Why France is the jihadis’ prime western target

Jonathan Fenby

The potential for fostering political and ethno-religious conflict is great, writes Jonathan Fenby
epa05442524 French riot police guards the street to access the church in Saint-Etienne-du-Rouvray where a fatal hostage taking incident happened, near Rouen, France, 26 July 2016. According to reports, two hostage takers were killed by the police after they took hostages at a church in Saint Etienne du Douvray. One of the hostages, a priest was killed by one of the perpetrators. EPA/IAN LANGSDON©EPA
French riot police guard the street in Saint-Etienne-du-Rouvray where Father Jacques Hamel was killed
Why France? Why has the home of the Enlightenment, of liberty, equality and fraternity become the prime western target for terrorists acting in the name of Isis?
The more determined President François Hollande sounds in declaring “war” on terrorism — as he did again after the murder on Tuesday of Jacques Hamel, an 85-year-old Catholic priest, made to kneel in his church before having his throat cut — the worse the threat appears to become. The state of emergency declared after the slaughter in Paris last November has not prevented further atrocities, including the deaths of 84 people in the Bastille Day attack in Nice or the stabbing of two police officers in front of their three-year-old son.
The medicine applied by the government since the attacks on the Charlie Hebdo magazine and a Jewish supermarket in Paris in January 2015 has clearly not been effective — although Manuel Valls, the prime minister, says that 15 attempted attacks have been thwarted since 2013. The opposition has suggested some radical measures but the basic question as to why these attacks keep happening has yet to receive a plausible answer.
Mr Hollande maintains that Isis targets France because it wants to destroy the values of civilisation the country embodies. That is no doubt true, though other western nations exhibit the same way of life denounced by the extremists.
Rather, a concatenation of several factors helps to explain why France remains the jihadis’ favourite target. To start with, the bombing of Isis bases inevitably attracts a response. This is the price of the firm action that Mr Hollande has espoused but which has not slowed down the pace of terrorist attacks on French soil.
Then there are the radicals of north African descent who have left France for Syria and Iraq, and are reliably reported to hold important positions in the Isis command structure. They are said to have maintained links with the “soldiers” who went to the Middle East and then returned to France to perpetrate the attacks in Paris last year.
Isis planners also appear to see an opportunity to drive a wedge between those in France, like Mr Hollande, who reject the most hardline security policies in the name of republican values, and those who call for Israeli-style measures. The potential for fostering political, ideological and indeed ethno-religious conflict ahead of next year’s presidential election is considerable.
Mr Valls said that the aim of those who murdered Father Hamel on Tuesday was to provoke a “religious war” in France. If there are economists in the Isis high command, they may also be counting on the attack to hit France’s status as the world’s leading tourist destination. Air France, reporting a 5 per cent revenue drop this week, pointed to “special concern” about the country among travellers.
There is also a more longstanding reason why such factors have come into play so powerfully in France. Twenty years ago, I spent time on some of the suburban housing estates that encircle Paris.
The alienation — captured in Mathieu Kassovitz’s seminal 1995 film, La Haine — of the young people who lived on these estates, many of them immigrants or the children of immigrants, was striking even then. It has only intensified since as high levels of unemployment and crime have dogged the banlieues.
Successive governments have failed to get to grips with the grievances of the children of the north Africans who came to France in more prosperous times. Neglect has been the order of the day. When, around the turn of the century, I raised the problem with ministers, they waved it away. “Those young men have only to become good Frenchmen,” one official remarked.
As a result, the gap between the France that holds itself up as a shining light for the rest of the world and the reality of life on the estates has deepened. The result is a rejection of the republic by young people who feel it is at best irrelevant to them, and at worst actively hostile. This, in turn, creates a climate in which a man like Mohamed Lahouaiej Bouhlel, the Nice killer, finds a home for his turbulent instincts in Isis propaganda.
After the Charlie Hebdo attack, Mr Valls spoke of “territorial, social and ethnic apartheid” in France and “unbearable discrimination”. Now he and Mr Hollande strike a more martial tone.

