Background

Barack Obama took office promising change. One front would be foreign policy – as the , “[Obama] promised to change the foreign policy priorities of a Bush administration that was unpopular abroad, had strained relations with key allies and was facing a growing Iranian challenge and a continuing menace from al-Qaeda."

So how exactly have these promised changes panned out in the last four years?

“Despite the rhetoric of the inauguration, the talk of extended hands and unclenched fists, there hasn't been any great difference between the Obama and George W. Bush administrations in foreign policy,” an  noted. “Afghanistan is still occupied, Iran is still the enemy (and subject to economic attacks, assassinations, and cyber warfare), special forces soldiers and drones wage undeclared war in dozens of countries, from Somalia to Pakistan to the Philippines, dictators and death squads are still the U.S. ally of choice from Bahrain to Colombia, interventions under the auspices of the never-ending War on Drugs continue to ruin lives, and cruise-missile humanitarianism has destroyed another country (Libya).”

The criticism is perhaps harsh, but it is clear that Obama treads much the same path as George W. Bush and his predecessors, even if he attempts to do it better. One has only to take a look at Foreign Policy’s “” piece for confirmation.

There are areas where Obama has tried to forge his own legacy. He has turned to the Pacific to engage with, but at the same time, contain, China. He has also mended fences in Europe, where the George W. Bush administration was at odds with France and Germany, but the US has not taken a very active role in resolving the European sovereign debt crisis. Given the sputtering economy at home, it might be too much to expect more.

As the presidential elections intensify, 51勛圖 dives deeper into foreign policy to analyze Obama’s performance in each region.

Why is Obama’s Foreign Policy Important?

US voters have a complicated relationship with foreign policy. In a recent Reuters poll, only 3% of registered voters said foreign policy was the most important issue in the campaign. Pundits debate about what to make of election promises in foreign policy since politicians know they will be held less accountable by a public largely disengaged in international affairs.

Nonetheless, foreign policy has played a role in the Presidential campaign. Mitt Romney has been critical of President Obama for failing to provide leadership on Syria. President Barack Obama’s campaign says it’s Romney who’s failed to provide a viable alternative. As  Magazine said, “foreign policy matters in elections — even in years when people think it doesn’t.”

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Though two years into the European Financial Crisis political progress has been made to rebuild the economies of European Union countries, economic instability remains prevalent across the continent, particularly in Greece and Spain. 

Background

Two years into the European Financial crisis, some political progress has been made. European Union members have agreed to a banking union and signed a fiscal compact. Germany has on stimulus and now conditionally supports expansionary measures.

However, uncertainty remains; the banking union and some legal observers of a fiscal compact when similar rules already existed.

Meanwhile, market confidence and economic growth prospects have not improved in the problem economies. Greece remains dependent on cash injections from its neighbors to pay bills and civil servants. In Spain, unemployment , nearing 25% in July with youth employment at 53%. Spain’s borrowing costs remain around 7% and its economy is poised to contract again in 2012.

Europe remains determined to hold together its currency union and move towards recovery in small steps. However, in this 360° Analysis 51勛圖 proposes new, bold, and out-of-the-box initiatives.    

Why is the European Financial Crisis important?

Europe, like the United States, is one of the world’s largest markets for consumer goods and services.  European demand impacts Chinese exporters, which in turn impacts raw materials producers in Africa and Latin America.

The financial crisis is compounded by demographics and globalization. European societies are , creating new policy challenges. And just as globalization has opened new markets for European goods, growth in many emerging economies makes Europe less attractive as a candidate for investment. 

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In the last two years, Atrapalo.com has introduced Spaniards to last minute hotel deals and stickers on Spanish restaurant windows have begun imploring passersby to order online via Just-Eat.es. To an American eye, it seems like a rewind to New York circa 2006. Not to mention the fact that Spain’s first social network, Tuenti, was founded by a Californian.

Spain is aware of the role startups play as an engine for economic growth. “The crisis can be a blessing,” economist Javier Santiso told a earlier this year in Madrid, “because it forces people to think big.”

Spain is also a European magnet for entrepreneurs. It has lower overhead and labor costs than neighboring countries, not to mention charming cities and plenty of sun. Magnus Jern, CEO of mobile app developer Golden Gekko, says, “We can bring European talent to our office in Barcelona that we could never afford to hire in their home countries.”

