Is the ESM another €700bn bazooka pointed in the wrong direction?

We’ve just got our hands on the draft treaty establishing the European Stability Mechanism (ESM), which comes into force in 2013 and is the follow up to the original eurozone bailout packages - dubbed the €750bn bazooka back in 2010.

As expected, the ESM will have an effective lending capacity of €500bn, but to maintain a Triple-A rating it needs to be backed up by €700bn in capital – pretty huge figures. This means that Germany will be on the hook for guaranteeing €190bn! We can’t imagine German taxpayers will be too happy about having that potential liability hanging over their heads for the next 12 years (at which point the fund will be reassessed). Moreover, given the structure of the fund, €80bn in capital must be paid in initially, meaning Germany has to pay in €4.3bn per year for the next five years – this could even increase if someone – yes we’re looking at Greece – puts in an early request for funding.

We were also wondering what would happen if one of the countries – this time we’re looking at all of the PIIGS – was unable to cover its share of the fund. The draft treaty seems slightly contradictory. First it states:

“The liability of each ESM Members shall be limited, in all circumstances, to its portion of the authorized capital at its issue price. No ESM Member shall be liable, by reason of its membership, for obligations of the ESM. The obligations of ESM Members to contribute to capital in accordance with this Treaty are not affected if such ESM Member becomes eligible for or is receiving financial assistance from ESM.”

This would suggest that no country would be forced to shoulder anyone else’s burden. However, it later adds:

“If an ESM Member fails to meet the required payment under a capital call…a revised increased capital call shall be made to all ESM Members with a view to ensuring that the ESM receives the total amount of paid-in capital needed.”

So in actual fact, if one or more members failed to put up their share, all the other members will be asked to cover it (with the expectation of getting it back, but, as we're beginning to see, that’s far from guaranteed in the eurozone crisis).

The treaty also contains some tough conditions for investors. First, ESM loans will be senior to all other loans except the IMF, which we expected. Second, the disbursement of any financial aid from the ESM will require “adequate and proportionate” private sector involvement (read debt restructuring or at least rescheduling) and thirdly, all eurozone government bonds issued post July 2013 must include a standardised form of Collective Action Clauses - which stop a small minority of bondholders holding up any restructuring deal by waiting for better terms.

Although this is intended to help shift the burden from taxpayers (a good thing in principle), giving investors such substantial warning is likely to turn the market for some European sovereign debt into a ghost town. Why buy new debt when you're being explicitly told that you're first in the firing line?

How this will help wean Ireland, Portgual and especially Greece off their current ECB and EU bailouts is far from clear and could turn the ESM into a self-fulfilling bailout fund.

As the conditions for bondholder involvement highlight, the ESM might eventually bring a necessary eurozone debt restructuring to fruition but by that point the write downs will need to be huge and such a large amount of the debt of peripheral countries will be owned by the taxpayer that the private sector burden will still end up being minimal.

*** Update 11am 20 May 2011:
Writing in the FT Quentin Peel suggests that the latest version of the treaty does not stipulate that ESM loans will be senior to private creditors. Having reviewed the version we have it looks as if its still mentioned in the preamble but not the body of the treaty, so it is possible that it could be removed, which would be big news. But since negotiations are ongoing its not completely clear whether it will be removed or not. We'll keep you posted on the situation...

From tomato sauce with pasta to Honorary German

Bild, Germany’s largest newspaper, yesterday came out in support of Mario Draghi’s candidacy for the role of ECB President, proclaiming him to be a “Honorary German Citizen”.

Clearly they don’t do things by halves…

In February Bild screamed "Mamma Mia!" over the thought of an Italian running the German currency. They claimed: “For Italians, inflation is a way of life, like tomato sauce with pasta.”

We’d expect that it won’t be too long until Merkel publicly comes out in support of Draghi (given that neither Sarkozy nor Bild would have supported him without her private approval).

To be honest, he’s been the only real candidate for a while – in terms of both skills and personality – but the fact that it took so long for an established professional, and the right man for the job, to overcome the massive stereotypes in Europe might say something about so-called EU unity… the picture doesn’t help either.

Bahrain worshippers protest death sentences

Source: Al Jazeera

Thousands denounce death sentences for anti-government protesters, and solidarity protests in Saudi Arabia and Pakistan.

Thousands of Bahraini Shia Muslims have gathered before a revered cleric to denounce death sentences given to protesters over anti-government rallies crushed last month in the Gulf kingdom.

The verdict, handed down by a military court a day earlier to four men accused of killing two policemen in violent protests last month, could intensify sectarian tension in the Sunni Muslim-ruled state that hosts the US Navy's Fifth Fleet.

"It's not true that they killed them," a man who identified himself only as Moussa said, after praying at the mosque of Sheikh Issa Qassim, as a police helicopter circled overhead.

"The government made it up just like a movie."

He was referring to video footage that Bahraini authorities have circulated showing the two policemen smashed by a vehicle that sped through a crowd of protesters, some of whom appeared to then trample and kick the fallen men.

Police kept a tight grip on roads leading to the village where the mosque is located, turning back many vehicles.

The rulings were only the third time in over 30 years that a death sentence had been given to a Bahraini citizen.

The seven defendants were tried behind closed doors on charges of premeditated murder of government employees, charges which their lawyers denied.

They have further divided a country whose Shia majority says it faces systematic discrimination, but whose Sunni leaders claim Iran is trying to extend its regional influence by manipulating its co-religionists.

Opposition leaders argue the protests in February and March were about demanding more political freedoms and a constitutional monarchy, and that the government is trying to caste it in a sectarian light.

"The sentence was appropriate," Mohammad al-Ammadi, a Sunni lawmaker, citing what he saw as the extreme brutality of the killings. "This is the first time this happened in Bahrain."

In his sermon, the cleric Sheikh Issa Qassim alluded to the growing rift in the country.

"If you wish to be assailed with problems, to lose all comfort ... then allow the spirit of antagonism to take hold and spread in your country," he said.

"This is a fire which may seem manageable at first, but is ultimately beyond control ... and its consequences are always grave."

In the aftermath of the protests, hundreds of people have been detained, and at least three have died in custody. Human rights groups say hundreds of people have been sacked from public sector jobs and that Bahraini forces have seized patients and health workers from hospitals where protesters had been treated.

The latter assertion figured in a rare, mild rebuke of Bahrain from the United States on the heels of the court ruling, which included life sentences for three other men.

"Security measures will not resolve the challenges faced by Bahrain," Heide Bronke-Fulton, a spokesperson for the US state department, said via email.

"We are also extremely troubled by reports of ongoing human rights abuses and violations of medical neutrality in Bahrain. These actions only exacerbate frictions in Bahraini society."

Germany urged Bahrain on Friday to rescind the death sentences.

"This draconian punishment impedes the process of rapprochement and reconciliation in Bahrain," Andreas Peschke, a spokesperson for the German foreign ministers, said on Friday.

Solidarity protests

More than 200 Shia Muslims protested in Saudi Arabia's oil-producing east on Friday in solidarity with fellow believers in nearby Bahrain, who are facing a rolling crackdown, two activists said.

The gatherings in the towns of Awwamiyah and Qatif on Friday defied a call by leading Shia clerics last week for an end to rallies in the conservative Gulf kingdom's Eastern Province, in an apparent bow to government pressure.

Shia activists in the area have held weekly protests over the past two months without major clashes with police.

"There was a protest of over 200 people in Awwamiyah, with the same demands as previous weeks. Police were present but far from the protesters," one activist in Awwamiya told the Reuters news agency by telephone.

