Sidelined

Germany's Incredibly Shrinking Role on the World Stage

With a wayward president at the helm in the United States, the world has become a more dangerous place. In response, though, German Chancellor Angela Merkel is once again steering Germany to the foreign policy sidelines, clearing the way for French President Emmanuel Macron. By DER SPIEGEL Staff

By Matthias Gebauer, Julia Amalia Heyer, Christiane Hoffmann, Peter Müller, Ralf Neukirch, René Pfister, Christian Reiermann, Christoph Scheuermann and Christoph Schult

Emmanuel Macron's En Marche party doesn't yet have a single seat in the European Parliament, but when the French president appeared in the body's plenary hall in Strasbourg last Tuesday, it already seemed as though he was in control. Macron shook hands with Federica Mogherini, the European Union's chief diplomat, and Jean-Claude Juncker, the enthusiastic European Commission president while a number of parliamentarians gave him a standing ovation. Others, meanwhile, hid behind signs castigating the French president for participating in the missile attacks in Syria. Macron stepped up to the lectern, where his speech, laid there by an aide, was already waiting.

Macron seemed to breathe new life and courage into the Continent after Brexit and the string of strong right-wing populist election showings. And in his Tuesday speech, he left no doubt about what is at stake. "Fascination with illiberalism is growing by the day," he warned. "The answer must not be authoritarian democracy but the authority of democracy."

Macron's focus was astonishing in its breadth as he cited philosopher Alexis de Tocqueville, who wrote the grand narrative of American democracy. Meanwhile, at almost exactly the same moment, the German chancellor was having to seek approval for her vastly more modest policy proposals.

Specifically, it was Ralph Brinkhaus and Katja Leikert, two deputy parliamentary group leaders, who were reciting their concerns on Tuesday with Macron's EU reform plans. Merkel did what she could to counter them, invoking in her comments to conservative parliamentarians gathered in Berlin everything from the 1555 Peace of Augsburg to the crises of the present, but she was unable to generate much in the way of enthusiasm. In the end, she was so accommodating to her party's parliamentary group that it appeared that it was not Merkel herself who is determining the guidelines of Germany's EU policies, but rather a handful of parliamentarians Macron has probably never heard of.

Has the 'Queen of Europe' Been Dethroned?

Not even five years have passed since the spate of essays and opinion pieces about Germany's hegemonic power over the Continent. The cold reality, the Economist wrote, is that "Germany is the power in Europe that counts the most. Top brass in Brussels, or Paris, can talk as much as they like.

But until Ms. Merkel agrees, nothing happens." The danger, it added, is not that Germany will grow too strong, but that it could refuse to take on the leadership role.

And today? The world has become a dangerous place, with a leader in the Kremlin dreaming of former Soviet power and an American president who doesn't appear to be able to tell the difference between politics and a video game ("missiles, nice and smart"). The U.S. missile strike in Syria a week ago Saturday was not nearly as explosive as it could have been -- but that certainly was no thanks to Merkel, who stood on the sidelines as the major powers decided what course of action the West would take.

That's just one example of how Germany is once again finding itself in the role of onlooker in international politics. The German government had to fight for a seat at the anti-Assad summit taking place in Brussels on Tuesday. When it came to sanctions against Russia in response to the poisoning of Russian double-agent Sergei Skripal, Germany had no say. And in the EU, Macron is now in the driver's seat.

It's more than just symbolic that the French president is to be welcomed in Washington today with great pomp and circumstance while Merkel is only making a brief "working visit" to the White House on Friday, just before the weekend.

Germany has fallen into the background again, and this isn't solely the result of Merkel's tortuously protracted attempts to form a government following elections last September. That is the spin the Chancellery is now giving it. But in recent years, Merkel has frittered away much of her political capital -- particularly with refugee policies that were an affront to almost all of Germany's allies. Merkel has also seen her power in Berlin diminished significantly. For years, Horst Seehofer -- who heads the Christian Social Union (CSU), the Bavarian sister party to Merkel's CDU -- gave the chancellor a free hand in foreign policy matters. But he now says there is no way he would have gone along with a military strike against Syria. "I would have used my veto," he says.

The country is currently experiencing a strange form of regression. During the Ukraine crisis, it was Merkel and not the United States who seized the initiative. A short time earlier, at the beginning of 2014, German Defense Minister Ursula von der Leyen said at the Munich Security Conference that sitting and waiting was no longer an option. "If we have means, if we have capabilities," she said, then "we have the obligation and we have the responsibility to engage."

Trump had barely been elected in November 2016 before the New York Times began describing Merkel as essentially the last defender of the liberal West. The chancellor has consistently rejected such notions, and to a certain extent she has been right to do so. How, after all, is a country that is required to have long debates in parliament before it can deploy a single soldier going to defend the West?

At the same time, the chancellor also felt thoroughly flattered. Merkel had long hesitated in announcing whether she would run for a fourth term, but she decided to do so just a short time after Trump's election, a decision that was linked to a feeling that her leadership was badly needed in a world that was coming unhinged. And then, in the middle of her campaign, she made her famous statement that made it sound as though Merkel was abandoning the postwar order. Europe, she said, had to be prepared to "take its fate into its own hands."

Europe's New Leader: Macron

Those words could have marked a turning point in European history, but it appears that the only person who took them seriously was Emmanuel Macron, who was sworn in as the president of France on May 14, 2017. After just under a year in power, he has established France as the leading nation in Europe and it is now he who is the defender of freedom and democracy.