The first wave of internet startups in Spain tended to recycle a business model that had been successful abroad. This ensured quick payback for investors, but created a bottleneck for capital that discouraged innovation. “The trend continues today and I find it extremely sad,” startup mentor Luis Rivera-Gurrea told 51勛圖.

Today, however, there are a number of trailblazing Spanish startups – among them Trovit, a classified ad aggregator, and Wuaki.tv, a video-on-demand business. The lists 350 companies, ranging from sole proprietorships and partnerships to multinationals with hundreds of employees.

And if Spain has yet to produce a generation of visionaries like Bill Gates, Steve Jobs and Larry Ellison, perhaps that is changing. According to a recent report in the print edition of La Vanguardia, young people have a different mentality than they once did. Driven by grim prospects in once-flourishing industries such as construction, they are embracing riskier pursuits. They now see their university degrees as a toolset for decision-making, rather than a way to open doors to a certain career.

Meanwhile, it seems like every company, university and city runs some variety of entrepreneurship institutions, be they informal advisory networks, code camps or accelerators. BBVA, Telefónica and Banesto (the domestic arm of Santander) are all in the game, with youth talent competitions, venture funds and pro bono consulting. The Plug and Play organization’s landing in Spain this year is further evidence.

Yet experts like Santiso and Rivera-Gurrea signed a last year bemoaning the lack of progress made by the estimated 2,500 institutions that support entrepreneurship in Spain. “High-potential entrepreneurship must take its place as the engine of the economy, just as the culture of hard work and talent must replace that of speculation and subsidy,” the statement said.

Even the creators of communities like the privately funded “Tetuán” Valley near Madrid admit they are a far cry from Silicon Valley. Too few skilled engineers understand marketing, and vice versa. Command of English is not universal.

A lack of available capital is especially crippling. With banks having ceased lending, angel investors few and far between, and corporate accelerators able to help only a few dozen companies each year, family and friends are the only option for many entrepreneurs. Entrepreneurship expert Jan Brinckmann finds many businesses adopting the lean startup model, but they often have to pack their bags in order to get closer to deep-pocketed investors.

Should the government do more, emulating countries like Canada, Chile and Germany? Rivera-Gurrea believes it should do less. “The government wastes resources and adds confusion. It has spent millions of euros funding all sorts of unviable products, and decisions are made by bureaucrats who have never seen the private sector,” he told 51勛圖. An alternative would be for the government to funnel its money through private institutions.

While it would be remiss to ignore the progress Spain has made in recreating Silicon Valley’s culture and financial infrastructure, the Spanish experience also illustrates the difficulty of this operation for many European countries.

The views expressed in this article are the author's own and do not necessarily reflect 51勛圖’s editorial policy.

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As observers focus on the troubled economies of Spain and Greece, it’s important not to lose sight of Germany.

Background

Germany’s vision of tough austerity and greater fiscal integration prevailed for two years after Greece’s debt crisis erupted in early 2010. Its record of  was seen as a model for Europe.

By the spring of 2012, however, as a wide range of European countries sank into a double-dip recession,  and a number of allies in other countries were weakened or forced from office. Germany was increasingly seen as isolated in supporting austerity instead of stimulus spending to promote short-term growth.

In June 2012, Chancellor Angela Merkel  to bail out other countries and again rejected joint efforts like eurobonds to pool debt. Behind the scenes, however, Merkel has pressed allies in Paris, Rome and elsewhere to cede more power to Brussels over their national budgets before Germany would agree to provide further backing for efforts to bolster the euro zone. She spearheaded ratification of the , signed in March by the leaders of 25 of the 27 European Union countries, to control deficits in the long run.

Most recently, Merkel said she was to help Greece restore growth, and expressed her “determination’' to keep it in the euro zone.

Why is Germany relevant when discussing the European financial crisis?

Since Germany is Europe’s largest economy and possesses, in Angela Merkel, its most skilled diplomat, it is the driving force behind recovery from the European financial crisis.

However, Germany has issues of its own – chief among them, an ageing population. It has raised its retirement age from 65 to 67, prompting some Germans to why they should have to work longer so that other Europeans can retire earlier. Germany also has a historical preoccupation with inflation which has long shaped the European agenda.

Germany is known for keeping its house in order.  Even as it contributed to bailout mechanisms such as the ESFS, it confirmed a goal of presenting a “” in 2014.

