Germany’s bridges to Russia split open Europe

Outreach to Moscow risks ignoring the concerns of central and eastern EU countries

Tony Barber 

    © James Ferguson

No western country’s relationship with Russia is more burdened with history than Germany’s. In June will fall the 80th anniversary of the Nazi invasion of the Soviet Union, prelude to titanic battles and wartime atrocities that still affect Germany’s self-image and weigh heavily on official attitudes to Russia.

None of this serves as an excuse, however, for some ill-judged remarks that Frank-Walter Steinmeier, Germany’s president, made last week on German-Russian relations. 

In a newspaper interview, he defended the Nord Stream 2 pipeline project, intended to deliver Russian gas to Germany across the Baltic Sea, as one of the few bridges between Russia and Europe in an otherwise deteriorating diplomatic and security climate.

Steinmeier went on to say that “for us Germans, there is another dimension” — the more than 20m Soviet people killed in the second world war. “That doesn’t justify any wrongdoing in Russian policy today, but we must not lose sight of the bigger picture,” he said.

The trouble with Steinmeier’s defence of Nord Stream 2 as repayment of a moral debt to Russia is that the president made no mention of other countries laid waste between 1939 and 1945 at Nazi hands. 

Russia became the legal successor state to the Soviet Union in the UN Security Council after the end of communism in 1991. But Russians are not the sole successor nation in terms of moral debts, as Ukraine’s ambassador to Berlin was quick to point out.

Indeed, the list of European countries that could claim to be owed a German moral debt is distressingly long and extends far beyond the borders of the defunct USSR. 

Without question the former West Germany, and the reunified German state after 1990, have made amends for Nazi crimes with admirable perseverance and a high sense of responsibility. But Steinmeier’s remarks underline how Russia, for many German politicians and business executives, remains a special case.

Germany’s Nord Stream 2 partnership with Russia arouses apprehension in parts of central and eastern Europe where historical memories last for centuries. Poland was wiped off Europe’s map for 123 years because of three partitions between 1772 and 1795 organised chiefly by Prussia and Russia. 

The Nazi-Soviet pact of 1939 was the prelude to another two-pronged attack on Poland.

Nord Stream 2, a project so close to completion that it may be too late to stop, carries no threat of territorial annexations or military aggression. But to the countries that lie between Germany and Russia, it looks like another arrangement made over their heads and with a scandalous lack of attention paid by Berlin to their concerns.

The implications for the EU may be profound. The professed ambition of the 27-nation bloc is to act like a strategically mature power with a coherent, united foreign and security policy. 

However, for the Baltic states, Poland and others, the lesson of Nord Stream 2 is not to entrust their freedom to some nebulous concept of EU security when Germany single-mindedly pursues bilateral deals with Russia.

For central and eastern Europeans, the crucial protector of their independence is not the EU but the US. In this way, defence and security can be added to the rule of law, media pluralism and migration as one more area where disputes divide some of the EU’s western European member states from some in central and eastern Europe.

The striking feature of Germany’s engagement with Russia is its broad cross-party support. Chancellor Angela Merkel has kept EU sanctions on Russia for its annexation of Crimea in 2014 and armed intervention in south-eastern Ukraine, but she is supportive of Nord Stream 2. 

The approach of Armin Laschet, the new leader of Merkel’s Christian Democratic party, seems less nuanced. When Russian president Vladimir Putin was busy seizing Crimea, Laschet criticised what he called “anti-Putin populism” in Germany.

Heiko Maas, Germany’s Social Democratic foreign minister, defends Berlin’s dealings with Moscow on the grounds that western countries must take care not to push Russia into closer economic and military co-operation with China. 

As for the rightwing populist Alternative for Germany and the leftist Die Linke parties, they disagree with the CDU and SPD on most things, but not on reaching out to Russia.

Yet what is the Kremlin giving Germany in return? The Bundestag was the target of a cyber attack in 2015 that the German authorities blamed on Russia. 

Four years later, an exiled Chechen rebel leader was murdered in Berlin on what prosecutors say were the Russian government’s orders.

In short, the argument that a close economic and energy relationship with Russia brings dividends in European security appears shaky, at least in the Putin era. 

The question German politicians should ask themselves is not how big their country’s moral debt to Russia is, but whether Nord Stream 2 and other bridges to Russia are achieving any worthwhile results.

Biden and the Fed Leave 1970s Inflation Fears Behind

Administration and Fed officials argue that workers not getting enough stimulus help is a larger concern than potential spikes in consumer prices.

