Kenya Held Back By Lack Of Accountability, Corruption

WASHINGTON – According to a BBC story, only 26% of money spent and collected by the Kenyan government has been fully approved in an audit for 2013-2014. Kenya’s auditor-general, whose report covered an annual budget of about $16 billion said there were “disturbing problems” in government’s accounting.

Spending with no justification 

The recently released report indicated that there are “still persistent and disturbing problems in collection and accounting for revenue”. According to the auditor-general, about 16% of all government accounts data is “misleading”, a polite way to say that several government agencies release to the public a great deal of false information aimed at hiding graft, embezzlement and worse.

False payrolls 

The BBC indicates that “Among the numerous items being questioned [by the report] are empty office spaces paid by the police and 32 faulty armored vehicles for the military. The health department’s accounts were particularly worrying as they failed to account for 22 billion Kenyan shillings ($216 million) worth of spending, the report said. The auditor-general also noted that $2 billion had been transferred to an offshore account, against regulations”….”When the authorities started biometrically registering all civil servants in 2014 they found more than 12,000 false names in the government’s payroll.”

Only 1.2% of total spending properly documented 

A WSJ story on the same topic notes that, according to same auditor-general’s report, only 1.2% of all Kenyan government spending is properly accounted for. About half is murky, while a quarter lacks any documentation.

There you go. 25% of the entire state spending cannot be justified.

Notwithstanding all this, Kenya is held up by the IMF and other multilateral institutions as one of Africa’s important success stories. An example to be followed by others. Many point out its IT companies and its successful M-Pesa mobile phone based payment system, used by millions.

Too much corruption 

And yet Kenya is ranked among the world’s most corrupt countries. It came 145 out of 174 nations on the Transparency International’s Global Corruption Perception Index.

President Uhuru Kenyatta tried to get rid of or punish corrupt officials. In March 2015 four cabinet ministers and other high-ranking officials have been suspended.

Obviously this is not enough.


Can Greece Be Saved?

WASHINGTON – The latest round of negotiations aimed at solving the Greek crisis (Yes, 6 years later we are still at it!) reminds me of what where described as the heroic but also grotesque efforts by the Spanish doctors who really, really wanted to prolong the life of semi-dead dictator Francisco Franco, back in November 1975.

Franco died

Well, guess what, heroic medical efforts notwithstanding, Franco was an old man. And he finally died.

In the case of Greece, the issue is not old age. It is about the crushing effects of a stupendous amount of debt (the Greek national debt is now $ 347 billion, 177% of GDP) that cannot possibly be paid back by a very weak country, poorly managed by a populist, ultra-left government.

There must be a solution

And yet, just like the Spanish doctors, the European central Bank (ECB), the International Monetary Fund (IMF) and the European Union (EU) Commission representatives keep on negotiating with Greece, as if by trying harder some magic solution will be found.

Political deal

The only (fake) “solution” is a political deal masquerading as serious debt restructuring. As Athens’ creditors believe that a Greek bankruptcy would cause too much unwanted and possibly unmanageable confusion, may be a panic in international financial markets, I bet that they shall invent a last minute “agreement” that will solve nothing. It will however provide political breathing room by kicking the proverbial can a bit farther down the road.

No progress since 2009

The facts are known. Greece was on the verge of bankruptcy at the end of 2009 when the new government announced that its predecessor had essentially cooked the books this way falsifying the actual debt figures.

Believe it or not, there has been no real progress since then. There have been numerous bailouts. But the fact is that more bailouts simply mean more debt. In the meantime, there has been and there is no serious plan aimed at reviving a comatose Greek economy, while the Greeks still have a hard time trying to adjust to the harsh reality of the end of subsidies for everyone, tolerated tax evasion, and soliciting briberies as a common practice to increase one’s income.

Keep trying

Just like Francisco Franco in 1975, Greece is near death. But, just like the Spanish doctors, most of the players still insist that there must be a way to ensure that Greece will stay in the Eurozone, that its economy will be somehow powered up, and that an orderly program that will guarantee the repayment of all the outstanding debt will be agreed upon and adhered to.

The Spanish doctors were eventually defeated by the limits of human biology. The negotiators trying once more to save Greece  will continue until they will realize that this farce cannot go on.

However, based on the record so far, we are still a long way from this moment of truth.