You don't have to agree with Macron on every point. There are good reasons to refuse to join a military strike led by a man who might one day confuse his mobile phone display with the proverbial nuclear button. And it serves no one if a future European Monetary Fund eases the pressure on Southern European debtor countries to reform.

And yet the French president still stands out pleasingly from the chancellor as someone who not only has the courage to form ideas, but also the courage to fight for those ideas in the face of opposition.

When Macron speaks about Europe, he does so out of commitment, conveying energy and passion.

He dances about like a boxer in the ring and there are six full glasses of water on the lectern. During the course of the evening, he will drink five and half of them.

On Tuesday night, Macron spent close to two hours speaking to around 300 people about Europe in the town of Épinal on the edge of the Vosges Mountains. It was his first "citizens' consultation" on the future of the EU. Macron would like to see to it that similar events are held all across Europe, including in Germany.

Macron didn't pick the easiest place to launch the initiative. As in many places in France, the major factories are dying out in Épinal, resistance to the EU is a tradition and the town's former mayor was one of the biggest opponents of the Maastricht Treaty that laid the foundations for the common currency. In other words, Épinal is not a place where Macron can expect to have an easy ride. Which is precisely why he came here.

Before the introduction of the euro, a Picon, a popular aperitif, only cost "five Francs at the counter," an angry older man said. "Now it costs three times that amount." A younger woman also expressed concern about growing competition from workers from neighboring countries.

Members of the audience also addressed the military strike in Syria, which Macron joined. All were questions that allowed the president to reveal his vision for Europe. There have been no wars in 70 years in Europe thanks to the EU, he said. "Think about that when you have your next Picon!"

"I have no red lines -- only horizons," Macron said during a speech given at the Sorbonne seven months ago. It is an audacious sentence -- a desire to look beyond one's immediate surroundings. But there's also a bit of hubris in it, a dollop of megalomania.

Merkel, of course, senses that a shift in power is taking place. There was a dark side to her role as "the queen of Europe," as some called her. Caricatures in Greece depicted her with a Hitler mustache during the debt crisis and Merkel dolls were burned in effigy. But she was also seen as someone who could not be bypassed if something was to be achieved in Europe. These days, however, it's Macron everyone wants to talk to.

At the end of European Union summits these days, Merkel often quickly disappears into her hotel after giving a short statement. Macron, by contrast, likes to use those events as an opportunity to make longer appearances with world leaders. "The real France is back," European Commission President Juncker said, visibly pleased, after Macron's speech before the European Parliament.

When Macron visited China in January, Merkel was in the middle of negotiations to form a government coalition together with the center-left Social Democratic Party. By that point, three months had already passed since the election. "He's conducting international politics and I'm stuck here," she told a colleague at a particularly boring moment.

Macron's style is totally different from Merkel's approach. He doesn't shy away from big ideas or from showing pathos or passion. In that sense, Macron is more comparable to Barack Obama, whose rise was to a large extent the result of his powerful skills as an orator.

Words Followed by Actions

In contrast to Obama, though, Macron has so far always followed up his words with actions. In mid-February, he announced that the use of chemical weapons in Syria would cross the "red line" leading him to take retaliatory military action.

It was more than just a symbolic statement. Macron didn't just use the same formulation that Obama had used almost six years earlier, but the French president also went on to launch missiles against Assad following the presumed deployment of chemical weapons in early April in Douma.

Merkel would never come to the idea of seeking to assume America's leadership role. She's fully aware of the dilapidated state of the Bundeswehr, Germany's armed forces, and she knows that the German people don't want to become entangled in the world's conflicts.

Merkel's pragmatism has always been the source of her success. It was only when she showed an apparently idealistic side during the refugee crisis that her popularity began to slip.

The German chancellor also lacks Macron's clear talent for dramaturgy. Merkel would never give a victory speech in front of a national symbol in the way that Macron did on the evening of his presidential election, when he spoke in front of the Louvre's glass pyramid, backed by the EU anthem, Beethoven's "Ode to Joy." When Merkel nearly scored an absolute parliamentary majority in the 2014 elections and supporters at CDU party headquarters began triumphantly waving paper German flags in celebration, she quickly moved to have them collected. The display was simply too ostentatious for her taste.

Merkel's rise to become the queen of Europe was by no means orchestrated -- it was a product of the logic of the euro crisis. She was the woman with the most cash, which conferred her power in Brussels. She also dealt with the crisis the same way she does with every other: with no overarching plan, but with considerable understanding for detail. Ultimately, Greece was permitted to remain in the eurozone and Europe got a bailout fund.

And whereas Merkel seeks to carefully untie Gordian knots, Macron seeks to cut them in half.

He has just created a new political force from scratch and decimated France's two traditional parties, the socialists and the conservatives -- which had for decades determined the country's destiny.

That experience has lent Macron a self-confidence possessed by few French leaders since Charles de Gaulle. If he was able to revolutionize France, then why wouldn't he be able to do the same for the EU, Europe and, yes, Western power structures?

Macron has convinced the French that their future is in Europe, and there is correspondingly great pressure now, one year before the next European Parliament elections, for him to present his first successes. And he made clear in his speech before European Parliament on Tuesday that he would achieve those successes even absent a major pact with Berlin.
Macron Is Well Aware of Germany's Contraints

The French president says that the EU has always been the result of ambitions pursued by "crazy people." In his speech on Tuesday, Macron didn't dedicate a single word to the Franco-Germanic partnership, "deliberately," as he would later say when a member of parliament asked him about it.

