June 28, 2012 7:47 pm

Soviet collapse holds a lesson for the euro
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Angela Merkel




There are moments in history when the impossible suddenly becomes the inevitable. The European leaders attending the latest in the long procession of Brussels summits to save the euro could do worse than reflect on one of these break points.



The other day I heard a distinguished former diplomat reminisce about the decade he had spent shadowing the Soviet Union. Through the 1980s, he told a gathering convened by Chatham House and the US Council on Foreign Relations, the west was absolutely sure of two things: the Soviet system was unsustainable; and it would last forever. As the diplomat spoke everyone in the room turned their minds to the euro.



Westerners were not alone in falling for the Soviet Union’s Potemkin façade. Policy makers in Moscow made the same mistake. Earlier this year, Ivan Krastev, the brilliant Bulgarian scholar and commentator, brought together a group of Russian experts and historians to reconstruct the last years of the Soviet imperium.



Hosted by the Institute for Human Sciences in Vienna, the experts explained the dynamics of Soviet disintegration to a small number of European Union officials. They sought to explain how an event that seemed unthinkable even as late as the fall of the Berlin Wall in 1989 appeared so obviously inevitable a few years later. The answers suggested the eurozone indeed has something to learn from the experience as it grapples with its own existential crisis.



The conviction that, whatever else happened, the state and socialist system were immutable, proved the downfall of Soviet policy makers. If you think that something cannot happen, then you are unlikely to take the necessary preventive action. Mr Krastev notes that Mikhail Gorbachev’s mistake was to believe in the innate superiority of socialism. That meant it could be sustained but not reformed.



At the moment of collapse in 1992, the irresistible impulse for break-up came from the centre – it was Russia rather than the peripheral states that seceded. As Mr Krastev puts it: “It was Russia’s decision to get rid of the Union and not the ever present desire of the Baltic republics to run away from it that decided the fate of the Soviet state.”



So for the Soviet Union should we read the eurozone; and for a secessionist Russia a disgruntled Germany? Well, no and yes.



No, because the eurozone is not an empire built on a doomed economic system. Whatever the design flaws, it rests on a willing pooling of sovereignty by democratic states. Nor is the single currency the cause of Europe’s economic ills. The global crash was a product of the Anglo-Saxon model of liberal financial capitalism. Those who blame the eurozone for the condition of, say, Spain should consider the dire plight of countries such as Britain and Hungary that kept their own currencies.



When the Soviet Union collapsed, maps of the continent had to be redrawn to include the dozen new states that emerged or re-emerged from the wreckage. National identities and boundaries would be untouched if the Germans reclaimed the Deutschmark, the French the franc and the Greeks the drachma.



Disintegration of the eurozone is not inevitable. The infuriating thing is that debtor and creditor countries alike broadly agree on what needs to be fixed. The requirement is for a mutualisation of both debt and of economic decision-making. The sticking point has always been one of sequencing.



Germany fears that if it gives ground too soon and agrees to eurozone bonds, its partners will pull back from both rigorous fiscal discipline and from a commitment to deeper integration of economic management. The Italians, Spanish, Portuguese and the rest argue that, in the absence of credible short-term support, their economies will remain trapped in the downward spiral of debt and deflation. Both sides are right. What’s missing is the trust to serve as the glue of compromise.



For all the differences, the parallels with the Soviet Union are still beguiling. I have lost count of the times I have been told by European politicians and central bankers that the euro will survive because, well, it was unthinkable to consider any other outcome. The cost of failure, this argument runs, would simply be too high.



Yet this conviction – and I am sure it is genuineoffers an increasingly threadbare shield against the gathering economic and political storms. The Soviets thought that doing nothing would preserve the status quo. They learnt subsequently that inaction is a decision like any other. To say that break-up of the euro would wreak havoc on the European and global economies will not of itself prevent it from happening.



As Mr Krastev observes, public opinion across Europe is turning against the single currency – or at least against the economic cost of sustaining it. At times of crisis, the popular response to “there is no alternativemay well turn out to be that any alternative is better.


