All posts by George Friedman

Mr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.

Europe Rethinks the Schengen Agreement

G.Friedman
Mr. George Friedman
is the CEO and Chief Intelligence Officer of  Statfor, a private intelligence company located in Austin, Texas.

 

  • Forecast
    • Rising immigration and fragile economic recovery in Europe will reduce political support for the Schengen Agreement, which eliminates border controls among member states.
    • The Schengen Agreement will likely be reformed to make room for countries to tighten their border controls more frequently.
    • Friction between Schengen members and other countries will remain, as will tension within the bloc itself.

Analysis

When France, West Germany, Belgium, the Netherlands and Luxembourg signed the Schengen Agreement in 1985, they envisioned a system in which people and goods could move from one country to another without barriers. This vision was largely realized: Since its implementation in 1995, the Schengen Agreement eliminated border controls between its signatories and created a common visa policy for 26 countries.

The treaty was a key step in the creation of a federal Europe. By eliminating border controls, member states gave up a basic element of national sovereignty. The agreement also required a significant degree of trust among its signatories, because it put the responsibility for checking foreigners’ identities and baggage on the country of first entry into the Schengen area. Once people have entered a Schengen country, they can move freely across most of Europe without facing any additional controls.

The Schengen Agreement was implemented in the 1990s, when the end of the Cold War and the prospect of permanent economic prosperity led EU members to give up national sovereignty in many sensitive areas. The creation of the eurozone is probably the most representative agreement of the period. But several things have changed in Europe since then, and member states are beginning to question many of the decisions that were made during the preceding years of optimism.

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World War II and the Origins of American Unease

G.FriedmanMr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.

We are at the 70th anniversary of the end of World War II in Europe. That victory did not usher in an era of universal peace. Rather, it introduced a new constellation of powers and a complex balance among them. Europe’s great powers and empires declined, and the United States and the Soviet Union replaced them, performing an old dance to new musical instruments. Technology, geopolitics’ companion, evolved dramatically as nuclear weapons, satellites and the microchip — among myriad wonders and horrors — changed not only the rules of war but also the circumstances under which war was possible. But one thing remained constant: Geopolitics, technology and war remained inseparable comrades.

It is easy to say what World War II did not change, but what it did change is also important. The first thing that leaps to mind is the manner in which World War II began for the three great powers: the United States, the Soviet Union and the United Kingdom. For all three, the war started with a shock that redefined their view of the world. For the United States, it was the shock of Pearl Harbor. For the Soviet Union, it was the shock of the German invasion in June 1941. For the United Kingdom — and this was not really at the beginning of the war — it was shock at the speed with which France collapsed.

Pearl Harbor Jolts the American Mindset

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(Greece and the Eurozone) Future of Free Trade

G.FriedmanMr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.

This is the second part of the article: “The ‘Grexit’ Issue and the Problem of Free Trade”. It is published with permission from Stratfor.

(The Greek Crisis brings up) the more fundamental issue (that) concerns neither the euro nor the consequences of a Greek default. The core issue is the future of the European free trade zone. The main assumption behind European integration was that a free trade zone would benefit all economies. If that assumption is not true, or at least not always true, then the entire foundation of the European Union is cast into doubt, with the drachma-versus-euro issue as a short footnote.

The idea that free trade is beneficial to all sides derives from a theory of the classical economist David Ricardo, whose essay on comparative advantage was published in 1817. Comparative advantage asserts that free trade allows each nation to pursue the production and export of those products in which the nation has some advantage, expressed in profits, and that even if a nation has a wide range of advantages, focusing on the greatest advantages will benefit the country the most. Because countries benefit from their greatest advantages, they focus on those, leaving lesser advantages to other countries for which these are the greatest comparative advantage.

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The ‘Grexit’ Issue and the Problem of Free Trade

G.FriedmanMr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX

The ‘Grexit’ Issue and the Problem of Free Trade is republished with permission of Stratfor.”

The Greek crisis is moving toward a climax. The issue is actually quite simple. The Greek government owes a great deal of money to European institutions and the International Monetary Fund. It has accumulated this debt over time, but it has become increasingly difficult for Greece to meet its payments. If Greece doesn’t meet these payments, the IMF and European institutions have said they will not extend any more loans to Greece. Greece must make a calculation. If it pays the loans on time and receives additional funding, will it be better off than not paying the loans and being cut off from more? 

Obviously, the question is more complex. It is not clear that if the Greeks refuse to pay, they will be cut off from further loans. First, the other side might be bluffing, as it has in the past. Second, if they do pay the next round, and they do get the next tranche of funding, is this simply kicking the can down the road? Does it solve Greece’s underlying problem, which is that its debt structure is unsustainable? In a world that contains Argentina and American Airlines, we have learned that bankruptcy and lack of access to credit markets do not necessarily go hand in hand.

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Germany Emerges

G.FriedmanMr. George Friedman is Founder and Chairman, Stratfor, a private intelligence company located in Austin, TX.

This article is published herein by permission of Stratfor.

German Chancellor Angela Merkel, accompanied by French President Francois Hollande, met with Russian President Vladimir Putin on Feb. 6. Then she met with U.S. President Barack Obama on Feb. 9. The primary subject was Ukraine, but the first issue discussed at the news conference following the meeting with Obama was Greece. Greece and Ukraine are not linked in the American mind. They are linked in the German mind, because both are indicators of Germany’s new role in the world and of Germany’s discomfort with it.

