German court decides to take back control with ECB ruling

Future historians may mark this as the decisive turning point in Europe’s history towards disintegration

Martin Wolf

German Court EBC defiance
© James Ferguson

The 75th anniversary of the defeat of Nazi Germany was May 8.

The 70th anniversary of the Schuman declaration, which launched postwar European integration, was May 9.

Just days before both, the German constitutional court launched a legal missile into the heart of the EU.

Its judgment is extraordinary. It is an attack on basic economics, the central bank’s integrity, its independence and the legal order of the EU.

The court ruled against the ECB’s public sector purchase programme, launched in 2015. It did not argue that the ECB had improperly engaged in monetary financing, but rather that it had failed to apply a “proportionality” analysis, when assessing the impact of its policies, on a litany of conservative concerns: “public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies”.

Chart showing eurozone inflation has remained consistently below target

Monetary policies are necessarily economic policies. But the ECB’s policies, including asset purchases, are justified by the fact that it was — and is — failing to achieve its treaty-mandated “primary objective”, which is “price stability” defined as inflation “below, but close to, 2 per cent over the medium-term”.

The EU treaty says other considerations are secondary.

The court also decreed that “German constitutional organs and administrative bodies”, including the Bundesbank, may not participate in ultra vires acts (those outside one’s legal authority).

Thus, the Bundesbank may not continue to participate in the ECB’s asset purchase programmes, until the ECB has conducted a “proportionality assessment” satisfactory to the court.

Chart showing the ECB’s 2015 asset purchase programme targeted by the German court is much larger than similar programmes in the US and UK

Yet the EU treaty states that “neither the ECB, nor a national central bank . . . shall seek or take instructions . . . from any government of a member state or from any other body [my emphases].” The court’s instruction puts the Bundesbank into a conflict of laws.

The court is also assailing the right of the ECB to make its policy decisions independently. Germany fought hard to install central bank independence within the monetary union.

Now, its constitutional court has decreed that unless the ECB satisfies the justices that it has taken full account of a highly political list of side-effects of monetary policies, asset purchases are impermissible. Courts in other member countries may see fit to decree that their national central banks cannot participate in policies they dislike.

Pretty soon, the ECB will have been sliced and diced into a nullity.

Chart showing the ECB has managed to contain yield spreads in the eurozone, so far

Above all, the German court decreed that it can ignore an earlier ruling of the European Court of Justice in favour of the ECB, because the former “exceeds its judicial mandate . . . where an interpretation of the Treaties is not comprehensible and must thus be considered arbitrary from an objective perspective.”

This is an act of judicial secession.

The EU is an integrated legal system, or it is nothing. It rests on the acceptance by all member states of its authority in areas of its competence. In a press release after the constitutional court’s judgment, the ECJ rightly responded that “the Court of Justice alone . . . has jurisdiction to rule that an act of an EU institution is contrary to EU law.

Divergences between courts of the member states as to the validity of such acts would indeed be liable to place in jeopardy the unity of the EU legal order and to detract from legal certainty.”

Imagine if the courts of every member state were able to decide that ECJ rulings were “arbitrary from an objective perspective”.

Chart showing low interest rates have kept the cost of government debt low

What are the implications?

If the German court is ultimately satisfied that the ECB adequately assessed the economic impact of its purchases, the PSPP might continue. But the courthas reduced the ECB’s future flexibility by limiting its holdings of any member country’s debt to 33 per cent of the outstanding total and insisting that asset purchases be allocated according to member states’ shares in the ECB.

In the absence of other eurozone support programmes, the chance of defaults has jumped. Indeed, spreads on Italian government bonds have duly risen a little since the court’s announcement. A crisis might ultimately ensue, with devastating effects; perhaps even a break-up of the eurozone.

Chart showing national central banks have ended up as large holders of their governments’ debts

Others might follow Germany in rejecting the jurisdiction of the ECJ and EU. Hungary and Poland are obvious candidates. Future historians may mark this as the decisive turning point in Europe’s history, towards disintegration.