The Sunni Muslim monarchy of Saudi Arabia, the world's top oil exporter and a major US ally, does not tolerate any form of public dissent.

Saudi protesters have called for solidarity with Shia in the nearby Gulf island kingdom of Bahrain, where a fierce crackdown has continued since anti-government rallies, led mostly by Shia, were crushed there in March.

Bahrain's uprising unnerved Saudi Arabia, which is connected to the Gulf island kingdom by a causeway. Saudi authorities sent in troops after Bahrain's rulers called on Gulf neighbours to support its crackdown.

In the Pakistani city of Lahore, Shia Muslims held a protest on Friday against the death sentence ruling in Bahrain, carrying symbolic coffins in a show of support.

Bahrain’s prime minister ordered the head of the country's civil service and other senior officials to review procedures for firing state employees, the state news agency said a week ago.

Related article: "Four protesters sentenced to death in Bahrain", April 28, 2011

Source: Al Jazeera, April 29, 2011

URGENT APPEAL for Ali Abdullah Hassan al-Sankis, Qassim Hassan Matar, Saeed Abduljalil Saeed, Adbulaziz Abdulridha Ibrahim Hussain at imminent risk of execution in Bahrein

Four men accused of killing two policemen during anti-government protests last month have been sentenced to death in Bahrain. They may be at imminent risk of execution.

Ali Abdullah Hassan al-Sankis, Qassim Hassan Matar, Saeed Abduljalil Saeed and Adbulaziz Abdulridha IbrahimHussain were sentenced to death on 28 April by a military court although they are believed to be civilians,their trial was conducted behind closed doors. The prosecution accused them of the premeditated murder of two police officers during anti-government protests in March by deliberately running them down with a vehicle. They and three other defendants tried with them - Issa Abdullah Kadhim Ali, Sadeq Ali Mahdi and Hussein Jaafar Abdulkarim – who were convicted and sentenced to life imprisonment, all reportedly deny the charge.

The seven defendants are believed to have been tried by a special court, the National Safety Court of First Instance, which was established under the State of National Safety (SNS), a national state of emergency declared by the King of Bahrain on 15 March. The provisions of the SNS are broadly drawn and vague, and it contains no explicit human rights guarantees. The SNS also established the National Safety Court of First Instance to try people accused of crimes committed under the state of emergency, and a National Safety Appeal Court to hear appeals from this special court. The SNS stipulates that Bahrain’s ordinary courts may not hear appeals from these special courts, whose verdicts are final.

It is expected but not yet confirmed that the seven defendants will lodge appeals. If this does occur, the appeals may be held very quickly and the four prisoners under sentence of death may be at imminent risk of execution. The seven are believed to have been held incommunicado for some time following their arrests which are believed to have taken place on or after 16 March, and they may have been subjected to torture or other ill-treatment.

RECOMMENDED ACTION: Please send appeals to arrive as quickly as possible:
--Expressing grave concern at the imposition of death sentences on Ali Abdullah Hassan al-Sankis, Qassim Hassan Matar, Saeed Abduljalil Saeed and Adbulaziz Abdulridha Ibrahim Hussain after a military court trial behind closed doors.
--Acknowledging the Bahraini government’s responsibility to protect the public and bring to justice those responsible for committing crimes, but insisting that this should always be done in accordance with international law and Bahrain’s international human rights obligations;
--Urging His Majesty Shaikh Hamad bin Issa Al Khalifa to commute the death sentences imposed today and those of all others facing possible execution in Bahrain if they are confirmed by appeal courts
--Urging His Majesty to establish a full, thorough and independent inquiry into all alleged abuses of human rights committed during the recent protests, including allegations of unlawful killings by the security forces, with a view to ensuring that those responsible for serious abuses are brought to justice through fair trials and without recourse to the death penalty.


APPEALS TO:

King
King Shaikh Hamad bin ‘Issa Al Khalifa
Office of His Majesty the King
P.O. Box 555
Rifa’a Palace, al-Manama,
BAHRAIN
Fax: 011 973 17664587
Salutation: Your Majesty

COPIES TO:

Prime Minister
Prince Khalifa bin Salman Al Khalifa
Office of the Prime Minister
P.O. Box 1000, al-Manama,
BAHRAIN
Fax: 011 973 17533033
Salutation: Your Highness

Minister of Justice and Islamic Affairs
Shaikh Khaled bin Ali al-Khalifa
Ministry of Justice and Islamic Affairs
P. O. Box 450, Manama
BAHRAIN
Fax: 011 973 17531284
Salutation: Your Excellency

Ambassador Houda Ezra Ebrahim Nonoo
Embassy of the Kingdom of Bahrain
3502 International Drive. NW
Washington DC 20008
Phone: 202 342 1111
Fax: 1 202 362 2192
Email: ambsecretary@bahrainembassy.org

PLEASE SEND APPEALS IMMEDIATELY.

Source: Amnesty International


May 2, 2011 Update

Set Aside Martial Law Death Sentences -- 4 Civilians Condemned to Death, 3 to Life in Prison in Unfair Military Trial

Bahraini authorities should set aside a military court ruling on April 28, 2011, sentencing 4 defendants to death and 3 others to life in prison for their alleged involvement in the murder of 2 police officers, Human Rights Watch said today. Human Rights Watch understands that the 7 defendants, ages 19 to 24, whose trial and sentencing lasted less than 2 weeks, are the 1st civilians to be convicted in special military courts set up after King Hamad bin Isa al-Khalifa declared martial law on March 15.

Authorities accused them of running over 2 police officers on March 16, 2011, when security forces attacked protesters occupying the Pearl Roundabout in central Manama.

"By establishing these special courts, the government of Bahrain is making it near impossible for defendants to enjoy the rights to which they are entitled," said Joe Stork, deputy Middle East director at Human Rights Watch. "The role of the military prosecutor, the makeup of the special court, and the meager access to legal representation undermine the most basic due process protections."

One defense lawyer who had initially acted in the case was arrested just before midnight on April 15 and lack of information about his whereabouts and well-being gives rise to concern that he may have been forcibly disappeared. Other defense lawyers were called in for questioning in recent days.

Authorities charged the defendants with premeditated murder under Bahrain's 1976 Penal Code and the 2006 counterterrorism law, which mandates the death penalty for certain crimes, including murder, when designated a terrorist crime. The trial began in the special military court, which the government calls the National Safety Lower Court, on April 17 after at least three pretrial sessions in early April. All the defendants pleaded not guilty to charges of premeditated murder. The rulings came four days after Bahrain's military public prosecutor, Col. Yusif Rashid Feleyfel, announced that the government was seeking the death penalty and defense lawyers presented their final pleadings.

Bahrain's Information Affairs Authority announced the death sentences on April 28 for Ali Abdullah Hassan al-Singace, 19; Qasim Hasan Matar Ahmad, 20; Saeed Abd al-Jalil Saeed, 19; and Abd al-Aziz Abd al-Ridha Ibrahim Husain, 24, "for their role in the deaths of policemen Kashef Ahmed Madhoor and Mohammed Farooq Abdulsamad."

The court sentenced Isa Abdullah Kadhim Ali, Sayyed Sadiq Ali Mahdi, and Husain Jafar Abd al-Karim, all age 19, to life in prison. A defense lawyer who represents one of the defendants told Human Rights Watch that during the trial lawyers were able to meet with their clients only twice - for 30 minutes before the trial began and once again before the final hearing. Unlike regular criminal court proceedings, the lawyer said, a military prosecutor presented the state's case, and a military judge, accompanied by two civilian judges, presided.

