Moldova latest from Economist website

Protests in Moldova

Moldova burning

Apr 8th 2009
From Economist.com

Violent protests erupt against the government of Moldova

THE poorest country in Europe is used to being neglected by the rest of the world. But protests against vote rigging in elections held on Sunday April 5th brought Moldova some attention this week. In the past few days youthful demonstrators, who were organised via Twitter and other social-networking sites, stormed parliament and the presidential offices in the capital city, Chisinau. Some threw rocks, broke windows and started fires. As the police belatedly tried to restore order, scores were injured and one person died. Nearly 200 people had been arrested by Wednesday. Amid allegations of foreign mischief-making, Moldova expelled the Romanian ambassador.

The immediate issue is the election result, in which the ruling Communists won a majority in the single-chamber parliament. The election was declared fair by outside monitors, who assessed what happened on the day, but the composition of electoral registers looks dodgy, as does the overwhelming support that the Communists enjoyed from the main media.

The protesters are loosely tied to established opposition parties. They are cross about the election and even more annoyed by the outgoing president, Vladimir Voronin. Mr Voronin has stated that, although he would step down in accordance with the constitution’s term limit, he would stay in politics as a “Moldovan Deng Xiaoping”. That seemed to suggest no change from the economic and strategic failures of the past two decades, which have seen Moldova’s 4m population languish in a geopolitical limbo between Russia and the European Union. Most Moldovans favour Europe but the political elite, mainly Soviet-trained and Russian-speaking, has found it hard to break old ties and habits.

Mr Voronin has wobbled in both directions. Of late he has seemed to favour ties with Moscow, chiefly because a deal with the Kremlin seems to offer the only hope of solving the frozen conflict with the self-declared state of Transdniestria. This densely populated and industrialised sliver of land on the eastern bank of the Dniester river has maintained an unrecognised independence since a brief civil war that finished with Russian intervention in 1992. Western attempts to resolve that debilitating impasse have got nowhere, whereas Russia has kept up a stream of initiatives.

With decent leadership and goodwill on all sides, it would be possible to have friendly relations with both Russia and the EU. But Moldova’s leaders have ended up with the worst of both worlds, ignored by the EU and bamboozled by Russia.

The most divisive question is relations with Romania. The Moldovan Soviet republic, which gained independence in 1991, was carved out of pre-war Romania in 1940, as a consequence of the Hitler-Stalin pact; Transdniestria, always in Russian hands, was bolted on. Nico Popescu, of the European Council of Foreign Relations, says that demands for closer ties with Romania have strengthened in recent years, as that country’s EU membership has contrasted ever more sharply with Moldova’s status as a “semi-failed state”. As well as EU flags, some protesters this week carried Romanian ones.

That has infuriated the Moldovan authorities. They find it much easier to fight the bogeyman of Romanian revanchism and chauvinism than defend their own dismal record in office. Andrei Popov, of the Foreign Policy Association, a Moldova-based think-tank, believes that the authorities may even be exaggerating the pro-Romanian element in the protests in order to discredit the opposition’s wider political demands.

There is little evidence that Romania has made a big effort to undermine Moldova. Romanian politicians, notably the president, Traian Basescu, have made grandiloquent and tactless statements. The mutual detestation between him and Mr Voronin is legendary. One practical Romanian policy has proved controversial: allowing Moldovans with roots in the pre-war Romanian state to apply for passports.

The political upheavals cry out for attention from the EU, which has failed to get to grips with Moldova’s ills. As with Ukraine’s orange revolution five years ago, it may take a heavyweight outsider to get talks going between entrenched but discredited authorities and an enthusiastic but incoherent opposition. If Europe cannot solve Moldova’s problems, it is hard to see much future for the trumpeted “Eastern Partnership” which is meant to reinvigorate EU policies towards the six ex-Soviet countries on its eastern borders.

Europe view 124--time to boycott France?

Europe.view

Plus rien de français?
Mar 26th 2009
From Economist.com


Skoda, blancmange and the price of principle

FRENCH politicians seem to see no benefit from economic integration with eastern Europe. The industry minister wants to “repatriate” jobs from Slovenia. President Nicolas Sarkozy says it is unacceptable that French manufacturers make cars for the French market in the Czech Republic.

That may just be rhetorical pandering to the protectionist views of the French public. But it is still offensive to the east Europeans, and could prompt a severe response—such as a boycott of French-made products.

Since 1989, the ex-communist countries have played by western rules. They have stabilised, privatised, liberalised, and opened up—the kind of wrenching economic reform that is the stuff of nightmares for the cosseted workers of old Europe. True, the easterners could have gone further (especially in reforming public finances, state bureaucracy and education). With pitifully little debate, they had to swallow a colossal (and largely French-drafted) European rulebook, with an array of stupid and unpleasant rules and penalties for breaking them, on everything from sugar prices to school kitchens.



While countries such as Britain sit neurotically on the sidelines, the new members yearn to gain admission to EU clubs such as Schengen (visas), Prüm (policing) and of course the euro zone.

That was in these countries’ own interest. Paying a price to be in the clubs that matter was better than staying outside. Yet the easterners’ feel their enthusiasm and cooperativeness have met little gratitude in the west. Their occasional bouts of chippiness and clumsiness are blown out of all proportion. The failure of Romania and Bulgaria to meet anti-corruption targets has tainted the whole region’s image. The Atlanticist loyalties of the new members have been mocked and distrusted.

France was in the forefront of such criticism, and also led the resistance in “old Europe” to the extension of the single market to labour and services. The new member states are still second-class citizens of Europe when it comes to working abroad or exporting their brainpower.

Now France is close to a head-on clash with the fundamental principles of the single market in goods. The next stage could be preferential treatment of domestic producers in government tenders. After that, it is easy to see a slide towards real protectionism in Europe. With the economic glue that holds the EU together weakening, the political links will fray too. In a race to the bottom, the biggest and richest countries will do best (or least badly). The poorer and smaller ones will be left humiliated, impoverished and resentful.

It would be rash to rely on the competition directorate and EU law to stop this dangerous drift. Much better would be to apply a sharp dose of economic pressure. Stroppy French workers may not realise it, but the ex-communist countries are one of their country’s biggest export markets. Renault, for example, sells more than 1m vehicles in eastern Europe. In 2008, France exported €21 billion ($28.5 billion) to the new member states of the EU (compared with €23 billion to the United States).

Boycotting all “French” goods would be a blunt instrument. Many French-badged cars are actually made in places like Poland. And many French-made products are not easily substitutable (Lithuanian šampanas has its charms, but even its die-hard fans don’t quite consider it an alternative to champagne).

But a slogan on the lines of “Aux armes, citoyens de la nouvelle Europe! Plus rien de Français!” would deliver a timely message. Georgian wine, Hungarian foie gras, Polish salami, Skoda cars, Italian fashion and skiing in Slovakia are all alternatives to the French-made offerings. Even—if you want to be really insulting—British cuisine.

BBC Radio 4 programme "Decision Time"

I can be heard discussing Russia with Sir Roderick Lyne, Sir Malcolm Rifkind and others here

Europe.view no 124

Fit as a Finn
Mar 19th 2009


What the rest of Europe can learn from the Nordic countries

IMAGINE some mythical countries called Badland, Eastland, Rohan, Northland, Southland and Midland. At the end of the 1990s, say, oil is found off the shores of Midland. A number of ethnic Northlanders live in the area of the oil find, and hence Northland claims the right to the oil. This leads to a conflict between Midland and Northland.

The conflict simmers for a few years, and escalates when Northland attacks Midland, conquering large swathes of land and sea, among them those containing the oil. Outsiders intervene and a United Nations force called UNMIMA (United Nations’ Mission in Midland) is created. UNMIMA successfully brokers a cease fire deal, and Northland withdraws. But the vacuum is filled by an irregular military force.

The UN Security Council then requests that NATO lead a multinational peacekeepng force to the conflict area.