Tsipras Goes To Moscow

WASHINGTON – Greek Prime Minister Alexis Tsipras thought that it was a good idea to pay a visit to Putin in Moscow. Nothing really substantive happened. But in politics symbolism matters. And this looks really bad.

We do not want to pay

Let’s look at the context. Here is a querulous, if fatuous, far left Greek Prime Minister who is trying his best to get his country out of commitments made by his predecessors with the EU, the IMF, and the ECB regarding austerity measures for Greece in return for life saving loans. This looks already pretty bad.

On top of that, his government officially demanded the payment from Germany of “war reparations” due to the damages inflicted by Germany to Greece during WWII. This demand is frivolous and stupid, in as much as all WWII issues have been settled long ago. Therefore Greece has no legal ground for making fresh demands.

In all this, to date it is not at all clear that Greece, despite a recent payment to the IMF, will be able to survive financially, within the Eurozone or out of it, after a debt default.

So, here we have a beat up country, now run by leftist ideologues, surviving only because of the good will of its European partners. You would think that, at the very least the Greek government would lay low and stay quiet.

Visit to Moscow

Well, no. Tsipras chose this very moment to fly to Moscow for consultations with Putin. Never mind that Putin is a huge problem for both the European Union and for NATO, on account of his active role in fomenting subversion in Eastern Ukraine. Do keep in mind that Greece is a member of both, the European Union and NATO.

And what was the point of this visit? This is not entirely clear, at least based on what has been publicly announced. But, for sure Tsipras wanted the whole world to know that Greece and Russia are on very friendly terms. Besides that, during his Moscow visit, Tsipras indicated that he disagrees with the economic sanctions policy against Russia imposed by the EU.

Work with Putin on energy

And there is more. On the very sensitive issue of Russian energy supplies to Europe, Tsipras and Putin also discussed Russia’s plan for a new gas pipeline that would deliver Russian gas across Turkey and potentially Greece in order to reach European markets. There have been rumors that Russia may give money to Greece now, as an advance on the transit fees that Greece would collect once the pipeline is built and completed.

This looks bad

Anyway, all this is mostly talk. But “the optics” of this visit, (as the Obama White House communications people would call the images of Tsipras and Putin smiling at each other), are positively awful.

Here is a sorry-looking country that owes its very survival to the benevolence of Europe and the West. And yet its Prime Minister loudly complains about the unjust terms inflicted upon it, while making preposterous war reparations demands.

This is bad enough. But not for Tsipras. In this very difficult situation, caused mostly by his behavior, the Greek Prime Minister, certainly aware of the security threat created by Moscow’s clear desire to redraw the post Cold War map of Europe, flies to Moscow for a friendly chat with Putin, the chief offender.

As a minimum, this is in very bad taste. And yet nobody says anything.

The Greek Economy Never Recovered – Now It is Once Again In Crisis

WASHINGTON – We were told months ago that Greece, the ultra-sick member of the Eurozone, was essentially out of danger. Thanks to a gigantic aid package, (240 billion Euro, or $ 306 billion), jointly created by the European Union, the European Central Bank and the International Monetary Fund, Greece had been stabilized.

Greece had been fixed

No more talk of Greece being forced out of the Eurozone. In fact, Athens had managed to go back to the international credit markets and sell bonds. The incredible spread between its treasury bonds and those issued by Germany and other “healthy” states had shrunk, significantly.

So, it seemed that the tough diet of spending cuts, privatizations and forced slimming down the once bloated public sector had worked.

Well, not really.

Greece back in the news

While many Eurozone economies this year are stagnating (France) or are in recession (Italy), Greece, sadly, is in much worse shape. So much so that, according to the Italian daily La Repubblica, Jyrki Katainen, the EU Commissioner for Economic Affairs, felt obliged to issue a statement of support in which he stressed that the EU will continue to assist Greece “in order to assure that it will be able to collect funds in the markets, and that it will continue to have full access to them”.

Economy in bad shape

Why this reassurance? Because the Greek stock market just collapsed. After sustained losses over the Summer, It lost 9% on October 15. Yes, this is 9%, in one day. The economy is still doing poorly, (-3.9% in 2013, a little above zero growth in 2014). Greek unemployment is still at 26.4%. Youth unemployment is at 50%.

And now potential Greek debt buyers demand higher interest rates. The Greek 10 year bond carried an already high interest of 7.6%, now it is 8.96%. (German 10 year bonds have less than 1% interest rate, US Treasury Bonds come at 2.15%). May be this has something to do with the fact that the Greek national debt, after all the interventions, loans and other measures concocted by its saviors, is now 190% of GDP.