Substantial portions of the ‘Background’ section of this article were paraphrased from the New York Times . All rights reserved by the original publisher.

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Partially adapted from: , Stephan Schulmeister. Intereconomics, Review of European Economic Policy, 47 (2), March/April 2012.

The assumption that asset markets are basically efficient has become increasingly questionable in the past three decades. Deregulation – notably the of 1999 – has allowed financial innovators to trade an ever more diverse set of assets, and at a much higher overall frequency (partially enabled by electronic platforms). Yet the financial sector has not improved its core functions; interest rates are no more generous to borrowers and risk is not better managed. Meanwhile, the past decade has seen pronounced bull and bear cycles. In this context, the Financial Transactions Tax (FTT) is a useful regulatory tool.

Today’s FTT proposals are primarily aimed at high frequency trading. Much of this trading is based purely on momentum. Essentially, short-term price trends (based on intraday data) are strengthened by the use of automated trading systems and accumulate to medium-term trends – which, in turn, are reinforced by trading systems based on daily data. This results in a systematic overshooting of exchange rates, commodity prices, interest rates, and stock prices in both the short and long term. This misalignment with market values, even if temporary, favours rent-seeking activities of financial investors/speculators and impedes entrepreneurial activities.

How might a tax punish the guilty (i.e., derivative traders and hedge funds) while sparing the innocent? First, define the scope to exclude dividends, stock or debt issuances, and the settling of trade accounts. And second, set the rate so low that it is immaterial to “real-world transactions.” For instance, were the tax set at 0.05% of the value of the asset (split between the buyer and the seller), an investor purchasing $10,000 of stocks on the spot market would pay a tax of just $2.50. Even hedgers are relatively safe, as they usually hold the derivative – not trade it.

However, the tax would create a deterrent to very fast, leveraged transactions – particularly those with a cascading effect that triggers multiple applications. Imagine a hedge fund using a fast automated trading system to follow trends based on high-frequency data. The system changes open positions of $10mn, on average 50 times a day. Since each change requires two transactions (one to close the former position and one for opening a new one), the fund’s daily transaction volume is $1bn, resulting in an FTT of $250,000 at 0.05%. Thus, the FTT renders high frequency trading unprofitable.

The tax would also curb derivative trading, deregulation’s ugliest offspring. As many commentators have noted, the current nominal value of derivative trades exceeds world GDP by a factor of about 70. This represents a three-fold increase since 1995. (Note: defenders of derivatives would note that the net value is much lower as financial institutions manage risk by offsetting exposures against each other. But derivative contracts no longer need to hedge against a real position following in 2000.)

While the FTT would likely decrease overall trading by about 70%, concerns that it would cause an increase in the cost of capital are exaggerated. This argument relies on the premise that the ballooning in the high frequency and derivative markets is necessary for asset markets to function. In reality, little harm will be done in purging some of the excess liquidity that these trades have created.

The largest challenge related to the FTT is a policy one. The tax necessarily impacts the most active traders and the largest financial centers, so they could mobilize a lobby in opposition. And if the tax were not implemented on a large scale, trading could move to tax-free jurisdictions. That said, the tax’s potential to fill government coffers will create advocates. Meanwhile, the offshoring of transactions and profits will only accelerate an existing trend – though this too, can, and may be regulated.

In conclusion, it is in the interest of regulators to curb ever-faster trading to restore stability to markets. And it is surprisingly easy to implement since all transactions are captured by electronic systems. A general FTT is consistent with a more pragmatic worldview and has the potential to become the first supranational European tax and finally the first global tax.

Stephan Schulmeister and Alex Hodbod also contributed to this piece.

For more on this subject, visit  context article.

Note: a previous version of this article incorrectly stated that the 70% anticipated decrease in trading corresponds only to derivatives.

The views expressed in this article are the authors' own and do not necessarily reflect 51勛圖’s editorial policy.

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Developed country societies have been steadily getting older ever since the coming of the industrial revolution. But now they are ageing more quickly as birth rates in many developed countries continue to remain well below replacement rate and life expectancy continues to rise. Median ages in several countries are now around the 45 year mark, and during the late 2020s will even near the 50 year barrier. According to UN data, the proportion of the world's population aged over 65 is set to more than double by 2050, rising to 16.2% from 7.6% currently. The elderly dependency ratio (number of 35-54’s compared to 65+) is expected to fall from 3.25:1 to 1.58:1 by 2050 – levels unseen in any society in human history. As ratings agency Standard & Poor’s noted in a recent report, the trend is .