It is interesting to consider how far Germany has come in a rather short time. When Merkel took office in 2005, she became chancellor of a Germany that was at peace, in a European Union that was united. Germany had put its demands behind it, embedding itself in a Europe where it could be both prosperous and free of the geopolitical burdens that had led it into such dark places. If not the memory, then the fear of Germany had subsided in Europe. The Soviet Union was gone, and Russia was in the process of trying to recover from the worst consequences of that collapse. The primary issue in the European Union was what hurdles nations, clamoring to enter the union, would have to overcome in order to become members. Germany was in a rare position, given its history. It was in a place of comfort, safety and international collegiality.

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Europe: When the Unthinkable Becomes Possible

G.FriedmanMr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.
A Geopolitical Diary: George Friedman Explains. Go to
http://bit.ly/1tLtfDd

This report is republished with permission of Stratfor.” http://www.stratfor.com/geopolitical-diary/europe-when-unthinkable-becomes-possible#axzz3Kf435r7Y

Europe’s economic crisis is slowly but steadily eroding the political systems of many countries on the Continent. New actors are emerging and threatening the supremacy of the traditional players. Alliances and events that seemed impossible only a few years ago are now being openly discussed across Europe. On Dec. 3, for example, Sweden announced it would hold early elections, partially because of political moves from the far right. In Spain, the ruling center-right party is openly discussing the possibility of entering an alliance with its traditional center-left rivals to prevent a protest party from taking over. Key members of the European Union, including Sweden, Spain, the United Kingdom and possibly Greece, will hold elections in 2015. In most cases, these countries will see outcomes nobody would have thought possible in 2008.

Sweden

Swedish Prime Minister Stefan Lofven announced the snap elections after his center-left government lost a budget vote less than three months after coming to power. Lofven’s announcement was precipitated by a decision by the far-right Sweden Democrats party to support the opposition during a budget vote. Sweden’s early elections, the first for the country in almost 60 years, will be held March 22, with the anti-immigration Sweden Democrats likely playing a central role. In Sweden’s parliamentary elections in September, no coalition managed to form a majority government, but the elections were marked by the strong performance of the far-right party, which received 12.9 percent of the vote, up from 5.7 percent in 2010, when it entered parliament for the first time.

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Europe’s Disturbing Precedent in the Cyprus Bailout

G.FriedmanMr. George Friedman is Founder and Chairman, Stratfor, a private intelligence company located in Austin, TX.

This article is published here in by permission of Stratfor.

The European economic crisis has taken different forms in different places, and Cyprus is the latest country to face the prospect of financial ruin. Overextended banks in Cyprus are teetering on the brink of failure for issuing loans they cannot repay, which has prompted the tiny Mediterranean country, a member of the European Union, to turn to Brussels for help. Late Sunday, the European Union and Cypriot president announced new terms for a bailout that would provide the infusion of cash necessary to prevent bankruptcies in Cyprus’ banking sector and, more important, prevent a banking panic from spreading to the rest of Europe.

What makes this crisis different from the previous bailouts for Greece, Ireland or elsewhere are the conditions Brussels has attached for its assistance. Due to circumstances unique to Cyprus, namely the questionable origin of a large chunk of the deposits in its now-stricken banking sector and that sector’s small size relative to the overall European economy, the European Union, led by Germany, has taken a harder line with the country. Cyprus has few sources of capital besides its capacity as a banking shelter, so Brussels required that the country raise part of the necessary funds from its own banking sector — possibly by seizing money from certain bank deposits and putting it toward the bailout fund. The proposal has not yet been approved, but if enacted it would undermine a formerly sacred principle of banking in most industrial nations — the security of deposits — setting a new and possibly destabilizing precedent in Europe.

Cyprus’ Dilemma
For years before the crisis, Cyprus promoted itself as an offshore financial center by creating a tax structure and banking rules that made depositing money in the country attractive to foreigners. As a result, Cyprus’ financial sector grew to dwarf the rest of the Cypriot economy, accounting for about eight times the country’s annual gross domestic product and employing a substantial portion of the nation’s work force. A side effect of this strategy, however, was that if the financial sector experienced problems, the rest of the domestic economy would not be big enough to stabilize the banks without outside help.

Europe’s economic crisis spawned precisely those sorts of problems for the Cypriot banking sector. This was not just a concern for Cyprus, though. Even though Cyprus’ banking sector is tiny relative to the rest of Europe’s, one Cypriot bank defaulting on what it owed other banks could put the whole European banking system in question, and the last thing the European Union needs now is a crisis of confidence in its banks.

The Cypriots were facing chaos if their banks failed because the insurance system was insufficient to cover the claims of depositors. For its part, the European Union could not risk the financial contagion. But Brussels could not simply bail out the entire banking system, both because of the precedent it would set and because the political support for a total bailout wasn’t there. This was particularly the case for Germany, which would carry much of the financial burden and is preparing for elections in September 2013 before an electorate that is increasingly hostile to bailouts.

Even though the German public may oppose the bailouts, it benefits immensely from what those bailouts preserve. As I have pointed out many times, Germany is heavily dependent on exports and the European Union is critical to those exports as a free trade zone. Although Germany also imports a great deal from the rest of the bloc, a break in the free trade zone would be catastrophic for the German economy. If all imports were cut along with exports, Germany would still be devastated because what it produces and exports and what it imports are very different things. Germany could not absorb all its production and would experience massive unemployment.

Currently, Germany’s unemployment rate is below 6 percent while Spain’s is above 25 percent. An exploding financial crisis would cut into consumption, which would particularly hurt an export-dependent country like Germany. Berlin’s posture through much of the European economic crisis has been to pretend it is about to stop providing assistance to other countries, but the fact is that doing so would inflict pain on Germany, too. Germany will make its threats and its voters will be upset, but in the end, the country would not be enjoying high employment if the crisis got out of hand. So the German game is to constantly threaten to let someone sink, while in the end doing whatever has to be done.