By Jim Tankersley and Jeanna Smialek

Federal Reserve Chair Jerome H. Powell has brushed off concerns about inflation, saying the bigger risk to the economy is doing too little rather than doing too much.Credit...Pool photo by Susan Walsh

WASHINGTON — Presidents who find themselves digging out of recessions have long heeded the warnings of inflation-obsessed economists, who fear that acting aggressively to stimulate a struggling economy will bring a return of the monstrous price increases that plagued the nation in the 1970s.

Now, as President Biden presses ahead with plans for a $1.9 trillion stimulus package, he and his top economic advisers are brushing those warnings aside, as is the Federal Reserve under Chair Jerome H. Powell.

After years of dire inflation predictions that failed to pan out, the people who run fiscal and monetary policy in Washington have decided the risk of “overheating” the economy is much lower than the risk of failing to heat it up enough.

Democrats in the House plan to spend this week finalizing Mr. Biden’s plan to pump nearly $2 trillion into the economy, including direct checks to Americans and more generous unemployment benefits, with the aim of holding a floor vote as early as next week. 

The Senate is expected to quickly take up the proposal as soon as it clears the House, in the hopes of sending a final bill to Mr. Biden’s desk early next month. Fed officials have signaled that they plan to keep holding rates near zero and buying government-backed debt at a brisk clip to stoke growth.

The Fed and the administration are staying the course despite a growing outcry from some economists across the political spectrum, including Lawrence Summers, a former Treasury secretary and top adviser in the Clinton and Obama administrations, who say Mr. Biden’s plans could stir up a whirlwind of rising prices.

No one better embodies the sudden break from decades of worry over inflation — in Washington and elite circles of economics — than Janet L. Yellen, the former Federal Reserve chair and current Treasury secretary. 

Ms. Yellen spent the bulk of her career fighting in a war against inflation that economists have been waging for more than a half century. 

But at a time when the American economy remains 10 million jobs short of its pre-pandemic levels, and millions of people face hunger and eviction, she appears to be ready to move on.

President Biden and Janet Yellen, the Treasury secretary, are pursuing a $1.9 trillion stimulus package to help struggling households and businesses make it through the pandemic downturn.Credit...Pete Marovich for The New York Times

“I have spent many years studying inflation and worrying about inflation,” Ms. Yellen told CNN earlier this month. “But we face a huge economic challenge here and tremendous suffering in the country. We have got to address that. That’s the biggest risk.”

In the guarded language of a Fed chair, Mr. Powell used a speech last week to push back on the idea that the economy was at risk of overheating. 

He said that prices could show a brief pop in the coming months, as they rebound from very low readings last year, and he said the economy could see a “burst” of spending and temporarily higher inflation when it fully reopened. 

But he said he expected such increases to be short-lived — not the sustained spiral that many economists worry about.

“That’s really not going to mean very much,” Mr. Powell said, noting that inflation has trended lower for decades. “Inflation dynamics will evolve, but it’s hard to make the case why they would evolve very suddenly, in this current situation.”

A small but influential group of economists is questioning that view — in particular, calling for Mr. Biden to scale back his economic aid plans, which include sending direct payments to most American households, increasing the size and duration of benefits for the long-term unemployed and spending big to accelerate Covid vaccine deployment across the country.

They argue that the size of the package outstrips the size of the hole the coronavirus has left in the economy. With so many dollars chasing a limited supply of goods and services, the argument goes, purchasing power could erode or the Fed might need to abruptly lift interest rates, which could send the economy back into a downturn.

“It’s hard to look at all those factors and not conclude there’s going to be inflationary pressure,” said Michael R. Strain, an economist at the conservative American Enterprise Institute who supported relief efforts earlier in the recession but was among the first economists to warn Mr. Biden’s plans could set off price spikes. “My worry is that by pushing the economy so hard, that will lead to some overheating.”

Mr. Summers, who is an economist at Harvard, warned in a Washington Post column that “judged relative to either the macroeconomic output gap or declines in family incomes, the proposed Covid-19 relief package appears very large.” 

There is a chance, he added, that Mr. Biden’s efforts “will set off inflationary pressures of a kind we have not seen in a generation.”

Such warnings were a familiar refrain from conservative economists who opposed going big on stimulus during and after the 2009 recession, when Mr. Biden was vice president and Mr. Summers was a top economic aide. 

They did not materialize: Inflation ran below the Fed’s 2 percent target rate for a decade after the crisis, and Mr. Obama’s $800 billion package has since been judged by many economists to have been too small. That shortfall contributed to sluggish growth and a painfully long recovery for lower- and middle-income Americans.

