation with the Europeans, this does not mean he will demand less. In fact, one of his campaign themes was that with greater consultation with Europe, the Europeans would be prepared to provide more assistance to the United States. Europe and Obama loved each other, but for very different reasons. The Europeans thought that the United States under Obama would ask less, while Obama thought the Europeans would give more.

The G-20 and Divergent Economic Expectations

Begin with the G-20 summit of 20 of the world’s largest economies, which, along with the Americans and Europeans, include the Russians, Chinese and Japanese. The issue is, of course, the handling of the international financial crisis. In contrast to the G-20 meetings held in November 2008, the economic situation has clarified itself substantially — itself an improvement — and there are the first faint signs in the United States of what might be the beginning of recovery. There is still tremendous economic pain, but not nearly the panic seen in October.

There is, however, still discord. The most important disagreement is between the United States and United Kingdom on one side and France and Germany on the other. Both the United States and the United Kingdom have selected a strategy that calls for strong economic stimulus at home. The Anglo-American side wants Europe to match it (though the United Kingdom has begun tempering its demands). It fears that the heavily export-oriented Germans in particular will use the demand created by U.S. and British stimulus on their economies to surge German exports into these countries as demand rises. Germany and France would thus get the benefit of the stimulus without footing the bill, enjoying a free ride as the United States builds domestic debt. We must focus here on Germany and the United States because Germany is the center of gravity of the European economy just as the United States is of the Anglo-American bloc. Others are involved, but in the end this comes down to a U.S.-German showdown.

German Chancellor Angela Merkel argued that Germany could not afford the kind of stimulus promoted by the Anglo-Americans because German demographic problems are such that the proposed stimulus would impose long-term debt on a shrinking population, an untenable situation. Germany and France’s position makes perfect sense, whether it is viewed as Merkel has framed it, or more cynically, as Germany taking advantage of actions Obama already has taken. Either way, the fact remains that German and U.S. national interest are not at all the same. As Merkel put it in an interview with The New York Times, “International policy is, for all the friendship and commonality, always also about representing the interests of one’s own country.”

Paralleling this is the issue of how to deal with the Central European financial crisis. Toxic U.S. assets did not create this problem, internal European practices did. Western European banks took dominant positions in Eastern Europe in the past decade. They began to offer mortgages and other loans at low interest rates denominated in euros, Swiss francs and yen. This was an outstanding deal unless the Polish zloty and the Hungarian forint were to plunge in value, which they have over the past six months. Loan payments soared, massive defaults happened, and Italian, Austrian and Swedish banks were left holding the bag.

The United States viewed this as an internal EU matter, leaving it to European countries to save their own banks. Meanwhile, the Germans — who had somewhat less exposure than other countries — helped block a European bailout, arguing that the Central European countries should be dealt with through the International Monetary Fund (IMF), which was being configured to solve such problems in second-tier countries. From the German point of view, the IMF was simply going to be used for the purpose for which it was created. But Washington saw this as the Germans trying to secure U.S. (and Chinese and Japanese) money to deal with a European problem.

Add to this the complexity of Opel, a German carmaker owned by GM, which Germany wants the United States to bailout but which the United States wants nothing to do with, and the fundamental problem is clear: While both Germany and the United States have a common interest in moving past the crisis, Germany and the United States have very different approaches to the problem. Embedded in this is the hard fact that the United States is much larger than any other national economy, and it will be the U.S. recovery (when it comes) pulling the rest of the world — particularly the export-oriented economies — out of the ditch. Given that nothing can change this, the Germans see no reason to put themselves in a more difficult position than they are already in.

The Germans will not yield on the stimulus issue and Obama will not press, since this is not an issue that will resonate politically. But what could be perceived as a massive U.S. donation to the IMF would resonate politically in the United States. The American political system has become increasingly sensitive to the size of the debt being incurred by the Obama administration. A loan at this time to bail out other countries would not sit well, especially when critics would point out that some of the money will be going to bail out European banks in Central Europe.