Cyprus was a place where Germany could show its willingness to get tough but didn’t carry any of the risks that would arise in pushing a country such as Spain too hard, for example. Cyprus’ economy was small enough and its problems unique enough that the rest of Europe could dismiss any measures taken against the country as a one-off. Here was a case where the German position appears enormously more powerful than usual. And in isolation, this is true — if we ignore the question of what conclusion the rest of Europe, and the world, draws from the treatment of Cyprus.

A Firmer Line
Under German guidance, the European Union made an extraordinary demand on the Cypriots. It demanded that a tax be placed on deposits in the country’s two largest banks. The tax would be about 10 percent and would, under the initial terms, be applied to all accounts, regardless of their size. This was an unprecedented solution. Since the global financial crisis of the 1920s, all advanced industrial countries — and many others — had been operating on a fundamental principle that deposits in banks were utterly secure. They were not regarded as bonds paying certain interest, whose value would disappear if the bank failed. Deposits were regarded as riskless placements of money, with the risk covered by deposit insurance for smaller deposits, but in practical terms, guaranteed by the national wealth.

This guarantee meant that individual savings would be safe and that working capital parked by corporations in a bank was safe as well. The alternative was not only uncertainty, but also people hoarding cash and preventing it from entering the financial system. It was necessary to have a secure place to put money so that it was available for lending. The runs on banks in the 1920s and 1930s drove home the need for total security for deposits.

Brussels demanded that the bailout for Cypriot banks be partly paid for by depositors in those banks. That demand essentially violated the social contract on the sanctity of bank deposits and did so in a country that was a member of the European Union — one of the world’s major economic blocs. Proponents of the measure pointed out that many of the depositors were not Cypriot nationals but rather foreigners, many of whom were Russian. Moreover, it was suggested that the only reason for a Russian to be putting money in a Cypriot bank was to get it out of Russia, and the only motive for that had to be nefarious. It followed that the confiscation was not targeted against ordinary people but against shady Russians.

There is no question that there are shady Russians putting money into Cyprus. But ordinary Cypriots had their money in the same banks and so did many Cypriot and foreign companies, including European companies, who were doing business in Cyprus and need money for payroll and so on. The proposal might look like an attempt to seize Russian money, but it would pinch the bank accounts of all Cypriots as well as a sizable amount of legitimate Russian money. Confiscating 10 percent of all deposits could devastate individuals and the overall economy and likely would prompt companies operating in Cyprus to move their cash elsewhere. The measure would have been devastating and the Cypriot parliament rejected it.

Another deal, the one currently up for approval, tried to mitigate the problem but still broke the social contract. Accounts smaller than 100,000 euros (about $128,000) would not be touched. However, accounts larger than 100,000 euros would be taxed at an uncertain rate, currently estimated at 20 percent, while bondholders would lose up to 40 percent. These numbers will likely shift again, but assuming they are close to the final figures, depositors putting money into banks beyond this amount are at risk depending on the financial condition of the bank.

The impact on Cyprus is more than Russian mafia money being taxed. All corporations doing business in Cyprus could have 20 percent of their operating cash seized. Regardless of precisely how the Cypriot banking system is restructured, the fact is that the European Union demanded that Cyprus seize portions of bank accounts from large depositors. From a business’ perspective, 100,000 euros is not all that much when you are running a supermarket or a car dealership or a construction company, but this arbitrary level could easily be raised in the future and the mere existence of the measure will make attracting investment more difficult.

A New Precedent
The more significant development was the fact that the European Union has now made it official policy, under certain circumstances, to encourage member states to seize depositors’ assets to pay for the stabilization of financial institutions. To put it simply, if you are a business, the safety of your money in a bank depends on the bank’s financial condition and the political considerations of the European Union. What had been a haven — no risk and minimal returns — now has minimal returns and unknown risks. Brussels’ emphasis that this was mostly Russian money is not assuring, either. More than just Russian money stands to be taken for the bailout fund if the new policy is approved. Moreover, the point of the global banking system is that money is safe wherever it is deposited. Europe has other money centers, like Luxembourg, where the financial system outstrips gross domestic product. There are no problems there right now, but as we have learned, the European Union is an uncertain place. If Russian deposits can be seized in Nicosia, why not American deposits in Luxembourg?

This was why it was so important to emphasize the potentially criminal nature of the Russian deposits and to downplay the effect on ordinary law-abiding Cypriots. Brussels has worked very hard to make the Cyprus case seem unique and non-replicable: Cyprus is small and its banking system attracted criminals, so the principle that deposits in banks are secure doesn’t necessarily apply there. Another way to look at it is that an EU member, like some other members of the bloc, could not guarantee the solvency of its banks so Brussels forced the country to seize deposits in order to receive help stabilizing the system. Viewed that way, the European Union has established a new option for itself in dealing with depositors in troubled banks, and that principle now applies to all of Europe, particularly to those countries with financial institutions potentially facing similar problems.

The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. If they decide that it isn’t obvious, then foreign corporations — and even European corporations — could start pulling at least part of their cash out of European banks and putting it elsewhere. They can minimize the amount of cash on hand in Europe by shifting to non-European banks and transferring as needed. Those withdrawals, if they occur, could create a massive liquidity crisis in Europe. At the very least, every reasonable CFO will now assume that the risk in Europe has risen and that an eye needs to be kept on the financial health of institutions where they have deposits. In Europe, depositing money in a bank is no longer a no-brainer.