That is the scenario for Cold Response, the annual military exercises in Norway that are running until March 25th of this year. Around 7,000 soldiers from 14 countries are participating. Some are part of the NATO-led peacekeeping force. Others will be part of the forces of other countries, such as defeated, resentful Midland and the irregulars from Northland.



Clearly, this scenario is not a template for a real conflict, unlike in cold-war days. Then NATO’s military exercises in Germany were broadly based on one central scenario: a huge Soviet conventional attack, and a desperate attempt to hold it back long enough for reinforcement from America to arrive. Nobody worried about Austrian nationalists seizing bits of northern Italy, or a reopening of the Schleswig-Holstein question.

The Cold Response scenario is clearly hypothetical. It has elements of last summer’s Georgian war, but with a Baltic flavour. Leave out the oil (and call it a fight over a port or a pipeline) and allow for Midland to be more like neutral Moldova than NATO-member Latvia.

In real life, if Russia was Northland (or supporting it) it is hard to see how the UN Security Council would be able to mandate any kind of intervention. Cynics might also wonder how enthusiastically Germany would support a NATO mission to quash an insurrection connected with Russia.

Cold Response is interesting not as futurology, but for what it reveals about Nordic defence planning now. Norway, a NATO member, is hosting an exercise in which non-aligned Sweden and neutral Finland are participating in force. It is the clearest sign so far of the burgeoning defence-and-security cooperation between the three countries. Denmark and France also have battalion-strength contingents.

The exercise comes on the heels of the much-delayed report by Thorvald Stoltenberg, a former Norwegian foreign minister. Published in February, it recommended much closer defence cooperation between the five Nordic countries in the Arctic region. It contained no fireworks, concentrating instead on search-and-rescue, and other uncontentious issues. It did not mention Russia as a threat. Countries such as Finland are keen to portray Nordic cooperation as cost-saving exercise, rather than anything more strategic.

Nonetheless, the Cold Response exercises in Norway send some interesting signals, not only to the counterpart countries in the region of the notional “Midland”. It also highlights the distance NATO still has to travel in contingency planning and exercises aimed at bolstering the alliance’s territorial defence, rather than just fighting wars in distant places.

Cold Response is just an exercise. But it is exercises that keep people fit. The Nordics are looking trim, while much of Europe is still flabby.

europe view column

Europe.view

Put the beam before the mote
Mar 12th 2009
From Economist.com


Eastern Europe should not be tempted by paranoia

WAS it all a conspiracy? It is not the first time in east European history that the question has been asked. Wicked western manipulators were a staple of communist-era propaganda. Before that, anti-Semitic politicians used to blame Jews (and Freemasons) for manipulating the destiny of other countries. In the 19th century, the German, Austro-Hungarian, Czarist and Ottoman empires kept almost the whole region from the Baltic to the Black seas divided up between the great outside powers.

Now the conspiracy theory is back again. Somebody was spreading rumours. Somebody with foreknowledge or malevolent intent was shorting currencies, stocks and bonds. Someone was using sinister-sounding financial instruments such as credit-default-swaps so that whatever happened, they would profit from a panic. These somebodies could be anywhere, but they are certainly foreign.

Or maybe it is all a plot by Germans to push the Austrian banks into bankruptcy so that they can buy them up cheaply. Or maybe it is a means for “old Europe” to destroy the competitive threat from the unloved “new Europe”. Or a French-German plan to create a core Europe round the euro zone, excluding the troublesome countries farther east. Or it is all some super-clever plot by the ex-KGB regime in Russia, details to be announced later. All that is missing is hook-nosed men in ringlets drinking the blood of Christian children.

The truth is more prosaic. Financial markets are usually wrong, often hugely so. When greed trumps fear they are over-enthusiastic, believing all kinds of positive nonsense and pouring money into dodgy companies and countries. Then the tide turns and they overreact, dumping perfectly good assets in an attempt to get their books in order.

Anyone tempted by the idea that outside conspiracy is to blame for eastern Europe’s woes should first reflect on the past. Was it an outside conspiracy that led supposedly sane Western institutions to lend tens of billions of dollars to Russian companies notable for their weak corporate governance and cash-splattered business models? Was it a western conspiracy that made supposedly sane people buy homes in derelict rural slums in Bulgaria in the belief that it was the new Dordogne? Was it a Western conspiracy that equated the reforms that were promised in the run up to European Union membership with actually making government transparent and efficient?

The right word for this is not “conspiracy”. Something like “groupthink” or the “madness of crowds” would be a better term. In any market movement, there will always be people who profit by betting against the herd. The wise investors who bailed out of the Russian short-term treasury bill market in early August 1998 made a packet. Those who stayed in lost a fortune. They left for the airport, in one case vowing that they would rather “eat nuclear waste” than invest in Russia again.

Conversely, savvy investors who bought at the bottom of the market in late 1998 have done well. A few years later nuclear waste was back on the menu, as investors praised the stability and prosperity of Vladimir Putin’s regime and guzzled anything in sight. Anyone who said that the good times came from rising oil prices rather than real reform was drowned out in a chorus of hurrahs. Again, some people sold their Russian assets in time. No conspiracy there, just foresight, or luck.

As so often with market downturns, the pain and unfairness now seem intolerable. It may perhaps be some consolation that the gloomiest and most ignorant outsiders are those most likely to lose out.

Warsaw Ghetto book review

The Warsaw ghetto

From beyond the grave

Mar 12th 2009
From The Economist print edition

A remarkable secret archive tells the story of life in the Warsaw ghetto

Who Will Write our History? Rediscovering a Hidden Archive from the Warsaw Ghetto By Samuel D. Kassow Vintage; 522 pages; $16.95. Allen Lane; £10.99 Buy it at Amazon.com Amazon.co.uk

THE Nazis succeeded in exterminating millions of Jews. But they did not succeed in extinguishing their history. That is the story told by Samuel Kassow, an American historian, in a poignant and detailed account of the secret archive of the Warsaw ghetto.

In the autumn of 1940, Warsaw’s Jewish population, swollen by forced immigration, amounted to nearly 450,000 people, all of them walled into an area covering less than four square kilometres. By early 1942 about 83,000 had died from hunger. That summer 300,000 were sent away to death camps, mostly to Treblinka. In April and May 1943 the remaining 60,000 were killed, or captured and deported, in the Warsaw ghetto uprising, during which the Germans levelled that part of the city.

Mr Kassow starts his story amid the passionate arguments among Jews in the declining days of the three great empires: the German, the Austro-Hungarian and the Russian. Was the great dream to be integration? Was it in identification with the surging national consciousness of countries such as Poland, at that stage still partitioned? Was it emigration to a Jewish state in Palestine? Or in the hope of a socialist paradise based on a brotherhood of man rather than ethnic, religious or national affiliation? Or some mixture of the above? Was Hebrew the real language of Jews, or a snooty, artificial distraction? Was Yiddish a degenerate linguistic compromise, or the essential literary and political medium?

After the first world war, those arguments became more pressing. A Jewish state was taking embryonic form in Palestine. The Soviet authorities launched a rival Yiddish-speaking Jewish homeland, Birobidzhan, in a desolate corner of the Russian far east. The newly reborn Polish republic offered the chance of partnership with gentile Poles in a common homeland, albeit one marred by prejudice and discrimination.

The task for Jewish historians in those years was finding an account of their past that would help make sense of the arguments about the present. What role, for example, had Jews played in the Polish monarchy before its dismemberment in 1795? Was the Polish-Lithuanian Commonwealth really a paradise of tolerance, or was that just another myth among so many others? Gentile historians’ accounts were inevitably partial. The Jewish collective memory, with its colourful, folkloristic stereotypes of poor beggars, rich merchants and pious rabbis, was a help, but not an answer. Documents were scanty or missing altogether.

That effort gathered pace after Poland regained its independence in 1918. A pioneer was the young Emanuel Ringelblum, a passionate activist in the left-wing Poale Zion movement. Starting as a student in 1920, he was to become one of his country’s best historians, up to his death in the ruins of the Warsaw ghetto in 1944. Ringelblum is the central character in this book; although it is not a formal biography, the author does an excellent job of accumulating the scraps of information and recollection that have survived the human and archival destruction of the war.