But the drumbeats emanating from the Elysée obscure the fundamental reason France is now in the grip of this reign of terror: the state demands allegiance to its lay republican principles, including the ban on Islamic veils in public places; but a minority of the population rejects that demand, sometimes violently. The tragedy is that, while the problem can be identified, the solution grows ever more elusive.
The writer is author of ‘The History of Modern France’, newly published in paperback

Growth in a Time of Disruption

Michael Spence

Newsart for Growth in a Time of Disruption

FORT LAUDERDALE, FLORIDA – Developing countries are facing major obstacles – many of which they have little to no control over – to achieving sustained high growth. Beyond the headwinds generated by slow advanced-economy growth and abnormal post-crisis monetary and financial conditions, there are the disruptive impacts of digital technology, which are set to erode developing economies’ comparative advantage in labor-intensive manufacturing activities. With the reversal of these trends out of the question, adaptation is the only option.
Robotics has already made significant inroads in electronics assembly, with sewing trades, traditionally many countries’ first entry point to the global trading system, likely to come next.

As this trend continues, the imperative to build supply chains based on the location of relatively immobile and cost-effective labor will wane, with production moving closer to the final market.
Adidas, for example, is already building a factory in Germany, where robots will produce high-end athletic shoes, and is planning a second one in the United States.
Given all of this, developing countries need to act now to adapt their growth strategies. A sensible framework for doing so must account for several key factors.
First, the problems in advanced countries – from slow economic growth to political uncertainty – are likely to persist, reducing potential growth everywhere for an extended period. In this context, developing countries must not succumb to the temptation to try to boost demand through unsustainable means, such as the accumulation of excess debt.
Instead, developing countries, particularly those in the earlier stages of economic development, must find new external markets for their goods, by maximizing trade opportunities with their counterparts in the developing world, many of which have considerable purchasing power.

While such demand will surely not offset the drop in advanced-country demand completely, it can help to soften the blow.
Second, investment, both public and private, remains a powerful growth engine. In economies with excess productive capacity, targeted investment can yield a double benefit, generating short-run demand and boosting growth and productivity thereafter. Given this, shortfalls in investment that promises high social and private returns must be reduced, and even eliminated.
These growth- and productivity-enhancing investments should be financed primarily from domestic savings, though some can also be financed with debt. Long-term, stable infrastructure investments can be financed at least partly by international development institutions.
Third, it is critical to manage the capital account in a way that protects and enhances the real economy’s growth potential. Large inflows of capital from countries with low interest rates can easily push up exchange rates, putting the tradable part of the economy under pressure. At the same time, the prospect of a capital-flow reversal adds risk, deters investment, and can produce sudden credit-tightening events.
In this context, selective capital controls and careful reserve management can help to stabilize the balance of payments and ensure that the terms of trade do not change too fast to be offset by productivity growth. In fact, successful developing countries were pursuing such policies even before the global economic crisis hit.
Fourth, a realistic approach to the digital revolution is needed. On one hand, developing countries should recognize that disruption, while happening fast, will not render their growth models obsolete overnight. China’s continued growth and rising household income are creating opportunities for lower-income economies in low-cost manufacturing.
On the other hand, developing countries must accept the inevitability of changes to their growth models caused by digital technologies. Instead of viewing these changes as a threat, and trying to resist them, developing economies should be getting ahead of them, by embracing disruptive innovations. This means investing in the capacity – physical and human – to support their use.
Beyond upgrading manufacturing, developing countries should be preparing for the shift toward services that they will inevitably undergo as incomes rise (though the precise timing is hard to predict). Indeed, they should be seeking ways to exploit opportunities to boost their trade in services, much like India and the Philippines have done.
Fifth, the distribution of gains from economic growth cannot be ignored. The advanced economies tried that, and the result has been rising political polarization, intensifying anti-establishment sentiment, declining policy coherence, and weakening social cohesion. In a low-growth environment, in particular, developing countries cannot afford to make the same mistake.
Sixth, it is important to establish sustainable growth patterns early on. A “green” approach would not only stimulate additional growth; it would also be likely to increase the quality of growth, not to mention the lives of ordinary people. Moreover, it will lead to a far more resilient economy in the long run.
Finally, entrepreneurial activity is vital to translate economic potential into reality. Policies that support such activity, such as by removing obstacles to new business creation and enhancing financing opportunities, cannot be left out of growth strategies. Opening channels for flows of information, ideas, expertise, and talent from abroad can only enhance these efforts.
Developing economies may not have much control over the headwinds that they face today, but that does not mean that they are powerless. Much can be done not just to sustain moderate growth, but also to secure a more prosperous and resilient future.