The official Bahrain News Agency (BNA) said that family members and others were allowed to attend the trial, although it was not open to the public. Under an April 8 National Safety Court of Appeal decision, media may not publish information about cases pending before the national safety courts to "ensure safety of evidence and guarantee the right of witnesses for legal protection."

A lawyer representing one of the seven men told Human Rights Watch that the defendants may appeal their convictions and sentences to a National Safety Court of Appeals. Those decisions are final and not subject to further appeal. In civilian trials, defendants can appeal criminal sentences to the Higher Court of Appeals, and the Court of Cessation must review all death sentences. On April 28 the BNA acknowledged that Bahrain has observed a "de facto moratorium on capital punishment" but "retained the right to apply the punishment for the most serious of crimes."

Bahrain is a party to the International Covenant on Civil and Political Rights, which includes guarantees for a fair trial. Although neither international law nor the covenant prohibit the establishment of special courts, the UN Human Rights Committee has explicitly confirmed that the trial of civilians by such courts can only be very exceptional and take place under conditions which genuinely afford the full guarantees of a fair trial. These include the right to presumption of innocence and against self-incrimination; the right to be tried before an independent tribunal; the right to a lawyer of the defendants own choice and to have adequate time and facilities for the preparation of a defense including the right to adequate communication with a lawyer and right to call and examine witnesses.

Human Rights Watch opposes the creation and use of special courts to try national security crimes, as it believes that ordinary courts are capable of effectively prosecuting serious crime including terrorist offences. Human Rights Watch also opposes capital punishment in all circumstances because of its irreversible, cruel, and inhumane nature.

"Even during a state of emergency, fundamental rights such as the right to life and the right to a fair trial must always be respected," Stork said. "And any restrictions during a genuine emergency must be strictly limited and justified by the exigencies of the actual situation. Bahrain's obligations as a party to the International Covenant on Civil and Political Rights remain fully in force."

As of April 27, according to the head of the Information Affairs Authority, Shaikh Fawaz bin Mohammed Al Khalifa, authorities had referred 405 detainees to the special military court and released 312. Human Rights Watch is aware of at least 4 other defendants currently on trial for attempted murder and other crimes before the National Safety Lower Court. On April 20, authorities announced the arrest of a suspect identified as A.Y.A., a 21-year-old male, who allegedly ran down a third police officer, Ahmed al-Muraisi, with a car on March 15, killing him.

One defense lawyer initially involved in the April 28 case, Mohammed al-Tajer, was arrested shortly before midnight at his home on April 15 and has not been heard from since. His wife and colleague lawyers told Human Rights Watch that authorities have not provided any information as to his whereabouts or his well-being, giving rise to concern that he may have been forcibly disappeared. Human Rights Watch has also received reliable information that over the past week Interior Ministry officials summoned 4 defense lawyers, including at least three involved in this case, and that each was questioned by the military prosecutor for between 1 1/2 and 2 1/2 hours.

Human Rights Watch is concerned that al-Tajer's arrest and the questioning of the other lawyers is a tactic by the government to intimidate and silence defense lawyers. Under the UN Basic Principles on the Role of Lawyers, states are required to guarantee that lawyers are able to perform all of their professional functions without intimidation, hindrance, harassment, or improper interference, and that their security is not threatened as a result of discharging their functions.

Despite the defendants' "not guilty" pleas, Bahrain TV aired a program on April 28, following the announcement of the sentences, in which several of the defendants appeared to describe in detail their plans to kill police officers. Human Rights Watch has reviewed the 24-minute program and believes that one of those shown on the broadcast was Ali Isa Ibrahim Saqer, 34, who died in custody under suspicious circumstances. He had gone to the police station after police officers came to his home looking for him in connection with the death of a police officer who had allegedly been run over by protesters.

Human Rights Watch viewed Saqer's remains during the ritual body washing before he was buried in his home village of Sehla on April 10. His body showed signs of severe physical abuse. Authorities maintained that Saqer had "created chaos" while in detention, "which led security forces to bring the situation under control," resulting in his death. Saqer's case was 1 of 4 documented by Human Rights Watch in April in which an individual died under suspicious circumstances while in police custody.

"By videotaping the alleged confessions of these defendants and shamelessly airing them on the day the sentences are handed down, Bahrain is taking a page right out of the propaganda playbook of notorious human rights abusers like Iran," Stork said. "It appears they included the televised confession of a detainee who to all appearances had been tortured to death."

Human Rights Watch called on the Bahraini authorities to immediately release information on the whereabouts and safety of Mohammed al-Tajer as well as hundreds of other detainees who have not been permitted contact with families or lawyers. The authorities should either release them or charge them now with a recognizable offense. In any event, they should have immediate access to lawyers, doctors, and families.

Source: Human Rights Watch, May 2, 2011
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Germany expels imam advocating death penalty for "practicing homosexuals"

Frankfurt - Authorities in Germany have ordered the expulsion of a visiting imam who argues that practicing homosexuals should be sentenced to death, officials said Thursday.

The move comes a day after Abu Ameena Bilal Philips delivered an open-air speech to around 2,000 Muslims in Frankfurt.

The convert to Islam, who is in his 60s, did not repeat his views on homosexuality during Wednesday's rally. Bystanders said the speeches at the rally for Islam were not inflammatory. About 500 opponents demonstrated against him as he spoke.

German officials said they had prepared an order, before he was due to speak, instructing Philips to leave the country by Saturday night and never return.

German immigration law allows for the expulsion of aliens who 'incite hatred against parts of the population' or advocate violence against them. In a video on YouTube, Philips has defended the death penalty for proven homosexual acts.

Philips is entitled to appeal the order, but only from abroad, police said, and must mail in proof that he has left. An arrest warrant is ready in case he does not leave before the expulsion deadline.

Philips was invited to address a demonstration in defence of 'Islam, the Misunderstood Religion' by Pierre Vogel, a German-born convert to Islam who authorities describe as Salafist.

Salafism is a fundamentalist form of Islam that advocates literal adherence to what believers say was the religion's original form, and is closely connected to Islamism, the belief that Islam must prevail over political life.

Philips, who was born in Jamaica and grew up Canada, has said he was a communist before he turned to Islam, at the age of 25.

Gay rights groups round the globe have repeatedly protested at his speeches.

Source: M&C News, April 21, 2011

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A dog eat dog world

This placard seems to capture how a lot of Portuguese are today feeling about their economic future - Socrates is the poodle in Merkel's arms. (hat-tip FTD)

A populist warning light?

A new opinion poll shows that Austrian, anti-immigrant, populist party FPÖ would end up on top if elections were held today, beating both the social democratic SPÖ and conservative ÖVP. There are of course multiple reasons for the party's rise, but we note that FPÖ leader Heinz-Christian Strachewhich last week slammed Austria's participation in, and the cost of, eurozone bail-outs. "Thank you, [Austrian Chancellor] Werner Faymannm," he said sarcastically.

In Finland, the "True Finns" party, under the leadership of Timo Soini (pictured), has seemingly come from nowhere and transformed itself into a full-scale political force. A recent opinion poll put it second, ahead of this month's national elections. Though not nearly as bad as FPÖ, it does run on a highly populist platform with a strong anti-euro flavour. The party was almost single-handedly responsible for derailing the EU deal on how to increase the size of the eurozone's bailout fund, the EFSF. The decision is now postponed until June, after the Finnish elections. And as Jan Sundberg, Professor at University of Helisnki puts it, "Portugal crashing would be a gift to the True Finns".

In the Netherlands, the government does not have a majority in Parliament, but has to rely on Geert Wilders' Party for Freedom, which is the third largest party in the country. Wilders has also spoken out against the euro-bailouts. So far, the Dutch government has relied on the other Dutch opposition parties to get its EU measures though parliament.