With fine Yiddishist instinct, Mr Kassow does an excellent job too of evoking the atmosphere of those years, particularly the YIVO institute in Wilno (now Vilnius), which was founded in 1925 to give class and clout to Jewish scholarly efforts. The early chapters of the book, full of hope and productive energy, make the final ones all the more effective. The hugely subtle, interesting and complicated world of Jewish thought and culture boiled down to a bitter fight over bread or over scrappy permits; either might hold off death for another few days.

The Jews of the Warsaw ghetto could not prevent their own murder. But thanks to the Oyneg Shabes, the secret archive organised by Ringelblum and other historians, at colossal personal risk, they were at least able to record what they thought, felt and saw. The archive ranged from raw eyewitness accounts to scholarly histories, such as Ringelblum’s own lengthy analysis of Polish-Jewish relations. About 35,000 pages (only a fraction of the whole) survived the war, buried in milk churns and tin boxes. Some were carefully soldered shut; others had leaked, leaving an illegible soggy lump requiring painstaking conservation work. That the documents came to light at all is thanks to the persistence of Rachel Auerbach, one of only three survivors of hundreds of people involved in the project. It was she who went to Warsaw in 1946 and demanded that the cold and hungry survivors of the city’s destruction make the effort to dig out the caches from the ruins.

Locked up for years in the Jewish Historical Institute in Warsaw, the documents have only recently been substantially restored. A full catalogue has yet to be made, but the papers about Ringelblum that Mr Kassow has studied give a vivid, sometimes unbearable, picture of the ghetto’s destruction at the hands of the Nazis, and of the efforts made to preserve a semblance of civilised life that had succumbed to the elemental desire for survival.

The archive also illustrates the tension that exists between the Jewish and gentile experience of the war in Poland. The summer of 1939 had aroused a remarkable sense of solidarity between both peoples; that soon gave way to harsher feelings. Some Polish gentiles outside the ghetto taunted its inmates for their passivity (while at the same time grudging them supplies of arms and ammunition). Nazi anti-semitic propaganda about “Judeo-Communism” had some effect. So did self-interest; dead Jews were unlikely to want their pre-war property back. A poignant short piece by a Jewish poet, Wladyslaw Szlengel, an ardent Polish patriot, sums it up. With no gentile Polish friends left to talk to, he takes comfort in telephoning the speaking clock.

How great it is to talk to you
No quarrels, no words
You are nicer, my little time clock
Than all my former friends.

It is a pity that the author does not give a little space to the view of the ghetto from the outside. And the use of “Pole” as the antonym for “Jew” may jar with some. Many of the people he writes about would have said they were both. But the book remains an informative and moving reminder of what was lost in the Holocaust and the ingenuity and heroism of those who tried to frustrate its perpetrators.

Ruthenia

I am still deluged with work involving the libel case so my journalistic output is very restricted. Sorry


Ruthenia

A glimpse of daylight

Mar 12th 2009
From The Economist print edition

Ruthenia was once independent, for one day. Now Ruthenes are getting restive

FOR connoisseurs of obscurity, the Republic of Carpatho-Ruthenia takes some beating. Seventy years ago, on March 15th, it enjoyed its sole day of independence—declared in the morning amid the Nazis’ dismemberment of the then Czechoslovakia, snuffed out in the evening by an invasion from neighbouring Hungary. Its leader, Avhustyn [Augustin] Voloshyn, died in a Soviet jail in 1945; so did many others. Before the world had even noticed its existence, independent Ruthenia disappeared into first the Nazi, then the Soviet empires.

Ruthenians have had little joy since. A list of famous Ruthenes begins and pretty much ends with Andy Warhol: the artist did not himself speak Ruthene, though his parents did. He once said he had “come from nowhere”. Many Ruthenian activists feel that way, too.

A million-plus by the most generous count (but far fewer according to sceptics), Ruthenians are scattered through the Carpathian regions of Slovakia, Poland and Ukraine, with another bunch in former Yugoslavia. Some are Orthodox, but most are eastern-rite Catholics. That prompted savage suppression in the communist era.

Many doubt the Ruthene claim to any form of national identity. Even the placename is disputed. Czechs and Slovaks, looking east, tend to talk of “Sub-Carpathia”; Ukrainians, looking west, talk of “Trans-Carpathia”. Communist rulers denied Ruthenes existed at all. Ukraine recognised them as an ethnic minority only in 2007. The language—sometimes called Rusyn—is dismissed as a mere dialect of established Slavic tongues, even by some who speak it.

But the Ruthenian cause is stirring. In western Ukraine, Ruthenian revivalists have demanded self-determination. One group has even declared independence. Their self-proclaimed prime minister, Petr Getsko, told a Russian government newspaper in December that the “lion’s share” of Russian gas exports to Europe pass through pipelines across Ruthenia.

In Slovakia, self-declared Ruthenians are more numerous, but shun the separatist strivings across the border. Overshadowed by Slovakia’s much larger Hungarian and Roma (Gypsy) minorities, they would be happy with just a little more schooling and broadcasting in their fragile language.

Hermann Simm

A spy scandal in Estonia

How many more?

Feb 26th 2009 | TALLINN
From The Economist print edition

A senior Russian spy in NATO is convicted

Get article background

WHY he did it is still unclear. But the “how” is leaking out. Hermann Simm, a former Estonian official who was one of Russia’s highest-placed spies in NATO, pleaded guilty to treason on February 25th and was jailed for 12½ years. The Estonian authorities have released some details of a case that has had the spook world buzzing for the past year.

Yakovlev, the man who ran Simm

Russia’s foreign intelligence service, the SVR, recruited Mr Simm on his holiday in Tunisia in 1995. He was a prime catch. He had finished a stint as a top policeman, and was starting a new security job at the defence ministry. The approach was made by Valery Zentsov, once a KGB officer in Soviet-occupied Estonia. Mr Simm was neither blackmailed nor, at first, bribed; he just wanted his Soviet-era rank of colonel back. At a third meeting he was put on the payroll, receiving just over $100,000 in all.

Mr Simm betrayed every secret that crossed his desk. There were plenty: as the man in charge of Estonia’s national security system, he organised the flow of all classified military documents in the country and abroad. Once Estonia joined NATO in 2004, he acted as the Kremlin’s eyes and ears on the alliance too (although his poor English, say some, may have limited his usefulness). He also tried but failed to get hold of secrets from Estonia’s security and intelligence services, which are separate from the defence ministry.

In 2002, say Estonian officials, Mr Zentsov was replaced by another Russian handler. Sergei Yakovlev worked for the SVR’s elite S-directorate, which runs “illegals”: spies who acquire a genuine identity in a foreign country. Mr Yakovlev, a near-native speaker of Portuguese, appears to have acquired Portuguese citizenship illegally, gaining a passport in the name of Antonio de Jesus Amurett Graf. Travelling as a business consultant, he met Mr Simm every three months or so, in at least 15 countries in the EU and elsewhere.

The plan came unstuck because of poor spycraft. According to spycatchers elsewhere, Mr “Graf” tried to recruit a senior official in another country, who reported the incident to his own counter-intelligence service. Under scrutiny, the Portuguese was seen meeting Mr Simm. That set alarm bells clanging across NATO. The difficulty was to observe Mr Simm closely enough to build a criminal case without sparking his suspicion. Estonia’s security service is getting many plaudits for this, which culminated in his arrest last September. In a separate prosecution, Mr Simm was ordered to pay 20m Estonian kroons ($1.7m) for the cost of new security systems. The SVR did not immediately reply to a request for comment.

Mr Simm is not the only Russian spy at high level in NATO. Several other countries are apparently following up five leads arising out of Mr “Graf’s” activities. The results are unlikely to become public. The way in which Estonia put Mr Simm openly on trial is striking. In other countries, those caught spying for Russia tend to be eased out discreetly rather than being brought to justice in the painful light of day.

europe view

Europe.view

Insult and penury

Mar 5th 2009
From Economist.com

Responding to western neglect and ignorance

THE economic crisis is still unfolding across the ex-communist world. Amid the genuine worries about jobs and savings are some other concerns—less substantial, but more toxic.

