Risks remain amid the global recovery
Financial weakness, debt and fears of a collapse in co-operation are hurdles
by: Martin Wolf   

The Bank for International Settlements is the stopped clock of international economic institutions. It has argued for monetary and fiscal tightening, whether that makes sense, or not. Fortunately, policymakers, or at least the central banks that are members of the BIS, have ignored its apparent conviction that the world needed an even deeper and more prolonged recession. Yet now, precisely because central banks wisely ignored its advice, a synchronised recovery has finally arrived. So does the latest BIS annual report tell the right time again, as it did in the years before the crisis?

It is worth recalling how wrong the BIS has been in the past. In June 2010, when, as we now know, the post-crisis damage was very much with us, the BIS already asserted that “the time has come to ask when and how these powerful measures can be phased out”. Oh no, it had not.

The time had come to act more aggressively to accelerate the recovery and so limit the longer-term damage of the crisis. The need then was not to phase out monetary and fiscal stimulus, but to strengthen it. The weak recovery is in good part a consequence of that failure.

Yet now things do look different. As Catherine Mann, chief economist of the OECD has stated, things are “better, but not good enough”. The Paris-based club of developed economies, in line with most forecasters, expects a modest pick-up in global growth this year and next. The hope must be that this will be the beginning of a sustained upswing, in which strengthening investment and faster productivity growth keep inflation in check. But hope is what this still is.

So what risks lie in wait for the recovery?

An obvious one is that monetary tightening will be too fast, even in the US, let alone the eurozone. Inflationary pressure remains remarkably subdued. Even the BIS, a worrywart’s worrywart, agrees that resurgence of inflation is not a large risk. This is partly because of globalisation, which has greatly enhanced competitive pressures.

Another risk is financial. As Jaime Caruana, general manager of the BIS, notes: “In a number of smaller advanced economies and emerging market economies, long financial booms have moderated or turned into downswings. And globally, debt is at record levels: in 2016, the stock of non-financial sector debt in the economies [of the group of 20 countries] stood at around 220 per cent of GDP, almost 40 percentage points higher than in 2007.” A striking feature is the remarkably rapid growth of credit and debt in China.

Warren Buffett has said that: “Only when the tide goes out do you discover who’s been swimming naked.” As interest rates rise, financial risks will crystallise. Yet reasons for optimism on this point also exist: the core western financial system is far better regulated and capitalised than it was in 2007; the Chinese authorities can stabilise their financial system, if necessary; no globally significant credit-driven boom is to be seen, except in China; and, finally, even though prices of highly valued equities might fall, that would not of itself cause a crisis in the credit system. If a financial risk exists, it is likely to be in public debt, maybe in the eurozone.

Yet another danger is renewed weakness in aggregate demand. This is one on which, rather surprisingly, the BIS does focus. But, so long as inflation remains subdued, both monetary and fiscal room for manoeuvre remains. Of course, this also argues against premature monetary tightening. Let us establish strong forward momentum first.

The final and possibly greatest danger is a collapse in global co-operation, perhaps even an outbreak of conflict. That would destroy the stability of the world economy on which all — including, though they do not know it, foolish nationalists and protectionists — depend. Indeed, it could destroy the stability of the entire global order. There is no doubt that, as the BIS notes, “formal statistical evidence, casual observation and plain logic indicate that globalisation has been a major force supporting world growth and higher living standards”.

Yet, as Ms Mann rightly says, this indubitable progress has coincided with rising inequality, a concentration of job losses at the middle-skill level and sharp declines in jobs in manufacturing in the high-income economies. That, in turn, has, among other things, led to the protectionism we see, notably in the US.

A collapse of the global political and economic orders could do enormous damage. The assumption, apparent in the markets, that such actions would be “full of sound and fury, signifying nothing” seems remarkably insouciant. It is perfectly possible that nothing much will happen. But it is also possible that the fragile spirit of rules-governed co-operation will simply vanish overnight.

We in the high-income countries allowed the financial system to destabilise our economies. We then refused to use fiscal and monetary stimulus strongly enough to emerge swiftly from the post-crisis economic malaise. We failed to respond to the divergences in economic fortunes of the successful and less successful. These were huge mistakes. Now, as economies recover, we face new challenges: to avoid blowing up the world economy, while ensuring widely shared and sustainable growth.

Alas, we seem likely to fail this set of challenges. The BIS talks, sensibly, of building resilience. A part of this lies in ensuring that growth becomes less dependent on debt. Yet that is only one way in which we need to make our economies more effective and politically legitimate. If we fail to respond to these structural challenges, the recovery is unlikely to prove strong or lasting.

The post-rescue phase is at last quite close. It is a time for reinforcing what was good and reforming what was not.

Europe's Backyard

Tensions Rising in Balkans as Hopes for EU Future Fade

By Walter Mayr and Jan Puhl

Photo Gallery: The EU's Fading Attraction in the Balkans

Fourteen years after being told they had a future in the European Union, countries in the Western Balkans are losing hope. Meanwhile, Turkish and Russian influence in the region is on the rise. So too is the nationalist rhetoric of old.

The man who hopes to become the prime minister of Kosovo has a past, documented under case file IT-04-84 at the International Criminal Tribunal for the former Yugoslavia in The Hague. Forty-eight-year-old Ramush Haradinaj, aka Smajl, was accused of crimes against humanity in 37 cases, including murder and torture.

The allegations are from the 1990s, when he was a field commander for the Kosovo Liberation Army (UÇK) in the war against the Serbs. The court ultimately found Haradinaj not guilty, a product of witnesses declining to testify at the last moment or, in some cases, dying suddenly. The United Nations police force in Kosovo has accused the UÇK veteran of dealing cocaine, while Germany's foreign intelligence service, the BND, described him in a 2005 analysis as being the head of a group involved in "the entire spectrum of criminal activities."

Despite his past, though, Haradinaj's alliance of former fighters managed to emerge victorious in Kosovo parliamentary elections earlier this month. With 34 percent of the voters supporting his alliance, it is now up to him to form a governing coalition.