In France, far-right Front National leader Marine Le Pen is gaining popularity, and one poll even showed her ahead of all other candidates ahead of next year's Presidential elections. Le Pen has called for France to leave the eurozone, along with Spain, Greece and Portugal, saying:

"They promised us that this currency would bring growth and welfare, and what happened? People were destroyed, we are talking about a real tragedy. Look at what happened to Greece."

Again, there are numerous factors at work here - and we should be careful to over-simplify or generalise - but it's hard not to detect a worrying trend: four of the eurozone's main creditor countries (and incidentally net contributors to the EU budget), which are underwriting struggling euro governments' debt to the tune of hundreds of billions, are experiencing a dramatic surge in support for populist parties. These parties would not only reject the bail-outs and the Single Currency but also, in all likelihood, the EU itself.

So what about the big kid on the block: Germany?

Germany doesn't really have its own version of the populist parties we see in other parts of Europe - on the left, Die Linke might fit part of the bill, but it's still not quite the same. Therefore, there's no real political platform for the kind of aggressive anti-euro sentiments that we see in Austria for example (which also plays on anti-immigration and anti-incumbency) - and there's unlikely to be one in the immediate future.

It's clear, however, that German public opinion is growing increasingly wary of the direction of the euro. Slowly, these sentiments are beginning to trickle through to party politics. The motion which was passed by a near-unanimous German Parliament asking Merkel to backtrack on an agreement between eurozone leaders, is one example (though it shouldn't be overstated either). But there clearly is a vacuum in EU politics in terms of voicing alternative visions for the direction of the Single Currency and the EU - and a mismatch between public opinion and the political class.

Writing in FTD last week, Wolfgang Münchau - who, until recently, was the arch-optimist amongst eurozone commentators - argued that "a right-wing spot is free" in Germany. He suggested that the liberal FDP will fill the vacuum and turn into a 'eurosceptic' party. Perhaps. If so, the hope is that the FDP could transform itself into a sensible, EU reformist party, pushing for the revolutionary idea (yes, sarcasm) that the single currency and the EU should be based on sound economics and democracy. Such an outcome would benefit both Germany and Europe.

The fear, as ever, is that the vacuum will be filled by other, nastier political forces.

A Europe in which populist, anti-immigrant parties hold strong positions in creditor (or triple A countries), while far-left parties gain prominence in debtor nations such as Greece or Portugal, would really be the worst of all worlds.

But if Europe's mainstream politicians continue to stick their heads in the sand, and refuse to speak about the problems facing the eurozone - they should not be surprised if voters turn to the parties that do engage in some straight talking, however flawed or nasty such talk may be.

Mainstream political parties and their leaders got it spectacularly wrong on the euro in the past. Perhaps it's time to think about some more fundamental solutions to the eurozone's problems?

How much longer can the eurozone live an alternate reality?

This week's fun and games are over, with EU leaders concluding their Brussels summit earlier this afternoon.

Once again, this summit is unlikely to be remembered for anything EU leaders could agree on but, rather, for what eurozone leaders, in particular, were unwilling to even discuss. Namely, getting to the root of sorting out the eurozone's short-to-medium-term future.

As the BBC's Paul Mason asks on his blog:

Why, within the space of 12 days, do we get a "grand bargain" to create a Euro Stability Mechanism (11 March), which is then (a) knocked back by Finland (b) defied by Portugal (c) renegotiated at the behest of Germany's FDP coalition partner so they can do a tax giveaway in the coming elections; and (d) excludes Ireland anyway?

Chancellor Angela Merkel's, and by extension Germany's, focus on what are, in the grand scheme of things, minor details is starting to betray a worrying resemblance to an obsessive-compulsive's inability to recognise the bigger and far more important realities in life. Merkel's two 'victories' from this summit appear to be the fact that Germany will now pay in its share of capital to the permanent post-2013 eurozone bailout fund over five years rather than four and an EU commitment to "stress test" nuclear power stations. These are both pretty obvious bones thrown to the domestic German audience - the SPD and Greens are breathing down the neck of Merkel's CDU party in important regional elections - but will do little to reassure people that the eurozone is serious about tackling its problems. Not for the first time, domestic politics is pitted against eurozone imperatives.

True, the proposals on economic governance and tighter fiscal discipline were broadly endorsed, but earlier German proposals have been watered down and there's still much to play for in regards to how much of the package will be credibly enforceable. How will Italy and Greece cope with demands to get their debt-to-GDP below the 60% threshold?

Partly also due to Finnish resistance, eurozone leaders were unable to reach agreement on how to top up the existing temporary bailout fund, which, with Portugal more or less in a state of political and economic crisis seems a little complacent to say the least. We're told that all will be settled at the next summit in June - but haven't we heard this before; "It will all be sorted next time, no need to worry".

Maybe Merkel and the rest of the eurozone's leaders just prefer working under pressure. June really will be cutting it fine: Portuguese elections are expected to have been held only a week or so before and the new attempt at credible stress tests for Europe's banks are due to be published.

How much longer can the eurozone live an alternate reality?

German Parliament flexes its muscles

As we've highlighted before, a bust-up in Germany over the fate of the eurozone's bail-out schemes could be imminent, both on the EFSF and its permanent successor.

As if Merkel didn't have enough on her hands, the Bundestag yesterday approved a motion that explicitly demands that the German government bans the EFSF from buying government bonds from troubled eurozone countries. In effect, the Bundestag is asking Merkel to backtrack on last weekend's agreement between eurozone leaders which would have given the EFSF the mandate to buy bonds directly. That's a pretty big set-back for the Chancellor.

The motion isn't binding for the government, but still hugely problematic since the Bundestag needs to approve any deal to increase the scope and size of the EFSF.

The vote illustrates the growing gaps between Angela Merkel and parliamentarians belonging to all three coalition parties (CDU, CSU and the FDP). If this happend in the UK it would be labelled an outright "rebellion" against the government.

According to Märkische Allgemeine, the Bundestag gave its consent to a permanent eurozone bail-out fund, a European Stability Mechanism (ESM), which would take over from the EFSF in 2013. However, it attached a number of strings, including:

- strengthened stability and growth pact
- guarantees for the independence of the ECB
- safeguards that the ESM would only be activated in emergency cases
- a mechanism which would involve private creditors in the rescue fund (unclear how this would work)
- a restructuring procedure which would include private creditors
- a guarantee that the eurozone would not turn into a transfer union.

If you think about it, those are not small thing to ask for in the current climate. This one could be interesting.

Will this make countries keener on joining the euro?

Negotiations on the shape and form of the eurozone's permanent bailout scheme - the "European Stability Mechanism (ESM)" - are entering a crucial phase. The fund is meant to be up and running by mid-2013 and is likely to have €500bn available. Of this amount, between €80bn and €100bn will be up-front cash from member states - the rest will come in the form of guarantees.

People are naturally getting nervous about this arrangement, particularly in Germany. Sueddeutsche suggested the other day that German taxpayers will need to contribute between €18bn to €25bn to the scheme in paid up cash (in addition to the guarantees).

Chancellor Angela Merkel isn't too keen on discussing how much Germany might have to contribute in the end. "She doesn't want to talk about this now", a diplomat reportedly said.

We can see why. A direct €25bn liability on Germany's books could increase the country's borrowing costs and hamper efforts to consolidate its budget.