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We are not there yet. European leaders, however, need to recognise that there is nothing immutable about the eurozonenor, for that matter, about the EU. These institutions are the product of historical circumstance and political vision. Today’s world is not the one imagined by the founding fathers of the EU nor by the architects of the single currency.


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The end of the cold war served as midwife at the birth of the euro. The grand project of monetary union had been talked about many times before but it was collapsing communism and German reunification that produced the final push. Unlike the Soviet Union, the eurozone is not predestined to collapse under the weight of its own contradictions, but neither is its survival inevitable.


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Copyright The Financial Times Limited 2012

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Special report: London

On a high

London is the very model of a global city—and thriving on it, says Emma Duncan. But there are threats to its future

Jun 30th 2012



STEVE VARSANO, A New Yorker who sells private jets, moved from America to London a couple of years ago. His showroom, which is kitted out as a luxury aircraft interiorcream leather seats, snakeskin walls, mahogany trimmings—is on Hyde Park Corner.




To some, Hyde Park Corner is a noisy roundabout. To Mr Varsano, it is an unbeatable location. Fifteen years ago, he says, 70% of the world’s private jets were sold in America. These days, maybe 35-40% are. “Anybody that can afford a jet comes to London. The only bits of London they know are Belgravia, Knightsbridge and Mayfair [the areas that converge on Hyde Park Corner]. They all have to stop at that light,” he says, pointing at the traffic light on the southern side of the roundabout. “As the car swings round, the guy in the back seat has to look into my showroom. I have the best window on four continents.”



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Mr Varsano is not alone in his enthusiasm for the city. Over the past quarter-century, unprecedented numbers of foreigners have come to live, work and invest in the city. Largely as a result, London has had an astonishing period of growth that has survived the recession in Britain and the economic crisis in Europe. It feels unstoppable; but that’s how it felt a century ago, and it turned out not to be.
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Out of darkness



London has been the centre of politics, administration, business and fun in Britain since the 11th century, but it was the Victorian age that made it great. The industrial revolution combined with the empire to supercharge London’s economy. Raw materials from the colonies were shipped into the docks and manufactured goods shipped out. The banking system which grew up in the City of London channelled private savings into productive enterprises all over the globe.



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As London produced goods, so it sucked in people. Its population grew from 1m in 1800, when it was already by far the biggest city in Europe, to 6.5m in 1900. That huge expansion spawned a massive construction boom. Most of the city’s housing is Victorian, as are its great buildings. Confident in the greatness of their age, the Victorians had little time for the past. Between 1830 and 1901, 23 churches, 18 of them built by Sir Christopher Wren, the architect of St Paul’s Cathedral in the City, were demolished. Suburbs ate up the countryside: William Morris, a 19th-century artist, designer and thinker, called the place a “spreading sore”.



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In 1939 its population hit 8.6m. By then the belief that London was at once too rich and too poor, as well as too powerful, had taken hold. So whole neighbourhoods were bulldozed to clear slums; a Green Belt was established to stop it spreading; the construction of offices in central London was, in effect, banned. Meanwhile war battered the city, driving out people and industry. Manufacturing started to decline. The docks, London’s core industry, were destroyed by container ships too deep for the river and by militant unions. The city went into a vicious cycle of decline. Schools emptied, crime rose and aspiring people left. By the late 1980s it had lost a quarter of its inhabitants.
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Phoenix reborn

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Then the population started rising again. Nobody really knows why. It may simply be that the economic factors that had caused it to shrink—the closure of the docks and the disappearance of manufacturing industry—had run their course, the policies designed to empty the place out had been abandoned and the gravitational pull of a great city had reasserted itself.



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Cities are powerful networks. According to Geoffrey West, a physicist at the Santa Fe Institute who has looked into the maths of cities, there is an urban constant that holds good the world over: every doubling in the size of a city brings a 15-20% increase in wages, patent output, the employment of “supercreativepeople, the efficiency of transport systems and many other good things associated with cities. There is a similar increase in crime and pollution, but the benefits of higher wages and greater opportunities evidently outweigh those disadvantages.