The biggest is resentment of the outside world’s neglect and ignorance.

How can western commentators lump Slovenia together with Tajikistan as “ex-communist countries”? Why do people confuse Poland’s sound public finances with Ukraine’s catastrophic ones? Why do the frugal Czechs with their solid banking system get lumped together with spendthrift Hungarians? Why does nobody give the countries any moral or political credit for what they have achieved? If any west European country faced the kind of jarring adjustment now being experienced in, say, Latvia, it would expect political upheavals.

Even those political protests that have bubbled up have been hugely exaggerated. It is quite reasonable—even responsible, one could argue—for the public in Latvia, Lithuania, Bulgaria and other countries to feel a bit cross with the politicians who led them into this mess. Isn’t that what political freedom is about?

On top of outsiders’ neglect and hypocrisy comes abandonment. Having painfully climbed into western clubs after five decades of communist captivity, the most advanced ex-communist countries now feel patronised and excluded. If feckless Greece, stagnant Portugal and overheated Ireland look like going bust, the rich countries of the euro zone will bail them out. But the rules for ex-communist countries wanting to join the single currency are arbitrary, and harshly imposed. Lithuania missed eurozone entry by seven-hundredths of a percentage point. Now Poland and Hungary want accelerated entry into at least the waiting room for the euro, and are snubbed.

It is much the same in NATO. Signals that the new American administration may be thinking of a bargain with the Russians over missile defence (you stop or slow down the Iranians, we stop or slow down our new bases in the Czech Republic and Poland) cause even more twitchiness. So new member states feel that they are in the second class compartment in matters of economic and military security.

Such feelings are understandable, but they are a poor basis for action. It was a similar story 20 years ago, when incredulous Sovietologists had to accept that something called “Ukraine” might become a real country and that the “Soviet Baltic Republics” were actually occupied territories on the verge of regaining their freedom. The West had to wake up rather uncomfortably to the news that tens of millions of people who had once been behind the Iron Curtain were now on their doorstep, eager to compete and integrate. It took several years to get the maps right, let alone to work out how to deal with the countries they depicted.

Gaining membership in the EU and NATO, the great achievement of the past decade, took years of hard slog for the countries concerned. The aim then—at least for the most ambitious applicants—was not just to meet west European standards, but to beat them. That happened quickly in some bits of the business world, but the same transformation often lagged in public administration, education, health and transport.

None of that mattered much in boom times. But it meant the ex-communist countries entered the current stormy weather in less than top condition. All too often, their public finances were soggy, bureaucracies unreformed and politicians complacent. The best way to change perceptions is to make them utterly inaccurate, not blame people who hold them for their ignorance, however galling it is.

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earlier leader (editorial) piece on CEE

Eastern Europe

Argentina on the Danube?
Feb 19th 2009
From The Economist print edition


Europe is facing nightmarish problems in its east. With help from the West, meltdown can be avoided

Correction to this article

IF YOU mix East Asia from 1997 with Latin America in 2001, do you get eastern Europe in 2009? Already worried, financial markets are pricing in the likelihood that one or more of the ex-communist countries in the region will default on its debt.

The biggest weakness lies in a financial system that has combined badly run local banks with loosely overseen subsidiaries of Western ones. During the boom years, this system gobbled up credit from abroad, leading to yawning current-account deficits. Both kinds of banks now have souring loan books—the result of reckless lending, often in foreign currencies. Some local banks have failed; many of the foreign-owned ones now depend on their parents’ willingness to keep financing them—and those parents have plenty of problems at home. The Greek government has told its banks to draw back from their lending in the Balkans. Austria’s lending to eastern Europe is equivalent to about 80% of its GDP.

If finance is the immediate worry, the global downturn is causing plenty of other problems. Exports of manufactured goods to western Europe have plummeted; remittances from migrant workers employed there will also surely fall. Ukraine, dependent on exports of steel and coal to Russia, seems to have abandoned the deal it struck with the IMF only three months ago as part of a $16.4 billion bail-out. Latvia, also rescued by the IMF, is expecting a 12% fall in GDP this year. The collapse in output is likely to be as big as Asia’s ten years ago—but with a twist. The Asian countries recovered thanks to export-led growth. Now the whole world is in a mess.



What can the governments do? In many places the policy levers look flimsy. Countries such as Poland and the Czech Republic have cut interest rates to help ease the pain—but this has sent their currencies tumbling, increasing the agony for households that have mortgages in Swiss francs or euros [bad wording here--I meant for Hungarian and Polish households, not Czech ones.EL]. Some countries have an extra problem of big external government debts (in Hungary’s case, the gross figure is near 100% of GDP)[another mistake, I meant gross as in private and public combined]. Even those that could perhaps afford to run a counter-cyclical policy to offset the effects of the downturn are squeezing public finances—in part because they think that cutting deficits will help them reach the (presumed) safety of the euro zone.

For four countries—the three Baltic states plus Bulgaria—the strong euro is a problem; they have pegged their currencies to it. Some fear a repeat of the doomed struggle to keep Argentina’s currency board afloat in 2000-01; or perhaps worse if one currency’s collapse swamps others. As for help from abroad, the IMF can give instructions to individual countries, but it cannot run the whole region. The European Central Bank, which is not a lender of last resort even to banks in the euro zone, has been sniffy about lending to countries outside it.

Worse for some, much worse for others

A very nasty recession is inevitable, but regional catastrophe is not. For a start, talk of “eastern Europe” is imprecise. The woes of Kazakh banks or of Ukraine’s public finances have little to do with the countries, mainly smaller, richer and better governed, that are already in the EU. If Ukraine defaults or (more likely) is forced to restructure its debt, it need not hurt others. Though the region has allowed startling imbalances to develop, foreign-exchange reserves are generally stronger than in Asia ten years ago; and there is less light-footed “hot money”.

For the new EU members, there is also the prospect of help from the West. Their banking systems are far more intertwined than Asia’s were—and the foreign banks are less likely to walk away (see article). The Baltic countries have been bolstered by a Swedish guarantee covering Swedish banks that operate there. Although the EU and the ECB may not want to get involved in bigger bail-outs, they will have to. Even the most short-sighted west European politician will surely not send his neighbours into economic and political anarchy.

This is the most perilous period for east European countries since the collapse of the Soviet Union. People there are going to be a lot poorer and (justifiably) crosser. But it would take a bout of wilfully destructive protectionism and the demise of the EU’s main institutions to turn that into disaster.

Briefing (three-pager) on CEE Economies

Having dropped everything because of the libel suit, I undropped it all briefly to write this piece which actually came out a week ago. Sorry for not posting it earlier

Ex-communist economies

The whiff of contagion

Feb 26th 2009
From The Economist print edition

Eastern Europe’s woes are not unmanageable. But they are not being managed. The result could be catastrophe

Get article background

Correction to this article

Sarah Hanson

AMID the wreckage of Latvia’s retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as “Nasing spesal”. Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country’s economic problems as “nothing special”.

Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country’s rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search of work, leaving rural villages and small towns depopulated.

The central assumption, in Latvia and many other countries in or near the EU, was that convergence with rich Europe’s living standards and other comforts was inevitable. Lending in foreign currency went from 60% of the total in 2004 to 90% in 2008. Why pay high interest rates in the local currency, the lat, when the cost of a euro loan was so much cheaper? In a few years Latvia would surely join the euro anyway. Similarly, worries about financing the inflows were dismissed: Swedish banks would no more abandon their subsidiaries in Latvia than they would pull out of, say, southern Sweden.

Last year tested those assumptions nearly to breaking point. First, Latvia’s housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.