To avoid this, the German government is pushing only for countries without a triple A rating to contribute paid-up cash, as triple A countries - so says Merkel - are lending their good name to the cause, and that's quite enough. But this, in turn, would increase the cash contributions from weaker eurozone members. This has raised alarm bells amongst weaker euro economies as well as a range of non-eurozone members.

Reuters yesterday quoted EU sources saying that eurozone members Estonia and Slovakia as well as Latvia, Lithuania, Bulgaria and the Czech Republic have all criticised the plans. They argue that basing cash contributions to the ESM on a country's proportion of the ECB's paid-up capital is unfair. The countries have even threatened to block proposals for tougher EU-wide budget rules unless changes are made to the suggested ESM arrangement. One representative said,

"Unless there is a change to the ESM capital key we will block the agreement on the governance package once it returns from parliament and EU finance ministers have to approve it by unanimity."

Also non-euro member Sweden has objected to the proposed capital key for the ESM.

Why do these countries feel so strongly about this issue. They're not in the eurozone after all? Well, probably because they understand that, were they one day to join, they could be forced to cough up actual cash to save a Greece, Ireland or Portugal. Paid up cash is a far more serious liability than loan guarantees. Slovakia's refusal to take part in the Greek bail-out gives a hint as to why these countries aren't thrilled by the prospect of a permanent bail-out arrangement linked to the ECB's capital key and credit status. In such an arrangement, smaller economies that haven't really done anything wrong could end up with a pretty hefty bill.

On a related note, where is the UK in all of this? So far, the UK appears to have taken little interest in the structure and pay-in arrangement of the permanent bail-out mechanism. If this is because it doesn't intend to ever join the euro, that's one thing.

But if it's because Britain thinks it has no stake in making sure that the new eurozone rules are fair and make economic sense - rather than facilitating even greater meltdowns down the road (a very real risk) - then the UK government is sadly mistaken.

The euro pact and Germany: Triumph or a coming bust-up?

The Telegraph's Ambrose Evans-Pritchard describes the weekend deal at the EU summit as a "total German triumph". He paraphrases Chancellor Angela Merkel saying that "whoever wants credit must fulfil our conditions".

Regular readers of this blog will know that we rate Ambrose very highly (at a time when most other journalists, including the FT gang, couldn't spot a currency-related credit crisis from a yard's distance, he warned against what we've seen in the eurozone over the last year).

On this one, however, we think that his assessment might be a bit premature.

Perceptions matter tremendously in markets as well as in politics. And the perception in Germany is certainly not one of triumph.

Die Welt quotes a top EU diplomat describing Merkel's "pact for the euro" as an "empty shell", predicting that "in the coming weeks the spreads of troubled countries could further increase". An analysis in the newspaper notes that the pact "remains far beneath the original expectations of the German government", given the large room for manoeuvre that member states are given in its implementation. The headline in the paper reads: "Merkel's secret euro capitulation".

And Merkel might even face a fight within her own coalition about the terms and crucial details of the euro pact.

Although FDP leader and Foreign Minister Westerwelle called the deal an acceptable compromise, liberal MP Frank Schaeffler said that "the result contradicts the position of the FDP group in parliament”. Volker Wissing, finance spokesman of the liberal faction in the Bundestag stressed that an earlier agreement on this among majority parties in the Bundestag "had excluded what has now been decided at government level", as he expected "very difficult talks", which could endanger the German Parliament's approval of the deal.

"It is surely close to a transfer union," Michael Meister, deputy parliamentary leader of the Christian Democrat (CDU) party added (and it was not meant as a positive remark). CSU MP Thomas Silberhorn bluntly said that "the government has stepped over a red line that the parliamentary groups had clearly defined."

Just ahead of the summit, another top Christian Democrat politician, Bundestag Speaker Norbert Lammert, had voiced concern about the whole thing, lamenting that "many representatives still don't feel sufficiently informed".

It is not clear whether these (prominent) backbenchers will in the end vote down the agreement. Bloomberg claimed this afternoon that several backbenchers have signalled their willingness to vote for the deal when it reaches the Bundestag.

But the strong talk is a reminder of the nervousness about all of this in Germany, especially in the run-up to the key regional elections in two weeks time in Baden-Württemberg - a stronghold for Merkel's CDU where the party could now suffer defeat.

It doesn't help that outgoing Bundestag President Axel Weber has stepped up his criticism of current eurozone policies. In a hearing at a Bundestag committee this week, he will warn European governments against making any bond purchases as a means of bailing out weak Eurozone countries, saying

"the result would be that private creditors and national financial policymakers would be relieved even further of their responsibility, and taxpayers of the countries doing the financing would be burdened with further, possibly substantial risks."

Chances are that Merkel will manage to push through this deal in the short term - though the German Parliament may demand some red meat in return for giving its approval.

But, as the EU correspondent for the Frankfurter Allgemeine Zeitung, Werner Mussler, warns: “the consistent loyalty of Germans to Europe is facing a test.” And Europe's biggest tabloid Bild today carries the headline, "saving the euro gets increasingly expensive!".

Some members of the German establishment have already started questionning the very premise on which Merkel has based her bail-out concessions (saving the euro, even with the risk of more bail-outs and a move away from traditional Bundesbank policy is cheaper than refusing to pay). For example, the former boss of the German industry federation BDI, Hans-Olaf Henkel. Although a former euro enthusiast, he now argues in favour of splitting up the eurozone, writing that it has become “a transfer union, a community of redistribution in which a new competitive discipline will emerge: who can tap the others for the greatest amount."

Berlin's biggest fear is that Mr. Henkel is finding it increasingly easier to recruit more allies.

Taiwan: President Ma Ying-jeou defends executions

ABOLITION FAR AWAY: The premier said European countries took 100 to 200 years to abolish the death penalty, and said polls show that 75% of Taiwanese support capital punishment

President Ma Ying-jeou yesterday defended the Ministry of Justice’s execution of 5 death row inmates and dismissed concerns that the move violated the International Covenant on Civil Rights.

The executions were carried out on Friday after Minister of Justice Tseng Yung-fu signed documents authorizing them, sparking protests from anti-death penalty activists, who condemned the Ma administration for ignoring the covenants that it had recognized as domestic laws.

Approached by reporters for comment, Ma yesterday simply said: “No” when asked whether the executions violated the covenants.

While Ma declined to say whether the government would suspend executions in the future, Premier Wu Den-yih, at a separate setting yesterday, suggested the death penalty would not be abolished any time soon.

“The executions of capital -punishment were in line with high social expectations and demand for a good public order in a country that respects the rule of law,” he said when approached for a comment on the concerns about the execution voiced by human rights groups.

“In order to stabilize public order and ensure public security, the death penalty should in no way be abolished,” he said.

Saying that “it’s not time to abolish capital punishment,” Wu urged activists in opposition to the use of capital punishment to communicate with the public about abolition of the death penalty and build a consensus on the issue.

Wu added that the government did not violate the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights.

“It’s clearly stated in the international human rights covenants that [countries] should refrain from handing down mandatory death penalties except for the most serious crimes,” Wu said.

Although some might feel uncomfortable with the executions, Wu said, all of the people executed were given due process and none of them was wrongfully put to death. Some had even asked for a quick execution, he added.

Wu said that it was also his dream that the death penalty could be ended in the country when the day comes that “everyone has a heart of gold” and that it would make no difference whether capital punishment exists or not.

Saying that it took 100 to 200 years for most European countries to eliminate the death penalty, Wu added that “maybe Taiwan could reach that point in a shorter time, like in several decades or so."

Wu mentioned the results of several polls suggesting that more than 75 % of Taiwan’s people are still against an abolition of the death penalty because the majority do not feel satisfied with the public order.