Now we must ask ourselves why the Germans would have created this risk. One answer is that they were confident they could convince depositors that Cyprus was one of a kind and not to be repeated. The other answer was that they had no choice. The first explanation was undermined March 25, when Eurogroup President Jeroen Dijsselbloem said that the model used in Cyprus could be used in future bank bailouts. Locked in by an electorate that does not fully understand Germany’s vulnerability, the German government decided it had to take a hard line on Cyprus regardless of risk. Or Germany may be preparing a new strategy for the management of the European financial crisis. The banking system in Europe is too big to salvage if it comes to a serious crisis. Any solution will involve the loss of depositors’ money. Contemplating that concept could lead to a run on banks that would trigger the crisis Europe fears. Solving a crisis and guaranteeing depositors may be seen as having impossible consequences. Setting the precedent in Cyprus has the advantage of not appearing to be a precedent.

It’s not clear what the Germans or the EU negotiators are thinking, and all these theories are speculative. What is certain is that an EU country, facing a crisis in its financial system, is now weighing whether to pay for that crisis by seizing depositors’ money. And with that, the Europeans have broken a barrier that has been in place since the 1930s. They didn’t do that casually and they didn’t do that because they wanted to. But they did it.

Europe, Unemployment and Instability

G.FriedmanMr. George Friedman is Founder and Chairman, Stratfor, a private intelligence company located in Austin, TX.

This article is published here in by permission of Stratfor.

The global financial crisis of 2008 has slowly yielded to a global unemployment crisis. This unemployment crisis will, fairly quickly, give way to a political crisis. The crisis involves all three of the major pillars of the global system — Europe, China and the United States. The level of intensity differs, the political response differs and the relationship to the financial crisis differs. But there is a common element, which is that unemployment is increasingly replacing finance as the central problem of the financial system.

Europe is the focal point of this crisis. Last week Italy held elections, and the party that won the most votes — with about a quarter of the total — was a brand-new group called the Five Star Movement that is led by a professional comedian. Two things are of interest about this movement. First, one of its central pillars is the call for defaulting on a part of Italy’s debt as the lesser of evils. The second is that Italy, with 11.2 percent unemployment, is far from the worst case of unemployment in the European Union. Nevertheless, Italy is breeding radical parties deeply opposed to the austerity policies currently in place.

The core debate in Europe has been how to solve the sovereign debt crisis and the resulting threat to Europe’s banks. The issue was who would bear the burden of stabilizing the system. The argument that won the day, particularly among Europe’s elites, was that what Europe needed was austerity, that government spending had to be dramatically restrained so that sovereign debt — however restructured it might be — would not default.

One of the consequences of austerity is recession. The economies of many European countries, especially those in the eurozone, are now contracting, since austerity obviously means that less money will be available to purchase goods and services. If the primary goal is to stabilize the financial system, it makes sense. But whether financial stability can remain the primary goal depends on a consensus involving broad sectors of society. When unemployment emerges, that consensus shifts and the focus shifts with it. When unemployment becomes intense, then the entire political system can shift. From my point of view, the Italian election was the first, but expected, tremor.

A Pattern Emerges in Europe

Consider the geography of unemployment. Only four countries in Europe are at or below 6 percent unemployment: the geographically contiguous countries of Germany, Austria, the Netherlands and Luxembourg. The immediate periphery has much higher unemployment; Denmark at 7.4 percent, the United Kingdom at 7.7 percent, France at 10.6 percent and Poland at 10.6 percent. In the far periphery, Italy is at 11.7 percent, Lithuania is at 13.3 percent, Ireland is at 14.7 percent, Portugal is at 17.6 percent, Spain is at 26.2 percent and Greece is at 27 percent.

Germany, the world’s fourth-largest economy, is at the center of gravity of Europe. Exports of goods and services are the equivalent of 51 percent of Germany’s gross domestic product, and more than half of Germany’s exports go to other European countries. Germany sees the European Union’s free trade zone as essential for its survival. Without free access to these markets, its exports would contract dramatically and unemployment would soar. The euro is a tool that Germany, with its outsized influence, uses to manage its trade relations — and this management puts other members of the eurozone at a disadvantage. Countries with relatively low wages ought to have a competitive advantage over German exports. However, many have negative balances of trade. Thus, when the financial crisis hit, their ability to manage was insufficient and led to sovereign debt crises, which in turn further undermined their position via austerity, especially as their membership in the eurozone doesn’t allow them to apply their own monetary policies.

This doesn’t mean that they were not profligate in their social spending, but the underlying cause of their failure was much more complex. Ultimately it was rooted in the rare case of a free trade zone being built around a massive economy that depended on exports. (Germany is the third-largest exporter in the world, ranking after China and the United States.) The North American Free Trade Agreement is built around a net importer. Britain was a net importer from the Empire. German power unbalances the entire system. Comparing the unemployment rate of the German bloc with that of Southern Europe, it is difficult to imagine these countries are members of the same trade group.

Even France, which has a relatively low unemployment rate, has a more complex story. Unemployment in France is concentrated in two major poles in the north and the south, with the southeast of France being the largest of them. Thus, if you look at the map, the southern tier of Europe has been hit extraordinarily hard with unemployment, and Eastern Europe not quite as badly, but Germany, Austria, the Netherlands and Luxembourg have been left relatively unscathed. How long this will last, given the recession in Germany, is another matter, but the contrast tells us a great deal about the emerging geopolitics of the region.

Portugal, Spain and Greece are in a depression. Their unemployment rate is roughly that of the United States in the midst of the Great Depression. A rule I use is that for each person unemployed, three others are affected, whether spouses, children or whomever. That means that when you hit 25 percent unemployment virtually everyone is affected. At 11 percent unemployment about 44 percent are affected.

It can be argued that the numbers are not quite as bad as they seem since people are working in the informal economy. That may be true, but in Greece, for example, pharmaceuticals are now in short supply since cash for importing goods has dried up. Spain’s local governments are about to lay off more employees. These countries have reached a tipping point from which it is difficult to imagine recovering. In the rest of Europe’s periphery, the unemployment crisis is intensifying. The precise numbers matter far less than the visible impact of societies that are tottering.