What can be done?

The ECB cannot be accountable to a national court. But the Bundesbank could provide the court with the proportionality analysis. Maybe that would be enough, albeit also a bad precedent. Or, the decision could be ignored.

If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. Alternatively, the ECB could just abandon efforts to rescue the eurozone and accept whatever outcome emerges.

Chart showing central bank holdings of Italian government debt have substituted for other domestic holders

The EU could initiate an infringement proceeding against Germany.

But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other. It could not change the ruling. More radically, the EU could act to create the needed degree of fiscal solidarity.

But the obstacles to this are large. A new treaty looks out of the question in today’s environment of intense mutual distrust. Finally, Germany could boldly secede from the eurozone.

Yet, before it makes such a decision, one hopes it, too, will be required to do a full analysis of whether that would be “proportionate”.

One point is clear: The constitutional court has decreed that Germany, too, can take back control.

As a result it has created a possibly insoluble crisis.

The Federal Reserve Is Changing What It Means to Be a Central Bank

By lending widely to businesses, states and cities, the Fed is breaking taboos about who gets money to prop up a frozen U.S. economy

By Nick Timiraos and Jon Hilsenrath

     Federal Reserve Chairman Jerome Powell in October. Win McNamee/Getty Images

The Federal Reserve is redefining central banking.

By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back.

And with large-scale purchases of U.S. Treasury securities, the Federal Reserve is stretching the boundaries for what a central bank will do to finance soaring federal debt—actions that move it deeper into political decisions it usually tries to avoid.

Fed leaders don’t like doing any of this. They believe they have no better alternative.

“None of us has the luxury of choosing our challenges; fate and history provide them for us,” Fed Chairman Jerome Powell said in a speech this month. “Our job is to meet the tests we are presented.”

Economists project the central bank’s portfolio of bonds, loans and new programs will swell to between $8 trillion and $11 trillion from less than $4 trillion last year. In that range, the portfolio would be twice the size reached after the 2007-09 financial crisis and nearly half the value of U.S. annual economic output.

It would make its role in the economy far greater than during the Great Depression or World War II, according to Wall Street Journal calculations. The portfolio had reached $6.57 trillion by April 22.

“The Fed is being sent on a mission to places it has never been before,” says Adam Tooze, a Columbia University history professor who writes about financial crisis and war. Due to the financial and economic shocks caused by the virus, he says, central-bank officials “are being sucked into a series of entanglements that they cannot control and that they normally will not touch with a long pole, but this time felt they had to go in, and go in hard.”

Many government policy makers, including past Fed critics, support its actions this time, though political calculations could change quickly.

“This should be considered a very freakish Black Swan event, not anything that would be revisited under ordinary circumstances,” says Sen. Pat Toomey (R., Pa.), who criticized the Fed after the last crisis for enabling large federal budget deficits. Last month, he helped advance the $2.2 trillion economic-rescue legislation in Congress that puts the Fed at the center of the government’s economic-rescue efforts.

Among risks the Fed is taking: that some programs won’t work, that officials won’t be able to unwind them, that politicians will grow accustomed to directing the central bank to fix problems its tools aren’t designed to solve, and that public discontent about the central bank’s choices will erode its authority over time.

This last risk is prominent because the Fed’s tools are better suited to helping large firms that borrow in capital markets than small ones that don’t.

“Capitalism without bankruptcy is like Catholicism without hell,” Howard Marks, director of investment fund Oaktree Capital Management LP, said in a letter to shareholders this month, writing that “Markets work best when participants have a healthy fear of loss.” Mr. Marks in a later interview said he didn’t want to imply Mr. Powell’s actions were wrong: “The fact that something can have negative, unintended consequences, doesn’t mean it’s a mistake.”

Mr. Powell defines the government’s task from a different moral perspective. “People are undertaking these sacrifices for the common good,” he said in his speech. “We need to make them whole to the extent we have the ability.”