The big cuts in social spending that the package entailed led to vigorous public protests. Now the government has resigned. At a time when strong leadership and public trust are needed more than ever, the country’s squabbling and discredited politicians look hopelessly out of their depth. Latvia is an economic pipsqueak, with just 2.4m people. But the rest of the region is watching nervously, fearful that more bad news from the Baltics could bring others crashing down too.

It is easy to be pessimistic. This is indeed the worst economic crisis since the collapse of the communist planned economies and the wrenching process of privatisation, liberalisation and stabilisation that followed. The main ex-communist economies are likely to contract by 3% this year, according to Capital Economics, a consultancy. Yet the picture is not uniform.


Only a few countries have needed an IMF bail-out. One is Latvia, whose economy is set to contract by at least 12% this year, and whose credit rating has just been downgraded by Standard & Poor’s to junk. Another is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. It received $25 billion in October and faces a contraction of up to 6%. A third is Ukraine—chaotically run, corrupt and badly hit by the slowdown in its main export market, Russia. Ukraine’s IMF deal brought it $4.5 billion in November. But a second tranche of $1.9 billion is stuck; the deal is unravelling as politicians squabble over spending cuts. Its economy is likely to shrink by 10% this year. Other countries with IMF packages agreed or pending include Belarus (a Russian ally which is still expected to see growth this year), Georgia (which was bailed out after last year’s war with Russia) and Serbia.

Most other countries in the region are faring much better, though. Poland—by far the largest economy of the new EU members—is nowhere near collapse. Unlike its central European neighbours, it is big enough not to depend chiefly on exports to the rest of the EU. By European standards, its public finances are in fairly good shape. Its debt-to-GDP ratio is below 50%. Growth will be negligible, or slightly negative, but nobody is forecasting a big decline. Some Polish firms and households have taken out foreign-currency loans—but the figure is around 30% of all private-sector lending, compared with twice that in Hungary.

The second-biggest economy, the Czech Republic, is in good shape too. Its economy may shrink by 2%, but it has a solid banking system and low debt. Its neighbour Slovakia is in better shape still: it managed to join the euro zone this year. Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe’s currency union, rather than just the indirect benefit of being due to join it some day.

Farther afield, the picture is very different. For the poorest ex-communist economies, the problem is not financial meltdown. They lack much to melt. Their exports are raw materials, agricultural products and people. In six countries, money sent home by foreign workers counts for more than 10% of GDP (in Tajikistan and Moldova it is more than 30%). Outsiders who agonise over the Latvian lat or Hungarian forint are rarely bothered with worries about the somoni (Tajikistan), leu (Moldova) or manat (Turkmenistan).

That highlights an important problem. Outsiders tend to lump “the ex-communist world” or “eastern Europe” together, as though a shared history of totalitarian captivity was the main determinant of economic fortune, two decades after the evil empire collapsed. Though many problems are shared, the differences between the ex-communist countries are often greater than those that distinguish them from the countries of “old Europe” (see table).

They range from distant, dirt-poor despotic places to countries in the EU that are not just richer than some of the old ones, but have better credit ratings, sounder public finances and stronger public institutions. In almost any contest for good government, stability or prosperity, Slovenia (under a sort of communism until 1991) looks better than Greece, which invented democracy and was never communist.

The thirst for capital

Historical and geographical quibbles aside, what the ex-communist countries have shared over the past decade is a mighty thirst for capital. Having missed out on decades of growth and integration with the outside world, almost all (a few oddballs in Central Asia aside) are trying to catch up. Money from abroad has come in from borrowing on the bond market, from foreign direct investment or from selling shares. Most often it has come through bank loans.

At one extreme is Russia, which enjoyed huge external surpluses thanks to its wealth of raw materials. But its big companies borrowed lavishly on the strength of that, creating a potential short-term debt problem. Russian corporate borrowers have to pay back around $100 billion this year. At the other extreme lie countries such as Slovakia. They attracted billions from foreign car manufacturers, drawn by a skilled workforce, low taxes and decent roads in the heart of high-cost Europe.

Countries that relied chiefly on foreign direct investment are the least vulnerable now. The new factories may shut down. But it is harder for that capital to flee. Those that rely on foreign investors buying their bonds, such as Hungary, are the most vulnerable: their fortunes vary with every twitch of a trader’s fingers. In the middle are those that rely on lending from foreign banks to their local subsidiaries. That looked solid in the boom years, as Western banks scrambled to win market share by offering good terms to borrowers and lenders in the fastest-growing bit of Europe. It is still highly unlikely that any Western bank will pull the plug on a subsidiary anywhere—even in troubled Ukraine.

But nerves are jangling. The ex-communist countries have survived the first phase of the crisis, thanks to their own policies and some external support. The second phase, in which the rich world is turning stingier and possibly more protectionist and lenders are scurrying to safety, may be harder. The ex-communist economies must repay or roll over a whopping $400 billion-odd in short-term borrowings this year. Coupled with the lazy but easy lumping of nearly three dozen countries together, that creates the region’s biggest danger: contagion (see article). In other words, failure in one place sparks a disaster in another, even though it may be far away and have the same problem in a far more manageable form.

Contagion could happen in many ways. One is if depositors lose confidence that their savings are safe. So far, Western-owned banks have enjoyed rock-solid credibility: more so, in many cases, than governments or other public institutions. But that confidence could be undermined. If only one foreign bank pulls the rug from under one local subsidiary, leaving depositors stranded, it will cloud perceptions of banks’ reliability across the region. The most dangerous kinds of bank runs would be those in which depositors try to pull out either their foreign currency, or local currency which they would then attempt to convert into hard currency. In some countries that could overwhelm the ability of the central bank to support the financial system.

Another weak point is where shareholders take fright. If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing (see chart).

For now, the most likely source of contagion is collapsing currencies. The paradox is that for countries with floating exchange rates, an orderly depreciation would in normal circumstances be a good way of cushioning an external shock, such as the slump in export markets now hitting the ex-communist economies. It stokes competitiveness and, along with lower interest rates, it lays the foundations for a return to growth. Governments with sound public finances might also consider running a looser fiscal policy to counteract the downturn.

Propping up the currency

For most of the countries in the region, such a textbook response is out of the question. Some have currency boards, or pegged exchange rates. In the Baltic states these have been the centrepiece of economic policy for more than 15 years. Abandoning them would not only bankrupt big chunks of the economy that have borrowed in euros. It would also be a huge psychological blow to public confidence in the whole idea of independent statehood. These countries have suffered the most painful part of being in the euro zone—the inability to devalue and regain competitiveness—without getting all the benefits.

Countries with floating exchange rates have a bit more room for manoeuvre. Their problem (a big one in Hungary, a lesser one in Romania and Poland) is that falling exchange rates may bankrupt the firms and households which have, in past years, taken out unwise loans in foreign currencies, chiefly euros and Swiss francs. That was, in effect, a convergence play. If you believed your country was heading for the euro zone some time in the next few years, then why not take advantage of the low interest rates there, rather than suffer the higher ones in your domestic currency?

What seemed a minor risk back then now looks painfully mistaken. For those earning forints or Polish zloty, the big swings in exchange rates in recent weeks have sent the size of both loans and repayments spiralling upwards. The zloty has dropped 28% and the forint 22% against the euro since the middle of last year. If the East Asian crisis of 1997 is any guide, these and other currencies may yet have further to fall.

This risk of a currency collapse will limit these countries’ options. So far many big central European countries have cut interest rates heavily to try to boost their economies—Poland’s central bank cut its policy rate again this week. But currency weakness will limit their room for manoeuvre. The Czech, Hungarian and Polish central banks issued a co-ordinated statement this week hinting they might intervene to support their exchange rates. But that route is tricky. Russia has blown half its reserves in a series of unsuccessful attempts to try to prop up the rouble.

Spending and tax policies would be another way of dealing with a downturn. But these are constrained, too. Those countries with a chance of joining the euro are scrambling to cut their budget deficits to get them in line with the 3% of GDP target set by the EU’s Maastricht treaty. Yet that aggravates the problem. The danger for Latvia and Ukraine is a downward spiral, where cuts in public spending damage the economy in a way that helps to entrench the deficit.