Macron is aware of the German chancellor's constraints. He knows that there are plenty of members of parliament from the CDU and the CSU who fear nothing more than the idea that Germany might invest a few billion euros more each year in the European community than it does now. As a result, he has been trimming his public statements down to Merkel's size for some time now.

In Strasbourg, for example, he spoke only of a "road map to enable us to advance step by step on banking union and establish a budgetary capacity to promote stability and convergence in the euro area." It almost sounded like something Merkel would say.

Merkel and German Finance Minister Olaf Scholz have taken note with no shortage of gratification.

There have already been several occasions when the two of them have sat together in the Chancellery considering how to respond to Macron. Both are determined to present a plan for the future together with the French president at the EU summit in June. The question, though, is what it will include.

After all, both are extremely critical of some of the French president's proposals and are skeptical that Macron's idea of installing a European finance minister is a good idea. They also aren't particularly fond of his proposal to establish a special budget for the eurozone to compensate for economic fluctuations within the currency area.

But the greatest conflict is the one over the future of the eurozone. One compromise would be to upgrade the European Stability Mechanism, the euro bailout fund, to become a kind of European Monetary Fund. The political calculation on the part of the German Chancellery and the Finance Ministry in Berlin is that the body could establish itself as an early warning system for public finances within the eurozone. It could also play a more important role in bank bailouts, as Macron has in mind.

Balancing Act

Merkel is facing a balancing act. She has to prevent a situation in which Macron loses either face or his patience. At the same time, she has to consider the resistance within her own ranks.

Many conservative parliamentarians in Berlin view the French president's activities with suspicion.

"I see absolutely no reason why I should make Macron's personal sense of happiness my political program," says Alexander Dobrindt, who heads the CSU party group in parliament.

The CSU, which shares power with the CDU at the national level, has always struggled with Merkel's EU policies, but in recent years, CSU party head Horst Seehofer has largely allowed the chancellor to do as she pleases on that front.

With Seehofer having now ceded much of his power in the CSU to Markus Söder, the party has become noticeably more obstinate on EU reform policy and will certainly not agree to anything that could jeopardize its position heading into Bavarian state elections in October.

Nor can Merkel rely entirely on parliamentarians from her own CDU. A recent European policy paper by deputy party whips Brinkhaus and Leikert may have been put forward as a mere position paper, but the reality is that it also contained a hidden threat to the chancellor.

The paper makes a specific reference to Article 23, Paragraph 3 of the German constitution that notes that parliament must be allowed to state its position in any negotiations with the EU.

That may sound technical, but in practice it has enormous consequences because it ties the government's hands in negotiations, preventing it from simply defying the guidelines set by parliament. The fact that parliamentarians from the chancellor's own party are threatening such a thing is rather unusual. Even if no decisions were made in the end, it still sent a clear message. "In addition to the party base, the parliamentary group has now also made clear that it is not willing to simply accept the government's policies," says one senior member of the parliamentary group.

How, though, is a chancellor who is facing such deep doubts from within her own party supposed to place an active role in charting Europe's future course? Even if Merkel had ideas, it's quite possible that she wouldn't be able to implement them now.

During her time as chancellor, Merkel has worked together with four French presidents. There was Jacques Chirac, with his machismo charm, the hyper-nervous Nicolas Sarkozy and then the misfortunate François Hollande. Ultimately, none of them proved to be a match for her. But now, Macron seems to be exactly that. He fills in every void that she leaves open.

An Antithesis and Ally

Macron recognized early on the potential created by Donald Trump's presidency -- above all for himself. The French president has succeeded in positioning himself to appear as both the U.S. president's antithesis and a his closest ally.

He shook Trump's hand so long at the G-7 summit that his knuckles turned white. He also promptly told the world why he had done so. And Trump told a French weekly that strength is what matters most to him.

It was the start of a wonderful friendship. A short time later, Macron invited his American counterpart to celebrate Bastille Day, the French national holiday, together. The images from that July 14, 2017 event went around the world. They showed Macron embracing Trump, almost hugging him, and they dined together with their wives at a posh restaurant in the Eiffel Tower.

Trump has said that Macron is "smart" and "strong" and "he's my friend."

This week, it is Macron's turn to travel to Washington at Trump's invitation -- for the first official state visit hosted by Trump after more than a year in the White House. For three days, the two, Donald and Emmanuel, will be celebrating the Franco-American friendship.

But while Trump is rolling out the red carpet for Macron, the best the German chancellor can expect is a one-day working visit -- and that's not just because Macron is a head of state and Merkel is merely a head of government.

There can be no doubt about the fact that Trump considers Macron to be his main point of contact in Europe. There's no other leader with whom he has such a personable relationship.

"We don't always agree, but we admire each other a great deal. We have a lot in common," Macron has said.

Merkel, on the other hand, has so far failed to succeed in establishing an even halfway reliable connection with Trump. As a woman, of course, the bromance route taken by Macron isn't open to her. His approach to the American president is reminiscent of the relationship former German Chancellor Gerhard Schröder had with Vladimir Putin: He's building up contact at the emotional and half-private level that he might be able to turn into political capital at a later date.