‘The Treasury is using the Fed as its arm,’ says a former CBO director, ‘because the Fed is better at setting up these facilities and getting the money out.’ Photo: Al Drago/Bloomberg News .

After cutting interest rates to near zero in mid-March, the Fed began a torrent of bond-buying programs to stabilize markets. Between March 16 and April 16, it bought Treasury and mortgage securities at a pace of nearly $79 billion a day. By comparison, it bought about $85 billion a month between 2012 and 2014.

Fed purchases help the government inexpensively finance its debt, which is soaring as the Treasury sends checks directly to households and spends more on unemployment insurance.

The central bank is preparing a second wave, programs in partnership with the Treasury to get loans directly to companies and state and local governments. Congress has armed the Treasury with $454 billion to work in cooperation with the central bank for the effort.

The Fed will lend as much as 10 times the amount Congress appropriated, with the Treasury taking the first losses on loans that go bad. The Treasury has so far committed around 40% of those funds to some of nine different programs, leaving room to expand them or deploy others.

Congress called upon the Fed in part because it developed capabilities to intervene during the 2008 banking crisis and is positioned like few other institutions to move fast. It also entered the crisis outside a partisan fray marked by distrust between congressional Democrats and the Trump administration, lawmakers and analysts say.

And Mr. Powell’s measured response to President Trump’s relentless attacks on him over the past two years have dispelled concerns among lawmakers that the central-bank chief would be a footman for the president or his re-election.

“The Fed is not naturally suited to do this,” says Douglas Holtz-Eakin, a Republican former director of the Congressional Budget Office, “but the Treasury is using the Fed as its arm because the Fed is better at setting up these facilities and getting the money out.”

Fed officials will hold a remote gathering Tuesday and Wednesday this week. Discussion will turn to implementation of an array of programs announced in the past few weeks and how much further to push its bond purchase programs.

Unique power

The Fed has a unique power, the ability to create money by crediting banks with funds they can lend.

That helps it guide the cost of money, which is the interest rate.

Low rates and money printing spurred consumer-price inflation after World War II and during the 1970s. Fed officials don’t see that as a risk now because the economy is sinking, meaning less consumer demand and less inflation. Moreover, inflation has been dormant for years in the U.S. and other countries like Japan with aggressive central banks.

Bigger federal borrowing needs will make it costly for the Treasury should interest rates eventually rise. “If the economy recovers and inflation is a problem, that will be the test,” says former Fed Chairwoman Janet Yellen. That isn’t a problem now. If it ever is, she says, “I think the Fed is going to win out on that.”

‘This is why the Federal Reserve was invented,’ says former Fed Chairwoman Janet Yellen, ‘to do emergency lending in a crisis.’ Photo: Elijah Nouvelage/Bloomberg News .

Whether the economy stabilizes depends on many forces out of the Fed’s control, including whether the coronavirus’s spread slows, whether other authorities put in place testing and monitoring programs to tame it, and whether treatments and vaccines are discovered.

The Fed said Monday it would expand a forthcoming program to provide financing to state and local governments squeezed by declining tax revenue. It will buy debts of up to three years in maturity issued by up to 261 municipal borrowers, including the 50 states, the District of Columbia, counties of at least 500,000 residents and cities of at least 250,000. It had initially said it would limit such purchases to counties of at least two million and cities of at least one million, in addition to the states.

Political minefield

The Fed has long seen lending to states and cities as a political minefield. Its initial population restriction for municipal borrowers has already invited blowback.

In a letter to Mr. Powell this month, Rep. Maxine Waters (D., Calif.), chairwoman of the House Financial Services Committee, said the program would have excluded 35 cities most heavily populated by African-Americans. “This approach risks exacerbating racial disparities in the federal government’s response,” she wrote.

Sen. Mike Crapo (R., Idaho), chairman of the Senate Banking Committee, sent Mr. Powell a letter the same day noting none of the municipalities in his state would be eligible and expressing unhappiness rural communities might be left behind. Other lawmakers have expressed similar complaints.