So far, the economic crisis has not translated into populist or protectionist politics. It is the east European countries that have been demanding that the rest of the EU stick by the rules of the single market. Their development over the past decades has been thanks to the free movement of capital, goods and labour. They would like a lot more of it: in a contest to subsidise industries, rich countries always win.

But that stance will not hold indefinitely if things get worse. Willem Buiter, a prominent economist, believes it is only a matter of time before some of the ex-communist countries introduce capital controls. That, in theory, would allow them to concentrate on stabilising their economies without worrying so much about the external value of their currency. If voters find the economic pain of adjustment unbearable, politicians can pass laws that will make foreign-currency borrowings repayable in local currency. That would be met with fury by the foreign banks, who would in effect see their loan books expropriated. But it could happen.

Against that background, what can be done? The east European countries are, belatedly, co-ordinating their approach within the EU, holding their own mini-summit on March 1st. They want to embarrass countries such as France for what they see as its protectionist approach to the crisis. They are supporting each other: the Czech Republic and Estonia were among those contributing to the Latvian bail-out.

But even co-ordinated local efforts are unlikely to make much difference, given the scale of the problem. The real lead, and the real money, must come from outside the region. That brings into play a slew of political problems. Having trumpeted their free-market principles in past years, and dismissed the stodgy approach of countries such as Germany and France, the new EU members from eastern Europe are now turning to old Europe in the hope that it can hurry up the flow of EU structural funds to counteract the downturn, bail out or prop up over-exposed banks in places like Austria, and stretch the rules of the European Central Bank to let it provide support to countries outside the euro zone. The case for such measures is strong, and it is in the interest of all Europe that contagion is contained. But that does not mean that it will happen.

Europe view -- Belarus

Europe.view

Closer still
Feb 26th 2009
From Economist.com


Europe should not embrace Belarus—yet


SO LONG as Belarus does not give diplomatic recognition to two Russian-backed puppet states in Georgia, its president, Alyaksandr Lukashenka (to give his name using the Belarusian transcription rules), can attend the European Union’s summit in Prague in May. That is the message coming from Brussels to the regime in Minsk. It is not wholly wrong, but it is not nearly enough.

By April, the EU has to decide whether the partial political liberalisation in Belarus in recent months warrants a real change in the way the country is treated. The issue is divisive. A powerful argument is that Mr Lukashenka is trying to escape the Kremlin’s embrace. His son, Viktar, is said to be pushing him in this direction.
AFP
AFP


Belarus under Mr Lukashenka is an odd mix of beastly and sometimes lethal repression (half a dozen people have disappeared and are believed murdered) coupled with a steady growth of national identity. It is not, however, the “red-white” identity of the beleaguered opposition. Named after the colours of the former Belarusian national flag, the opposition is strongly pro-Western, and traces the country’s historical roots back to the Grand Duchy of Lithuania (which had its capital in present-day Belarus, and an official language that is an ancestor of modern Belarusian).

Mr Lukashenka has treated the “red-white” cause roughly, not only politically but also in his discouragement of Belarusian language and culture. Instead, he has promoted a “red-green” identity, named for the colours of the Soviet-era “Byelorussian” flag—briefly dropped in favour of the red-white version, and now restored. It stresses Soviet-era themes, such the role of Belarus in the second world war, and ideas such as Slavic brotherhood. In some ways, he has moved closer to Russia, pressing the “union state” (much discussed but never implemented) and closer military ties.

Some think that history will judge him kindly for that. Perhaps in a future Belarus, his moustachioed visage will even be on the bank notes, as a father of the nation alongside such giants as Francisk Skaryna, the first person to translate the bible into Belarusian.

But from another point of view, this is all an atrocious betrayal of European and Atlantic principles. Mr Lukashenka is just flirting with the West, in order to drive a harder bargain with Russia. He has done it before; now he is doing it again. Inviting Mr Lukashenka to rub shoulders with Europe’s leaders at the May summit would be a colossal mistake. It would demoralise the people in Belarus who believe in a European future. And it will show the Belarusian leadership that a few phoney gestures towards freedom are all that is needed to fool the West.

It is certainly right to bring business, culture and other bits of public life in Belarus into close relations with the West. Training officials to deal with EU rules, and a more relaxed visa regime, will help dilute the paranoia and sense of isolation that the regime has stoked. It will be particularly effective at a time when the gloss is fading from Russia’s experiment with oil-fuelled superpowerdom. So the EU should certainly press ahead with the “Eastern Partnership”, conceived and promoted by the Czechs, Poles and Swedes as a way of extending Europe’s soft power to the eastern borderlands.

It may be necessary to swallow hard and relax the travel ban on some senior people in the regime. It may even be necessary to meet at some point with Mr Lukashenka—preferably as part of a deal that sees him leaving power. But it is a step too far to treat him as if he had done everything already.

Hermann Simm

[I am totally tied up with libel litigation right now so apologies for the paucity of material on the site]

Espionage at NATO

Spy scandal in Estonia
Feb 26th 2009 | TALLINN
From The Economist print edition


A senior spy for Russia in NATO is convicted


WHY he did it is still unclear. But the “how” is leaking out. Hermann Simm, a former Estonian official who was one of Russia’s highest-placed spies in NATO, pleaded guilty to treason on Wednesday February 25th and was jailed for 12½ years. The Estonian authorities have released some details of a case that has had the spook world buzzing for the past year.

Russia’s foreign-intelligence service, the SVR, recruited Mr Simm on his holiday in Tunisia in 1995. He was a prime catch. He had finished a stint as a top policeman, and was starting a new security job at the defence ministry. The approach was made by Valery Zentsov, once a KGB officer in Soviet-occupied Estonia. Mr Simm was neither blackmailed nor, at first, bribed; he just wanted his Soviet-era rank of colonel back. At a third meeting he was put on the payroll, receiving just over $100,000 in all.

Mr Simm betrayed every secret that crossed his desk. There were plenty: as the man in charge of Estonia’s national security system, he organised the flow of all classified military documents in the country and abroad. Once Estonia joined NATO in 2004, he acted as the Kremlin’s eyes and ears on the alliance too (although his poor English, say some, may have limited his usefulness). He also tried but failed to get hold of secrets from Estonia’s security and intelligence services, which are separate from the defence ministry.

In 2002, say Estonian officials, Mr Zentsov was replaced by another Russian handler. Sergei Yakovlev worked for the SVR’s elite S-directorate, which runs “illegals”: spies who acquire a genuine identity in a foreign country. Mr Yakovlev, a near-native speaker of Portuguese, appears to have acquired Portuguese citizenship illegally, gaining a passport in the name of Antonio de Jesus Amurett Graf. Travelling as a business consultant, he met Mr Simm every three months or so, in at least 15 countries in the EU and elsewhere.

The plan came unstuck because of poor spycraft. According to spycatchers elsewhere, Mr “Graf” tried to recruit a senior official in another country, who reported the incident to his own counter-intelligence service. Under scrutiny, the Portuguese was seen meeting Mr Simm. That set alarm bells clanging across NATO. The difficulty was to observe Mr Simm closely enough to build a criminal case without sparking his suspicion. Estonia’s security service is getting many plaudits for this, which culminated in his arrest last September. In a separate prosecution, Mr Simm was ordered to pay 20m Estonian kroons ($1.7m) for the cost of new security systems. The SVR did not immediately reply to a request for comment.

Mr Simm is not the only Russian spy at high level in NATO. Several other countries are apparently following up five leads arising out of Mr “Graf’s” activities. The results are unlikely to become public. The way in which Estonia put Mr Simm openly on trial is striking. In other countries, those caught spying for Russia tend to be eased out discreetly rather than being brought to justice in the painful light of day.

Europe View

Europe.view

Open sore

Feb 5th 2009
From Economist.com

Unintended consequences of modernisation

Get article background

FIRST the financial crisis, then the economic one, then—soon—a social one, and after that a political one. The world economic crisis is hitting the countries of eastern Europe particularly hard. Events such as devaluations, ratings downgrades and shocking economic statistics that would be front-page news in normal times barely make it into a preoccupied world media.