Not an inspiring picture.

Political instability

To make things worse, the government headed by Prime Minister  Antonis Samaras survives on an extremely small parliamentary majority. There are now rumors of early elections.

The possibility of a good showing by the left-wing Syriza Party, likely to quarrel with Brussels on all issues related to the (demonized) EU-imposed austerity, creates fears of political instability, on top of extreme economic and financial weakness. Hence the (feeble) attempts by the EU to reassure the markets.

Well, good luck with that. The truth is that after years of extraordinary interventions (the Greek financial crisis started in October 2009) and many near death experiences, Greece is not out of the woods. This is not just a minor relapse. This is serious. As the rest of Eurozone seems to have caught a bad cold, it appears that Greece has got pneumonia.

More bailouts for Athens?


Ukraine Cannot Win Against Russia – Give Up The East

WASHINGTON – Despite its (surprising) military successes against the pro-Russia rebels, there is no way that Ukraine can “win” this Moscow-funded civil war in the East of the country. And I say this keeping in mind that in any conflict there is no victory until your enemy says: “I lost”, and stops fighting –for good. In other words, nobody can declare victory until the other side keeps fighting, or gets ready to resume fighting.


A real Kiev “victory” in this conflict in Eastern Ukraine would imply that Vladimir Putin has given up –for ever– on any and all claims as the defender of ethnic Russians within Ukraine. It would imply that the rebels, lacking Russian supplies, military advisers and cash, have to give up, and essentially “surrender”. A real victory would also imply that the issue of secession has been “resolved” and closed –for good.

Now, I do not see anything even resembling this. Sure enough, it seems that the relatively weak Ukrainian armed forces overall have performed way above expectations. They have regained territory and taken control of cities held by the rebels. This may be good for morale.

Ukraine cannot win against Russia

However, there is no way that Ukraine in the long run can prevail against a much bigger, militarily stronger and better funded Russia. (And do keep in mind that Russia, despite all this, is and will continue to be the main energy suppliers to Ukraine).

Besides, so far at least, the economic pressures enforced by the  US and the European Union against Russia in the form of sanctions have not had the desired effect to make Putin stop his (not so) indirect aggression against Ukraine.

Putin can keep this conflict going

In other words, Putin can keep this crisis going for as long as he wants, almost with impunity. And let’s be clear: Russia does not have to win military battles in order to succeed. Success for Russia is keeping an unfriendly pro-Western Ukraine bogged down in a never-ending conflict. Success for Russia is an impoverished, semi-failed Ukraine that will never become a strong partner for Europe, let alone become an alternative model for Russians tired of Putin’s authoritarian rule.

If Putin wants it, he can keep this Eastern Ukraine secession issue going for years. If so, this messy civil war will become the constantly open wound that will sap Ukraine’s meagre resources, this way preventing the government from focusing on the most urgent problems of economic revitalization and development.

No real help to Ukraine from the West

And President Petro Poroshenko should once and for all give up on any hopes to get any real help from the West. It is now abundantly clear that neither the Europeans nor the Americans regard the fate of ethnic Russians within Ukraine something so important that it would justify the freezing of all relations with Moscow or, far worse, getting into a military confrontation with Putin.

Who cares about the ethnic Russians?

Yes, Putin is a thug. He grabs what he wants with not even an attempt at obtaining negotiated solutions. However, his appetites –the West believes– are confined to unresolved ethnic and territorial issues emerging from the sudden (and possibly hasty) dissolution of the old Soviet Empire.

And (privately at least) Western policy-makers would concede that Putin…well… he has a point. After all, he is focusing only on ethnic Russians living in Ukraine, a neighboring country with a long history of deep relations with Russia.

Sure enough, Russia has invented the story of the Russian minority under threat from the neo-Nazis in Kiev . But, there again, Putin concerns are limited to ethnic Russians. He is not threatening the US or other NATO countries.

Give up the East

Given all that, it is quite obvious that the West will not support Kiev in a prolonged war to the bitter end against Russia and its proxies in Eastern Ukraine. And this really means that President Poroshenko is essentially alone in all this.

In a context in which the West will provide moral but not material support, Germany’s invitation to find a negotiated solution in practice is a not so subtle invitation to give up and essentially, (if not formally), surrender: “Please, President Poroshenko, do us a favor and give Putin what he wants, so that this mess will be over, and we can all resume business as usual. This crisis is costing us money”.