Let Europe Pay for Italy’s Bank Bailout

Matteo Renzi’s plan to inject money from the Italian government would destabilize the economy.

By Harald Benink

    Photo: Getty Images/iStockphoto

During his press conference last week, Mario Draghi, the president of the European Central Bank, said that the European Union’s rules of state aid for problem banks contain all the flexibility needed to cope with “exceptional circumstances.” He also said that a public backstop is a measure that would be “very useful” to help banks deal with their nonperforming loans.

In Italy, nonperforming loans on the balance sheets of Italian banks currently amount to €360 billion, according to the International Monetary Fund’s latest Global Financial Stability Report. At some point, these banks will have to start recognizing losses on these loans and find new equity capital to compensate for them. Investors are concerned, as demonstrated by falling share prices at some of Italy’s leading banks.

To help bolster these problem banks, Matteo Renzi, Italy’s prime minister, has proposed a capital injection of €40 billion, financed by government debt. This amount is likely to be insufficient as compensation for the losses on the nonperforming loans.

More importantly, such a bail-out would violate the EU’s rules, which require that losses first be borne by shareholders, then the holders of subordinated debt, bond holders and holders of large deposits, all before resorting to taxpayer money. In order to get around these rules, Mr. Renzi would make use of an exemption clause in the EU’s Bank Recovery and Resolution Directive, which applies to cases where the stability of the financial system is at stake. As evidence, Mr. Renzi points to the widespread fall in bank-stock prices across Europe following the Brexit referendum last month.

But allowing the Italian government to bail out its banks would imply an increase in government debt. At more than €2 trillion, and with a debt-to-GDP ratio of approximately 135%, government debt is already irresponsibly high. A potential destabilization of Italian government finance and of the euro system associated with even lower debt sustainability would be unwise.
Moreover, allowing shareholders and creditors to avoid having to write off at least part of their debt, thus suspending the EU rules only six months after they entered into force, would undermine the credibility of Europe’s single resolution mechanism. The SRM is supposed to provide an orderly means to manage failures at systemically important institutions, and is meant to put an end to the old “too big to fail” regime under which a bank’s bondholders did not have the incentives to monitor bank risk and undertake disciplinary action. Under SRM, unsecured creditors can no longer expect governments to bail them out. Circumventing the EU’s rules would thus seriously damage the credibility of SRM and significantly increase the probability of a future banking crisis.

As Jeroen Dijsselbloem, the chair of Eurogroup, has said, in order to address the problems of Italy’s banking sector, the focus must be on their unsecured creditors being the first to bear the burden.

Where appropriate, small retail investors who have been misled into believing that the bank debt they purchased is riskless may be compensated for losses associated with the write-offs.

Furthermore, a public recapitalization involving a residual amount of new capital after the unsecured creditors have taken a haircut may be necessary to restore confidence.

If destabilization is to be avoided, this capital injection shouldn’t be provided by the Italian government. It should come instead from Europe’s permanent rescue fund, the European stability mechanism. When the ESM was created in 2012, it was agreed that part of the fund, for an amount up to €60 billion, may be used for the direct recapitalization of banks after write-offs by private investors have taken place.

Mr. Draghi is right when he states that a public backstop may be very useful. But such a public backstop should only be allowed after private investors have taken a haircut. And it should be provided not by Italian taxpayers, but by European taxpayers only.

Mr. Benink is professor of banking & finance at Tilburg University in the Netherlands.

Dogs and Cats Living Together

Jared Dillian
Editor, The 10th Man

Dr. Peter Venkman: This city is headed for a disaster of biblical proportions.

Mayor: What do you mean, “biblical”?

Dr. Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath-of-God-type stuff.

Dr. Peter Venkman: Exactly.

Dr. Ray Stantz: Fire and brimstone coming down from the skies. Rivers and seas boiling.

Dr. Egon Spengler: Forty years of darkness. Earthquakes, volcanoes…

Winston Zeddemore: The dead rising from the grave.

Dr. Peter Venkman: Human sacrifice, dogs and cats living together—mass hysteria.

These are strange times.