It would be nice to say that the countries that followed the right (ie Western-mandated) policies in past years are surviving reasonably well, while naughty ones that failed to finish their homework are suffering. That’s true up to a point. Reckless policies (especially in the big ex-Soviet countries) are punished particularly hard. Prudent Estonia squirreled away a cushion of savings in good times that will make it a bit less vulnerable than its Baltic neighbours to the south.

The much bigger lesson is that what once looked like the right thing now seems to have been either useless or outright dangerous. As Katinka Barysch, of the Centre for European Reform, a think-tank, points out in a new paper*, the ex-communist countries now in the European Union have made themselves particularly vulnerable thanks to their energetic adoption of open economic policies.

First, they are hugely dependent on exports—close to 100% of GDP in some cases. Foreign trade is a fine thing. It brings in investment from outside and creates a wonderfully competitive environment at home. But when the export markets crash, the effect is immediate.

Secondly, the kind of foreign trade was particularly risky: these countries integrated into the global-supply chain in industries such as electronics and cars, which are proving far more cyclical than anyone suspected. That may prove a near catastrophe for a country such as Slovakia, which is one of the world’s top producers (on a per capita basis) of cars and car parts.

Even worse, it is the auto industry where politics is playing a role in the new era of bailouts. In theory, cash-strapped vehicle producers should be favouring low-cost locations as they try to cut costs. That would mean more investment in Slovakia and Hungary, but cut-backs in high-cost France and Germany. But the rich-Europe bailout packages include clear conditions: save the jobs at home.

Selling the banking system to outsiders is proving to be another vulnerable area. In the 1990s, that looked like pure common sense. Local banks were wobbly and sometimes outright dodgy. Foreign banks promised modernisation and a big capital base: just what an emerging economy needed. For a time that proved a huge success. Foreign banks drove down borrowing costs for firms and households who wanted to borrow, provided attractive investment vehicles for those who wanted to save, and made juicy profits in the process.

Now that looks very different. It is the western banks that look wobbly. Their loans are going sour (especially those made in foreign currency on wildly optimistic assumptions). A harsh political suspicion is in the air: are (say) Polish companies losing vital lines of credit because (say) Austrian managers are pulling the liquidity home?

It’s too late to put the clock back, but demography makes new thinking urgently needed. The great worry for the ex-captive nations was always that they would get old before they got rich. A long slump risks catastrophe.

The best hope now is to stoke competitiveness by improving infrastructure and education, and continuing with structural reforms of pensions, the labour market and so on. But these are painful. And from the public’s point of view, the reformers have some explaining to do.

"New Europe and the economic crisis” by Katinka Barysch is published by the Centre for European Reform.

Money in misery

Divorce (another opening salvo from my new secondary beat as legal-affairs correspondent)

Feb 5th 2009
From The Economist print edition

International marriages are crumbling with the global economy, revealing unseen pitfalls in cross-border divorce law. Good news for lawyers

Tim Marrs

MARRIAGES that thrive on money may wither with thrift. That is a depressing lesson from the world economic crisis, which has brought a surge in business for divorce lawyers in former boomtowns such as London and New York. When one or both spouses is from a foreign country, divorce is not just sad but complicated too—especially when most assets may be in a third country, a pension in a fourth, and offspring in a fifth.

Globalisation has made binational marriages, once exotic, much more common among high-earning, highly mobile families. When they stop being high-earning, life gets tricky. Louise Spitz of Manches, a London law firm, has observed an “exceptional” period since September. “With the redundancies in the City there has been a concomitant wave of marital upheaval,” she says. “Families used to living on huge bonus income are unable to continue with the commitments they have taken on—housing and school fees and the cost of living the high life.” Manches has taken on eight more divorce lawyers to cope with the extra work. A high proportion, Ms Spitz and other lawyers reckon, of the once-rich couples now breaking up include at least one foreign spouse.

So who sues whom for divorce and where? How much money will be awarded to whom? Will it be collected? And how? The answers are far trickier than most non-lawyers would imagine. Take, for example, this lightly disguised but real-life example: a wealthy philandering Texan banker with a French wife. Formerly resident in New York, with a recently-lost good job and rented house in London, he now plans to move back to Texas. His wife, newly suspicious and with no money of her own, wants to take the children home to France. She needs her family, she says. What she actually needs is urgent, specialist legal advice.

A London divorce settlement might give her many millions: a house, school fees and maintenance until the children are adults, or even indefinitely. An English court may well disregard a prenuptial agreement, particularly if one of the parties did not have independent legal advice. And it will tend to care more about immediate needs than about whether assets were acquired during the course of the marriage, or predate it, or are the result of an inheritance. All assets are likely to be divided. If the wife is lucky, she may even be able to collect her share.

In the wife’s native France, things will look very different. In her favour is that conduct counts—so adulterous spouses will be penalised. In most other Western countries, divorce courts have given up attributing blame. Even domestic violence is often ignored, though it still counts heavily in some jurisdictions, such as Florida.

But in the typical French divorce, any alimony (also called maintenance) will be less and for eight years at most; any prenuptial agreement will be binding. Only assets acquired during the marriage are up for grabs. If, in our example, the American husband moves to France, he will be expected to play an equal part in bringing up the children—a requirement that would delight some fathers, but by no means all.

If the errant husband has the divorce filed in Texas, the tables are turned even more dramatically. The wife risks being left penniless. In Texas state law, alimony is usually minimal and temporary—though child support, thankfully, is a federal matter. In America, the law varies hugely between states. Most exclude from the settlement assets acquired before the marriage (but Michigan and Colorado don’t). Most exclude inherited property (but Massachusetts and Oregon don’t). In most states, judges will enforce prenuptial agreements (but they often won’t in Alaska).

If the Texan husband decides to file in New York, however, he may find the outcome startlingly expensive. As in some English court rulings, New York courts may award one party a share of a spouse’s future earnings—assuming that they are based on a qualification, such as an MBA or medical degree, that was earned thanks to a joint effort in happier times. Yet New York law has one big catch: unless the parties have signed a formal separation agreement it requires proof of cruelty, adultery or abandonment, whereas other states allow “irreconcilable differences” as grounds for a divorce. So binational couples in New York who want to end their marriage may find themselves unable to do it there, and squabbling about alternatives. Rules differ, too, on what constitutes residency in a particular jurisdiction. In hedonistic Las Vegas, six weeks is enough.

According to Jeremy Morley, an international divorce lawyer based in New York, hiding assets from a spouse is also much easier in some countries than in others. California, at one extreme, requires complete disclosure of assets. At the other extreme, Austria, Japan and many other countries require very little disclosure. A California court recently ordered a husband to pay $390,000 in costs and penalties to his wife because he did not disclose some significant financial information. In another jurisdiction, the assets could have stayed hidden.

Who gets the children?

Cash and kids may pull in different directions. Countries that are “man-friendly” (shorthand for favouring the richer, usually male, partner) when it comes to money may be “mum-friendly” when it comes to custody. Japan, for example, is quick and cheap for a rich man—unless he wants to keep seeing his children. English courts are ferocious in dividing up assets, even when they have been cunningly squirrelled away offshore. But compared with other jurisdictions, they are keen to keep both divorced parents in touch with the children.

The children’s fate, even more than family finances, can be the source of the hottest legal tussles. The American State Department unit dealing with child abduction has seen its caseload swell from an average in recent years of 1,100 open cases to 1,500 now. In Britain, the figures rose from 157 in 2006 to 183 in 2007, according to Nigel Lowe of Cardiff Law School.

Of the cases reported worldwide, mothers are the main abductors when a marriage breaks down. They are cited in 68% of cases. Ann Thomas, a partner with the International Family Law Group, a London law firm, says child abduction has increased “dramatically” in the past three years or so. A big reason is freedom of movement within the European Union, which has enabled millions of people from the new member states to live and work legally in the richer part of the continent. That inevitably leads to a boom in binational relationships, and in turn more children of mixed marriages. Ms Thomas notes that when a relationship between a foreign mother and an English father breaks down, the mother often assumes that she can automatically return to her homeland without the father’s permission. That may be a costly legal mistake.