Merkel has never had that ability. Until recently, however, she had been considered the woman who could rein in men with outsized egos like Erdogan, Putin and Trump -- with her sharp mind, her "no bullshit" attitude and her approach of keeping emotions out of politics to the extent possible.

But emotions also play a role in global politics. Trump hasn't forgotten how Merkel lectured him while congratulating him over his election, admonishing him not to lose sight of values like democracy, freedom and human dignity. Now it's Macron who is his friend and Merkel is left looking like the school teacher.

The military strike against Assad in Syria this month also brought Trump and Macron even closer together. Macron's advisers say he telephones almost daily with Trump. "The mutual trust is great," says a diplomat who advises Macron on foreign policy.

German Absence

Trump and Macron planned the strike against the Assad regime together with British Prime Minister Theresa May, but without any German involvement whatsoever. They didn't even think to ask Germany for military support because they already suspected what the answer would be: Do it without us.

As such, Merkel's cabinet remained largely clueless about the timing and scope of the retaliatory strike that followed Assad's poison gas attack. The only reliable information channel was that between German Defense Minister Ursula von der Leyen and her U.S. counterpart James Mattis, one of the few pragmatic politicians still present in the Trump administration. Von der Leyen and Mattis call each other regularly, even in the days following Trump's threatening tweets against Russia.

Officials at Defense Ministry also have another channel of information in Joe Dunford, the chairman of the Joint Chiefs of Staff, and were able to use it to get a rough idea of what the retaliatory strike might like look. And it wasn't without a certain amount of pride that the ministry passed its insider information along to the Chancellery.

Meanwhile, Trump demonstratively thanked France and Britain for participating in the military strike against Assad. It's been a long time since Germany was the subject of any praise from Trump.

Indeed, Germany's military reserve has not sat well within the White House. Richard Grenell, Trump's candidate for U.S. ambassador to Germany, tweeted after the military strike that Berlin should have participated as well. Grenell's situation is indicative of the sad state of relations right now between Germany and the U.S. Trump hasn't had an ambassador in Berlin for a year and the Democrats in the U.S. Senate are refusing to confirm his nominee.

No one in Washington understands the German position on the airstrikes in Syria -- supportive but unwilling to participate. The gap between words and deeds in German foreign policy is simply too wide. That was inherent in the contradictory statements coming out of Berlin the day after the attack by its Western allies in Syria. Chancellor Merkel said the military deployment had been "necessary and appropriate. In an interview with DER SPIEGEL, meanwhile, Foreign Minister Maas expressed his understanding for the German military's deployment in the former Yugoslavia in 1999 to stop the murder in Kosovo. But despite estimates of up to a half-million dead in Syria, he is still unwilling to draw a direct line between the past and the present. "In this conflict, that is not the role that we, in consultation with our partners, wish to play," Maas said.

It sounded a little like the old division of labor under the mantra that one party shoots and the other mediates. But the reality is that Germany isn't really playing any role at all. German is having trouble even getting a place at the table.

After the attack in Syria, those who participated in the airstrikes have thus far been uninterested in hearing about German mediation efforts and peace initiatives. "For now, our influence has shrunk even further," says one member of Merkel's cabinet.

Plus, Chancellor Merkel and her foreign minister apparently don't agree entirely on how the political process in Syria should be structured. Maas wants to exclude the possibility of negotiations with Assad but the Chancellery is less dogmatic about the issue.

Shrinking Influence

After the Skripal case, Macron and Trump were likewise quick to establish a joint position -- and again the German government dallied when it came to punitive measures for Moscow. Definitive evidence proving Moscow is behind the attack is still lacking today. But the British government has pressured its allies to show solidarity and to tighten Russian sanctions. Macron sided with London at the time and against the Germans.

Government sources in Berlin say that Macron offered the British and the Americans tough sanctions without first discussing the matter with Merkel. He is said to have proposed closing Russian diplomatic outposts in France and also threatened to go it alone if the Germans refused.

Ultimately, Berlin had no choice but to go along. In the end, the German government moved to expel four Russian Embassy employees in order to avoid totally isolating itself.

The incident is even more telling given that Russia had long been Merkel's domain in Europe. It was during the Ukraine crisis that the chancellor chalked up her greatest foreign policy successes. Never before in postwar history has Germany played as important a foreign policy role as it did the night in Minsk in February 2015 when, at the peak of fighting in eastern Ukraine, Merkel mediated between Moscow and Kiev and prevented the war from spreading further. At the time, she had then-French President François Hollande in tow. He fell asleep at the table as Merkel moved to rescue world peace.

Merkel convinced the Americans not to deliver weapons to Ukraine and was considered the only person who had a chance of getting anywhere with Putin. Ultimately, though, the numerous telephone calls between the chancellor and the Kremlin chief only created the appearance of closeness. In fact, Merkel and Putin have never established a trusting relationship. It has been years since Putin has come to Germany for a bilateral visit. Merkel was last in Moscow in 2015 for the 70th anniversary of the end of World War II. A new visit is currently in the planning stages.

It's about time. After a phase of self-occupation, the country needs to kick back into gear in foreign policy terms if it doesn't want to completely cede its claim to leadership and responsibility.