The news from Kosovo, the mini-republic located northeast of Albania, is consistent with the atmosphere in the Western Balkans these days. Kosovo, Macedonia and Bosnia-Herzegovina, all part of former Yugoslavia, have spent years waiting to become members of the European Union, but it seems in the early summer of 2017 as though they have almost been forgotten. And people there are beginning to lose their patience. The result: increasing numbers of people leaving the region, accelerated Islamization and rising nationalism. Violent protests recently in the Macedonian capital of Skopje along with ranting about a Greater Albania in both Tirana and Pristina, the capitals of Albania and Kosovo respectively, have served to demonstrate just how tense the situation has become.

Located at the historical intersection between the Orient and the Occident, the Western Balkans are something of a geopolitical no-man's-land. Between the territories of EU member states Croatia and Greece, there are six countries in the region whose chances of joining the European bloc any time soon are extremely limited.

Kosovo, Serbia, Bosnia and Herzegovina, Macedonia, Montenegro and Albania: All were promised a future in the European Union at the Thessaloniki Summit in 2003, a time when optimism was widespread in the Balkans. But their hopes have been dashed: Not long after that summit, the EU switched from expansion to naval gazing, its energies being rerouted to the euro crisis and the dangers presented by populism and, more recently, Brexit.

Way back in 2010, then-Czech Foreign Minister Karel Schwarzenberg blasted the lack of attention paid to the Western Balkans, saying the region threatened to become "nitroglycerine under our behinds." And now, it has become increasingly apparent that others are taking advantage of the West's lack of action, including autocratically governed countries with historic ties to the Balkans like Russia and Turkey, in addition to new sponsors and mentors from the Persian Gulf.

The Balkans, a region that has produced numerous crises in Europe, is once again threatening to become a security risk. The attraction of the EU is fading and the nationalist rhetoric of the past is returning. If the EU had a joint foreign and defense policy, this would be its test case: the sustainable pacification of the Balkans.

1. KOSOVO: The Threatening Scenario of Greater Albania

As a commander during the war, Kosovo President Hashim Thaçi's codename was Gjarpri, Albanian for "snake," because he hardly left any tracks. But for years now, criminal prosecutors have been on his tail.

In the 1990s, Thaçi was one of the founders of the paramilitary liberation army UÇK and has been president of Kosovo since 2016. And now, just as he has been handed the privilege of granting his old comrade Haradinaj the task of forming a government, he faces potential prosecution for war crimes by a special tribunal in The Hague.
Seemingly by chance, books about streetfighters-turned-politicians, such as Joschka Fischer and Gerry Adams, lie strewn about on Thaçi's desk in the capital of Pristina. The president of Kosovo is intent on demonstrating that the Thaçi of today no longer has anything in common with the man who, as a German intelligence report once claimed, controlled "a criminal network active in all of Kosovo."

Sitting amid the gold-gilded, Rococo chairs and crystal chandeliers in his office, the head of state makes it clear that he is interested in talking about Kosovo's future, and not about his own past. "The main threat," he says, "is that the EU will come too late to this region, thus leaving space for others, including radical Islamists." He says he is also concerned about "rising nationalism in the region and the increase of Russian influence wherever Serbs live." In April, Thaçi even threatened the unification of all Albanians in the Balkans in a joint state if the EU was to close its doors. Now, though, he says his comments were misunderstood.

Ten years after Kosovo declared independence from Serbia, the country - the majority of whose population is comprised of ethnic Albanians -- still finds itself among Europe's step-children.

Five EU member states and 75 additional UN countries have declined to recognize Kosovo as an independent nation -- and it is the only European country west of Belarus whose residents require a visa to travel into the EU. Its isolation, combined with an official unemployment rate of almost 30 percent, has accelerated the exodus of mostly young Kosovars.

Increasing Islamism

"Every year, the German Embassy alone receives 55,000 visa applications," says political scientist Naim Rashiti, "but it takes up to half a year to process them. By contrast, citizens of Kosovo can travel to Turkey without a visa. The EU still represents the promise of a better future, but in some parts of society, this certainty is eroding through Turkey's growing influence in addition to increasing Islamism."

Per capita, more fighters from Kosovo have joined Islamist militias in the Middle East than from any other country in Europe. One-sixth of the jihadists from Kosovo have fallen in battle, but many of them have since returned home. The government in Pristina does what it can to combat radical imams, but in a recent statement, the German government noted: "Saudi Arabian missionary organizations are also active in Kosovo, spreading the Wahhabi interpretation of Islam by sending preachers."

For half a millennium, Kosovo was under Ottoman rule and now Turkish economic and cultural influence is again on the rise. Turkish investors have pumped a billion euros into sectors such as transportation and energy, but money has also been made available for private schools, student dormitories and grants for Koran students to study in Turkey.

The West, meanwhile, doesn't quite know what to do about Kosovo. In 1999, NATO launched air strikes to end Serbian autocrat Slobodan Milosevic's violent control over the Albanian-majority region and the international community pumped 33 billion euros into Kosovo in the period prior to 2008 alone. Indeed, the extent of that involvement might explain why Washington, Berlin and other Western capitals are unwilling to see Kosovo's Feb. 17, 2008, declaration of independence for what it is: a violation of international law. Russian President Vladimir Putin is fond of pointing to Kosovo when justifying his own country's annexation of the Crimea or de facto annexation of Abkhazia.

The U.S. was instrumental in paving the way for Kosovo's independence and saw Hasim Thaçi as the young republic's hope for the future - despite Thaçi's instrumental leadership role in the UÇK, a group the U.S. State Department had listed as a terrorist organization as recently as 1998. In return, the U.S. was able to establish a heavily guarded military base in Kosovo - and 18 years after NATO intervention, the former rebel leaders of the UÇK still control political and economic life in the country. Ahead of the last parliamentary elections, they formed an alliance for the first time.

Ramush Haradinaj, the lead candidate and victor of those elections, promised voters that, were he to become prime minister, he would even annex areas within the republic of Serbia. Initially, though, he would likely face more pressing concerns. The new special tribunal in The Hague will soon be issuing indictments against former members of the UÇK leadership, perhaps including head-of-state Thaçi. Charges could include offenses such as murder, torture, sexual violence and illegal organ trafficking.

A Symbol of Rapprochement

For many, he is a hero, for others, a possible war criminal - what is that like? Kosovo President Thaçi pauses when asked the question in his office. Then, he says: "First of all, I was the supreme political commander, not the military commander. Second, no special tribunal in the world can rewrite history. We have nothing to hide."