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And London had a great deal going for it: international connections, a useful time zone and, by the 1980s, a free-market government. In 1986 the Big Bang, which deregulated the City’s financial services, set off a spate of growth that restored London to its place as one of the world’s great financial centres. Growth drew in foreigners, who have arrived in ever larger numbers, bringing money (sometimes), skills (often) and a willingness to work harder than the natives (usually).



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Some come for jobs, some for sanctuary, some for fun. London has a creative buzz that makes it feel more like New York than Paris or Rome. It may be the result of the density of art colleges or the mildly anarchic street culture, but it has been heightened by the arrival of young foreigners escaping more conventional or oppressive societies, and coming to find themselves and each other. The art world, where language is no barrier to communication, is flourishing as never before.



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The city has got better in duller ways, too. Devolution has improved its infrastructure. London’s mayoralty, established in 2000, has far less power than those in, for instance, France or America. Yet the mayor can make a great deal of difference to transport, and has done so. Getting around the city is not quite as painful an experience as it was ten years ago.



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The vicious cycle has turned virtuous, most visibly in education. Whereas private education in London was excellent, the state schools used to be particularly dreadful. But under both the previous and the current governments, money and effort have been concentrated on the capital. The academies programme, under which schools get more freedom and help from private-sector sponsors, has made most impact in London. The two most successful groups of academies, ARK and Harris, are there. The effects are showing up in the exam results.




Partly thanks to better education, fewer Britons are leaving the city. At the same time, foreigners are still coming and, because of recent immigrants’ high fertility, the birth rate is accelerating. So the population is rising fast (see chart 1).
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As Mr West’s urban maths suggests, London’s contribution to the country’s economy has grown faster than its population. In 1997, the capital’s gross value added per person was one-and-a-half times that of Britain as a whole; by 2010 the ratio had risen to nearly one-and-three-quarters. Londoners are also better paid and better qualified than their compatriots. And although the economic crisis has hit financial services hard, the city as a whole has got off relatively lightly.



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London subsidises the rest of the country by around £15 billion a year; only the south-east and east of the country, whose prosperity is largely derived from their proximity to London, are also in surplus. Altogether, the greater south-east contributes around £40 billion a year to the rest of the country’s finances.



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Internationally, London also stands out. Whereas Britain has dropped down the GDP per person league to 7th, London is still 5th among cities in terms of GDP, and comes top or second in most of the rankings that include less measurable factors.



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But London is not just a bunch of impressive numbers; it is also an astonishing human artefact. A city that a generation ago was on the skids has become a place where the world meets to study, work, create, invent, make friends and fall in love. It is Britain’s economic and cultural powerhouse, Europe’s only properly global city and a magnet for rich and poor, from anywhere and everywhere.



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Londoners know they are living through something extraordinary. Many novelists have tried to capture the sense of heightened experience that comes from living at the centre of the worldJohn Lanchester in “Capital”, Sebastian Faulks in “A Week in December”, Oliver Harris in “The Hollow Man”, for instance—with varying degrees of success. The uneasy excitement that pervades the city is hard to bottle.
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It seems inconceivable that a gravitational pull as strong as London’s should weaken, but the city’s moment will, inevitably, pass. Its core industry, financial services, grew because of the accumulation of capital and trade flows. These days, capital is accumulating elsewhere, and the fastest-growing trade flows are not between the rich world and emerging countries but between different parts of the emerging world.



Yet London is not entirely at the mercy of external forces. Policies matter. Just as the British government unwittingly accelerated London’s decline after the second world war, so politicians today risk driving away some of the people on whom this city, and this country, depend for their future prosperity.


BUSINESS
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June 27, 2012, 6:25 p.m. ET
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European Banks Are Facing More Pain In Spain
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By SARA SCHAEFER MUÑOZ And LAURA STEVENS



Spanish-owned banks aren't the only ones under pressure to fortify themselves against Spain's crumbling economy. Foreign banks with big Spanish operations also find themselves in a tough position—and with few options.