The cost of having older, smaller workforces, and supporting and caring for all the extra elderly people is bound to have a profound impact on prospects for economic growth and on public policy in general. In Spain, for example, the cost of the government pension program will roughly double as a share of GDP by 2050.

This pattern affects a broad swath of economies, from Western Europe to Eastern Europe to Asia. The most affected are Germany, Japan, and Italy. The four developed countries that have relatively more stable reproduction rates are the US, the UK, France, and Scandinavia.

Connections Beneath The Surface

The idea that ageing can explain the European debt crisis seems spurious at first. Economists have explained that the crisis was a confluence of different factors – fraudulent spending (Greece), accumulated government debt (Italy), a property bubble (Spain and Ireland), and patently low economic growth (Portugal) – compounded by the application of common remedies. But naturally the search continues for an underlying root cause.

To hear the case for ageing, 51勛圖 sat down with Barcelona-based economist Edward Hugh, whose blog posts largely the European debt crisis.

“Saving and borrowing patterns are generationally interconnected”, Hugh says, “and it is one generation saving for its pensions which has financed the reckless borrowing of another, younger one.” According to Hugh, net savings in some countries (for instance, Germany and Holland – two of Europe’s older populations) are directly related to net borrowing in others (notably Spain and Ireland).

One of the reasons that Europe’s political leaders don’t try harder to find a solution is the apparent conflict of interests, Hugh suggests. In the short term the weight of the crisis falls on the young, who suffer high levels of un- and underemployment, while the older age groups have been relatively sheltered: they are in management positions, they are costly to fire, and they have long-term contracts.

Effectively, the size of the over-50 constituency – in conjunction with the disenchantment and apathy of younger voters – creates an inbuilt policy bias which ensures that pensions are maintained as much as possible. For example, Spanish Prime Minister Mariano Rajoy’s first act was to raise pensions by a symbolic one percent, even while he argued that the country was in a desperate fiscal situation.

“Youth unemployment continues to soar but beyond making indignant speeches and offering vague promises little is really done”, sighs Hugh. Even as opinion polls show a that older workers deny young people jobs, he finds labor reforms tame and slow-acting.

Some youth are now voting with their feet by emigrating, according to recent anecdotal reports in and about young Spaniards turning up at German language centers. Economists for more policies that encourage movement within the European Union to balance unemployment and satisfy demand for skilled workers in Germany, Austria, and the Netherlands. But such flows reinforce the domination of the “old age” vote in countries that lose young workers, making it even more difficult for those economies to recover sustainable growth paths. In some economies the effect is quite pronounced – in Latvia, for instance, as many as 200,000 out of a total population of just 2mn have left since 2000.

The Immigration Theory, Debunked

Hugh’s work implies that to return to sustainable growth, the developed world must find ways to pay for its pensions and create youth employment.

One potential solution is the influx of working-age migrants to developed economies. Spain, for instance, received 5mn of these so-called economic migrants from 2000 to 2008. These workers spend money, pay taxes, and in some cases directly provide care to the elderly.

But immigrants tend to be low-skilled, undocumented workers – making them easy to cut loose when the business cycle turns sour. Many of Spain’s economic migrants came to work in the country’s unsustainable property boom and are now unemployed. Others in the agricultural sector have been by locals forced to trade down to lower-paying jobs.

In view of the above, Harvard’s – using Spain as an example – that the revenue migrant workers generate only offsets the government benefits that they and their families consume for healthcare and education. This is especially true if they remit a portion of their earnings to their home countries. Their eventual retirement would then, Feldstein says, exacerbate the ageing problem.

Feldstein’s argument holds less for highly skilled workers who have a high potential to generate jobs and growth. Developed countries might explore green-lighting residency permits for doctors, graduate students, and entrepreneurs from emerging markets who study in universities abroad – though this brings political and diplomatic complications.

Broad Structural Reforms Needed

For Hugh, the economist, there is not one panacea but rather a “shift in priorities and resources from the old towards the young.” That might include incentivizing couples to have more children, lowering school fees, and increased gender equality so that young mothers can better participate in the labor market.