Hashim Thaçi complains that neighboring Serbia is treated as a model pupil. "Serbia is a failed state in the Western Balkans, nothing more," says the Kosovo president. "It is the root of all evil in this region; Serbia is blocking Bosnia and violating the sovereignty of Kosovo and of Montenegro." Thaçi says that Kosovo "fulfills 94 criteria for visa-free travel, but then a 95th is invented."

It's no wonder, he says, that his people are losing their patience and their trust in Brussels. Fellow Albanians in the neighboring states of Albania, Serbia, Montenegro and Macedonia see things the same way, he says. Thaçi denies dreaming of the establishment of a Greater Albania.

Instead, he prefers to say: "Kosovo is Kosovo, we don't want to redraw the borders. But we Albanians would like to, at some point, live in the same geographic space, without borders."

Around 5 percent of the Kosovo population is still made up of Serbs. About an hour's drive north of the capital, one arrives at a structure of steel and concrete stretching across the Ibar River. Rebuilt with the help of more than a million euros from the EU, the bridge connects the Albanian southern part of the city of Mitrovica with the largely Serbian northern part. New wooden benches have been installed on the riverbanks to facilitate encounters between the two ethnicities, but only pedestrians are allowed to cross the bridge.

Initially, the span was intended as a symbol of rapprochement, but it has instead become emblematic of a lasting conflict. Fully 90 percent of the Kosovar Serbs still say that don't want to live in a state with Albanians North of the river, Serbian flags still fly in the divided city.

Thus far, a resurgence of violence between Serbs and Albanians has been prevented primarily due to funding and pressure from the EU. That money is distributed on both sides of the river and houses and streets are being fixed up across the entire city. Brussels has also pressured Serbia into no longer providing Serbian residents of Kosovo with passports, with which they could enter the EU without a visa.

And in Belgrade, Serbian President Aleksandar Vucic has left no doubt that he is willing to sacrifice the Kosovo Serbs on the altar of an EU future.

2. MACEDONIA: Ethnic Tensions and European Hopes

The further south you drive from Pristina toward the border with Macedonia, the less ubiquitous becomes the blue flag of Kosovo - and the more prevalent the double-headed eagle flag of neighboring Albania. It is the symbol of that which binds across all borders.

In Macedonia, formerly the southernmost republic of Yugoslavia, Albanians represent 25 percent of the population. They tend to be concentrated near Macedonia's western border and traditionally feel closer to their fellow Albanians in Kosovo, Albania, Serbia and Montenegro than to their Slavic countrymen.

On April 27, Talat Xhaferi became president of Macedonian parliament, the first time ever that an ethnic Albanian had been chosen for that position. A mini-flag with the double-headed Albanian eagle can be found on his desk as well. After he was elected, violence broke out, with followers of long-time nationalist-conservative ex-Prime Minister Nikola Gruevski storming the parliament and assaulting their political adversaries. In the eyes of Slavic-Macedonian ultra-nationalists, Xhaferi's election represents the first step toward the country's partition, and they are concerned that a "binational" arrangement could ultimately lead to the establishment of Greater Albania.
Removing the Srebrenica Massacre from the School Books

This worry is partly the result of a trip taken to Albania in late 2016 by three senior Albanian-Macedonian politicians. In the capital of Tirana, they joined Albanian Prime Minister Edi Rama in signing a "platform" with a long list of demands. Later, both Rama and Kosovo President Hashim Thaçi hinted that the Albanians, disappointed as they are with the EU, could seek to shift borders in the region.

The rift between political parties and ethnic groups in Macedonia has become deeper in recent years, despite it having long been a model country in the Balkans. It achieved independence in 1991 without the firing of a single shot and quickly applied to join Western political and military alliances.

Macedonia, population 2 million, has had an Association Agreement with the EU for 16 years, has been an accession candidate for 11 years and, fully nine years ago, was at the cusp of becoming a member of NATO. Yet neither membership in EU nor NATO has come to fruition, and Macedonia's southern neighbor Greece is primarily to blame. Athens has consistently exercised its veto right, complaining that the name Macedonia is historically the provenance of ethnic Greeks. Greece wants Macedonia to change its name.

Prime Minister Gruevski, who stepped down in 2016, was initially considered to be pro-European, only changing course once he realized that the EU and NATO couldn't even solve the name conflict with Greece. He developed into an autocrat and he now stands accused of electoral fraud, corruption and large-scale surveillance of civilians. He also transformed the center of Skopje into a nationalist-Macedonian Disneyland - with gigantic, totalitarian-esque bronze statues recalling a glorious past.

A pro-European protest movement, known as the Colorful Revolution, developed in the country in response to Gruevski's rule, with demonstrators throwing paint bombs at monuments to the premier's government. In spring 2016, Simona Spirovska became the face of the revolution; the red-headed actress still wears a military jacket flecked with paint from back then, when she would frequently join the paint throwers. "The useless buffoon," as she says, got on her nerves. "Recently, a lot of EU money flowing into Macedonia has been diverted."

The government, accusing the demonstrators of being Albanian though the movement was in fact diverse, used the protests to enflame ethnic conflict. Ultimately, the EU was able to negotiate a deal with the parties to the conflict which led to new elections. With Albanian support, Social Democrat Zoran Zaev won - a representative of the political old guard who has been under investigation for corruption.

Currently, there is no obvious way out of the dead-end into which Macedonia has maneuvered itself. "The EU is slowly losing its regulative power here and support for united Europe is falling," a Western political consultant in Skopje warns. And Simona Spirovska, the actress and activist, says: "Our mission isn't over. It has only just begun."

3. BOSNIA and HERZEGOVINA: Faces of Ethnic Partition

Vernes Voloder lived not even 500 meters from the Stari Most, the famous Old Bridge of Mostar, in the Muslim eastern side of the city when the 1991 war began. He survived the siege by Orthodox Serbs and the following skirmishes between the Catholic Croatians and the Muslim Bosniaks, who had initially been allies. But by the time the Croatians blew up the famous Stari Most spanning the turquoise Neretva River in 1993, Voloder had already left his hometown. "This bridge, which connected the Muslim quarter with the Croatian quarter was a fact of life for us," he says. Mostar, one of the largest multi-ethnic cities of Yugoslavia prior to the outbreak of war, had lost its symbol.

Today, a quarter-century later, the bridge is back, its reconstruction financed with millions of euros from the EU.