A shuttered building in Culver City, Calif., last month.Credit...Jenna Schoenefeld for The New York Times

“The onus should be on anybody who says the economy is about to overheat,” said Austan Goolsbee, a former head of Mr. Obama’s Council of Economic Advisers. 

“There have been many prominent voices saying that — that there was about to be inflation — for more than 10 years.”

And the fact that the Fed is brushing off overheating concerns is emboldening some Democrats.

“Earlier today, Fed Chair Powell gave an important speech about the state of our economy and what we need to do to get back on track,” Bharat Ramamurti, deputy director of the National Economic Council, said on Twitter Wednesday. “His remarks help back the case President Biden has been making for the American Rescue Plan.”

Many economists have déjà vu when it comes to overheating warnings. Nathan Sheets, a former Treasury official, was global head of international economics at Citigroup in the early 2010s. He recalls hearing worried murmurs about runaway inflation during meetings from London to New York.

“People were really, really sweating,” he said, noting that he, too, fretted that prices might take off. “It just didn’t happen. The world has changed in meaningful ways and the risks of overheating and high inflation are much less pronounced.”

Inflation warnings are a remnant of the late 1960s and 1970s, when American prices were driven relentlessly higher by wage increases, an oil embargo and geopolitical developments.

The result was uncomfortable — restaurants updated their menu prices with stickers; The New York Times reported in 1980 that Manhattan’s “69 Cents Shops” had decided to rebrand to the “88 Cents Shops” — and the cure was downright painful. After years of rapid inflation, Fed Chair Paul A. Volcker began to lift borrowing costs to staggering levels to cool off the economy. 

He received car keys from auto dealers who couldn’t make sales and planks of wood from home builders facing a dearth of demand. “Dear Mr. Volcker,” one wrote on a block with a knot. “I am beginning to feel as useless as this knothole.”

But for more than a quarter century, price gains have been surprisingly low — not too high.

In developed economies, including those of Japan, the euro area and the United States, monetary policymakers have actually been trying to encourage higher inflation in recent years. 

Inflation hasn’t sustainably reached the Fed’s 2 percent target since before the 2008 global financial crisis, looking at a Commerce Department index that strips out volatile fuel and food. Price pressures haven’t substantially exceeded 2 percent since the early 1990s.

Economists have struggled to understand the phenomenon, but they largely think inflation is being held down by a cocktail of aging demographics, changing consumer expectations and limited pricing power in a globalized world where consumers can search online to compare prices.

Market-based inflation expectation measures are hovering right around 2 percent, and consumer inflation outlooks have dipped slightly over the past decade, though one gauge ticked up in a recent reading. If buyers don’t expect higher prices, companies may find themselves unable to raise them, so whatever people anticipate can drive reality.

It’s also hard to see where a big and sustained spike in prices would come from, analysts said.

Airfares, apparel prices and hotel prices all took a hit in 2020 during the depths of the pandemic, and they’re likely to jump sharply as the economy reopens and consumers with money in their pockets take vacations and refurbish their wardrobes, said Alan Detmeister, a former inflation expert at the Fed who now works at the bank UBS.

Yet the price of goods that experienced a jump as workers shifted to home offices — from the category that includes laptop computers to the one that tracks cars — could fall back, weighing down overall gains. Categories that matter a lot to the overall index, like rent and health insurance, are both subdued and slow-moving.

In any case, a temporary bounce-back in prices is not the same as an inflationary process in which price gains continue month after month.

Even if prices do temporarily bounce, the Fed has pledged to be patient in the way it thinks about inflation. In years past — including under Ms. Yellen’s watch — it lifted interest rates before price gains had really picked up to head off potential overheating. The central bank’s new framework, adopted last year, calls for policymakers to aim for a period of above-2 percent inflation so that it hits its goal on average over time.

And besides stabilizing prices, Congress also tasks the Fed with trying to achieve maximum employment. 

Charles Evans, the president of the Federal Reserve Bank of Chicago, said earlier this month that $1.9 trillion in government spending would have the potential to help the Fed hit its inflation and job market goals faster.

“I’m hard-pressed to see the size of this leading to overheating,” he said.

Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley

Jeanna Smialek writes about the Federal Reserve and the economy. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine. @jeannasmialek


Lessons in betting against bubbles from the Big Short

Knowing for sure that something is askew may not be enough to make you money

He now runs a chain of hotels in his native Ghana. 