The Political Consequences of High Unemployment

It is important to understand the consequences of this kind of unemployment. There is the long-term unemployment of the underclass. This wave of unemployment has hit middle and upper-middle class workers. Consider an architect I know in Spain who lost his job. Married with children, he has been unemployed for so long that he has plunged into a totally different and unexpected lifestyle. Poverty is hard enough to manage, but when it is also linked to loss of status, the pain is compounded and a politically potent power arises.

The idea that the Germany-mandated austerity regime will be able to survive politically is difficult to imagine. In Italy, with “only” 11.7 percent unemployment, the success of the Five Star Movement represents an inevitable response to the crisis. Until recently, default was the primary fear of Europeans, at least of the financial, political and journalistic elite. They have come a long way toward solving the banking problem. But they have done it by generating a massive social crisis. That social crisis generates a political backlash that will prevent the German strategy from being carried out. For Southern Europe, where the social crisis is settling in for the long term, as well as for Eastern Europe, it is not clear how paying off their debt benefits them. They may be frozen out of the capital markets, but the cost of remaining in it is shared so unequally that the political base in favor of austerity is dissolving.

This is compounded by deepening hostility to Germany. Germany sees itself as virtuous for its frugality. Others see it as rapacious in its aggressive exporting, with the most important export now being unemployment. Which one is right is immaterial. The fact that we are seeing growing differentiation between the German bloc and the rest of Europe is one of the most significant developments since the crisis began.

The growing tension between France and Germany is particularly important. Franco-German relations were not only one of the founding principles of the European Union but one of the reasons the union exists. After the two world wars, it was understood that the peace of Europe depended on unity between France and Germany. The relationship is far from shattered, but it is strained. Germany wants to see the European Central Bank continue its policy of focusing on controlling inflation. This is in Germany’s interest. France, with close to 11 percent unemployment, needs the European Central Bank to stimulate the European economy in order to reduce unemployment. This is not an arcane debate. It is a debate over who controls the European Central Bank, what the priorities of Europe are and, ultimately, how Europe can exist with such vast differences in unemployment.

One answer may be that Germany’s unemployment rate will surge. That might mitigate anti-German feeling, but it won’t solve the problem. Unemployment at the levels many countries are reaching and appear to be remaining at undermines the political power of the governments to pursue policies needed to manage the financial system. The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.

Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation.

This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.

History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring. Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out.

It is difficult to see not only how this is contained within countries, but also how another financial crisis can be avoided, since the political will to endure austerity is broken. It is even difficult to see how the free trade zone will survive in the face of the urgent German need to export as much as it can to sustain itself. The divergence between German interests and those of Southern and Eastern Europe has been profound and has increased the more it appeared that a compromise was possible to save the banks. That is because the compromise had the unintended consequence of triggering the very force that would undermine it: unemployment.

It is difficult to imagine a common European policy at this point. There still is one, in a sense, but how a country with 5.2 percent unemployment creates a common economic policy with one that has 11 or 14 or 27 percent unemployment is hard to see. In addition, with unemployment comes lowered demand for goods and less appetite for German exports. How Germany deals with that is also a mystery.

The crisis of unemployment is a political crisis, and that political crisis will undermine all of the institutions Europe has worked so hard to craft. For 17 years Europe thrived, but that was during one of the most prosperous times in history. It has not encountered one of the nightmares of all countries and an old and deep European nightmare: unemployment on a massive scale. The test of Europe is not sovereign debt. It is whether it can avoid old and bad habits rooted in unemployment.

Character, Policy and the Selection of Leaders

Mr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.

This article is published here in by permission of Stratfor.

The end of Labor Day weekend in the United States traditionally has represented the beginning of U.S. presidential campaigns, though these days the campaign appears to be perpetual. In any case, Americans will be called on to vote for president in about two months, and the question is on what basis they ought to choose.

Many observers want to see intense debate over the issues, with matters of personality pushed to the background. But personality can also be viewed as character, and in some ways character is more important than policy in choosing a country’s leadership.

Policy and Personality

A candidate for office naturally lays out his plans should he win the election. Those plans, which may derive from an ideology or from personal values, represent his public presentation of what he would do if he won office. An ideology is a broadly held system of beliefs — an identifiable intellectual movement with specific positions on a range of topics. Personal values are more idiosyncratic than those derived from an ideology, but both represent a desire to govern from principle and policy.

As we all know, in many cases the presentation of intentions has less to do with what the candidate would actually do than it does with what he thinks will persuade the voters to vote for him. But such a candidate, possessing personal ambition more than principle, would not be opposed to doing what he said, since it suited the public. He has no plans himself beyond remaining in office.

Then there are those who profoundly believe in their policies. They sincerely intend to govern based on what they have said. This is what many think elections ought to be about: ideas, policies, ideologies and beliefs. Thus, in the case of the current American election, many are searching for what the candidates believe and asking whether they actually mean what they say.

In the United States and other countries, policy experts decry the fact that the public frequently appears ignorant of and indifferent to the policies the candidates stand for. Voters can be driven by fatuous slogans or simply by their perception of the kind of person the candidate is. The “beauty pageant” approach to presidential elections infuriates ideologues and policy experts who believe that the election should not turn on matters as trivial as personality. They recognize the personal dimension of the campaign but deplore it as being a diversion from the real issues of the day.

But consider the relationships between intentions and outcomes in American presidencies. During the 2000 campaign, George W. Bush made the case that the American war in Kosovo, undertaken by President Bill Clinton, was a mistake because it forced the United States into nation-building, a difficult policy usually ending in failure. There is every reason to believe that at the time he articulated this policy, he both meant it and intended to follow it. What he believed and intended turned out to mean very little. His presidency was determined not by what he intended to do but by something he did not expect nor plan for: Sept. 11, 2001.