In practice this means that Ukraine will have to give up –formally or de facto, by conceding large autonomies that amount to independence– its Eastern territories where most of the ethnic Russians live.

Allowing Eastern Ukraine to secede is only way to end the conflict

I have suggested this unpleasant solution a while ago. And I did so not because this is the “right” way to end this conflict; but simply because I do not see any better alternative for an outnumbered and outfunded Ukrainian government that will never be able to prevail, all by itself, against Moscow.

War or economic development?

President Poroshenko at some point, and I hope sooner rather than later, will have to realize that (sadly) he is the head of an impoverished country that survives today only because of credit lines and loans from the International Monetary Fund and other friends.

If Ukraine wants to create a viable economy, it has to stop this costly and in the end unwinnable war. In order to do so, it should grant total autonomy/independence to the East.

Ukrainian Prime Minister Yatsenyuk Both Defiant And Conciliatory In A Speech At The Atlantic Council

By Paolo von Schirach

March 12, 2014

WASHINGTON – The Western world seems to be united in its support for the embattled (and truly broke) Ukraine. Regarding the unprovoked Russian invasion of the Crimean peninsula, The G 7 issued a statement indicating that territorial changes in the Ukraine arrived at without following the proper constitutional process will not be recognized: “Any such referendum [on the secession of the Crimea] will have no legal effect“. The EU, on its part, also condemned the Russian military occupation and Moscow’s moves aimed at the annexation of the Crimea.

Obama’s support

President Obama added his open support when he received at the White House Arseniy Yatsenyuk, the Ukrainian Prime Minister, on March 12, just days prior to the planned referendum on joining Russia to be held on March 16 in the Crimea now under Russian military occupation (in violation of the Ukrainian constitution). So, the message to Putin is clear: “We, Europe and America, stand firmly with the new government in Kiev. What Russia has done is unacceptable. Moscow has to order its troops to go back to their barracks”.

Prime Minister Yatsenyuk at the Atlantic Council

The young (39 years old) and affable Prime Minister Yatsenyuk, speaking at a packed event hosted by the Atlantic Council, a prestigious, non partizan Washington foreign policy think tank, talked confidently about all the support his country has received.

And yet, the general tone in the West, and even in the words articulated by the Prime Minister, is not bellicose. Yatsenyuk opened his remarks at the Atlantic Council referring to the Russians as past and future “partners”. He repeatedly indicated that this unprecedented crisis created by the invasion should be resolved through dialogue and diplomacy. He pointed out that the Ukrainian government is eager to work on new laws and regulations that will further enhance the autonomy of the (mostly Russian speaking) Crimea. He pledged that there is and there will be no discrimination in the Ukraine against the large Russian minority.

Autonomy to the Crimea

In other words, he almost said (anyway this is what I read between the lines) that the Ukraine is willing to give the Crimea virtual (even though not legal) independence. (Any formal secession could be arrived at only by following a prescribed constitutional process).

Yatsenyuk did everything he could in his remarks at the Atlantic Council to reassure the Russian government in Moscow, the Russians in the Crimea and in the rest of the Ukraine that they have nothing to fear. The government in Kiev does not and will not discriminate against anybody.

Which is to say that if indeed the Russians have intervened militarily because of a genuine concern about the welfare of the Russians in the Crimea, there is really no issue. The Ukrainians are committed to protecting all citizens equally, regardless of ethnicity.

The Russians can get reassurances

If the Russians have indeed acted in good faith, out of fear about the fate of their brethren in the Ukraine, then they should seize this opportunity and start a dialogue with Kiev aimed at spelling out how the Russians in the Crimea and elsewhere in the Ukraine will be protected by the new government.

If this were indeed the real issue, then it could be addressed and solved, since the Ukrainians, according to the Prime Minister, are willing to concede (almost) everything when it comes to additional autonomy to the Crimea.  Yatsenyuk pointed out that this would not require a major effort, as there was no violence or discrimination against ethnic Russians in the Crimea prior to the Russian military occupation.

The alleged persecution of Russians is just an excuse

The problem is that Putin used the alleged persecution of ethnic Russians in the Ukraine as a convenient excuse. I doubt that he believes any of what he said publicly to justify Russia’s military intervention. The fact is that for his purposes of power consolidation and reaffirmation at home, seizing the Crimea after having lost (politically) the Ukraine seemed the clever thing to do. This notion of “saving” oppressed Russians unjustly separated from the Motherland has a certain ring among Russian nationalists, and so this was a politically astute move. In Russia and among most Russians, Putin now looks very good.