European Fragmentation

Obama will need something in return from the Europeans, and the two-day NATO summit will be the place to get it. The Obama administration laid out the U.S. strategy in Afghanistan last Friday in preparation for this trip. Having given on the economic issue, Obama might hope that the Europeans would be forthcoming in increasing their commitment to Afghanistan by sending troops.

But there is almost no chance of Germany or France sending more troops, as public opinion in those countries is set against it and they have vastly limited military resources. During the U.S. presidential debates, Obama emphasized that he would be looking to the Europeans to increase aid in Afghanistan (the “good” war) while Iraq (the “bad” war) ends. The Germans will make some symbolic gestures — aid to Pakistan, reconstruction workers — but they will not be sending troops.

This will put Obama in a difficult position. If he donates money to the IMF, some of it earmarked for Europe, while the Europeans not only refuse to join the United States in a stimulus package but refuse to send troops to Afghanistan, the entire foundation of Obama’s foreign policy will start becoming a public issue. Obama argued that he would be more effective in building cooperation with European allies than Bush was or U.S. Sen. John McCain would have been. If he comes home empty-handed, which is likely, the status of that claim becomes uncertain.

Which brings us to the third meeting: the Obama-EU summit. We have been speaking of Germany as if it were Europe. In one sense, it is, as its economic weight drives the system. But politically and militarily, Europe is highly fragmented. Indeed, one of the consequences of German nationalism in dealing with Europe’s economy is that Europe’s economy is fragmented as well. Many smaller EU members, which had great expectations of what EU membership would mean, are disappointed and alienated from Germany and even the European Union itself largely due to the lack of German willingness to help them in their time of need.

More Fertile Ground for Obama

These are the waters Obama can go fishing in. Clearly, NATO is no longer functioning as it was a generation ago. Reality has shifted, and so have national interests. The international economic crisis has heightened — not reduced — nationalism as each nation looks out for itself. The weaker nations, particularly in Central Europe, have been left to fend for themselves.

The Central European countries have an additional concern: Russia. As Russia gets bolder, and as Germany remains unwilling to stand in Moscow’s way due to its energy dependence on Russia, countries on the EU periphery will be shopping for new relationships, particularly with the United States.

Obama’s strategy of coming closer to the Franco-German bloc appears to be ending in the same kind of train wreck in which Bush’s attempts ended. That is reasonable since these are not questions of atmospherics but of national interest on all sides. It therefore follows that the United States must consider new strategic relationships. The countries bordering Russia and Ukraine are certainly of interest to the United States, and share less interests with Germany and France than they thought they did. New bilateral relations — or even multilateral relations excluding some former partners like Germany — might be a topic to think about at the EU summit, even if it is too early to talk about it.

But let’s remember that Obama’s trip doesn’t end in Europe, it ends in Turkey. Turkey is a NATO member but has been effectively blocked from entry into the EU. It is doing relatively well in the economic crisis, and has a substantial military capability as well. The United States needs Turkey to extend its influence in Iraq to block Iranian ambitions, and north in the Caucasus to block Russian ambitions. Turkey is thus a prime candidate for an enhanced relationship with the United States. Excluded from Europe out of fears of Turkish immigration, economically able to stand on its own two feet, and able to use its military force in its own interest, it doesn’t take a contortionist to align U.S. and Turkish policies — they flow naturally.

However planned, Obama’s visit to Turkey will represent a warning to the Germans and others in its orbit that their relationship with the United States is based, as Merkel put it, on national interest, and that Germany’s interests and American interests are diverging somewhat. It also drives home that the United States has options in how to configure its alliance system, and that in many ways, Turkey is more important to the United States than Germany is.

Obama has made the case for multilateralism. Whatever that means, it does not have to mean continued alignment with all the traditional allies the United States had. There are potential new relationships and potential new arrangements. The inability of the Europeans to support key aspects of U.S. policy is understandable. But it will inevitably create a counter pressure on Obama to transfer the concept of multilateralism away from the post-World War II system of alliances toward a new system more appropriate to American national interests.

From our point of view, the talks in Europe are locked into place. A fine gloss will be put on the failure to collaborate. The talks in Turkey, on the other hand, have a very different sense about them.