A slender 40-year-old in jeans and a hipster T-shirt, Voloder has since returned to Mostar and walks almost every day from the Muslim eastern part of the city to the Croatian sector in the west. He works for a non-profit institute as an "ethno-therapist," seeking to get Croats and Bosniaks talking to one another again.

Even 25 years after the war broke out, Serbs, Croatians and Bosniaks are still feuding with each other within the confines of the Bosnia and Herzegovina federation. The Serbian half of the republic is threatening to secede and to remove all reference to the genocidal slaughter of 8,000 Muslims in Srebrenica from their school books.

In 1995, after U.S. air strikes put an end to the Serbian massacre of Muslims, Washington leaned on the three warring parties to sign a peace deal in Dayton. It is still in force today. The problem, however, is that the peace agreement solidified ethnic segregation. Bosnia and Herzegovina is made up of a Serbian entity - the Republika Srpska - and a federation of Croatian and Bosniak entities.

Political offices are dispersed using a complicated formula aimed at parity and several institutions exist in triplicate, such as electricity suppliers, pension funds, water supply facilities and district councils.

In the street where Voloder works, there is a public transportation training facility where young Bosnians take classes until 12:30 p.m., followed by Croatians in the afternoon. There are two school directors and two different teams of teachers. It took Voloder months to get the teachers to sit down at a table together and talk about teaching Croats and Bosniaks together for at least a couple hours a week. He was successful until the moment when a television broadcaster showed up and interviewed a Croatian student who said he couldn't stand Muslims. That brought a premature end to the dream of joint schooling.

Billions in development aid from the EU has likewise been unable to change the fact that Bosnia-Herzegovina remains a poorly functioning entity. Its residents have shown little interest in stepping across the ethnic divide for the good of the commonwealth.

"Our politicians have made things comfortable for their clientele in the bloated public sector," says Amna Popovac, the Muslim founder of a citizens' initiative in Mostar. "Regardless of whether they are Croatian or Bosniak, Dayton marked the birth of a political class that has no interest in democratic controls." She says that city leaders have spent 300 million euros in tax money and EU aid in the last nine years.

To obscure the lack of progress, Bosnia's politicians continue to resort to the same nationalist language common in the 1990s. Milorad Dodik, president of the Republika Srpska, for example, has been demanding for years that the Serbian portion of the country secede, which would be a violation of the Dayton Accords. In the Croatian cantons, meanwhile, Dragan Covi is promoting the establishment of an exclusively Croatian region, with the ultimate goal of becoming part of EU-member Croatia. The EU, protector and sponsor of the cold peace in Bosnia and Herzegovina, has remained silent on the issue.

Cutting off funding to the country is not an option, says an EU representative in Bosnia who would like to remain anonymous. That would be "welcome to the rabble rousers on all sides," he says. "We would produce martyrs."

In the early summer of 2017, there is no war in the Western Balkans, nor are there pockets of civil conflict. There is, however, a growing repudiation of the European project across the entire region.

While it may be understandable that the EU is losing its attraction and influence as a symbol of security and prosperity, it is also dangerous. Peace in the Western Balkans is being threatened by the barely concealed Albanian ambition for a common state beyond existing borders just as it is by the megalomania of Serb nationalists.

What is currently taking place in the Balkans, says the EU representative in Mostar, is a total masquerade. Nobody in the EU believes, he says, "that Bosnia will become a member in the foreseeable future." As such, the country is making little effort to conform to European standards.

"The attraction of the European Union has faded. We are no longer a role model."

In 2018, the 100th anniversary of the end of World War I will be celebrated. Three years ago, Angela Merkel launched the so-called Berlin Process, an attempt to build a bridge from Brussels to the Western Balkans. It was originally set to be completed in 2018, but given the current state of affairs, even small steps would be seen as achievements worthy of celebration: visa-free travel to the EU for citizens of Kosovo, for example, or Bosnian access to EU structural funds. Or a solution to Macedonia's name-conflict with Greece.

And in return: The promise of lasting peace in the Balkans.

Europe’s Gradualist Fallacy

Yanis Varoufakis
. euro coin

ATHENS – Europe is at the mercy of a common currency that not only was unnecessary for European integration, but that is actually undermining the European Union itself. So what should be done about a currency without a state to back it – or about the 19 European states without a currency that they control?
The logical answer is either to dismantle the euro or to provide it with the federal state it needs.

The problem is that the first solution would be hugely costly, while the second is not feasible in a political climate favoring the re-nationalization of sovereignty.
Those who agree that the cost of dismantling the euro is too high to contemplate are being forced into a species of wishful thinking that is now very much in vogue, especially after the election of Emmanuel Macron to the French presidency. Their idea is that, somehow, by some unspecified means, Europe will find a way to move toward federation. “Just hang in there,” seems to be their motto.
Macron’s idea is to move beyond idle optimism by gaining German consent to turn the eurozone into a state-like entity – a federation-lite. In exchange for making French labor markets more Germanic, as well as reining in France’s budget deficit, Germany is being asked to agree in principle to a common budget, a common finance ministry, and a eurozone parliament to provide democratic legitimacy.  
To make this proposal palatable to Germany’s government, the suggested common budget is tiny (around 1% of aggregate eurozone income) and will fund only the basic structures that a federation-lite entails, like common deposit insurance to give substance to Europe’s (so-called) banking union and a portion of unemployment benefits. The plan also envisages common bonds, or Eurobonds, which will cover but a fraction of new debt and explicitly prohibit mutualization of member states’ mountainous legacy debt.
Macron knows that such a federation would be macroeconomically insignificant, given the depth of the debt, banking, investment, and poverty crisis unfolding across the eurozone. But, in the spirit of the EU’s traditional gradualism, he thinks that such a move would be politically momentous and a decisive step toward a meaningful federation.
“Once the Germans accept the principle, the economics will force them to accept the necessary magnitudes,” is how a French official put it to me recently. Such optimism may seem justified in light of proposals along those lines made in the past by none other than Wolfgang Schäuble, Germany’s finance minister. But there are two powerful reasons to be skeptical.
First, Chancellor Angela Merkel and Schäuble were not born yesterday. If Macron’s people imagine a federation-lite as an entering wedge for full-blown political integration, so will Merkel, Schäuble, and the reinvigorated Free Democrats (who will most likely join a coalition government with Merkel’s Christian Democrats after the September federal election). And they will politely but firmly reject the French overtures.
Second, in the unlikely event that Germany gives federation-lite the go-ahead, any change to the functioning of the eurozone would, undoubtedly, devour large portions of the reformers’ political capital. If it does not produce economic and social results that improve, rather than annul, the chances of a proper federation, as I suspect it will not, a political backlash could ensue, ending any prospect of a more substantial federation in the future. In that case, the euro’s dismantling will become inevitable, will cost more, and will leave Europe in even greater shambles.
If I am right that Macron’s gradualism and his federation-lite will prove to be a failure foretold, what is the alternative? My answer is straightforward: Re-deploy existing European institutions to simulate a functioning federation in the four realms where the euro crisis is evolving: public debt, banking, investment, and social deprivation.
Once these four sub-crises have been stabilized, hope will be restored, and the idea of Europe rehabilitated. Then – and only then – should we embark on the constitutional assembly process underpinning any agenda for constructing a full-fledged democratic federation.
But how can we simulate a macroeconomically – and macro-sociologically – significant federation now, under the existing treaties and institutions?
Imagine a press conference featuring the presidents of the European Council, the European Commission, the European Central Bank (ECB), and the European Investment Bank (EIB).