But Putin is now in a bind abroad. The West is against all this. There is no way that an open land grab that violates key principles of international law, along with a multilateral treaty that guarantees Ukrainian sovereignty co-signed by Russia, can be ignored. Berlin, London and Washington simply cannot continue business as usual with Moscow.

What will the West do?

That said, it is unclear to me, despite the declared support for the Ukraine, what exactly does the West plan to do. Are we ready to go to the next level: namely serious economic sanctions against Russia? We certainly could, starting with the seizure of bank accounts and properties owned by the Russian oligarchs (most of them friends of Putin) who have stashed their loot in London and Geneva and who bought luxury homes in Paris or the Riviera.

Sanctions, anybody?

We could really hit Russia where it hurts. And let’s remember that Russia does not have a lot of staying power. It has a relatively weak economy that is almost totally dependent on the revenue provided by selling oil and gas abroad.

Of course, there are also clear European vulnerabilities. The Russians know that Europe depends on Russia’s gas. Therefore, if Europe freezes economic relations with Russia, and gas stops flowing west, what will happen in Germany or Poland? How will they keep the lights on without Russian gas? No easy answer for this, as there is no immediate alternative to Russian gas. This energy dependence makes it very unlikely that Germany, Sweden or Bulgaria are prepared to enforce really tough economic sanctions against Russia.

In the US the picture is only marginally better. (By the way, we have all the gas we need here at home). President Obama, notwithstanding his recent show of support, has no special interest in prolonging a foreign crisis that most Americans do not even begin to understand, just a few months before the November congressional elections in which his party already stands to lose a lot of seats.

Putin’s calculations

All in all, my sense is that the Russian “Crimea Gamble” included the calculation that there would be no Western united front against Russia. If this is so, Putin may really believe that he will get away with this unprecedented land grab.

I would love to be wrong on this, but I suspect that Putin’s assessment is correct. There will be a split within the West. If Putin is right, in the end he will prevail. He is a bully willing to take risks. The “peace-loving” Europeans are not in the same league.

Western verbal support

For the moment, everybody is saying the right things. But when it comes to “action” I suspect the music will change –a lot. The poor Ukrainians will realize that they are pretty much on their own on the Crimea.

They will get (some)  money from the EU, the US and the IMF to stabilize the economy, and more help down the line for structural fiscal and institutional reforms. But nobody is going to engage in serious, prolonged actions –let alone military actions– against Russia, in order to restore law and order in the Crimea.

Without real (as opposed to verbal) support, the Kiev government will have to settle. It is obvious that the Ukraine cannot afford to be in a state of permanent crisis with Russia. There are just too many intertwined interests, too many relationships. Eventually some face-saving formula regarding the final status of the Crimea will be devised.

The world will nod and we shall all move on.

Financial Aid To The Ukraine? Great Idea But Huge Costs

By Paolo von Schirach

March 10, 2014

WASHINGTON – A few days ago, I argued in a related piece that it is hard to believe how Ukraine can be considered by either Russia or the West as a coveted prize in this emerging new version of an East-West confrontation. The country is vast, (almost the size of Texas), and it is home of a fairly large population, (somewhere around 45 million). Other than that, however, Ukraine is a real mess. It is poorly organized, very corrupt and essentially broke. Indeed, just to get things back together, we are talking about a $35 billion bill. I assume that includes all the unpaid natural gas bills that Ukraine owes Russia’s Gazprom.

Save the Ukraine?

And yet, notwithstanding this economic train wreck, now the talk is about the (semi-broke) West bravely stepping up to the plate in order to “save” Ukraine. Indeed, if I understand correctly the still hazy plans articulated by US Secretary of State John Kerry and some European policy-makers, we are in for a lot more than just an emergency financial rescue operation.

We are talking about a long-term commitment to turn the Ukraine around.

We are talking a major, multi-year assistance package, (including money, tools, technical expertise), aimed at helping the new leaders of the courageous Maidan demonstrators in planning and then implementing major reforms. The goal is nothing less than a reborn Ukraine that would prove to the world (and of course to its Russian neighbors) that a messed up, post-Soviet Republic can become a viable, modern country by adopting best practices when it comes to ensuring basic freedoms via good governance and the adoption of sound economic management. In a nutshell: if we are serious about this, we are talking years and years of sustained work, and tens of billions of dollars.