Several analysts have said if lawmakers want more aid for local governments, they are better positioned to provide grants to states rather than rely on the Fed to make loans.

Fed officials worry they might end up holding municipal debts borrowers can’t repay. Left unanswered are questions such as what role it would play in a bankruptcy and if it would support the borrower or line up with other creditors to get its money back.

“The Fed doesn’t want to be in a position to say, ‘You have to raise taxes or cut pay to policemen or firemen,’ ” says Scott Alvarez, the Fed’s general counsel from 2004 to 2017. “That’s one of the reasons we didn’t make loans directly to municipalities in 2008.”

The central bank experienced awkward moments in the previous crisis managing assets it held due to its bailout of investment bank Bear Stearns Cos.—including when it foreclosed on a shopping mall in Oklahoma City, owned loans on Hilton hotels in Hawaii and Puerto Rico, and sold a portfolio of debt on Red Roof Inn hotels after its bankruptcy. Mr. Alvarez says the Fed can be patient with assets that go bad because it doesn’t have to answer to shareholders.

Protesters at Bear Stearns headquarters, March 2008. Photo: Chris Hondros/Getty Images .

The Fed’s corporate-debt backstops have been extended to include so-called fallen angels, companies recently downgraded to junk status. It also will buy exchange-traded funds that invest in junk bonds, and it will provide financing to investors in business-loan funds known as collateralized loan obligations, or CLOs.

Many private-equity funds added debt to their portfolio companies before the crisis in the junk-bond and CLO markets. By supporting junk bonds and CLOs, the Fed could be helping private-equity funds that made their portfolio companies vulnerable before the crisis with heavy debt burdens.

“It does take a fair amount of work to think about all the incentives our facilities are creating,” says Boston Fed President Eric Rosengren.

Fed officials have concluded they need to offer broad support to corporate-debt markets to prevent credit from drying up and producing even more wide-scale bankruptcy and job loss. “I’d be willing to take more credit risk than I would have before this situation,” says Cleveland Fed President Loretta Mester, “because this is a huge, unprecedented, negative shock.”

The Fed’s $600 billion Main Street Lending Program will be its most complicated task, current and former Fed officials say. For the first time since the Great Depression, the Fed will lend directly to small and midsize businesses, offering loans of up to four years through banks. It is trying to reach firms too large to qualify for Small Business Administration loans but too small to issue debt on Wall Street.

‘Black Thursday,’ Oct. 24, 1929, across from the New York Stock Exchange. Photo: Associated Press .

“The Fed took a hit to its reputation when it was seen as having facilitated the 2008 bailout of Wall Street and leaving Main Street un-helped,” says Vincent Reinhart, former Fed economist and now chief economist at asset-management firm Mellon. “They’re not going to do that again.”

The challenge isn’t just deciding who gets money. It is also how much to charge and on what terms.

‘Bagehot’s Dictum’

Central bankers live by “Bagehot’s Dictum,” named for the 19th-century British writer who edited the Economist magazine. To stop a panic, Walter Bagehot said, a central bank should lend freely against good collateral at an interest rate a bit higher than normal.

Walter Bagehot / Photo: Hulton Archive/Getty Images .

Brian Sack, the director of global economics at investment fund D.E. Shaw who ran the New York Fed’s markets desk after the last crisis, says that might not be well suited for the moment. Punitive rates implied by Bagehot might not be appropriate, and collateral is hard to size up in a mandatory shutdown. His addendum to Bagehot, he says: “Lend more freely than Bagehot under some circumstances.”

The Fed doesn’t want to lend to businesses that aren’t viable, says Ms. Mester, the Cleveland Fed president. It also doesn’t want to let viable ones fail because cash flow is temporarily cut off. Distinguishing between the two is the challenge—especially now. With Americans unable or unwilling to engage in commerce, nothing more than the passage of time may be needed to turn illiquidity into insolvency.