This is not unique to Bush. John F. Kennedy’s presidency, in terms of foreign policy, was defined by the Cuban missile crisis, Lyndon Johnson’s by Vietnam. Jimmy Carter’s presidency was about the Iranian hostage crisis. None of these presidents expected their presidency to be focused on these things, although perhaps they should have. And these were only the major themes. They had no policies, plans or ideological guidelines for the hundreds of lesser issues and decisions that constitute the fabric of a presidency.

Consider Barack Obama. When he started his campaign, his major theme was the need to end the Iraq war, but soon after Labor Day in 2008, the Iraq issue had become secondary to the global financial crisis. It was not clear that Obama had any better idea than anyone else as to how to handle it, and by the time he took office, the pattern of dealing with it had been established by the Bush administration. The plan was to prevent the market from inflicting punishment on major financial institutions because of the broader consequences and to redefine the market by flooding it with money designed to stabilize these institutions. Obama continued and intensified this policy.

Frequently, a campaign’s policy papers seem to imply that the leader is simply in control of events. All too often, events control the leader, defining his agenda and limiting his choices. Sometimes, as with the Sept. 11 attacks, it is a matter of the unexpected redefining the presidency. In other cases, it is the unintended and unexpected consequences of a policy that redefine what the presidency is about. Johnson’s presidency is perhaps the best case study for this: His policy in Vietnam grew far beyond what he anticipated and overwhelmed his intentions for his time in office. No president has had a clearer set of policy intentions, none was more initially successful in adhering to those intentions and few have so quickly lost control of the presidency when unintended consequences took over.

Fortune and Virtue

Machiavelli argues in The Prince that political life is divided between fortuna, the unexpected event that must be dealt with, and virtu, not the virtue of the religious — the virtue of abstinence from sin — but rather the virtue of the cunning man who knows how to deal with the unexpected. None can deal with fortuna completely, but some can control, shape and mitigate it. These are the best princes. The worst are simply overwhelmed by the unexpected.

People who are concerned with policies assume two things. The first is that the political landscape is benign and will allow the leader the time to do what he wishes. The second is that should the terrain shift the leader will have time to plan, to think through what ought to be done. Ideally, that would be the case, but frequently the unexpected must be dealt with in its own time frame. Crises frequently force a leader to go in directions other than he planned to or even opposite to what he wanted.

Policies — and ideology — are testaments to what leaders wish to do. Fortune determines the degree to which they will get to do it. If they want to pursue their policies, their political virtue — understood as cunning, will, and the ability to cope with the unexpected — are far better indicators of what will happen under a leader than his intentions.

Policies and ideology are, in my view, the wrong place to evaluate a candidate. First, the cunning candidate is the one least likely to take his policy statements and ideology seriously. He is saying what he thinks he needs to say in order to be elected. Second, the likelihood that he will get the opportunity to pursue his policies — that they are anything more than a wish list casually attached to reality — is low. Whether or not a voter agrees with the candidate’s ideology and policies, it is unlikely that the candidate-turned-leader will have the opportunity to pursue them.

Bush wanted to focus on domestic, not foreign policy. Fortune told him that he was not going to get that choice, and the beliefs he had about foreign policy — such as nation-building — were irrelevant. Obama thought he was going to rebuild the close relationship with the Europeans and build trust with the Arab world. The Europeans had many greater problems than their relationship with the United States, and the Islamic world’s objection to the United States was not amenable to Obama’s intentions. In the end, both of their presidencies resembled their campaign policies only incidentally. There was a connection, but for neither did the world go as expected.

The Question of Character

When Hillary Clinton was competing with Obama for the 2008 Democratic Party presidential nomination, she ran a television commercial depicting a 3 a.m. phone call to the White House about an unexpected foreign crisis. The claim Clinton was making was that Obama did not have the experience to answer the phone. Whether the charge was valid or not is the voter’s responsibility to answer. However, implicit in the ad was an important point, which was that the character of a candidate was more important than his policy position. When woken in the middle of the night by a crisis, policies are irrelevant. Character is everything.

I will make no serious effort to define character, but to me it comprises the ability to dissect a problem with extreme speed, to make a decision and live with it and to have principles (as opposed to policies) that cannot be violated but a cold-blooded will to do his duty in the face of those principles. For me, character is the competition within a leader who both wants power and wants something more. His precise position on the International Monetary Fund is not really relevant. His underlying sense of decency is, along with an understanding of how to use the power he achieved.

If this is vague and contradictory, it is not because I haven’t thought about it. Rather, of all of the political issues there are, the nature of character and how to recognize it is least clear. It is like love: inescapable when you encounter it, fragile over time, indispensable for a fully human life. Recognizing character in a leader would appear to me the fundamental responsibility of a voter.

The idea that you should vote for a leader based on his policy intentions is, I think, inherently flawed. Fortune moots the most deeply held policies and the finest leader may not reveal his intentions. Lincoln hid his intentions on slavery during the 1860 campaign. German Chancellor Angela Merkel never imagined the crisis she is facing when she ran for office. Intentions are hard to discern and rarely determine what will happen.

The issues that George W. Bush and Barack Obama had to deal with were not the ones they expected. Therefore, paying attention to their intentions told us little about what either would do. That was a matter of character, of facing the unexpected by reaching into his soul to find the strength and wisdom to do what must be done and abandon what he thought he would be doing. The grace and resolution with which a leader does this defines him.