According to a report released yesterday by the Ministry of Justice that compiled the results of nine public surveys conducted by several different organizations between 1993 and 2008, nearly 80 percent of the respondents opposed abolition of the death penalty.

The groups that carried out the polls include the Justice Ministry, the Cabinet’s Research, Development and Evaluation Commission, Academia Sinica and a poll center operated by the Chinese-language United Daily News.

The report said that over the past 15 years, whenever asked whether they supported the abolition of the death penalty, 70 % to 80 % said no.

Source: Taipei Times, March 5, 2011

Five executions spark concern in EU, Germany

In the face of widespread criticism, the justice minister said that the executed inmates had committed atrocious crimes.

The Ministry of Justice’s execution of 5 death-row inmates on Friday drew concerns and condemnation from the EU and various advocacy groups opposing capital punishment.

In a statement issued following the executions, EU High Representative for Foreign Affairs and Security Policy Catherine Ashton said she deeply regretted the execution and urged Taiwan “not to undertake further executions."

Saying the EU had been encouraged by Taiwan’s de facto moratorium on executions that had been in place from late 2005 until last year, Ashton called on Taiwan to “put in place an immediate de facto moratorium on executions, pending legal abolition."

The executions came less than a year after the ministry resumed the implementation of capital punishment in April last year.

Following the resumption of capital punishment, Taiwan is now once again “one of the very few industrial democracies to implement capital punishment,” Ashton said, adding that the EU considers the abolishing the death penalty a contribution toward the enhancing of human dignity and the progressive development of human rights.

“It’s the EU’s view that the death penalty does not serve as an effective deterrent, and that any miscarriage of justice, which is inevitable in any legal system, would be irreversible,” Ashton said in the statement.

The German government also expressed concerns over the execution, with Taiwanese Representative in Berlin Wei Wu-lien being summoned to the German Federal Foreign Office (AA), according to a press release posted on its Web site.

Marcus Loening, the German Federal Government Commissioner for Human Rights Policy and Humanitarian Aid at the AA, said in the statement: “I strongly condemned the executions."

Loening said he has always regarded Taiwan as a positive example of democracy and rule of law, but the worst thing emanating from the execution was that Taiwan sent a very negative signal.

“Against this background, today the head of the Taipei Representative Office in Berlin has been summoned to the Foreign Office,” the statement said.

James Lee, director-general of the Ministry of Foreign Affairs’ Department of European Affairs, declined to confirm or deny that he had been summoned to meet with German officials.

“That European countries raised concern following the execution was understandable as it has been their wish that Taiwan could restore a moratorium. We have maintained contact with them about our difference of opinion on the issue,” Lee said.

Lee did not elaborate what messages the AA has conveyed to Taiwan via the meeting with Wei.

Lee said Taiwan has been trying to make European countries understand that the executions were carried out according to the law, as Taiwan followed the rule of law.

As Taiwan is a country that respects human rights, it has been working toward reducing the use of capital punishment before a consensus is reached on revising the laws to eliminate the death penalty, he added.

Minister of Justice Tseng Yung-fu said on Friday that the latest executions were of people “who had committed atrocious crimes and who had killed between 3 and 5 people."

He added that the 5 people executed had exhausted all possible legal avenues and “there were no reasons not to execute them. We had to deal with them according to the law."

Unconvinced, Sam Zarifi, Amnesty International’s Asia-Pacific director, said in a statement that “the Taiwanese authorities have repeatedly stated their intention to abolish the death penalty. But they have — yet again — acted contrary to their own commitments and against the global trend towards abolition of the death penalty."

He said President Ma Ying-jeou’s administration had apparently not learned the right lesson from the execution of Chiang Kuo-ching in 1997.

Serving in the air force at the time, Chiang was accused of raping and murdering a girl and was soon executed. It was discovered last month that Chiang was actually innocent and that he had admitted to the crime under torture.

Only last month, Ma had to apologize for the execution of an innocent man, the statement said.

Following that so closely with today’s executions, however, shows a blatant disregard for the fallibility and irreversibility of the death penalty,” the statement, said, condemning Taiwan for failure to provide a “procedure that would allow people under sentence of death to seek pardon or commutation of the sentence — a right recognized by [the] International Covenant on Civil and Political Rights [ICCPR], which Taiwan has legally committed to implement."

The Anti-Death Penalty Asia Network, a cross-regional alliance of non-governmental organizations, lawyers and human rights activists from 23 countries, also released a statement expressing their regrets upon hearing about the latest executions.

Questionable legality

Taiwan Alliance to End the Death Penalty executive director Lin Hsin-yi said that since the ICCPR already enjoys the status of a domestic law, the legality of the executions may be called into question.

She said several other human rights organizations around the world — including the Murder Victims’ Families for Human Rights and the International Commission against the Death Penalty — have contacted her to express their concerns and regrets and that many of them will likely release their own statements condemning the executions after gathering more information about the cases.

Chinese Nationalist Party (KMT) Legislator Wu Yu-sheng, who is known for his support of the death penalty, on the other hand, described the executions as “belated justice."

He said he understood the dilemma of the government because of international pressure and the backlash from local civic groups, but said that if the government does not carry out executions, it will leave a bad impression on society and that it will not be fair for those on death row.

Wu expressed hope that the ministry would continue to execute death-row inmates and “complete the execution of all inmates this year."

‘SAVE MONEY'

Entertainer Pai Ping-ping, whose daughter was murdered in 1997, said: “It is a good thing to execute them, because it helps to solve a lot of problems.”

“Isn’t it good for the government to save the money used to incarcerate them to take care of the underprivileged?” Pai asked.

After the latest executions, 40 convicts remain on death row, according to the official tallies.

Source: Taipei Times, March 5, 2011

Taiwan: 5 death-row convicts executed

5 convicts on death row were executed in Taiwan Friday, the Ministry of Justice said in a statement, potentially dealing the country's international human rights image a severe blow.

The executions came less than a year after the ministry resumed enforcing capital punishment verdicts last April after ending an unofficial moratorium on the execution of death-row inmates that had existed since 2005.

The resumption of the practice was widely criticized by the international community, including by Amnesty International and the European Union.

According to the MOJ statement, the 5 death-row inmates were executed Friday evening after Minister of Justice Tseng Yung-fu signed their execution decrees earlier in the day.

The 5 inmates were identified as Guang Chung-yen, Wang Kuo-hua, Chung Teh-shu, Wang Chih-huang and Chuang Tien-chu, the statement said.

After Friday's executions, there remained 40 convicts on death row, according to official tallies.

The death penalty was last carried out in Taiwan on April 30, 2010, when 4 death row inmates were executed.

Source: Focus Taiwan TV, March 4, 2011


Taiwan executes murderers amid death penalty debate

5 convicted murderers have been executed in Taiwan amid a growing national debate on whether to abolish the death penalty.

The government, along with religious and human rights groups, opposes capital punishment but most victims' families are in favour of it.

Surveys show most of the population also support the death penalty.

Taiwan's government adopted an informal moratorium on executions in 2005, but dropped it following an outcry.

In the 1980s and 1990s Taiwan put to death 505 criminals - a figure which dropped to 36 over the past decade.

Instead, judges were given the ability to sentence violent criminals to life in prison.

But last year, Taiwanese justice minister Wang Ching-feng was forced to resign following an outcry from victims' families when she tried to insist on extending the informal moratorium on the death penalty.

4 convicts were executed, bringing the moratorium to an end.

On Friday, the new justice minister signed the execution orders for another 5.

40 more convicts remain on death row. An official in the justice ministry told the BBC that although the government wants to eventually end the practice, it must first win over the public.