The Fed limited how much debt small firms can have before qualifying for Main Street program loans. It is requiring banks to hold 5% of each loan to insulate itself from becoming a dumping ground for bad debts. Borrowers will face restrictions on executive compensation and dividend payments. The Treasury will take the first $75 billion of any losses.

One danger is that the Fed revives Wall Street, where its tools have been tested, while the Main Street program falls short, says Glenn Hubbard, a Columbia economics professor who was chairman of the Council of Economic Advisers under President George W. Bush.

“I’m really worried it’s not going to work,” he says, noting that would be a reputational blow to the central bank.

Unlike in the 2008 bailouts, where the Fed and Treasury turned profits on bank rescues, Mr. Hubbard says, officials shouldn’t be concerned about recouping the Treasury’s investment. “If the Fed doesn’t lose money,” he says, “that says they weren’t lending to borrowers who needed the money.”

Another danger is that Congress gets used to asking the Fed to intervene. The central bank has aggressively guarded its independence, especially after it succumbed to President Nixon’s pressure to goose the economy ahead of the 1972 election and was later blamed for the resulting inflation.

Already, lawmakers are pressing the Fed to bail out particular sectors. On Friday, Sen. Ted Cruz (R., Texas) sent a letter to Mr. Powell asking the central bank to come up with ways to lend to oil-and-gas companies that have too much debt to qualify for existing Fed programs. Mr. Powell recently said the Fed’s authorities wouldn’t permit such rescues.

Last month, Fed lawyers helped nix legislative language that would have had Congress explicitly directing the Fed to launch lending programs, according to people familiar with the negotiations. Instead, Congress provided money to the Treasury that the Treasury could use in collaboration with the Fed at the discretion of both.

Mr. Toomey, who consulted with Fed officials during the negotiations, says he hopes Congress made clear such coordination was reserved for emergencies: “You have to be concerned about the precedents.”

The Fed’s actions represent a level of cooperation with Congress and Treasury not seen since World War II. Back then, the central bank held down long-term interest rates to help finance war spending and the recovery. The Fed successfully pressured the Truman administration to agree in 1951 to end that policy.

Queuing on New York’s Fulton Street to buy meat during World War II. / Photo: ASSOCIATED PRESS .

Treasury and Fed coordination during World War II “was the right thing to do, but it was hard to undo,” says Jeremy Stein, a former Fed governor who chairs Harvard University’s economics department. “You can imagine a similar thing playing out here.”

Ms. Yellen says such concerns can be overstated. She and former Fed Chairman Ben Bernanke say the Fed’s independence would be more seriously imperiled if it didn’t act boldly to protect the economy.

“This is why the Federal Reserve was invented,” says Ms. Yellen, “to do emergency lending in a crisis.”

Coronavirus bursts the US college education bubble

Soaring fees, worthless degrees and dicey investments have hurt the economy

Rana Foroohar

Bubbles are bursting everywhere and America’s most prestigious export — higher education — won’t be immune. Universities are like landlocked cruise ships: places with all-you-can-eat buffets and plenty of beer, but almost no way of social distancing.

Many colleges are considering running online classes into the autumn and beyond. But that requires additional resources that most are ill equipped to afford. Even before coronavirus, 30 per cent of colleges tracked by rating agency Moody’s were running deficits, while 15 per cent of public universities had less than 90 days of cash on hand.

Now, with colleges shuttered, revenues reduced, endowment investments plunging, and the added struggle of shifting from physical to virtual education, Moody’s has downgraded the entire sector to negative from stable. The American Council on Education believes revenues in higher education will decline by $23bn over the next academic year.

In one survey this week, 57 per cent of university presidents said they planned to lay off staff.

Half said they would merge or eliminate some programmes, while 64 per cent said that long-term financial viability was their most pressing issue. It’s very likely we are about to see the hollowing out of America’s university system.

US universities are world class. But the system as a whole is in trouble. Cost is a big part of the problem. I’ve written many times about the US’s dangerous $2tn student debt load. Soaring tuition fees, worthless degrees and dicey investments made by both universities and the government have become a huge headwind to economic growth and social mobility.