But in the 1990s Tony Yeboah played football at a high level, his two seasons at Leeds United sandwiched between longer spells in the Bundesliga. 

In England he is fondly remembered for a wonder-goal against Wimbledon fc. 

Watch it on YouTube. 

Trapping a high ball expertly on his chest, he juggles between defenders before smashing the ball off the crossbar into the net.

Great goals stay in the mind long after the game-to-game grind of a championship win fades from memory. 

So it is with investing. 

Success often comes down to the compounding of incremental gains over time. 

The trades that capture the imagination, though, are the bold ones with big payoffs. 

Among the biggest and boldest was “The Big Short”, a bet against subprime mortgages before the 2008 crash, and also the title of a book by Michael Lewis (and, later, a film).

That episode feels relevant again. 

The recent spectacular run-up in stock prices and the attendant mania in pockets of the financial markets have the word “bubble” on many investors’ lips. 

A new paper* by Aaron Brown of New York University and Richard Dewey of Royal Bridge Capital, a hedge fund, re-examines the Big Short and sounds a note of caution. 

It argues that the bet against subprime mortgages was far riskier than is often appreciated. 

The paper has a subtler message, too: the way in which a trading idea is expressed is as important as the insight that underpins it.

People who lived through it can scarcely forget the subprime crisis. Still, here’s a recap. 

In the mid-2000s, house prices were rising rapidly in many rich countries. 

In America, much of the growth in mortgage lending was to “subprime” borrowers with low credit scores. 

These mortgages were pooled and turned into securities. 

The riskiest tranches of these pooled mortgages took the first losses, providing a buffer for the aaa-rated tranches. 

Such was the demand for aaa bonds that standards slipped. 

Just about anyone could get a subprime mortgage.

America’s housing boom had all the hallmarks of a bubble: cheap money, a build-up of debt and a belief that there was no risk. 

If you were so minded, how could you bet against it? 

A handful of clever people worked out that subprime bonds were likely to suffer a higher rate of default than was suggested by their price or credit rating. 

So they bet against the riskiest tranches of the worst pools. 

They entered into agreements with banks, called credit-default swaps (cds), which insured specific mortgage bonds against default. In 2007 and 2008, default rates soared. 

The cds insurance was triggered. 

The payoff was as spectacular as a Tony Yeboah goal.

Why didn’t more people bet this way? 

Mr Brown and Mr Dewey spoke to investors who considered the short subprime trade, but passed on it. 

One turn-off was the Big Short’s steeply negative “cost of carry”: the premium on cds insurance was high. 

Moreover, mortgage cds were illiquid instruments, making it tricky to get out of the trade. 

A high cost of carry is a big bar when the payday might be years away—if it comes at all. 

The banks that were the counterparties to the cds could be dragged under. 

Maybe the government would make good all mortgage-holders when the bust came. 

History did not play out this way. 

But investors could not be sure at the time.

Traders found other ways to bet against the bubble. 

One was to sidestep the negative-carry problem by buying risky tranches of subprime securities, with double-digit yields, and at the same time taking out insurance on “safe” aaa tranches using cds with a fairly low premium. 

The bet here was that a housing bust would blow up both risky and safe tranches; but while waiting for the apocalypse you could benefit from positive carry. 

Perhaps the safest way to profit from a bubble is the pick-up-the-pieces trade, in this case buying mortgage bonds at fire-sale prices after the bust.

A subtext of the Brown-Dewey paper is that conviction can be your enemy. 

Knowing for sure that something is very askew may not be enough to make you money. 

Still, the precariousness of the Big Short is a big part of its legend. 

Yes, things might have played out differently. 

And if Tony Yeboah’s shot were an inch higher, then it would not have been a goal. 

But it was not a fluke. 

He had scored an equally spectacular goal against Liverpool a month earlier. 

That one went in off the crossbar, too.

Can Navalny Take Down Putin?

Unlike the protests that roiled Russia in 2011-12 in response to Vladimir Putin’s third presidency, today’s protest movement has a charismatic and sympathetic leader. But Putin has spent the last decade consolidating a police state, and he is prepared to use every available tool to retain power.

Nina L. Khrushcheva

MOSCOW – There are arguably two moments in the last century when a wrecking ball was taken to Russia’s political regime. 

In 1917, the Bolshevik Revolution toppled the country’s teetering monarchy. 

And, in 1991, an abortive coup by Marxist-Leninist hardliners against the reformist Mikhail Gorbachev accelerated the tottering Soviet Union’s collapse. 