To that end it is increasingly involving victims' families in the trial process. By allowing them to vent their anger at the murderers, and allowing them to hear the background of those convicted, the hatred of some families is reduced.

The hope is that, in time, people will learn to respect all human lives, even those of murderers.

But it is not a simple matter.

1 of the 5 men executed on Friday - a rapist and murderer - had been on death row for 10 years.

He had pleaded to be executed, saying it was a waste of taxpayers' money to keep him alive.

Source: BBC News, March 4, 2011


Government backs enforcing death sentences in line with law

The government must enforce capital punishment verdicts in accordance with the law as Taiwan is a country that upholds the rule of law, Presidential Office spokesman Lo Chih-chiang said Friday.

Lo was reacting to the Ministry of Justice's (MOJ's) confirmation that 5 inmates on death row had been executed earlier in the day, potentially dealing the country's human rights image a severe blow in the international community.

The executions came less than a year after the ministry resumed enforcing death sentences in April 2010, when it ended an unofficial moratorium on the execution of death-row inmates that had existed since 2005.

The resumption of the practice was widely criticized by the international community, including by Amnesty International and the European Union.

Lo acknowledged that abolishing capital punishment is a prevailing trend in many countries around the world, but he said most Taiwanese people have yet to reach a consensus on the issue.

With the public divided on whether the death penalty should be abolished, Lo said, it will take time to forge a consensus through rational discussion.

"And until capital punishment is formally abolished, legally meted out death sentences must be enforced in accordance with the law. Otherwise, there should be justifiable reasons to defer enforcement of those verdicts," Lo said.

On criticism that the latest executions seemed to contradict President Ma Ying-jeou's previous pledge to reduce the use of capital punishment, Lo said Ma's stance has remained consistent since his stint as justice minister more than a decade ago.

"Reducing the use of capital punishment is one thing. Imposing a moratorium on legally issued death penalty verdicts is another, " Lo said.

In line with the policy of limiting the use of capital punishment, Lo said Taiwan has invalidated legal provisions that mandated the death sentence as the only penalty for specific crimes.

According to the MOJ statement, the 5-death row inmates were executed Friday evening after Minister of Justice Tseng Yung-fu signed their execution decrees earlier in the day.

The 5 inmates were identified as Guang Chung-yen, Wang Kuo-hua, Chung Teh-shu, Wang Chih-huang and Chuang Tien-chu, the statement said.

3 of them -- Wang, Chuang and Guang -- signed pledges to donate their organs before their executions.

Their bodies were sent to Kaohsiung Chang Gung Memorial Hospital in Kaohsiung City and Far Eastern Memorial Hospital in New Taipei City to have their organs removed for transplant to suitable patients, the statement said.

After Friday's executions, there remained 40 convicts on death row, according to official tallies.

The death penalty was last carried out in Taiwan on April 30, 2010, when 4 death row inmates were executed. They were the 1st executions since 2005.

The lack of executions since 2005 drew attention early last year when then Justice Minister Wang Ching-feng, who opposed capital punishment, insisted on stays of execution for death row inmates.

Wang resigned on March 11, 2010 following an outcry from victims of violent crime and their families. Tseng, who succeeded Wang to the position, has promised to carry out the death penalty according to the law.

Tseng apologized Friday evening for failing to tell the truth earlier in the day that he had signed the decrees in the morning to execute the 5 inmates.

"I had to withhold the information until after they were executed, " Tseng told reporters after attending a Legislative Yuan session in the evening.

He said all of the 5 executed inmates had been involved in felonies, including serial rapes and killings, and that their cases had long been closed.

Source: Focus Taiwan News Channel, March 4, 2011
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A blueprint for doing nothing?

‘Enhanced economic co-ordination in the euro area’ is the long winded title for the new watered down version of the Franco-German ‘pact for competitiveness’ - the blueprint for saving the eurozone (well...).

Following the massive hostility towards the initial proposals the pact was pawned off onto Herman Van Rompuy, the European Council president, in an attempt to find a compromise. The result is a four page document that outlines some nice ideas but, scratch the surface, and it has very little substance.

The pact focuses on: fostering competitiveness, fostering employment and enhancing the sustainability of public finances. It feels as if we've heard this before, i.e. the Lisbon Agenda (or the new Europe 2020 strategy, same difference) with a pinch of the original Stability & Growth Pact.

All admirable aims and definitely issues which need to be tackled, especially if the eurozone is to avoid a similar crisis in the near future.

In most areas the actual policy specifics (specifics being pretty much every aspect of the policy other than the general overarching aim) will be left to member states, bringing into question the actual need for this document at all. Between the new macroeconomic monitoring and the increasing acceptance in member states for the need to enhance competitiveness on the national scale, what value is this pact supposed to add in real life? The lukewarm reception it received seems to support this, and casts further doubts over the chances of an agreement which contains something new and convincing being produced at the March summits.

An interesting question is how the German Bundestag and Bundesrat will respond to a proposal which quite clearly give national government quite a bit of discretion in defining their own caps on debt levels and wage setting arrangements.

At best the new pact looks to be a set of guidelines for member states to follow and to show a unified approach. That is fair enough, but it should not be treated as more.

Germany reacts to criticism of Foreign Minister Guido Westerwelle's trip to Iran

German Foreign Minister
Guido Westerwelle and
President Mahmoud Ahmadinejad

BERLIN, Feb. 22 (UPI) -- German Foreign Minister Guido Westerwelle has defended himself against criticism that he met with Iranian hard-line President Mahmoud Ahmadinejad to free two German journalists.

"Whoever criticizes this trip should tell that to the two who are now back in Germany," he said.

Westerwelle Saturday flew to Iran to bring home two German journalists who had been sitting in an Iranian prison for several months. They were arrested last October while interviewing the son of Sakineh Mohammadi Ashtiani, whose death-by-stoning sentence for an adultery conviction drew international condemnation last summer.

The affair had further undermined Germany's relations with Iran, which is shunned by the West for its controversial nuclear program and its crackdown on the domestic opposition.

After months of negotiations, Tehran last week indicated that the pair, reporter Marcus Hellwig and photographer Jens Koch, might be released on the condition that Westerwelle meet with Ahmadinejad. It was the first such bilateral encounter between the Iranian president and a German foreign minister.

Afterward, Westerwelle, Hellwig and Koch boarded the Bundeswehr plane and flew to Germany, where they were greeted by the journalists' families who had feared for their relatives for months.

The German opposition and exiled Iranians in Europe condemned the meeting as an unnecessary gesture to the Iranian regime at a time when it's coming under pressure from protesters.

"This trip is nothing but pinning hope on the bankrupt and utterly failed policy of appeasement," the National Council of Resistance of Iran, an exiled Iranian opposition group, said in a statement e-mailed Saturday to reporters.

It said Westerwelle's meeting with Ahmadinejad took place "only a few days after the bloody crackdown" on Iranian anti-government protesters, and served "only (to) embolden the regime to further suppress Iranian people."

And indeed, after Westerwelle had departed, the regime in Tehran tried to use the meeting to its advantage.

The New York Times quoted Iranian Foreign Ministry official Hassan Qashqavi as saying on Sunday that Westerwelle's visit "proved the failure of European Union policy on Iran."

Brussels has in the past asked EU foreign ministers not to visit Iran. "The current visit puts an end to such a decision," Qashqavi is quoted as saying.

German Chancellor Angela Merkel was informed about the trip but didn't know that it would include a meeting with Ahmadinejad, her spokesman said Monday.