If you don’t believe me, take it from the New York Fed, which two years ago called out student debt and the dysfunctions of higher education as problems for the overall US economy.

That’s a sad irony, given that a college degree is supposed to increase wealth and productivity.

Unfortunately, the US system of higher education — like healthcare, housing, labour markets and so much else in America today — is bifurcated. Those with fancy brand-name degrees from top schools do great. So do many who attend high-quality, low-cost community and state programmes. But millions in the middle get neither a cheap nor a useful education.

Underemployed and debt laden, they were struggling even before coronavirus struck. One study by the think-tank Demos found that the average student debt burden for a married couple with two four-year degrees was $53,000, and resulted over their lifetimes in an overall wealth loss of $208,000.

Economically, young people have been hit especially hard by the crisis as they do much of the low-paid, high-touch service work that has been shut down. Some 11m college students work: almost three-quarters of them for 20 hours or more a week, and 4.4m full time. Yet few are eligible for federal bailout money.

Colleges, however, will get plenty. Many of the top recipients of federal aid are big state universities, such as the University of California, which incurred $558m of coronavirus-related costs in March alone. But a number of rich Ivy League colleges have received aid, too.

Harvard, with its $40bn endowment, was given a nearly $9m CARES grant. It is returning the funds, as are many other top private schools, following public pressure. They are right to do so.

Covid-19 has put moral hazard front and centre on the national agenda. The US cannot have taxpayer-funded bailouts that put big rich companies — or colleges — ahead of those who need help more. We need to focus on the most productive use of funds and worry first about helping the most vulnerable individuals and worthy public institutions.

Still, some schools — particularly second tier private institutions — will go under, as many did in the 1930s Depression. That’s appropriate given the froth in the sector today. As the Roosevelt Institute has outlined, educational institutions have become highly financialised in recent years.

Many have engaged in dicey debt deals and complex swaps arrangements that backfired, leaving institutions and students with even more costs. In that sense, the coronavirus-induced crisis could be a welcome chance to take on some of the problems in US higher education.

As economists from Michael Spence to Joe Stiglitz have shown, a good chunk of the value of a college degree lies in market signalling rather than the acquisition of skills.

Moreover, paying $75,000 a year for a private, four-year degree isn’t the only way to learn. My daughter will graduate this spring from Bard High School Early College in Manhattan, a public high school associated with Bard College, where students earn two years of college credits as well as a high-school degree in four years.

It’s one of many such “6 in 4” schools, which should become a new national model for secondary education. We might also look closely at the effects of our pandemic-induced, real-time experiment with online learning. Institutions are under pressure to drop fees for classes conducted virtually.

The fees may go back up whenever business might return as usual. But, given the likely decrease in enrolment rates, some may stay down for good.

If so, that would be the beginning of some much needed deflation in the price of US higher education.

5 Things to Know If Kim Jong Un Dies

Hereditary dictatorships rarely last past three generations, and collapse may be in the cards for North Korea.

By Oriana Skylar Mastro

North Korean leader Kim Jong Un
North Korean leader Kim Jong Un attends a wreath-laying ceremony at the Ho Chi Minh mausoleum in Hanoi on March 2, 2019. Dien Bien/Getty Images

North Korea’s dictator, Kim Jong Un, was reported to have had a cardiovascular procedure on April 12, treating a health condition allegedly stemming from “excessive smoking, obesity, and overwork,” according to one South Korean publication.

Since then, Kim has not made any public appearances; he was absent from April 15 celebrations of North Korea’s most important holiday, the birthday of his grandfather and founder of the regime, Kim Il Sung. On Saturday, April 25, he even missed the annual parade celebrating the founding of the armed forces. Panic has reportedly broken out in North Korea’s capital of Pyongyang, where residents are buying up necessities in preparation for the worst.