This is going to be expensive

Turning the Ukraine around is of course a great idea. The problem is that, even assuming good will and not too much negative Russian interference, (you can count on Moscow’s attempts at sabotaging pro-Western policies), this is going to be difficult and very, very costly.

Therefore, Western leaders should make this very clear. For instance, I am not sure that US voters, worried about unemployment, stagnant wages and massive student loans debt burdening millions of young workers are that keen on pouring billions of dollars into the Ukraine mess.

Let’s try

That said, I do hope that America and Europe, with the support of the IMF and others, will try this. If the Ukraine succeeds, if it becomes like Poland, a former Communist country that successfully embraced Western values, this would strengthen Europe and America. Furthermore, it would show the world that our model works. Yes, a well-functioning democracy is the foundation for sustainable prosperity.

Nation building? Again?

Look, I realize that here in the US any undertaking that even remotely resembles “nation building” evokes the truly bad experiences of Afghanistan and Iraq. And for very good reasons. Lacking judgment and even elementary common sense, the Bush administration and to a lesser extent the Obama administration poured tax payers’ money into costly and generally ill-advised development assistance projects aimed at these two countries. The US “Grand Strategy” at the time of the Bush administration was to crush dangerous tyrants and autocrats, have free elections so that the people would finally have a say, and then help the new, democratically elected policy-makers rebuild their countries following the tried and tested Western model. And so, thanks to America, there would be genuine freedoms, market economies, no more corruption, gender equality –and a lot more. Yes, people would vote, children would get immunizations, girls would go to school. A New World.

Nice and noble ideas. But it could not be done. Not because the aims were bad, but because there was a gigantic disconnect between the lofty goals on one side and the relatively small resources allocated, plus the (almost insane)  belief that much could be done in a relatively short period of time on the other.

It could not be done

Simply put, you cannot have gigantic social and economic transformations –premised on new values being genuinely embraced by millions– in a matter of a few years. At the time of the US military occupation in 2001, Afghanistan was a semi-destroyed country with almost no viable economic activities. Thanks to the Taliban, it lived virtually in the Middle Ages. It was disconnected from the rest of world.

The very fact that some people in Washington embraced the notion of  a turbo-charged modernization program as a viable proposition is baffling. And that approach, mind you, was developed before the rebirth of the Taliban-led insurgency made everything a lot more difficult.

Ukraine is different

Well, if we fast forward to today’s Ukraine with the still fresh memories of the Afghan and Iraqi failures in our minds, the idea of starting  all over along the same path looks really unpalatable. And for very good reasons.

The huge difference, though, is that the Ukraine, while in truly bad shape, is a semi-modern country. It has educated people and some of the building blocks to make things work. Therefore we can assume that our chances of success would be a lot higher. And, again, let’s keep in mind that helping to build a viable society in a vast country at Europe’s immediate periphery in the long-term would help peace and stability in the Continent.

Uncertain mission, but worth pursuing

That said, if America and Europe are serious about this undertaking, we are talking about tens of billions of dollars over a number of years. Beyond the immediate financial crunch, the Ukraine will need investments and help to modernize its industries, its infrastructure, its governance, its education systems, and what not. And, let’s not forget that this noble attempt may fail. If the country will not abandon its deeply rooted culture of corruption nothing much can be done.

Still, even keeping in mind the lessons of Afghanistan and Iraq, and the uncertainties embedded in any undertaking of this magnitude, the Ukraine is a far better place. And the stakes for the West are arguably much higher.

Vladimir Putin’s dream is to bring major pieces of the old Soviet Union back into the fold. But he has nothing good to offer. Beyond oil and gas, Russia is not a leader in anything. Whereas Europe and America can offer a new path to democracy and prosperity (via investments, technology transfers and trade) to the Ukrainian people.

And ultimately it is in our own self-interest to demonstrate that our values and our systems really work. This is the best lesson that we can offer to all the people who suffer under autocratic regimes, in Russia and elsewhere:

Democracy is the right choice, and it is really good for you.