They issue a joint declaration launching – as of tomorrow morning – four new initiatives requiring no treaty change or new institution.
First, the EIB will embark on a large-scale green investment-led recovery program to the tune of 5% of eurozone income, funded entirely through issues of EIB bonds, which the ECB will purchase in secondary markets, if necessary, to keep their yields ultra-low.
Second, the ECB will service (without buying) the Maastricht-compliant part (60% of GDP) of maturing eurozone sovereign bonds, by issuing its own ECB bonds. These bonds are to be redeemed by the member state whose debt has been partly serviced by the ECB at the very low yields that the ECB can secure.
Third, failing banks will be de-nationalized. Based on an informal intergovernmental agreement, the ECB’s banking supervisor will appoint a new board of directors, and any recapitalization will be funded directly by the European Stability Mechanism. In exchange, the ESM will keep banks’ shares, in order to sell them back to the private sector at some future date.
Fourth, all profits from the ECB’s bond purchases, along with any profits from its internal Target2 accounting system, will fund a eurozone-wide, US-style food-stamp program that provides for the basic nutritional needs of European families falling below some poverty threshold.
Notice how one press conference suffices to announce to the world that the eurozone is about to simulate a political federation that uses existing institutions to restructure all public debt (without any haircuts), create a proper banking union, boost aggregate investment, and alleviate poverty on a continental scale. Notice also that this simulated federation can indeed be brought about tomorrow morning, without falling afoul of the existing EU treaties.
The euro crisis resulted from the fallacy that a monetary union would evolve into a political union.
Today, a new gradualist fallacy threatens Europe: the belief that a federation-lite will evolve into a viable democratic federation. As paradoxical as it may sound, announcing a simulated federation today may be the last chance to rescue the dream of a proper European Union.

Is It Time To Buy Platinum?

by: Hebba Investments

- Platinum is the worst-performing precious metal in the complex and has been down four of the last five years.

- At current prices, mine production is unsustainable and as we approach platinum's cash costs of production, supply will inevitably decrease.

- Negativity based on its role in the auto industry is driving investor sentiment.

- Implementation of tougher emissions standards in China for diesel are scheduled to go into effect in January 2018, which will use more platinum.

- Speculative sentiment is the most bearish it has been since the CFTC has published records in 2006.
While we have put a heavy focus in covering gold and silver, the hammering that platinum has received has piqued our interest. We believe that in platinum investors might have the best opportunity of all precious metals. Of course, looking at the YTD chart of platinum doesn't inspire much confidence:
Source: GoldchartsRUs
In fact, it's not only this year platinum has been falling. It has been the worst-performing precious metal over the last 10 years. After the drop seen on Monday, it has fallen four out of the last five years -- how is that for beaten down?
Source: GoldchartsRUs
Much of this drop has been attributed to the expectations of "changing consumer interests" as they purchase more gasoline vehicles vs. diesel vehicles. Since gasoline vehicles primarily use palladium in catalytic converters (diesel vehicles use platinum), the result is that industrial demand will fall for platinum -- hence surging palladium, which has almost reached parity with platinum.

While this is a strong argument, we believe that it has its flaws. That is allowing investors an opportunity to pick up platinum at what we feel is a significant discount to its true value.
Industrial Demand Loss Is Over-Exaggerated
Even if we assume that analysts are correctly predicting consumer tastes, which is far from certain (like this 2013 prediction of diesel cars on U.S. roads doubling by 2018), the actual fall in diesel market share is a very slow process. In fact, according to a 2016 UBS report, this fall in market share is around 4% -- over the next decade -- from 13.5% of worldwide auto demand to 9.5%. Assuming no increase in the growth of the general automotive market, that suggests around a 3% drop a year in platinum automotive catalyst use, or around 100,000 ounces per year.
Looking at the total platinum supply/demand chart, we see that while this 100,000 year drop is sizable, it is certainly not going to kill the platinum industry.
This change in consumer automotive habits of 100,000 ounces per year through 2025 would make up a little over 1% of total platinum demand and would be entirely covered by the average 100,000-ounce drop in production seen over the past few years. Again, this all assumes that diesel's market share drops by 4% over 10 years (or a 30% drop in the total diesel market) and consumers do not increase automotive purchases (flat industry growth).
Of course, even if we do see all of this happen, the production of platinum is one of the most overlooked issues in the industry.
Platinum Mine Supply Is Due to Plummet
Platinum is a rare element and mining it is very expensive. In fact, it costs more on a per-ounce basis to mine platinum than gold. According to a report issued last September by the South Africa-based Minxcon Group, the total worldwide cash cost of platinum is $829 per ounce, with South African production (the largest producer of platinum) pegged at $980 per ounce.