Berlin Should Support Macron

Macron needs to finally be provided with answers to his proposals for the eurozone. And Berlin needs to show some support for reform -- for the European Monetary Fund, for example. This won't be possible without yielding further sovereignty to Brussels. At the same time, that doesn't necessarily have to mean that Berlin moves away from the correct principles that guided it through the euro crisis -- namely that it will only provide its financial solidarity in exchange for structural reforms.

A new effort is needed in Ukraine, and Foreign Minister Maas has already announced his plan to launch one. The country in the EU's backyard has more than 40 million citizens and threatens to become a failed state. Germany cannot leave the country in the lurch.

Most importantly, however, Germany has to answer this question: Who are we? Where do we stand in the conflict between Russia and the West? Germany is a part of the West, but it could also use its special relations with Russia in ways aimed at preventing the further escalation of the new East-West conflict.

Even if it is difficult for her, the German chancellor needs to establish better ties to Trump, and it would be correct to rebuild contacts at all levels. Macron has already demonstrated that it is possible to exercise influence on Washington. It's in Germany's interest that the United States remain in Syria in order to protect the Kurds there from Turkish aggression, but also to ensure that a Western presence remains and that the conflict is not left entirely in the hands of the Russians, Iranians and Turks.

Finally, even if it was right that Germany didn't participate in the April 13 airstrikes -- the country cannot continue to practice military abstinence in the long run. That's why it is necessary to take steps to limit the requirement of German parliamentary approval for all forms of military action. Doing so is necessary to establish the conditions that would allow Germany to participate in any rapid deployment that might be required. It would also be a prerequisite for closer military cooperation within Europe. That's a view that, incidentally, is also shared by the French president. When Macron stood at Merkel's side on Thursday during his visit to Berlin, a journalist asked him if he would like to see greater German involvement in Syria.

He said he had held intensive discussions with Merkel in the days prior to the military strike. But, he said, German participation would not have been realistic because of constitutional restraints. In a volatile situation like that, he added, you can't "wait several weeks for a parliamentary debate."
Macron might as well have said: It's time for Germany to play a more active role.


By Matthias Gebauer, Julia Amalia Heyer, Christiane Hoffmann, Peter Müller, Ralf Neukirch, René Pfister, Christian Reiermann, Christoph Scheuermann and Christoph Schult


Donald Trump’s Normal Fed

Kenneth Rogoff

US President Donald Trump shakes hands as he announces his nominee for Chairman of the Federal Reserve

CAMBRIDGE – In a presidency that has shown little regard for conventional institutional norms, how can one explain Donald Trump’s completely reasonable appointments to the Federal Reserve Board? The most recent nominations, Columbia professor Richard Clarida and Michelle Bowman, the bank commissioner for the state of Kansas, continue a pattern of choosing seasoned technocrats, beginning, most importantly, with Jerome Powell, the new Fed chair.

If Trump were a normal president, appointing highly regarded individuals who can ensure effective policymaking would be business as usual. But here is a president who has often chosen officials with little government experience, and then seems to task them with creating the most disruption possible in the departments they are selected to run. Yet for the Fed, the author of
The Art of the Deal has nominated as vice-chair an academic (Clarida) whose most famous paper is entitled “The Science of Monetary Policy.”

All right, you might say, giving Trump credit for maintaining stability at the Fed is like giving high marks for not starting a nuclear war. The idea of central-bank independence has gained enormous traction over the past 30 years among politicians worldwide. Not only is it the norm in democracies such as the United States, the eurozone and Japan, but even strongman leaders like Russian President Vladimir Putin and Hungarian Prime Minister Viktor Orbán pause long and hard before challenging their central banks.

But people forget just how new the idea of central-bank independence really is. The venerable Bank of England gained monetary independence only 20 years ago. Back in the early 1980s, when I wrote an academic paper making the case for independence as a tool to establish central banks’ anti-inflation credibility, one journal after another rejected it. The referees scoffed at the idea that independence could be more than a meaningless façade, easily pierced by the government.

Which brings us back to Trump. Is he just pausing long and hard before pressing the Fed to stoke the economy ahead of the 2020 election, and ultimately to monetize the massive deficits wrought by Republican tax cuts? If that is his plan – and who really believes a cornered Trump would not resort to high inflation? – the good news is that his Fed appointments will not make his life easy.

Trump does appear to understand this. After all, on the campaign trail in 2016, he himself railed against Powell’s predecessor, Janet Yellen, for allegedly holding down interest rates to facilitate Hillary Clinton’s election. Now as president, that is exactly what he would like to see in 2020. Interviewing candidates to succeed Yellen last year, he supposedly asked just one key question: “You aren’t going to raise interest rates and ruin my beautiful stock market, are you?”

True, Trump is somewhat constrained by the need to win Senate approval of his nominations. In fact, some conservative Republicans have objected to another of his appointments, Marvin Goodfriend of Carnegie Mellon University, for daring to suggest that the Fed might need a new approach to monetary policy (negative interest rates) to confront the next very deep recession or financial crisis. And although someday the Fed will almost surely embrace this advice (I have also published on the issue), Goodfriend’s nomination barely survived the US Senate Banking Committee. But, by and large, the Senate has given Trump what he wants, and many Republicans would have embraced a disrupter – for example, a disciple of Ron “End the Fed” Paul – or another conservative preaching a return to the pre-World War I gold standard.