As a result, there is much speculation that the North Korean leader is gravely ill. U.S. officials and the intelligence community have received reports about Kim’s troubled health, but, given the closed nature of North Korea, it is impossible to accurately assess the severity of Kim’s condition.

If Kim dies, or is even incapacitated, it poses a serious threat to the regime. The hereditary nature of North Korea’s government means that internal stability is heavily reliant on the smooth succession to a new leader—which likely means one of Kim’s family members.

But, as I found in my recent study of all hereditary autocracies since World War II, passing power is particularly difficult in family dictatorships, where the ability to find an individual who is both competent and enjoys elites’ support is relatively low, due to the small pool of candidates.

As in medieval monarchies, succession crises become the norm, and obscure figures or new dynasties rise as a result: Since World War II, no family dictatorship has ever managed to pass power for a third time.

The situation is dire in North Korea, where there is no clear successor to Kim. Instability in North Korea would have immediate and long-term implications for the region and U.S.-China competition. Here are five things you need to know as speculation about Kim’s health continues.

1. If the regime collapses, it will happen quickly.

A common characteristic of family dictatorships is rapid and often unexpected collapse. Most failed regimes disintegrate completely in less than a year from the first signs of crisis: Experts have speculated about the potential collapse of the North Korean regime for decades, for example, during Kim’s monthlong absence from the public eye in 2014. The rumors about Kim’s health are of great interest, because the expectation of a power transition can be enough to spark such a crisis.

The durability of the Kim regime is a historical anomaly. Twelve out of 18 family dictatorships in place since World War II have collapsed, with the average lasting 32 years. In contrast, the North Korean regime has endured for over seven decades, despite famine, economic crisis, international sanctions, and restrictions on foreign trade, as well as two transitions of power. There is currently no formidable outside challenge to the Kim dynasty, neither by the military nor by the North Korean people.

However, this past resiliency tells us little about the future, because a common characteristic of family dictatorships is rapid and often unexpected collapse. It doesn’t help that Kim hasn’t designated a successor, and the most likely candidate is a woman—Kim’s sister Kim Yo Jong—which would be unprecedented for authoritarian hereditary regimes.

2. The United States is prepared, kind of.

The U.S. military plans for two main scenarios: a North Korean attack on South Korea and the collapse of North Korea. The United States conducts a number of annual joint exercises with South Korea to test and hone their preparedness in these contingencies. The alliance is strong, with both countries continually improving their joint operational effectiveness.

For example, the Combined Forces Command, established in 1978, comprises equal numbers of U.S. and South Korean officers. The command’s structures and processes have allowed the two countries to build strong operational integration, enabling military decision-making that is faster and more efficient than if the United States and South Korea had two separate commands.

But transfer of wartime operational control from the United States to South Korea remains unresolved. The two sides are still in the process of making such a command change a viable option, although it will be years before South Korea meets the agreed-upon conditions for that transfer.

Also, the best response to instability in North Korea would depend on an unpredictable variable, the cause of the instability, and there are many possible triggers: refugee problems caused by food shortages, political instability due to fighting factions, a civil war caused by regime change, or a coup. Another big unknown is the dynamics an incapacitated Kim would spark.

It does not help readiness that the United States has put off or scaled back major joint exercises with South Korea since 2018, and both its aircraft carriers dedicated to the region are battling the coronavirus.

3. North Korean nukes would need to be secured quickly.

The United States would face many challenges, alongside South Korea, in the event of collapse in the North. But securing and destroying nuclear weapons and associated facilities would be the top priority.

A key part of the strategy to counter North Korean weapons of mass destruction is to prevent the proliferation of material, weapons, and know-how beyond the peninsula to new actors. In a North Korea collapse scenario, the United States would likely seek to establish a cordon sanitaire around the country to prevent nuclear materials from getting out and into the hands of other rogue actors, or even terrorist organizations.

North Korea is currently estimated to have between 20 and 60 nuclear weapons, a stockpile of 75 to 320 kilograms of highly enriched uranium, 39 relevant nuclear sites, and 49 missile sites.