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Three European banksBarclays BARC.LN -15.53%PLC, Deutsche Bank AG DBK.XE -4.49% and ING Bank NV—have large Spanish units. They already have pumped in billions of euros of capital to shore up those businesses, but as the Spanish government conducts a wide-ranging review of the sector's health and the economy continues to struggle, they could demand even more, according to bankers and analysts.

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Making matters more difficult, Spanish regulators, like their counterparts elsewhere in Europe, are encouraging banks to transform their local subsidiaries into financially self-sufficient entities, according to people with knowledge of regulators' efforts. In other words, instead of relying on funds transferred from the parent companies, the local subsidiaries would need to develop the ability to raise funding locally.

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The combination of Spain's worsening economic outlook and the mounting government pressure further threatens to make Spain a less attractive place for the banks to do business.


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"The big problem is that they can't get out," Christopher Wheeler, an analyst at Mediobanca Securities in London, said of Deutsche Bank and Barclays, which both acquired Spanish banks in the 1980s. "They have a pretty big footprint there, but they can't sell the branches because you'd just be giving them away."
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To be sure, banks such as Barclays, Deutsche Bank or ING are large institutions, their Spanish units account for less than 5% of their overall balance sheets. But the businesses will eat away at future profits, analysts say.


Mr. Wheeler noted weak earnings from Deutsche Bank's overall retail banking business segment in the first quarter, some of which he said could be attributed to slowdowns in areas such as Spain.


Barclays, which over the past year has scouted out possible acquisition targets in Spain, has put the search on pause, according to people close to the bank.


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Barclays had £25.8 billion ($40.4 billion) of gross assets in Spain as of the first quarter and announced last year it would funnel an additional €1.3 billion to shore up its Spanish business in order to meet new rules set by Spanish regulators. According to analysts at Citigroup, C-3.73%,76% of Barclays's €2 billion ($2.5 billion) in loans to real-estate developers are past due or otherwise problematic. The bank has set aside enough funds to cover some 62% of the portfolio.


The London-based bank has been more conservative than many Spanish peers in flagging worrisome property-developer loans, analysts say. But Spain's deep economic downturn will increase pressure on other areas of lending, as well.


Barclays also has some £5.4 billion in corporate loans, and Spain's souring economy means that the country "will be a drag on Barclays corporate business for an extended period," said Ian Gordon, an analyst with Investec Securities in London.


A Barclays spokesman said the bank is "focused on generating a return despite challenging conditions."


Deutsche Bank had a total of €29.1 billion in exposure to Spain at the end of March, including €6.4 billion in exposure to financial institutions such as loans to banks.


Exposure in Spain is "principally to highly diversified, low risk retail portfolios and small and medium enterprises," Deutsche Bank said in its first-quarter report.


Following Spain's request to the European Union for up to €100 billion in bank rescue money, it will launch a sector-wide audit of the Spanish banks, to be carried out by international firms and completed in July. The findings of the audit could have implications for foreign banks in Spain, analysts say, causing lenders such as Barclays, Deutsche Bank and ING to set aside further buffers against losses even on mortgage books and on other portfolios that had been considered relatively low-risk.
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Bloomberg News

Banks such as Barclays, Deutsche Bank or ING are large institutions, their Spanish units account for less than 5% of their overall balance sheets. But the businesses will eat away at future profits, analysts say. Above, a Barclays branch in Madrid.


Barclays has some £14.3 billion in residential mortgages, while Netherlands-based ING has €9.2 billion.


In a recent investor presentation, ING said its client base is healthy, and the majority of the loans were issued before the crisis. The Dutch bank's credit exposure in Spain totals €37.6 billion, nearly half of it through covered bonds issued by Spanish banks that it bought up in the past and is now slowly getting rid of.


Covered bonds have been a favorite fundraising tool of Spanish banks. They are bonds backed by collateral—usually residential mortgages—and are usually considered low risk because if a bank defaults on the loan, the creditor receives the collateral. In the case of Spain, with the real-estate market continuing to decline, that collateral likely would be worth less, say analysts and people familiar with the fixed-income market, leaving the lender with a loss.


A spokesman for ING, which has launched a successful deposit campaign through ING Direct, said that the bank's position in Spain is strong, in part due to the large degree of Spanish customer funding it holds.