Does the wave of protests that have swept Russia in recent weeks herald another regime change?

Not likely. 

To be sure, unlike the protests that roiled Russia in 2011-12 in response to Vladimir Putin’s third inauguration as president, today’s protest movement has a charismatic and sympathetic leader. 

Not only has Alexei Navalny been a relentless anti-corruption advocate for years; when he was arrested last month, he had just returned from Germany – where he had spent months recovering, after being poisoned with the Kremlin’s favorite nerve agent, Novichok – to continue confronting Putin’s regime.

But, unlike the twilight of the czars and the Soviets, Putin’s regime is neither teetering nor tottering. 

Putin has spent the last decade consolidating a police state, and he is prepared to use every available tool to retain power. 

The leader who invaded Ukraine and illegally annexed Crimea in 2014 to bolster his foundering approval rating, and who secured a constitutional amendment last year so that he could remain president for life, is not about to be forced from power by a movement of weekend protesters.

Yet there is something particularly excessive, even irrational, about Putin’s suppression of Navalny, his associates, and his supporters. 

Already, law-enforcement officers have detained thousands (including journalists), often using brutal tactics. The government has also blocked social-media platforms, because they are supposedly fueling unrest.1

Meanwhile, the Kremlin-controlled television networks endlessly broadcast fawning stories about Putin, and every effort is being made to discredit the protest movement. 

By effectively shutting down central Moscow, including public transport leading to it, the government has severely inconvenienced many citizens – and made it seem like Navalny’s fault. 

The government wants “peaceful city-dwellers” to be able to do their weekend shopping, the narrative goes, but the “law-breaking” protesters, much like “terrorists,” insist on disrupting “normal” life.

By the Kremlin’s logic, when foreign leaders, journalists, and diplomats speak out in support of the opposition, they are merely proving that Navalny is the factotum of a global plot to destabilize Russia. 

To drive this point home, Russia’s Ministry of Foreign Affairs recently expelled three European diplomats for attending Navalny rallies – while Josep Borrell, the European Union’s high representative for foreign affairs and security policy, was visiting Moscow, no less.

The Kremlin is treating Navalny himself accordingly – like an enemy of the state. Navalny’s farcical court hearings since his return from Germany recall Stalin’s show trials in the 1930s, with one key difference: Navalny is not capitulating to the dictator by confessing his “crimes.” 

During the proceedings, Navalny rebuked the state’s lawlessness and denounced his sentence – almost three years in a penal colony – as illegitimate.

Moreover, Navalny recently released a viral video accusing Putin of using fraudulently secured funds to build a billion-dollar palace on the Black Sea. 

While Russians expect their leaders to be corrupt, Navalny consistently puts into perspective the scale of the riches that corruption generates. (He did the same with his 2017 investigation into then-Prime Minister Dmitri Medvedev.)

Navalny’s attacks thus directly undermine Putin. In this sense, Navalny is not like one of Stalin’s Trotskyist targets; he is Trotsky himself. And he needs to be purged.

Putin’s fears are compounded by the possibility that a slow-motion palace coup may be unfolding. Since the annexation of Crimea, Western sanctions have been choking Russia’s economy, fueling resentment among the country’s political elites, who long for access to their Swiss bank accounts and Italian villas. 

They may now seek to oust Putin, much in the same way Nikita Khrushchev was ousted in 1964. And a humiliated Putin would presumably be much easier to overthrow than a popular one.

The emergence of mystics and proselytizers with promises of clarity offers further evidence that Russia’s ossified regime is beginning to destroy itself. 

Grigori Rasputin, a self-proclaimed holy man, helped to drive the rotting imperial monarchy into the ground. In the 1980s, when the Soviet empire was beyond reform, TV psychiatrists were all the rage.

Today, political shamans of all stripes – from communist to nationalist – are rising to prominence. 

They predict Putin’s imminent death, warn of a Western or Chinese takeover, and speculate that Navalny is a project of Russia’s security services that got out of hand. Some have even interpreted Navalny’s name – which translates as “push away” – as a sign that he is the one who will drive out Putinism.

Nonetheless, as the Kremlin’s response to the protests has shown, Putin and the state are one and the same. 

That makes toppling him a particularly difficult proposition – at least for now.

Nina L. Khrushcheva, Professor of International Affairs at The New School, is the co-author (with Jeffrey Tayler), most recently, of In Putin’s Footsteps: Searching for the Soul of an Empire Across Russia’s Eleven Time Zones.