Unfortunately, the battle for the Fed’s independence is far from over. Trump may just be keeping his powder dry until a real conflict erupts. Right now, the Fed’s planned interest-rate hikes are largely prophylactic. Inflation is rising only very slowly, even as the economy seems to be running red-hot. But the moment of reckoning could still come. And, assuming that Trump stays healthy, avoids impeachment, and runs again, the last thing he would want in 2019 and 2020 is sharply higher interest rates, an untimely rise in unemployment, and a likely price collapse in his beautiful stock market.

In a crunch, the Fed’s much-vaunted independence could prove more fragile than most people realize. It is not enshrined in the US Constitution, and the president and Congress maintain several levers of control. An act of Congress created the Fed in 1913, and in principle Congress could revamp it, say, by greatly increasing congressional oversight, or by starving it of funding. Indeed, from time to time bills have floated around Congress that would have done just that.

For now, Fed appointees have been treated almost as well as generals in the Trump universe. True, with ballooning deficits and the approach of the 2020 election campaign, testing times lie ahead. But for now, let’s acknowledge that this is one area where the Trump presidency has been almost normal – so far.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of This Time is Different: Eight Centuries of Financial Folly, his new book, The Curse of Cash, was released in August 2016.


Iran’s Regime Under Siege

By Xander Snyder


It’s hard to shake the sense that a reckoning is approaching for Iran’s regime. The assaults from abroad are very public. Over the weekend, a suspected Israeli missile strike targeted an Iranian military base in Syria, the second such strike in April. On April 30, Israeli Prime Minister Benjamin Netanyahu presented what he claims is definitive evidence that Iran has violated the terms of the nuclear deal, which would provide additional motivation to U.S. President Donald Trump to cancel the deal when it comes up for reauthorization next month.

But Tehran is facing resistance at home as well, most recently with strikes in Iranian Kurdistan. Whether it comes from Israel, the U.S. or both, Iran is on the verge of a major test, and every move it makes abroad could jeopardize its security at home.

Kurdish Protests

The catalyst for the Iranian Kurdistan protests was the closure of Iran’s borders with Iraq.

Iran first shut its border with Iraq after Iraqi Kurdistan voted for independence in a referendum last September.

When Iraqi forces were deployed to suppress the mostly Kurdish province of Kirkuk, the Iranian government, anticipating a flood of Kurdish separatists trying to enter Iran, closed the border and sent about a dozen tanks, supported by artillery, to help enforce the closure. Iran reopened its border crossings with Iraq in late December but specifically excluded routes taken by “kolbars,” Kurdish porters who carry heavy loads of goods between Iraqi and Iranian Kurdish regions. Tehran said the decision was connected to the smuggling of illegal arms and drugs.

Illegal arms smuggling into Iranian Kurdistan is a legitimate risk for Iran. Iran’s Kurdish population includes separatist elements and, like Turkey, Iran is concerned about any pan-Kurdish movement that could bring its Kurds together with the more battle-hardened Kurds in Iraq and Syria.

But Iran’s socio-economic problems – high unemployment, inflation in the price of certain staple products and currency depreciation – point to two other motives for the anti-smuggling measures.

First, Iran wants to bring all cross-border, black market trade under the government’s purview so that it can tax it. Second, having failed to realize the full benefits from foreign investment that the government was hoping the Joint Comprehensive Plan of Action would provide, the government is now attempting to encourage domestic consumption in the hopes that it will provide a much-needed catalyst for economic growth. Indeed, in March, Iranian Supreme Leader Ayatollah Ali Khamenei declared that in 2018, Iranians should focus on buying domestic goods.

The problem, though, is that much of Iranian Kurdistan’s economy depends on imports carried by kolbars from Iraq. According to Kurdish media, up to 80,000 kolbars are now out of work, and businesses lack goods to sell. The protests in response are not large – hundreds of shop owners are estimated to have gone on strike, and about 20 arrests have been made – and the government appears to have gotten most of the affected cities back to work, with the exception of Baneh. They surely aren’t large enough to challenge the government, which put down much larger unrest in January. But Iranian Kurdistan is just one of many simmering pockets of resentment toward Tehran. For instance, farmers in Isfahan and other provinces have staged several protests throughout the year in response to what they say is poor water management in the face of severe, nationwide drought. Then there is the banknote protest, an effort to circumvent traditional forms of censorship. This isn’t going to bring down the government either, but the spread of anti-government sentiment could encourage more people to participate in the next large-scale protests, whenever they occur.


(click to enlarge)

And this is precisely the sort of uncontrollable messaging that the Iranian regime – which came to power in 1979 through a mass uprising that incorporated diverse social strata – wants to prevent. The government can’t stop the spread of defaced banknotes, but it did implement a ban of the messaging app Telegram on April 30. Iran hopes that by eliminating this unmonitored channel of communication – which is used by 40 million Iranians, about half the country’s population – it will be able to get ahead of the next wave of opposition before it reaches the streets. In place of Telegram, the government is encouraging Iranians to use a homegrown messaging app called Soroush, which comes equipped with “Death to America” emojis.

Israel and the U.S.

The reason these domestic issues matter now, even though they’re still under control, is that they are intimately connected to Iran’s regional expansion. The more money the Iranian government spends on its foreign adventures in Syria, Iraq and Lebanon, the less money it has to invest at home. And the more Iran antagonizes the West and its allies, the harder it will be for it to attract investment, shed missile sanctions and realize the benefits of the JCPOA – if it survives.