I want to emphasize that we are not talking all-in sustainable costs here -- we are talking the actual cash costs of production. As in, if production falls below the cash cost of a mine, then that mine is losing money on a daily basis for the company. Depending on closure and maintenance costs, it would make more sense for a company to close the mine down than continue producing.
In fact, looking at the cash cost curve for South African platinum miners (where we have data), most of their production is not profitable on a cash basis.
Source: Minxcon Consulting Group (editing text is ours)
The line representing the average platinum price was dated to when platinum was trading at over $1,000; now it looks as if almost 70% of South African ounces are unprofitable. We do note that this shows platinum-equivalent production, and with surging palladium the cost structure is probably a little bit more appealing. Regardless, it shouldn't be that much different.
What this means is that we expect significant mine closures in South Africa unless we see much higher platinum prices. Investors are already shorting major platinum companies, with Lonmin (OTC:LNMIF) having the honor of being the seventh-most shorted issue on the London exchange. When companies are this cash-strapped and unable to raise cash via new equity (due to low share prices), then something has to give when trying to conserve cash. What this means is that mine closures and layoffs are on the horizon, as they simply don't have the balance sheet cash to maintain cash-losing operations.
Whether it be Lonmin or any of the other platinum miners, we expect mine closures to be announced if platinum remains under $1,000 per ounce. Just as the announcements of cuts in uranium production caused a surge in uranium prices earlier this year, we expect that whenever cuts in platinum production are announced there will be a commensurate jump in the platinum price.

Regardless, investors should expect drops in mined platinum supply at current prices, which we believe will more than make up for lost demand due to automotive consumer preferences.
Improving Emission Standards
While in the U.S. the new administration is not expected to beef up any sort of emission standards, in Europe and China tougher emission standards are coming for both gasoline and diesel vehicles.
Similar to the Euro V standards, China's implementation of "China V" is expected in stages through 2017 as the Chinese government gets serious about its battle with pollution and smog.
What is very interesting is that standards for gasoline vehicles went into effect this past January, with the primary pollution control catalyst being palladium. While we doubt this is the main driver behind the 2017 rally in palladium, we think it certainly could have been a contributor to the physical tightness that we seem to be seeing in palladium.
These standards were implemented for gasoline vehicles this past January, but not for diesel vehicles. Starting Jan. 1, 2018, the implementation of "China V" will go into effect for diesel vehicles. Since the primary PGM used in diesel vehicles is platinum, we expect Chinese demand for physical platinum to rise as the new standards take effect in early 2018.
While we can't say it will be a game-changer, we certainly think that it could provide both a physical and psychological boost to the negativity surrounding the platinum market. Pair that with mine closures, and you have a market ripe for a rebound.
Investor Sentiment Is Rarely This Negative
Earlier this year, hedge funds did something they haven't done since records began in 2006 -- they have taken a net short position in platinum. That short position has continued up to now as the latest COT report shows that speculative traders are short by around 500,000 ounces (10,000 platinum contracts).
Source: CFTC
With such negativity among the speculative community, this allows opportunity for short squeezes and contrarian sentiment investors to take positions. This is especially true when we feel the fundamentals don't support such a low price.
In fact, when looking at the platinum/gold ratio, our current value of 1.34 is close to the spike-highs seen over the last 50 years.
Source: GoldChartsRUS
The chart above says a lot because it shows how rare the current break between gold and platinum is historically. Also, based on this chart, we believe that the contributor of automotive demand might be a bit overemphasized as platinum was able to maintain a premium to gold through much of the last 50 years, despite its low usage as an auto catalyst in the 1970s and the increasing usage of palladium in more recent years.
Conclusion for Investors
While volatility in platinum is almost certain to continue and we cannot rule out a further drop in the metal, we think there are plenty of reasons for investors to like platinum here.
Decreasing supply as platinum drops toward its cash costs of production, mine closures in South Africa, increasing usage in China on improving emissions standards, and a potential reversal in the tremendously bearish sentiment by speculative investors are all things that could be the catalyst for a reversal in the metal.
In fact, we believe the downside in platinum is fairly limited as the cash costs of production of the metal seem to be in the mid-$800 range, which is a 5%-10% downside from current prices.
If the metal reverts to its historical parity or premium to gold, it could easily provide 20% or greater upside as it reaches parity again with gold.

Thus, if investors can be patient, we think they should seriously to consider the Sprott Physical Platinum and Palladium Trust (SPPP) or the ETFS Physical Platinum Shares (PPLT). The reversal could happen quickly as a producer going under, a significant mine closure, or a change in investor sentiment would provide a much more V-shaped recovery then a simple grind higher.
Out of all of the precious metals, we like platinum the best and we are excited about the potential upside.

What Real Independence Looks Like

by Nick Giambruno

Every July 4, Americans have less independence to celebrate.

The country’s original principles preserved a certain degree of independence for the individual. But today, the US only pays lip service to those ideals.

In light of Independence Day, I think we should consider an important question:

What does real independence look like, and how can you achieve it?

Anyone paying the slightest attention to the welfare/warfare state knows what it does not look like:

• Confiscatory taxes at all levels.

• The gutting of the Bill of Rights through the so-called Patriot Act, the National Defense
Authorization Act, secret courts, executive orders, and indefinite detention.

• The need to comply with an ever growing stack of regulations, edicts, and laws.

• The militarization of the police.

• Use of the IRS as a political weapon.

• Assassination of US citizens without due process.

• Indirect capital controls through FATCA.

• Warrantless NSA spying.

• Worldwide perpetual warfare with an undefined enemy.

• Never-ending money printing and destructive “stimulus” efforts.

• Ever expanding welfare programs.

• Domestic use of drones.

• Stealth taxation by inflation and a fiat monetary system.

This is just a short synopsis of the current state of affairs. The list is far from exhaustive.

Years ago, kids used to say, "Hey, it's a free country." You don't hear that much anymore.

Unfortunately, the US government’s financial health will continue to deteriorate as it spends to support these unsustainable policies. This will only make the government even more desperate.

Imagine what will happen then…

Expect more government and less freedom all around.

If history is any guide, it won’t be pretty. I strongly recommend securing an insurance policy before it's too late.

Most people have medical, life, fire, and car insurance. You hope you never have to use these policies, but you have them anyway. They give you peace of mind and protect you if and when the worst does happen.

International diversification is the ultimate insurance policy against an out-of-control government. Think of it as “freedom insurance.”

It frees you from absolute dependence on any one country. Achieve that freedom, and it becomes very difficult for any group of bureaucrats to control you.

The results can be life changing.

For centuries, wealthy people around the world have used international diversification to effectively protect their money and their families. Now, thanks to modern technology, anyone can implement similar strategies.