Tim Marrs

Most advanced industrialised countries, plus most of Latin America and a sprinkling of others, are signatories to the 1980 Hague Convention, a treaty which requires countries to send abducted children back to the jurisdiction where they have been living previously. That is fine in theory: it means that legal battles have to be fought first, before a child is moved. It is a great deal better than a fait accompli which leaves one parent in possession, while the other is trying to fight a lengthy and expensive legal battle in a faraway country.

But in practice things are very different. Views on the desirability of children being brought up by “foreigners” vary hugely by country; so do traditions about the relative roles of fathers and mothers in bringing up their children after divorce. In most Muslim countries, for example, the assumption is that children over seven will be brought up by the father, not the mother, though that is trumped by a preference for a local Muslim parent. So the chances of a foreign mother recovering abducted children from a Muslim father are slim. Apart from secular Turkey and Bosnia, no Muslim countries have signed the Hague Convention, though a handful have struck bilateral deals, such as Pakistan with Britain, and Egypt and Lebanon with America.

Japan has not signed it either—the only member of the rich-country G7 not to have done so. Canada and America are leading an international effort to change that. Foreign fathers, in particular, find the Japanese court system highly resistant to attempts even to establish regular contact with abducted and unlawfully retained children, let alone to dealing with requests for their return. Such requests are met with incomprehension by Japanese courts, complains an American official dealing with the issue. “They ask, ‘Why would a father care that much?’” Countries edging towards signing the Hague Convention include India, Russia and mainland China. But parents whose ex-spouses have taken children to Japan should not hold their breath: as Ms Thomas notes, even if Japan eventually adopts the Hague Convention, it will not apply it retrospectively.

Games with different rules

Moreover, even signatory countries may be bad at abiding by the convention, especially when it means enforcing the return of children to a parent alleged to have been abusive. The annual State Department report to Congress on observance of the Hague Convention lists Honduras as “non-compliant” and nine other countries (Brazil, Bulgaria, Chile, Ecuador, Germany, Greece, Mexico, Poland and Venezuela) as showing “patterns of non-compliance”. Anyone in a wobbly marriage with a citizen of these countries might bear that in mind before agreeing to let the children go on holiday there.

But America is not blameless either, particularly if parents try to recover their children through state rather than federal courts, where judges may be unaware of the Hague Convention’s requirements. “Except in Florida, New York, California and Texas, a judge may only hear one Hague case in his career,” says a State Department official. Judges who get it wrong can be overruled on appeal, but it takes time and money: the Hague Convention aims to make proceedings quick and cheap, thus making abduction less likely. Whereas Britain offers automatic legal aid to the foreign parent trying to recover the children, in America they must rely on their own resources or a pro bono lawyer.

Making wily choices about possible jurisdictions is often criticised as “forum shopping”. But the stakes are high: ending up in the wrong legal system, or with the wrong approach, may mean not just poverty but misery. Mr Morley says the differences between one divorce jurisdiction and another are far more than, say, playing a sporting fixture at home or away. As the table shows, totally different rules apply.

So it is understandable that a disillusioned spouse, and his or her lawyer, will try hard to get the most favourable jurisdiction. Yet that can all too easily lead to each party starting, or even finishing, a divorce in a different country. Sorting out these cross-border legal wrangles can be colossally expensive. A tussle between jurisdictions usually starts in six figures, in dollars, euros or pounds; when all four legal bills, of both sides’ costs in both countries, are totted up, it easily shoots into seven figures. And it is hugely time-consuming. The children involved may reach adulthood before the final verdicts are given.

International attempts to tidy up the law have made some things better, but not all. The European Union (where 875,000 divorces take place each year, a fifth of them binational) introduced a reform in 2001 called Brussels II. This has largely stopped “forum shopping”, with a rule that the first court to be approached decides the divorce.

The problem with this rule is that it encourages those in troubled marriages to end them, not mend them. Even if a marriage is doomed, the trend in family law is to resolve the dispute out of court, typically through mediation. A race to issue proceedings makes it much more likely that matters will get nasty, as well as lengthy and costly. David Hodson, an international family law specialist, notes sadly that “This law works against reconciliations and resolutions out of court. Cases can be won and lost by one spouse issuing a divorce a matter of minutes before the other spouse. That must be wrong.”

Tim Marrs

The law of dirty tricks

Brussels II also encourages some less scrupulous lawyers to behave badly, urging their clients to act fast and dirtily. A London divorce lawyer recalls a case where a husband from an overseas country had acquired his wife’s European nationality by marriage, living briefly in her continental home country before moving to London. Five years and two children later, the marriage was on the rocks, with the husband away working in East Asia. Without his wife’s knowledge, he filed for divorce in her country, one of the stingiest jurisdictions in Europe (from her point of view). His only connection with it was his marriage to the wife he was trying to dump cheaply. Had the case been heard in London, where both parties had much stronger links and had owned a home for years, she would have done far better.

To avoid such cases, a further EU measure, Rome III, tried to stipulate that a marriage should be ended only by the law that has governed it originally. That works fine in similar countries where divorce rules are highly codified, precedents do not matter and judges’ discretion is limited. It already applies in some northern European countries, so that Dutch courts, for example, will apply French law when dealing with a French couple whose marriage has ended during a posting in The Hague.

But such a rule works much less well when other systems are involved. English law is much more complex, and is based on intricate precedents and judges’ discretion that cannot simply be looked up and applied. Even greater difficulties arise when couples come from more distant countries. Would a Swedish court want to apply sharia law to a divorcing couple recently arrived from Saudi Arabia? Many Swedes flinched at that. Mr Hodson complains that it would mean that “the essence of a country’s community life found in its family laws is removed and replaced by the laws of another country.” In the United Kingdom, he says, it would be “entirely against [national] law and policy.”

For richer, for poorer

Now that Rome III has been stymied, a group of nine countries, led by Spain and France, is going ahead under a provision in EU law known as “enhanced co-operation”. This allows like-minded countries to work together, leaving the unwilling behind. And still more international tidying-up operations are in the works. Another Hague Convention tries to harmonise arrangements on cross-border child-support payments—an area that tends to be a bit less contentious than divorce, where views of what is fair differ wildly.

Perhaps the biggest weakness of the system is the advantage that it gives to the richer partner when an international marriage breaks up. Experienced lawyers can operate, if necessary, with high speed to help the poorer spouse—for example, by putting the first hefty legal bill on the husband’s credit card before he is aware of what his wife is up to. In England, that may be followed by a swift move to initiate divorce proceedings, and then an emergency maintenance application that includes provision for legal costs. When the richer party has assets in that jurisdiction, a fair fight is possible. But Kerstin Beyer, a German-British divorce lawyer at the International Family Law Chambers in London, says the tables are often stacked against the poorer (and usually less knowledgable) spouse. Some husbands file for divorce abroad and simply fail to turn up at the English court, hoping that the cost and delay of enforcing the judgment abroad will lead their ex-wife to give up. A client of hers trying to gain the assets she had been awarded in Colorado was faced with a demand for a $15,000 upfront payment from a lawyer there: an impossible expense for someone of her means. Another has been pursuing, expensively and so far fruitlessly, assets in Luxembourg and Germany awarded by a London court. Pensions are particularly tricky. Some countries split them between divorcing couples as a matter of course; others regard such requests from foreign courts coldly.

More fundamentally, divorce arrangements in countries with English-style common law are still liable to be influenced by highly atypical fights between the super-rich, who can afford to take cases to the highest courts. In most marriages there is barely enough money to support one family in one country, notes Ms Spitz. Spreading that between two sides is a stretch, even without an expensive legal fight. As house prices plunge and savings shrivel, divorcing couples are fighting over a shrinking cake.