And though Iran’s parliament did walk back some cuts to cash subsidies after the January protests, the growing threat of direct confrontation between Iran and Israel risks forcing Iran to spend even more heavily on its military. Israel hasn’t taken responsibility for the latest missile strike on an Iranian base in Syria, but it is the most likely candidate. If such strikes continue, Iran may reach a point where it will be compelled to retaliate or risk a deterioration in its position in Syria, a position for which it has fought so hard and spent so much. At the same time, a costly war with Israel would severely strain Iran’s finances and risk yet another round of mass protests.

Lurking beneath all these developments is the U.S. threat to back out of the JCPOA. Should the U.S. decide not to extend the sanction waiver on May 12, European countries and Iran could still try to uphold the deal. But the uncertainty would nevertheless spook foreign investors, who would fear follow-on U.S. sanctions targeting entities doing business with Iran (similar to those recently levied on Russia). Cash-strapped Iran desperately needs investment capital, which was a large part of the reason it agreed to the JCPOA in the first place. Investment has primarily flowed to the oil industry, mostly benefiting a small elite, but the end of the JCPOA could turn the tap off even for these funds, further straining an Iran that is facing an ever-growing regional military presence and the costs that accompany such expansion.

Every rial Iran spends defending its newfound regional position is one less spent on its domestic concerns, and the less the regime spends at home, the greater the risk of an uprising against the regime. The solutions Iran does have, such as collecting higher taxes by forcing border closures, also generate new political threats or exacerbate existing ones. Iran is damned if it does and damned if it doesn’t.


North Korea’s Strategy After Halting Its Nuclear Program

By George Friedman

 

The North Koreans took a step back from the U.S. red line last week by announcing that they would halt, at least temporarily, the testing of nuclear weapons and missile systems. They also said they would dismantle an important missile launch site. The willingness to state this publicly is in some ways more significant than the actions. The North Koreans have not tested a nuclear weapon in more than seven months or an intercontinental ballistic missile in nearly five months, and at this point those tests are the key to further development. They need to know that the configuration of their nuclear weapons will fit on their missiles and that their guidance system – which has troubled them before – is functioning. To determine those things, they must do tests.

Promises in politics aren’t worth much, and just because North Korea abandoned one missile test site doesn’t mean it can’t just test at one of its other existing sites. But still, there is something more in this decision than simply trying to shape the political landscape.

The question is what North Korea is trying to achieve. A pre-emptive U.S. attack was taken off the table by the South Koreans, who were not prepared to see Seoul destroyed by North Korean artillery. The U.S. would consider an attack now only if intelligence indicated an imminent North Korean strike against the United States. Having taken that off the table, the North Koreans have given themselves and the U.S. room for maneuver in what appears to be impending talks.
Retiring an Old Strategy
My initial reaction when North Korea accelerated its nuclear and missile programs a year ago was that it made a U.S. attack likely. Later, as South Korea’s opposition to such an attack became clear, I returned to a view I had held for years: that North Korea is a brilliant negotiator, using nuclear weapons as a tool to both focus and frighten the world. I called this the “ferocious, weak and crazy” strategy. North Korea’s greatest fear has long been regime collapse, triggered by outside forces. So it showed itself to be ferocious and, therefore, not to be toyed with. It showed itself to be weak and, therefore, not worth toying with because it will collapse anyway. Finally, it showed itself to be crazy and, therefore, unpredictable and liable to disproportionate responses. This was the strategy, but what North Korea was really doing was buying time to build up its strength so that it could move beyond the game.

The nuclear program and the failure of the United States in particular to take steps to block it followed from the ferocious, weak and crazy strategy. It paralyzed the Clinton, Bush and Obama administrations, which could not figure out how to deal with a power so difficult to read and potentially explosive. This gave the North Koreans the cover to nearly complete a comprehensive nuclear weapons capability.

At this point, North Korea doesn’t have to bluff being dangerous. It has a conventional arsenal capable of terrifying South Korea and enough real nuclear capability to cause Japan and South Korea to take it very seriously. Even the U.S. can’t be entirely sure of its immunity. North Korea no longer needs to be seen as weak. And above all, it must not appear to be crazy. The unpredictability North Korea needed to have from 1992 to the present has become a liability. The greatest threat to North Korea is that the U.S. will regard it as unpredictable and launch an attack, regardless of South Korea’s wishes, to protect the United States. At this point, as a nuclear power in some respects and a near threat to the United States, North Korea must start behaving as utterly rational, leaving the craziness behind.
Is Survival Enough?
With talks with South Korea scheduled for April 27, and the American president coming to visit, North Korea has achieved regime survival. If the regime is cautious, no one is going to try to topple it. Therefore, the decision to stop its nuclear and missile development and dismantle launch facilities decreases the threat of war – while not taking it off the table altogether. After all, what is stopped can be resumed, overtly or covertly.

Still, North Korea has created room for an agreement. No one wants war in the Korean Peninsula, which is a stable platform for moving forward. The issue now is whether North Korea wants more than regime survival. One thing it could press for is a U.S. withdrawal from South Korea and some sort of weak confederation with the South. But South Korea is hardly likely to put all its eggs in a Korean confederation, nor does it want to confront a Japan that would be very unhappy with such an agreement. As for the United States, anything that would force it back from the Korean Peninsula would weaken its position relative to China, which may be an unacceptable trade-off.