I think that those who obsess over policies and ideologies are not wrong, but they will always be disappointed. They will always be let down by the candidate they supported — and the greater their initial excitement, the deeper their inevitable disappointment. It is necessary to realize that a leader of any sort cannot win through policy and ideology, and certainly not govern through them unless he is extraordinarily fortunate. Few are. Most leaders govern as they must, and identifying leaders who know what they must do is essential.

We study geopolitics, and geopolitics teaches that reality is frequently intractable, not only because of geography but because of the human condition, which is filled with fortune and misfortune, and rarely allows our lives to play out as we expect. The subjective expectation of what will happen and the objective reality in which we live are constantly at odds. Therefore, the tendency to vote for the candidate who appears to have deeper character, in the broadest sense of the term, would appear to me less frivolous than voting on the basis of ideology and policy. Both of those will and always do disappoint.

As to the question of who has the greatest character in this election, I have no greater expertise than any of my readers. There is no major in character at any university, nor a section on character in newspapers. The truth of democracy is that on this matter, none of us is wiser than any other.

The Election, the Presidency and Foreign Policy

Mr. George Friedman is the CEO and chief intelligence officer of Stratfor, a private intelligence company located in Austin, TX.

This article is published here in by permission of Stratfor.

 

The American presidency is designed to disappoint. Each candidate must promise things that are beyond his power to deliver. No candidate could expect to be elected by emphasizing how little power the office actually has and how voters should therefore expect little from him. So candidates promise great, transformative programs. What the winner actually can deliver depends upon what other institutions, nations and reality will allow him. Though the gap between promises and realities destroys immodest candidates, from the founding fathers’ point of view, it protects the republic. They distrusted government in general and the office of the president in particular.
Congress, the Supreme Court and the Federal Reserve Board all circumscribe the president’s power over domestic life. This and the authority of the states greatly limit the president’s power, just as the country’s founders intended. To achieve anything substantial, the president must create a coalition of political interests to shape decision-making in other branches of the government. Yet at the same time — and this is the main paradox of American political culture — the presidency is seen as a decisive institution and the person holding that office is seen as being of overriding importance.

Constraints in the Foreign Policy Arena

The president has somewhat more authority in foreign policy, but only marginally so. He is trapped by public opinion, congressional intrusion, and above all, by the realities of geopolitics. Thus, while during his 2000 presidential campaign George W. Bush argued vehemently against nation-building, once in office, he did just that (with precisely the consequences he had warned of on the campaign trail). And regardless of how he modeled his foreign policy during his first campaign, the 9/11 attacks defined his presidency.
Similarly, Barack Obama campaigned on a promise to redefine America’s relationship with both Europe and the Islamic world. Neither happened. It has been widely and properly noted how little Obama’s foreign policy in action has differed from George W. Bush’s. It was not that Obama didn’t intend to have a different foreign policy, but simply that what the president wants and what actually happens are very different things.
The power often ascribed to the U.S. presidency is overblown. But even so, people — including leaders — all over the world still take that power very seriously. They want to believe that someone is in control of what is happening. The thought that no one can control something as vast and complex as a country or the world is a frightening thought. Conspiracy theories offer this comfort, too, since they assume that while evil may govern the world, at least the world is governed. There is, of course, an alternative viewpoint, namely that while no one actually is in charge, the world is still predictable as long as you understand the impersonal forces guiding it. This is an uncomfortable and unacceptable notion to those who would make a difference in the world. For such people, the presidential race — like political disputes the world over — is of great significance.
Ultimately, the president does not have the power to transform U.S. foreign policy. Instead, American interests, the structure of the world and the limits of power determine foreign policy.
In the broadest sense, current U.S. foreign policy has been in place for about a century. During that period, the United States has sought to balance and rebalance the international system to contain potential threats in the Eastern Hemisphere, which has been torn by wars. The Western Hemisphere in general, and North America in particular, has not. No president could afford to risk allowing conflict to come to North America.
At one level, presidents do count: The strategy they pursue keeping the Western Hemisphere conflict-free matters. During World War I, the United States intervened after the Germans began to threaten Atlantic sea-lanes and just weeks after the fall of the czar. At this point in the war, the European system seemed about to become unbalanced, with the Germans coming to dominate it. In World War II, the United States followed a similar strategy, allowing the system in both Europe and Asia to become unbalanced before intervening. This was called isolationism, but that is a simplistic description of the strategy of relying on the balance of power to correct itself and only intervening as a last resort.
During the Cold War, the United States adopted the reverse strategy of actively maintaining the balance of power in the Eastern Hemisphere via a process of continual intervention. It should be remembered that American deaths in the Cold War were just under 100,000 (including Vietnam, Korea and lesser conflicts) versus about 116,000 U.S. deaths in World War I, showing that far from being cold, the Cold War was a violent struggle.
The decision to maintain active balancing was a response to a perceived policy failure in World War II. The argument was that prior intervention would have prevented the collapse of the European balance, perhaps blocked Japanese adventurism, and ultimately resulted in fewer deaths than the 400,000 the United States suffered in that conflict. A consensus emerged from World War II that an “internationalist” stance of active balancing was superior to allowing nature to take its course in the hope that the system would balance itself. The Cold War was fought on this strategy.