Praise For Mario Draghi Is A Way To Forget That Europe’s Structural Economic Problems Have Not Been Fixed – The Financial Situation Is Much Better; But The Economies Of Southern Europe Remain Hopelessly Weak

[the-subtitle ]

By Paolo von Schirach

January 20, 2013

WASHINGTON – I am really worried about too much praise for European Central Bank President Mario Draghi. He is described as Europe’s savior, as a genius because last Summer he bluntly said that he would do whatever is necessary to defend the Euro.

Draghi’s bet

Since the bond markets did not test this bold proposition, in essence believing that Draghi would be able to follow through with adequate liquidity aimed at supporting bonds under pressure, he won the battle. There is no more downward pressure against the Club Med countries bonds. Europe’s financial markets are back to “normal”. So, this is it? Just one brave statement of intentions by the head of the monetary authority fixed everything?

This is patently absurd. There is a huge difference between the end of an emergency and return to normalcy. Mario Draghi deserves a lot of credit for boldy asserting his intention to fight for the integrity of the monetary union.

German help

But this is after all his job. And by the way this would have never worked had Draghi failed to enlist the German government as key supporter for his plan. Imagine if Chancellor Merkel had said publicly that Draghi’s strategy couldn’t work because key Eurozone members would not provide the liquidity to rescue Club Med. That would have been a disaster.

Still, some praise is deserved. In an environment where timidity and half measures are the best that mediocre leaders can come up with, Draghi’s blunt words were like a lion’s roar.

Meltdown avoided, picture this bleak

That said, it should be crystal clear to all observers that the President of the ECB cannot turn Europe around all by himself. The idea that since monetary meltdown has been avoided now all is well is plain stupid. Sure, the patient (Club Med) did not die, and he may be soon out of intensive care. But the prognosis is that there will never be a full recovery. The ailment is so severe that it created permanent damage.

Weak Club Med economies

Let’s look at the picture. The Eurozone is in a recession. Unemployment is at 11%. If this is bad, look at Spain where it is at 27%. Yes, that is 27%. Youth unemployment in the Club Med countries is around 50%. Austerity measures, while necessary to cut spending and restore some confidence in highly indebted countries, are recessionary. They have sucked oxygen out of the room. Tied to the Euro, the Club Med countries cannot hope in an export led recovery aided by a devalued currency. More broadly, they still lack macroeconomic policies that would strongly encourage domestic and foreign investors.

Greece will never come back

Just look at Greece. After the latest bailout, Greece will have received 255 billion Euro. This is an astounding figure for a small country. The IMF now warns that it may need an extra 9 billion Euro. And, despite all the massive interventions, the economy is in free fall. Sure enough, the Greek 10 year bond is now “down” to 11%. This is a huge success if we consider that it was at 30% just few months ago. While this is great progress, 11% is still extremely high. (Germany is less than 2%).

If markets had total confidence in the rescue plans for Greece, then its sovereign debt should be regarded as debt of any other perfectly solvent country, with zero risk premium attached. But it is not so. And this proves that Draghis’ victory, while significant, is only partial and temporary. Avoiding the Euro’s meltdown is not the same as restoring full credibility in Europe’s future.

ECB cannot fix weak economies

The truth of the matter is that Southern Europe’s structural problems are not just fiscal. They are also economic. True enough, its public sectors are still too large and inefficient, its welfare programs too expensive. Partial reforms have yet to resolve these core problems. But, in addition, its economies are not competitive, productivity is too low. There is no business creation. Old and underfunded education systems are unable to turn out world class knowledge workers. And, to make it even worse, all Southern European countries have extremely low fertility rates. This means societies made out mostly of inactive old people clamoring for pensions, medical care, disability benefits and more.

Europe will under perform

Even if Mario Draghi were the best central banker in history, the ECB cannot fix these systemic problems all by itself. Without miraculous economic transformations, dragged down by its weak and needy Southern periphery, Europe will continue to under perform.

Greek Prime Minister Calls Country’s Problem A “Liquidity” Issue – Not So: Greece Is Structurally Insolvent – The ECB-IMF Bail Out Will Have To Go On Indefinitely, Or Greece Is Finished

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By Paolo von Schirach

October 6, 2012

WASHINGTON – Greece is in sticky a situation. (Yes, it is Greece again). The European Central bank (ECB), and the International Monetary Fund (IMF), have not yet released $ 41 billion worth of additional loans to Athens, because they do not like the savings plans put forward by Greece.

Greece is behind, but Germany will help

This is a charitable way of putting it. The truth is that Greece is delinquent on most of its reform pledges. Be it the agreed upon shrinking of the public sector or the pace of privatizations, the Greeks are chronically behind. And this is a clear indication of how poorly and I would add unseriously Greece goes about taking care of its own affairs.