Collectively, German lenders have the highest exposure to Spain at $146.1 billion—of which $53.1 billion alone is exposure to banks, according to the Bank for International Settlements.


Germany's so-called Landesbanks rushed in and invested heavily in European sovereigns and banks through such bonds, along with mortgage-backed securities and other risky assets, in the early 2000s.



—David Enrich and Eyk Henning contributed to this article.


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Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved



How to Make Trade Easier
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Robert B. Zoellick, Ahmad M. Al-Madani, Donald Kaberuka, Haruhiko Kuroda, Thomas Mirow, Luis A. Moreno
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27 June 2012 
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WASHINGTON, DCThe world is now in the fourth year of the Great Recession. So far, the economies belonging to the World Trade Organization have resisted the kind of widespread protectionism that would make a bad situation much worse. But protectionist pressures are building as weary politicians hear more and more calls for economic nationalism.



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The WTO’s best defense of open trade is a good offense. A new WTO Trade Facilitation Agreement would benefit all by increasing developing countries’ capacity to trade, strengthening the WTO’s development mandate, and boosting global economic growth. More than a decade after the launch of the Doha Round of global free-trade talks, this agreement could be a down payment on the commitment that WTO members have made to linking trade and development.


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Developing countries stand to gain the most from improving trade facilitation. The right support would help traders in poorer countries to compete and integrate into global supply chains.


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There are rich opportunities for gains. Inefficiencies in processing and clearing goods put traders in developing countries at a competitive disadvantage. Outdated and inefficient border procedures and inadequate infrastructure often mean high transaction costs, long delays, opportunities for corruption, and an additional 10-15% in the cost of getting goods to marketeven more in landlocked countries.


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Research by the World Bank suggests that every dollar of assistance provided to support trade-facilitation reform in developing countries yields a return of up to $70 in economic benefits. When funds are directed at improving border-management systems and procedures – the very issues covered by the trade-facilitation negotiations – the impact is particularly significant.


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Projects aimed at boosting efficiency and transparency, supported by development banks and bilateral donors, have made a dramatic difference. In East Africa, procedural improvements have reduced the average clearance time for cargo crossing the Kenya-Uganda border from almost two days to only seven hours. In Cameroon, some of our organizations have worked with the World Customs Organization to help the customs authority reduce corruption and increase collection of revenuesestimated to be more than $25 million a year.


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On the Laos-Vietnam border, a sub-regional cross-border transport agreement has cut cargo transit times from four hours to just over one hour. A new customs component to a highway project between Phnom Penh and Ho Chi Minh City helped increase the total value of trade through the Moc Bai-Bavet border by 40% over three years. In Peru, some of our banks have worked with international freight forwarders to connect remote villages and small businesses to export markets through national postal services, turning more than 300 small firms into exporters, most for the first time.


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The outlines of a new WTO Trade Facilitation Agreement are already clear, but some technical differences remain on specific provisions. Developing countries want a credible commitment to support implementation, such as technical assistance and capacity-building. A World Bank study estimates that the costs of implementing the measures likely to be covered by a Trade Facilitation agreement would be relatively modest$7-11 million in the countries studied, spread out over a number of years – especially when compared to the expected benefits.


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Capacity-building and financing programs for governments that want to improve their trade facilitation are available already. Major donor countries and international development organizations have put a priority on, and increased investment in, trade facilitation. According to the OECD, from 2002 to 2010, trade facilitation-related assistance increased ten-fold in real terms, from almost $40 million to nearly $400 million.



The African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the Islamic Development Bank, and the World Bank stand readyalongside the WTO – to assist developing countries through the process of full and effective implementation of the agreement. That means helping countries to assess their trade-facilitation needs on a case-by-case basis, match those needs with the resources required, and broker partnerships between recipient countries and development allies to ensure that support is provided quickly and efficiently.



In international negotiations, there is always a way forward if the benefits of an agreement are shared by all. Trade facilitation offers a development dividend for all countries. It is time for WTO members to make progress on issues where there is room to do so. It will be a down payment on a solid investment.




Copyright Project Syndicate