"In that kind of a situation it is always a question of weighing the pros and cons," spokesman Steffen Seibert said at a regular news conference in Berlin. "Our international partners are still absolutely clear that our opinion of Iran hasn't changed at all. ... We're absolutely clear about the fact that the situation in Iran concerning human rights and political freedoms is unacceptably bad."

He added that Merkel was happy with the outcome of the trip.

Source: United Press International, February 22, 2011

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Studying the cost of Greece leaving the euro

The "European Economic Advisory Group", CESifo, is a joint venture by two of Germany's most respected research institutions. Earlier in the week, it published an interesting report examining the various potential policy responses to the eurozone crisis.

One of the authors is CESifo Director and heavyweight economist Dr. Hans-Werner Sinn (pictured). When he speaks, Germany listens.

Here are some of the key points in the report:

On establishing a permanent "transfer union" - in which taxpayers in stronger economies subsidise weaker countries, such as happened between Western and Eastern Germany - the report notes:

The persistent flow of public funds has in the end helped eastern Germany only a little, if at all. It has made it another European Mezzogiorno – a region stuck in a low-development equilibrium.

(...)

Whether the EU budget should be expanded for this purpose is a distributional question that will have to be decided by the political process. Politicians should not overlook, however, that there is the risk of Greece becoming addicted to the transfers, since it seems to have become addicted to the capital flows of the past.

It warns against the harmonisation of wages across the EU, citing regional differences in Italy as an example:

The Italian Mezzogiorno has been caught in such an equilibrium for half a century and more. Its GDP per capita is about 60 percent of that of the rest of Italy and does not show any sign of convergence. In Italy, the causes for this situation can be sought in a common wage policy, mainly dictated by the conditions of the North, which has always resulted in wages that were way too high for the South and resulted in persistent mass unemployment.

The under-development has forced the state to help out with transfers from the North. These transfers have provided an alternative income source in the South to which the political system and the economy have grown accustomed, perpetuating the situation, as it seems, even more.

They also explore the alternative to a transfer union - devaluation.

There's a distinction between internal and external devaluation. The former means tough austerity measures and squeezes on wages and jobs at home, as in Latvia (whose economy, as CESifo notes, shrunk by 19 percent in 2009).

The other option is external devaluation, which would involve Greece leaving the eurozone. From page 118 onwards, the report looks at such a scenario, with special focus on Greek banks. They note that if Greece did decide to leave the eurozone there would undoubtedly be a bank run, amongst other problems, therefore the ECB would probably need to guarantee all Greek bank deposits.

After demonstrating that Greece would take a big hit should it embark on external devaluation and head for the exit, they make an important observation: Greek banks might suffer just as much if no devaluation occurs, while private sector companies would be clear winners in the case of an external devaluation:

As Greek banks are net borrowers abroad and net lenders at home, the external depreciation will probably hurt them by shrinking the eurovalue of their assets more than shrinking the eurovalue of their liabilities.

However, this analysis forgets the additional write-off losses on claims against the companies of the real economy that will be driven into bankruptcy after an internal depreciation. If these write-off losses are taken into account, it is not clear whether banks fare better after an internal depreciation than after an external one. It is only clear that companies of the real economy will fare better after an external depreciation.

In view of these uncertainties in the analysis, the EEAG has decided not to opt for a particular policy alternative but only to inform policymakers of the relevant arguments. Definitely, there is no alternative that clearly dominates the other in all dimensions.

This is not a call for Greece to leave the eurozone, but the distinguished economists are clearly toying with the idea - though stressing that every scenario involves huge costs.

Meanwhile, FAZ today reports today that more than 200 German Professors, amongst them Dr. Sinn, have warned in a petition to the German Government, against extending the eurozone bailout. They call upon the German government to prepare

for a possible failure of the eurozone aid scheme and (...) prepare a detailed insolvency plan for eurozone countries with excessive debt

This is the only way, they argue, to avoid

collectivising the debt of member states, which leads to higher taxes and higher inflation in the EU as a whole.

It's not getting any easier for Angela Merkel.

The EU should impose sanctions on Gaddafi

Over on the Spectator's Coffee House blog, we set out the case for imposing sanctions on Gaddfi's regime (while also looking at the difficulties EU member states are facing in coming up with a common policy on Libya, in what is a painfully familar story).

We argue,

The EU spends €460 million a year in operational costs alone on its new foreign policy department, the External Action Service, headed up by Catherine Ashton. This body - created by the Lisbon Treaty - was Europe’s ‘great white hope’ for the global stage, finally allowing it to speak with one voice and therefore giving it leverage where it previously had none.

It hasn’t quite worked out that way. Caught between Cairo and Tripoli, the EU has received yet another reminder that its bureaucracies and institutions cannot magically replace 27 individual foreign policies, as EU leaders continue their bickering over what to do.

The EU’s response to the turbulence in Libya has been fragmented at best, and contradictory at worst. Italian PM Silvio Berlusconi – one of the few EU leaders with some clout in Libya – initially said that he didn’t wish to “disturb” Colonel Gaddafi since the situation was “evolving”. Czech Foreign Minister Karel Schwarzenberg maintained that the EU should not "get involved too much" because, "If Gaddafi falls, then there will be bigger catastrophes in the world”, though he later said he had meant something else.

In stark contrast, Finland, France – and in more careful language also Germany – have called for sanctions to be imposed on Gaddafi, including a travel ban and a freeze on his and his family’s assets, something categorically rejected by Italy and a few other countries. Still others have spoken in terms of general condemnation but proposed no concrete action, a group including Britain so far. Meanwhile, no one is paying much attention to the EU’s alleged foreign policy chief, Catherine Ashton. It all feels awfully familiar.

Does the absence of a common EU stance matter? I believe it does. While it’s true that the EU’s leverage in Libya and some other parts of Northern Africa and the Middle East is very limited, when Europe does pull together it can actually exert influence in its backyard. Enlargement remains the EU’s greatest foreign policy achievement made possible through a mix of aid and trade incentives.

So what should be done?

The UK should throw its full weight behind German, French and Finnish calls for sanctions, including an EU-wide travel ban on Gaddafi and his family, as well as a freezing of their assets across the bloc. Other possible responses, such as imposing a no-fly zone over Libya, should also be explored. The Colonel’s delirious speech yesterday – and his son’s comments that the family will fight “to the last bullet” – have confirmed that Gaddafi ranks amongst the Mugabes of this world (if anyone for a second thought otherwise).

Finnish Foreign Minister Alexander Stubb put it best when he said that "How can we on one side look at what's going on in Libya, with almost 300 people shot dead, and not talk about sanctions or travel bans, and at the same time put travel bans and sanctions in Belarus?". EU-wide sanctions could hurt Gaddafi – financially and politically – but waiting for too long will lessen their impact.

In terms of responding to the challenges in the wider region, David Cameron is absolutely correct in calling for radical reform of the EU’s neighbourhood policy, which together with other European programmes (such as the European Investment Bank), has dished out billions to the region, with few strings attached. In future, no reform on the human rights front should mean no cash.

At the same time, the EU needs to use other incentives and tools to promote long-term democratic and economic transformation in the region. For example, the EU should consider opening up its markets to more goods from North African countries on the path towards democracy. This should include agricultural products, which at the moment face a patchwork of tariffs in various guises before they can enter Europe. These barriers are contributing to rural poverty in North Africa and therefore instability. The UK is in a strong position to spearhead such trade reforms.

To give with aid on the one hand and take away through trade restrictions with the other makes no sense. Alas, it’s symptomatic of the inconsistency that too often characterises the EU’s relations with the outside world.

The Libyan protesters’ push for change presents an opportunity for Europe to put this right.