Still, despite that, now the Greek leaders seem to be getting needed political cover, in the form of an official visit by Angela Merkel, the German Chancellor. This gesture is correctly interpreted as an open commitment to Greece. Greece will stay in the eurozone; and so the never ending bail out will have to continue. Germany will keep paying and Athens will get more money.

Liquidity crisis?

But even in this desperate situation, the Greeks continue their game of self-deception. Commenting on the current impasse with its lenders, Greek Prime Minister Antonis Samaras is quoted by Reuters saying that: “The key is liquidity. That is why the next credit tranche is so important to us“. And how far would Greece go without this additional money from indulgent lenders? Not that far: just until November.

Now, words have meaning. Only a fool or a liar would call this disaster a “liquidity” problem. You may have a liquidity problem when you are short of cash for a limited period of time. For example, you may be in a temporary bind because you have payments due, while others who owe you money are late paying you.

Greece is insolvent

This is not the case in Greece. Greece is totally broke. Its problem is called “solvency“, or better yet “insolvency“. And from the looks of it the crisis is beyond solutions. There is just too much debt, and a structurally weak economy that cannot possibly generate enough revenue to pay current bills, plus interest on the debt and principal repayment.

Germany likely to keep the bail out going

If Angela Merkel, fearful of any fall out that would occur as a consequence of Greece being forced to exit the eurozone, has decided that it is in Germany’s political and economic interest to keep supporting Greece for the indefinite future, then Prime Minister Samaras has nothing to fear. If and when Germany will have enough of this, then Greece is dead. And its demise will be due to insolvency and not because of a temporary liquidity issue.

IMF Christine Lagarde Believes The Euro Has to Succeed In Order To Keep European Countries Together – How So? EU Countries Will Do Fine Even If Some Eurozone Members Have To Go

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By Paolo von Schirach

April 21, 2012

WASHINGTON – IMF Managing Director Christine Lagarde stated in a public forum hosted by Charlie Rose that she is hopeful about Europe and the future viability of the Euro because the common currency is one big part of a broader coming together of diverse European states moved by a shared aspiration towards political unity. The failure of the Euro would stop this process, she added; and this might allow the resurfacing of old intra-European struggles.

The Euro keeps the peace in Europe?

What? The Euro as anti-conflict antidote? This is a bit odd. Are we to believe that if the Euro in its present form proves to be unworkable, then it is back to the Franco-Prussian war?

Everybody would agree that a successful European monetary union would be a major step forward in the long and tortured European unification journey, (this is assuming –as Lagarde assumes– that there is a shared desire to get to a unified Europe). But to assert that the Euro has to succeed otherwise we may go back to ancient animosities, potentially erupting into fresh conflicts, is a bit odd –especially coming from a former French Minister. It is really a stretch to make a connection between the desire to keep Europe at peace and the Euro as a way to guarantee peace.

The Euro’s problems

No, the Germans are not going re-invade France any time soon, with or without the Euro. That said, the Euro has real problems of its own that have really nothing to do with European peace and security. The Euro is unfortunately the half baked result of a half baked plan. It is an imperfect monetary union in as much as it assumed fiscal restraint among diverse countries that are still sovereign in all matters of taxes and spending. Well, as it turned out, some of them behaved badly and allowed huge fiscal imbalances, disobeying the rules.

The evidence shows that the Southern members, (Greece, Italy, Portugal and Spain), used the lower interest rates provided by a stronger currency to borrow more without considering the long term implications of higher debt levels. Now they are deeply in debt, while their weak economies are structurally incapable of regaining competitiveness. And the austerity measures adopted (under duress) work as recessionary wet blankets, at least in the near term.

Weak members will have to leave

Something has to give. I do not believe that these intrinsically weak Southern countries can catch up and stay within a monetary union that ties them with more productive and fiscally more restrained Northern Europe. They lack the ability and the will to re-engineer themselves, becoming all of a sudden dynamic and innovative societies.

The solution is an exit from a monetary union that was conceived for more advanced economies. Should the laggards have to negotiate their exit from the Eurozone, this would be a big mess, but not an occasion for restarting World Wars. There was no danger whatsoever of another intra-European conflagration before the Euro. If some members have to go, and I really believe they have to, Europe may be more messed up, but it will still be at peace.