The Cold War Consensus Breaks

Between 1948 and the Vietnam War, the consensus held. During the Vietnam era, however, a viewpoint emerged in the Democratic Party that the strategy of active balancing actually destabilized the Eastern Hemisphere, causing unnecessary conflict and thereby alienating other countries. This viewpoint maintained that active balancing increased the likelihood of conflict, caused anti-American coalitions to form, and most important, overstated the risk of an unbalanced system and the consequences of imbalance. Vietnam was held up as an example of excessive balancing.
The counterargument was that while active balancing might generate some conflicts, World War I and World War II showed the consequences of allowing the balance of power to take its course. This viewpoint maintained that failing to engage in active and even violent balancing with the Soviet Union would increase the possibility of conflict on the worst terms possible for the United States. Thus, even in the case of Vietnam, active balancing prevented worse outcomes. The argument between those who want the international system to balance itself and the argument of those who want the United States to actively manage the balance has raged ever since George McGovern ran against Richard Nixon in 1972.
If we carefully examine Obama’s statements during the 2008 campaign and his efforts once in office, we see that he has tried to move U.S. foreign policy away from active balancing in favor of allowing regional balances of power to maintain themselves. He did not move suddenly into this policy, as many of his supporters expected he would. Instead, he eased into it, simultaneously increasing U.S. efforts in Afghanistan while disengaging in other areas to the extent that the U.S. political system and global processes would allow.
Obama’s efforts to transition away from active balancing of the system have been seen in Europe, where he has made little attempt to stabilize the economic situation, and in the Far East, where apart from limited military repositioning there have been few changes. Syria also highlights his movement toward the strategy of relying on regional balances. The survival of Syrian President Bashar al Assad’s regime would unbalance the region, creating a significant Iranian sphere of influence. Obama’s strategy has been not to intervene beyond providing limited covert support to the opposition, but rather to allow the regional balance to deal with the problem. Obama has expected the Saudis and Turks to block the Iranians by undermining al Assad, not because the United States asks them to do so but because it is in their interest to do so.
Obama’s perspective draws on that of the critics of the Cold War strategy of active balancing, who maintained that without a major Eurasian power threatening hemispheric hegemony, U.S. intervention is more likely to generate anti-American coalitions and precisely the kind of threat the United States feared when it decided to actively balance. In other words, Obama does not believe that the lessons learned from World War I and World War II apply to the current global system, and that as in Syria, the global power should leave managing the regional balance to local powers.

Romney and Active Balancing

Romney takes the view that active balancing is necessary. In the case of Syria, Romney would argue that by letting the system address the problem, Obama has permitted Iran to probe and retreat without consequences and failed to offer a genuine solution to the core issue. That core issue is that the U.S. withdrawal from Iraq left a vacuum that Iran — or chaos — has filled, and that in due course the situation will become so threatening or unstable that the United States will have to intervene. To remedy this, Romney called during his visit to Israel for a decisive solution to the Iran problem, not just for Iran’s containment.
Romney also disagrees with Obama’s view that there is no significant Eurasian hegemon to worry about. Romney has cited the re-emergence of Russia as a potential threat to American interests that requires U.S. action on a substantial scale. He would also argue that should the United States determine that China represented a threat, the current degree of force being used to balance it would be insufficient. For Romney, the lessons of World Wars I and II and the Cold War mesh. Allowing the balance of power to take its own course only delays American intervention and raises the ultimate price. To him, the Cold War ended as it did because of active balancing by the United States, including war when necessary. Without active balancing, Romney would argue, the Cold War’s outcome might have been different and the price for the United States certainly would have been higher.
I also get the sense that Romney is less sensitive to global opinion than Obama. Romney would note that Obama has failed to sway global opinion in any decisive way despite great expectations around the world for an Obama presidency. In Romney’s view, this is because satisfying the wishes of the world would be impossible, since they are contradictory. For example, prior to World War II, world opinion outside the Axis powers resented the United States for not intervening. But during the Cold War and the jihadist wars, world opinion resented the United States for intervening. For Romney, global resentment cannot be a guide for U.S. foreign policy. Where Obama would argue that anti-American sentiment fuels terrorism and anti-American coalitions, Romney would argue that ideology and interest, not sentiment, cause any given country to object to the leading world power. Attempting to appease sentiment would thus divert U.S. policy from a realistic course.

Campaign Rhetoric vs. Reality

I have tried to flesh out the kinds of argument each would make if they were not caught in a political campaign, where their goal is not setting out a coherent foreign policy but simply embarrassing the other and winning votes. While nothing suggests this is an ineffective course for a presidential candidate, it forces us to look for actions and hints to determine their actual positions. Based on such actions and hints, I would argue that their disagreement on foreign policy boils down to relying on regional balances versus active balancing.
But I would not necessarily say that this is the choice the country faces. As I have argued from the outset, the American presidency is institutionally weak despite its enormous prestige. It is limited constitutionally, politically and ultimately by the actions of others. Had Japan not attacked the United States, it is unclear that Franklin Roosevelt would have had the freedom to do what he did. Had al Qaeda not attacked on 9/11, I suspect that George W. Bush’s presidency would have been dramatically different.
The world shapes U.S. foreign policy. The more active the world, the fewer choices presidents have and the smaller those choices are. Obama has sought to create a space where the United States can disengage from active balancing. Doing so falls within his constitutional powers, and thus far has been politically possible, too. But whether the international system would allow him to continue along this path should he be re-elected is open to question. Jimmy Carter had a similar vision, but the Iranian Revolution and the Soviet invasion of Afghanistan wrecked it. George W. Bush saw his opposition to nation-building wrecked by 9/11, and had his presidency crushed under the weight of the main thing he wanted to avoid.
Presidents make history, but not on their own terms. They are constrained and harried on all sides by reality. In selecting a president, it is important to remember that candidates will say what they need to say to be elected, but even when they say what they mean, they will not necessarily be able to pursue their goals. The choice to do so simply isn’t up to them. There are two fairly clear foreign policy outlooks in this election. The degree to which the winner matters, however, is unclear, though knowing the inclinations of presidential candidates regardless of their ability to pursue them has some value.
In the end, though, the U.S. presidency was designed to limit the president’s ability to rule. He can at most guide, and frequently he cannot even do that. Putting the presidency in perspective allows us to keep our debates in perspective as well.