So long as North Korea stops being unpredictable, it gains security but loses the ability to terrify. If North Korea wants to force a break between South Korea and the U.S., it is pushing into territory where its new rational strategy won’t take it. If what it wants is recognition of the legitimacy of its regime, it can have that. This is undoubtedly what U.S. Secretary of State-designate Mike Pompeo discussed in North Korea, what the South Koreans will discuss with the North and, ultimately, after all the preliminaries are done, what President Donald Trump will discuss. The U.S. had a chance to topple North Korea in the 1990s. It didn’t take that chance because it seemed too risky and unnecessary. Now it is no longer an option, so formalizing the reality is the next step. The mystery is whether the North Koreans want more. They have a great deal to lose if that gamble fails, and in fact they have always been cautious, however they appeared.


A Downturn That Costs Jobs Could Catch the U.S. Unprepared

More than half of states lack enough unemployment funding for a recession

By Sarah Chaney 
 .

State unemployment funds have picked up during the recovery, thanks to low jobless rates, but many states have failed to rebuild funds sufficient to pay benefits at a recession level for a year. Photo: Caitlin Ochs/Bloomberg News 


In 2009, mired in the depths of recession, Ohio’s unemployment trust fund went broke, prompting the state to borrow $2.6 billion from the federal government so it could keep sending checks to unemployed workers.

Now, with the state unemployment rate down to 4.4%, the debt has been repaid and the trust fund has started to rebuild, but not enough to leave Ohio with sufficient funds to manage another economic downturn. 
That challenge exists across the country: Low unemployment has led to a recovery in state unemployment funds, but the recovery is mixed and incomplete. State unemployment trust fund reserves hit $55.2 billion last year, up substantially from $9.5 billion in 2010. Despite the rebound, more than half of U.S. states lack enough unemployment funding to be prepared for another recession, Labor Department data show.

Economists and policy experts say many states—including powerhouses like New York, California and Texas—are missing an opportunity to rebuild their funding during good economic times. Complicating their outlook, the federal government may not be in a strong position to help the next time the U.S. economy goes south, because federal budget deficits are approaching $1 trillion.



RECESSION READINESSStates ranked according to number of years of unemployment benefits in reserve. 

Source: Labor Department




“Given how robust the recovery has been, this is a high number of states to not be meeting the recommended federal solvency measure,” said George Wentworth, senior counsel at National Employment Law Project, a group that advocates for the unemployed. “When there is another recession these systems are going to…provide considerably less economic security.”

For a trust fund to be recession-ready, it must have enough in reserve to pay out benefits at a recession level for a year. As of the beginning of 2018, 24 states and jurisdictions including Washington, D.C. and Puerto Rico exceeded this standard, while 29 states and territories including the Virgin Islands fell below it, according to a Labor Department report.

By comparison, in 2000, when the national unemployment rate matched today’s 4.1%, 30 states met the solvency standard. 
In the majority of states, trust fund money derives from taxes on employers, with a few states requiring employee contributions. If states run out of funds, the federal government typically provides a backstop.





State trust funds owed $47 billion to the federal government in 2011, according to a Century Foundation paper by Andrew Stettner. By the end of 2017 their debt had been reduced to about $1 billion.

To pay back the federal government and recover funding, states have pursued different strategies. Nine states reduced the duration of benefits to fewer than the traditional 26 weeks.

North Carolina is among those nine. The cuts might have helped to encourage individuals to find work. In the second quarter of 2017, the percentage of workers claiming unemployment benefits was lower in North Carolina than in any other state. The average weekly benefit was $252, 46th in the nation.

The state’s fund is now big enough to make payouts through a recession, but some policy experts say cutting benefits will come with costs. During a recession, the duration of benefits and average payment could prove insufficient to cover a wide swath of unemployed workers. 

IN RESERVE




Total U.S. unemployment insurance trustfund reserves

Note: As of Dec. 31
Source: Labor Department  



“If there is a tremendous economic downturn, it will not provide the assistance to the families or have a stabilizing role,” said Bill Rowe, deputy director of advocacy at the North Carolina Justice Center, an organization aimed at alleviating poverty.
States figuring out how to address low funding levels are faced with limited options that often boil down to how much to cut worker benefits or raise employer taxes.

That debate is still playing out in Ohio.

For Steve Bruns, president of Ohio-based Bruns General Contracting, part of the legislative solution lies in limiting the length of worker benefits. He hopes the state can bring the fund back to solvency, as taxation scars from the last recession still linger. 
Mr. Bruns’s construction company was paying nearly three times as much in taxes per employee to the state in the wake of the recession, as Ohio paid off debt to the federal government. The firm cut costs on energy, employee perks and building operations as a result of recessionary pressures exacerbated by the extra taxation, he said.





“We were scrambling trying to figure out how to make ends meet,” Mr. Bruns said. “(The taxation) was just another burden you had to deal with.”

With others arguing the employer tax is minimal and necessary to save worker benefits, Ohio’s newest legislation proposal—House Bill 382—continues to stall.

“Everyone recognized the system was not adequately funded but kept kicking the can down the road because no one wanted to do the heavy-lifting to actually fix the problem,” said Don Boyd, director of labor and legal affairs at the Ohio Chamber of Commerce, of the prerecession days.

“I don’t think we’ve done an adequate job of addressing the issue to try and make sure we have enough in our trust fund to weather the next storm.”

A spokesman for the Ohio Department of Job and Family Services declined to comment.