In many cases, you don’t even need to leave home to build your own “freedom insurance.”

You can start by…

• Moving some of your money into gold. It’s an inherently international asset not under the control of any government.

• Moving some of your money into foreign bank accounts and cryptocurrencies like bitcoin.
• Owning foreign real estate.

• Obtaining a second passport.

• Structuring your cash flows so you’re less dependent on any one country for your income. The goal is to create multiple sources of revenue from international investment opportunities and trends. Bonus diversification points if you do all this through your own offshore company domiciled in a favorable jurisdiction.

• Moving your digital presence to a favorable foreign jurisdiction. This adds significant political diversification benefits. Your digital presence often includes your IP address (which often pinpoints you to a precise physical address), email account, online file storage, and the components of personal and business websites.

Setting up your own “freedom insurance” is how you declare your personal independence. It ensures that no particular government can totally control your life.

When you achieve that, you’ll know what real independence looks like.

Until next time,

Peru's Future Growth Can be Lifted Through Structural Reforms

By Francisco Roch, IMF Western Hemisphere Department

After sustained improvements in economic and social indicators since the turn of the century, Peru has its eyes set on becoming a high-income nation, but achieving this goal will require additional reforms, the IMF said in its latest assessment of the country.
With growth averaging over 5¼ percent since 2000, Peru has significantly reduced unemployment and poverty. Inflation is in the low single digits, the fiscal position has strengthened, and dollarization (borrowing and saving in U.S dollars) has declined markedly. Sound economic policies and structural reforms—in the context of the recently ended commodity boom—have played an essential role in this improvement.

But building on these gains will require additional reforms to help Peru, an emerging middle-income country, reach high-income status. Given the experience of other countries, Peru will need to be careful to avoid being stuck in a “middle income trap.” Even if high-income status is attainable, international experience suggests that it will take time.


Short-term picture: resilience in the face of major domestic shocks

The current environment is difficult given the Odebrecht corruption scandal and one of the worst episodes of flooding and landslides in over 50 years. On the external side, while commodity prices have recovered somewhat since late 2016, they remain significantly lower than during the commodity boom. There is also uncertainty about the U.S outlook and how much protectionist pressures will rise globally. These developments will hurt growth in 2017—forecast at 2.7 percent—but the economy is expected to bounce back in 2018–19, the report said.

Boosting potential growth: increasing investment and productivity

Fast Facts

  • Real GDP growth (2016): 3.9%
  • Per capita GDP (2016): $6,199
  • Unemployment rate (2016): 6.7%
  • Poverty rate (2016): 20.7%
  • Life expectancy at birth (2015): 74.6 years
  • Adult literacy rate (2015): 94%
    Potential growth in Peru has been declining since the end of the commodity boom. During 2001–08, before the Great Recession, the country’s potential growth averaged 5.7 percent, and it has been on a steady decline ever since. The main factors behind this decrease are low productivity and not enough capital. The IMF estimates potential growth over the medium term at about 3¾ percent.

    To enhance potential growth, the government has introduced several structural reforms to tackle the main impediments to higher investment, stronger tax collection, and lower financing costs. These policies include:

    • a new institutional framework for public and public-private infrastructure investment to reduce red tape;

    • improving the business climate by cutting administrative procedures and promoting the use of digital processes;

    • a new tax regime for small and medium enterprises to make the current tax system more progressive, reduce compliance costs, increase the use of electronic payments, and formalize value chains.

    Increasing potential growth above 4 percent over the medium term, however, will likely require additional reforms to boost investment and productivity. The IMF recommends that Peru consider measures that help investment grow at a similar pace to during the commodity boom and that increase productivity to around double the rate assumed in the report’s baseline scenario.

    Labor market policies

    The government is also looking to modernize labor markets that make it easier for employers to hire new workers and hence boost growth. With labor laws that offer generous protection to workers, the result is that about 53 percent of Peru’s workforce is outside the formal job market, with no protection, no social security or unemployment contributions and paying no taxes.

    A recent opinion survey also pointed to labor market regulations as a key impediment to growth in Peru. For instance, terminating employees for economic reasons is severely limited as it requires authorization from the Ministry of Labor or the courts. And these regulations are linked to informality, although other factors such as education levels, the tax system, access to public services, and enforcement of laws have also played a role.

    The government, therefore, is rightly focusing on reducing the high levels of informality. It has set up a Social Protection Commission to reform the social security system, with the aim of increasing its coverage while reducing informality.

    IMF analysis suggests that the growth gains from labor market reform—such as relaxing policies that push labor costs above productivity growth, or reducing labor taxes and firing costs—can be significant. The Social Protection Commission can therefore make an important contribution to help Peru reach its high-income goal.

    How Saudi Wahhabism Is the Fountainhead of Islamist Terrorism

    By Yousaf Butt

    LONDON — The horrific terrorist attacks on the Charlie Hebdo weekly in Paris have led to speculation as to whether the killers — the brothers Chérif and Saïd Kouachi — were lone wolves or tied to masterminds in ISIS or its rival, Al-Qaeda. Although Al-Qaeda in Yemen has taken credit for the attack, it is unclear how closely the affiliate actually directed the operation.

    No matter which organizational connections (if any) ultimately prove to be real, one thing is clear: the fountainhead of Islamic extremism that promotes and legitimizes such violence lies with the fanatical “Wahhabi” strain of Islam centered in Saudi Arabia. And if the world wants to tamp down and eliminate such violent extremism, it must confront this primary host and facilitator.

    Perversely, while the Saudi Ambassador to Lebanon Ali Awad Asiri took part in a “Je suis Charlie” solidarity rally in Beirut following the Paris attacks, back home the Saudi blogger Raif Badawi received the first 50 of 1,000 lashes he is due each Friday over the next 20 weeks. His crime? Running a liberal website promoting the freedom of speech. (Thankfully, in recent days it seems the Saudi authorities have buckled to international pressure and suspended the sentence.)

    It would be troublesome but perhaps acceptable for the House of Saud to promote the intolerant and extremist Wahhabi creed just domestically. But, unfortunately, for decades the Saudis have also lavishly financed its propagation abroad. Exact numbers are not known, but it is thought that more than $100 billion have been spent on exporting fanatical Wahhabism to various much poorer Muslim nations worldwide over the past three decades. It might well be twice that number. By comparison, the Soviets spent about $7 billion spreading communism worldwide in the 70 years from 1921 and 1991.