Hugh’s chief suggestion is to establish a common euro zone treasury to allow pension contributions to be pooled, in effect treating the German surplus and the Spanish deficit as a linked phenomenon. George Soros has called this common treasury the “” in the euro zone project.

Also, Hugh believes older folks will need to work longer to justify the benefits they currently receive. This idea is jarring given the commonly held belief that older employees crowd out younger ones. But according to The Economist, the “lump of labor” argument – once used to discourage women from joining the workforce because they would steal jobs from men – has simply by economic data. Therefore, Spain’s recent move to raise the retirement age from 65 to 67 is a positive step. France has also raised its retirement age from 60 to 62 though the law could be modified by the newly elected socialist party. 

Finally, Hugh cautions policymakers against having a “permanent optimistic upside bias” and urges them to take ageing more seriously. Since ageing receives minimal attention in the press (especially when compared to, for example, global climate change), it is not surprising that its significance has been under-appreciated. Notably, though, ratings agency S&P of another wave of developed country sovereign downgrades if substantial reforms are not enacted.

And if they are not, Hugh says, “Europe will become a continent for old men.”

The views expressed in this article are the author's own and do not necessarily reflect 51勛圖’s editorial policy.

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The collapse in late January of Spanair, Spain’s 4th largest airline, drew attention to the pitfalls of government running private industry. The Catalunya region owned 89.1% of Spanair—which it as Barcelona Airways—through a consortium of government institutions.

Catalunya viewed Spanair as a strategic investment in Barcelona’s airport when it acquired 80% of the struggling airline from Scandinavian Airlines in 2009 for the nominal sum of one Euro. Nevermind that Spanair was still reeling from a 2008 crash in Madrid, or that it was set to have an EBITDA of – €4.7mn for 2009. A forecast by the Boston Consulting Group projected a rapid turnaround after implementation of cost cutting measures and route optimization.

It was not to be. In spite of a significant increase in passengers that made Spanair the largest carrier by passenger volume at Barcelona El Prat, the airline lost €30mn in 2010 and €115mn in 2011. With Spanair needing cash injections to continue operations, Catalunya issued convertible debt that diluted SAS’s remaining ownership interest. In order to sidestep an EU threshold for municipal investments, it obligated other municipal entities to step in, such as the city’s convention center (though ultimately the risk fell to Catalunya as the largest shareholder in those entities).  

The problem was that, in an industry increasingly dominated by low-cost airlines and large flagship carriers, Spanair was caught awkwardly in the middle. It could not beat Ryanair or Vueling’s costs on nearby destinations and its long-haul network did not reach Asia or North America. Spanair could fill seats by accepting lower margins, but could not convert those passengers into loyal customers.

The collapse was perhaps a microcosm of the enterprise’s general untidiness. After an 11th-hour deal with Qatar Airways fell through, Spanair ordered its entire fleet to return to Barcelona, stranding 22,700 passengers around Europe. Though Spanair , executives worried about flight safety as personnel began to abandon their posts. The concern for safety is commendable, but the lack of a contingency plan in case of a cease of operations is scandalous.

Now the focus turns to Catalunya’s financial health. Since Spanair leaves debts of €350mn on assets worth just €100mn, shareholders will have to write down their investments to zero (Scandinavian Airlines has already done so with its minority stake). The cash injections, which totaled €150mn, look like money thrown away. And it’s not like Catalunya is awash with cash, either. It recently went under review for downgrade with rating’s agency Moody’s after the unusual move last December to meet cash obligations by issuing bonds to its citizens via savings banks. Moody’s warns that Catalunya may have difficulty meeting its compulsory deficit limit of 1.3% gross regional product in 2012 after direct debt rose 25% in 2011.

Nonetheless, the bankruptcy could be a blessing in disguise for Catalunya. Without having to prop up the airline, Catalunya won’t have to fund non-performing assets and could actually see improvement in its net debt and interest expense, which both sit at about 3 times 2006 levels.

Above all, Spanair shows the headaches that governments go through when running private companies. , Catalunya was to blame for “The absence of any public-sector supervision proportionate to the financing supplied, and the inanity of [Spanair’s] leadership.”  Perhaps the better decision for Catalunya (take note, European governments) would have been to not invest in the first place. 

*[The title is a play on Spanair’s slogan, meaning “The one for all.” Deuda means debt.]

The views expressed in this article are the author's own and do not necessarily reflect 51勛圖’s editorial policy.

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