Given advancements in its missile technology, North Korea can hit South Korea, Japan, and even potentially the United States with nuclear weapons and has threatened to do so on multiple occasions. Kim or a successor may use nuclear weapons as a last-ditch effort to deter outside intervention that could ensure and accelerate the collapse of the regime.

4. China would take the lead militarily, whether the United States likes it or not.

One big problem is that U.S. contingency planning does not adequately account for the role of Chinese forces in a collapse contingency. The conventional wisdom is that Chinese intervention would largely be limited to dealing with refugees along its border, and any actions taken would be in support of North Korea.

But changes in Chinese military capabilities, heightened concerns about nuclear security, and prioritization of geopolitical competition with the United States have encouraged China to broaden its thinking in recent years.

Specifically, China would likely undertake an extensive military intervention with an eye on expanding regional influence if a major conflict broke out on the Korean Peninsula. Recent Chinese statements and military training exercises also point to heightened preparations for intervention.

Moreover, it is likely that the Chinese military would reach North Korean nuclear facilities sooner than U.S. or South Korean troops, thanks to China’s geographical proximity to North Korea, the vicinity of its troops, and the possibility that North Korean troops would exhibit relatively low resistance to Chinese forces.

China might also enjoy early warning, allowing for advanced preparation, because the shared border provides China with unique opportunities to collect intelligence. All of this points to the need for the United States to change its planning assumptions to account for the presence of Chinese troops on the peninsula following any credible signs of instability in Pyongyang.

5. The collapse of the Kim regime would likely set back America’s position in Asia.

It is not an exaggeration to say that the future of the U.S. role in Asia, and thus the status of its competition with China for power and influence, rides on how the United States responds to instability on the Korean Peninsula. Unlike China, the United States is not a resident Asian power; it relies on a network of alliance relationships for military access.

The unpredictability of U.S. President Donald Trump’s stance on North Korea, vacillating between “fire and fury” and dramatic praise for Kim, may create uncertainty among U.S. allies as to how the country would behave in a confrontation.

Similarly, if the United States does not follow through completely on its alliance commitments to South Korea, this could encourage allies to pursue alternative arrangements and seek greater accommodation of China, weakening the U.S. position.

Instability caused by the collapse of the Kim regime would most certainly lead to a civil war that would involve the United States as South Korea’s ally. Hundreds of thousands of troops would be needed for stability and WMD elimination operations in North Korea.

Such a war would then likely involve deaths in the order of tens of thousands of people, even millions, and the choice to detonate any U.S. nuclear weapons within North Korea would bring “hellish results,” as the security studies expert Barry Posen has argued.

The drain of a major war on the Korean Peninsula would be cataclysmic for U.S. resourcing of the great-power competition with China in other areas and arenas.

In short, while many may cheer at the sign of political troubles in North Korea, the situation is complicated. U.S. policymakers would almost certainly face a deck stacked against them if regime instability hits Pyongyang.

It would take once-in-a-generation leadership to create the U.S. statecraft that would navigate the United States safely through a potential crisis.

viernes, mayo 15, 2020



Turkey Pushes South

By: GPF Staff

Turkey Pushes South
(click to enlarge)

In its bid to create an area of influence along its southern border, Turkey has initiated two military campaigns in Iraq and Syria.

These efforts have been directed at rivals it considers terrorist groups and geopolitical competitors like Iran, Russia and the Syrian government.

In Syria, Turkey has conducted ground missions over the past four years as part of Operation Euphrates Shield, Operation Olive Branch and Operation Peace Spring.

Through these operations, Ankara hoped to create a buffer zone along its border with Syria, repatriate Syrian refugees and confront geopolitical rivals such as the Russian-backed Syrian regime, Iranian proxies and Kurdish armed groups.

In Iraq, Turkey has conducted a multiphase operation, Operation Claw, designed to curb the political influence and supply chains of Iraqi Kurdish groups that the Turkish government considers to be affiliated with the terrorist Kurdistan Workers' Party.