Let’s make a list of the top 13 strange things out there right now.

1. Numero uno. The gold medal. Interest rates are negative all over the world.

2. Many Republicans want to reinstate Glass-Steagall, along with the Democrats.

3. There are housing bubbles all over the world, big ones. And they keep on going.

4. Japan might do the helicopter drop (as discussed last week) and cancel its outstanding debt.

5. US debt is over 100% of GDP, and nobody is campaigning on deficit reduction (except for the Libertarians).

6. The normally wild-eyed Libertarians are running as sane centrists.

7. Russia might actually be interfering with US elections.

8. Terrorism is rampant across the globe, and nobody seems to care.

9. Great Britain voted to leave the EU.

10. Scotland may again try and secede from Great Britain.

11. Stocks are at all-time highs.

12. Gold is up 30% in a few months, and people are still massively underinvested.

13. The Federal Reserve is the most hawkish central bank in the world.

Actually, I could have gone and listed another 13. It’s crazytown out there.

I think a lot about history. Thomas Carlyle, the Scottish philosopher, said, “The happiest hours of mankind are recorded on the blank pages of history.” It’s true.

Remember studying US history in high school? You learned all about Woodrow Wilson and World War I and then you learned about FDR and World War II, but you skipped over Harding/Coolidge/Hoover in between.

What happened in the 1920s, anyway? Only the biggest economic boom in the history of the United States, coupled with massive technological progress and improvements in longevity and people’s standard of living. The best time ever. You might think people would want to study the conditions that led to that prosperity, so it can be repeated.

So what was it? Why were things so good?

Faced with a huge postwar recession in 1920-1921, really a depression, the Harding administration’s response was to do… nothing! Literally nothing.

And so—it was the fastest and sharpest recovery in modern history. I forget the exact statistics, but unemployment dropped from 11-something percent to 2-something percent in a matter of a few years. And yet Wilson and FDR are considered to be the “great” presidents.

The happiest hours of mankind are recorded on the blank pages of history.

The pages of history are not very blank right now. We live in interesting times.

Keep a Cool Head

I think the first step is to acknowledge that these are not normal financial conditions. Far from it.

Normal financial conditions are when interest rates are at 6%, you can reasonably save for the future in a bank account, stocks are neither rich nor cheap, bonds aren’t trading at 160 or 180 or 200 cents on the dollar, and dozens if not hundreds of startup companies aren’t valued at more than a billion dollars.

None of this is normal.

The reason it isn’t normal is because this—all of this—is the result of the accumulation of every government intervention in the last 30 years. That is the reason why we are here today.

Professional investors complain about this all the time, about the distortions, that they can’t do their job of finding undervalued assets and waiting for them to return to fair value. Nothing is at fair value.

What few of these professional investors have realized is that you have to adapt or lose assets and shut down your fund. If everything is distorted, you have to front-run the distortions.

Unpleasant, but that is the reality of the situation.

Business has been good for me. I will admit it: I have no particular edge when it comes to security valuation. But I am excellent at trading ahead of government stupidity. Policymakers are easier to predict than corporate earnings, at least for me. If we went back to the ‘50s or the ‘80s or the early ‘90s, when things made sense, I would have a very tough time of it.

Sad, but true: you can’t have an opinion on stock X or bond Y without having an opinion on what the government is going to do that is going to affect stock X or bond Y.

Nobody was surprised by what happened to the coal industry—Obama said what he was going to do, then did it—but it’s probably the best example of how, in certain instances, the government has 100% control over the outcome. It didn’t matter how compelling the valuation case was, how cheap the assets got. It was a zero.

Election 2016

Every year around this time, the sell-side firms’ research departments will go and make a list of what stocks will win and what stocks will lose depending on who gets elected.

Speaking of coal, if Trump gets elected, for sure, coal will rip. I’d say that the Democrats would be bad for financials, but financials are going to get hammered no matter who gets elected (note: it might already be priced in).

I don’t pay too much attention to these election plays—a bit too much like roulette. But the bigger idea here is that both major candidates represent bigger government, more intervention, and even bigger distortions. In other words, more opportunities for you and me. I wish that weren’t true, but that is the world that we live in.

The whole notion of the CFA makes me laugh. Forget security analysis, all you need is a newspaper, or its electronic equivalent.