    This appears to be a monumental campaign to bulldoze the more moderate strains of Islam, and replace them with the theo-fascist Saudi variety. Despite being well aware of the issue, Western powers continue to coddle the Saudis or, at most, protest meekly from time to time.

    For instance, a Wikileaks cable clearly quotes then-Secretary of State Hillary Clinton saying “donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide.” She continues: “More needs to be done since Saudi Arabia remains a critical financial support base for al-Qaeda, the Taliban, LeT and other terrorist groups.” And it’s not just the Saudis: Qatar, Kuwait and the United Arab Emirates are also implicated in the memo. Other cables released by Wikileaks outline how Saudi front companies are also used to fund terrorism abroad.

    Evidently, the situation has not improved since Hillary Clinton was secretary of state. Late last year, Vice President Biden caused a stir by undiplomatically speaking the truth at an event at Harvard’s Kennedy School of Government, saying:

    “Our allies in the region were our largest problem in Syria. The Turks were great friends... [and] the Saudis, the Emirates, etcetera. What were they doing?.... They poured hundreds of millions of dollars and tens of tons of weapons into anyone who would fight against Assad — except that the people who were being supplied, [they] were al-Nusra, and al-Qaeda, and the extremist elements of jihadis who were coming from other parts of the world.”

    More recently, the Saudi role in promoting extremism has come under renewed scrutiny. Calls for declassifying the redacted 28 pages of the 9/11 congressional commission have been getting stronger. And statements from the lead author of the report, former Florida Sen. Bob Graham, suggest they are being hidden because they “point a very strong finger at Saudi Arabia as the principal financier” of the 9/11 hijackers. He has been unusually explicit, “Saudi Arabia has not stopped its interest in spreading extreme Wahhabism. ISIS...is a product of Saudi ideals, Saudi money and Saudi organizational support, although now they are making a pretense of being very anti-ISIS.”

    In fact, Saudi blogger Raif Badawi’s wife, Ensaf Haidar, made a similar observation about her husband’s flogging: “the Saudi government is behaving like Daesh [a derogatory Arabic term for ISIS].” About 2,500 Saudis are thought to be in ISIS’ ranks.

    Ensaf Haidar’s quip exposes a deeper truth. One could reasonably argue that the House of Saud is simply a more established and diplomatic version of ISIS. It shares the extremist Wahhabi theo-fascism, the lack of human rights, intolerance, violent beheadings etc. — but with nicer buildings and roads. If ISIS were ever to become an established state, after a few decades one imagines it might resemble Saudi Arabia.

    How does Saudi Arabia go about spreading extremism? The extremist agenda is not always clearly government-sanctioned, but in monarchies where the government money is spread around to various princes, there is little accountability for what the royal family does with their government funds. Much of the funding is via charitable organizations and is not military-related.

    The money goes to constructing and operating mosques and madrassas that preach radical Wahhabism. The money also goes to training imams; media outreach and publishing; distribution of Wahhabi textbooks, and endowments to universities and cultural centers. A cable released by Wikileaks explains, regarding just one region of Pakistan:
    Government and non-governmental sources claimed that financial support estimated at nearly 100 million USD annually was making its way to Deobandi and Ahl-e-Hadith clerics in the region from “missionary” and “Islamic charitable” organizations in Saudi Arabia and the United Arab Emirates ostensibly with the direct support of those governments.
    Although the Wahhabi curriculum was modified after the 9/11 attacks, it remains backward and intolerant. Freedom House published a report on the revised curriculum, concluding that it “continues to propagate an ideology of hate toward the ‘unbeliever,’ which include Christians, Jews, Shiites, Sufis, Sunni Muslims who do not follow Wahhabi doctrine, Hindus, atheists and others.” This is taught not only domestically but also enthusiastically exported abroad.

    Of course, initially there was complicity with the U.S. and Pakistan in promoting this ideology to counter the Soviet invasion of Afghanistan. In addition to the radical indoctrination, thousands of volunteer jihadis from Saudi Arabia and other Arab countries were also dispatched to fight alongside the mujahideen in Afghanistan. But it remains a complicated problem to this day because the politicians in the poor countries getting the Saudi and Gulf-Arab funds approve these extremist madrassas in part because the local authorities likely receive kickbacks.

    In many places in poor Muslim countries the choice is now between going to an extremist madrassa or getting no education at all. Poverty is exploited to promote extremism. The affected areas include Pakistan, Indonesia, the Philippines, Malaysia, Thailand, India and parts of Africa. The same Wikileaks cable explains:
    The network reportedly exploited worsening poverty in these areas of the province to recruit children into the divisions’ growing Deobandi and Ahl-eHadith madrassa network from which they were indoctrinated into jihadi philosophy, deployed to regional training/indoctrination centers, and ultimately sent to terrorist training camps in the Federally Administered Tribal Areas (FATA).
    The more tolerant indigenous versions of Islam cannot survive in the face of the tsunami of money being poured into promoting theo-fascist Wahhabism. This is a major problem that the Muslim world must urgently address.

    But it is also a problem where the West can help by stopping its historical pandering and support of Middle East tyrants who spread this extremism. The most fundamental way to make the message clear to the House of Saud would be to threaten to stop buying oil from them. Given the relatively cheap oil prices these days it need not be an empty threat.

    Eliminating the occasional militant leaders in drone and special-forces strikes is of limited use in reducing extremism if millions of radicals are being actively trained in Wahhabi madrassas across the Muslim world.

    The fight against ISIS and Al-Qaeda is deeply ironic since these organizations were created and are sustained, in part, by funds we hand over to the Saudis and Gulf Arab nations to purchase their oil. And while France mourns its cartoonists and police officers, the French government is busy signing military and nuclear deals worth billions with the Saudis. If we continue down this road, it may well be a never-ending war.

    The House of Saud works against the best interests of the West and the Muslim world. Muslim communities worldwide certainly need to eradicate fanatical Wahhabism from their midst, but this will be difficult, if not impossible, to accomplish if the West continues its support of the House of Saud. The monarchy must be modernized and modified — or simply uprooted and replaced. The House of Saud needs a thorough house cleaning.

    Dr. Yousaf Butt is a senior advisor to the British American Security Information Council and director at the Cultural Intelligence Institute. The views expressed here are his own.