Spain's Federalism Problem

After enduring almost half a decade of non-stop recession, Catalonian President Artur Mas and his incumbent Convergence and Union Party have had enough with Madrid. Failure to tackle debt and restore growth at the center has led Mr. Mas and his regional majority to pursue outright independence. But achieving independence won't be easy, and Mr. Mas will have to get permission from the national government just to hold a referendum on the issue. Even if he gets the okay, the fight for independence will still be far from over, and the regional leader will have to convince a large number of skeptics that his plans will prove to be a better alternative than anything Madrid has to offer.

Catalonians have taken to the streets in droves to show their support for independence

But regardless of what happens at the polls, will secession even serve Catalonia's interests? Sure, leaving Spain may rid the region of an economic deadweight that has slowed all growth, but secession could spell trouble when it comes to foreign trade as the new country would have to sign multitudes of bilateral and multilateral agreements just to maintain its current level of commerce. Furthermore, once free of Spanish clutches, the region will lose its Eurozone membership, which could spell trouble on a whole host of economic fronts. Public debt payments could be stalled and financial transactions could grind to a halt as well.

So what then is the solution to this grand dilemma? If staying part of Spain endangers Catalonia even further, what should the region's leaders do when it comes to the unknown waters of independence?

Well, while no solution is perfect, there are better, more sound alternatives to President Mas's heavy handed separatism. One of those alternatives would be to demand more authority from the central government. While Spain is certainly a federal country, its brand of federalism puts a premium on central authority. The post-Franco constitution explicitly states that all regional authority stems from the national government. Concentrating so much power at the center means that for any regional government to gain any level of authority, it must lobby the national government to devolve more power to the peripheries. Even this devolution isn't constitutionally guaranteed, however, and is only maintained by weak majority-passed statutes. 

Furthermore, the very fact that Spain has taken this statute-led approach to federalism has created an asymmetry of subnational power across the regions. While some regions like the Basque country, and more importantly, Catalonia have broader powers, others, like Andalusia have bypassed efforts at devolution. Asymmetry tends to be a good approach when it comes to multinational countries like Spain because it ensures that minority-majority areas have more local sway than would otherwise be allotted under an entirely equal, symmetric system like the United States. These multinational countries use asymmetry to "hold together" their highly diverse hinterlands from sectional conflict and ensure that a weak center maintains some level of unity.

The only problem with Spain is that it is not a "holding together" country. Rather, its various regions "came together" like the American colonies and ceded their regional authority to a stronger center in order to overcome an insurmountable challenge. In the American case, that insurmountable challenge was the British Empire. For Spain, it was the Muslim Moors. But unlike America, Spain never had the same fear for central authority that enveloped the British Atlantic world during the 18th Century. This meant that the centrifugal forces of regionalism had next to no steam and stood no match against nationalist unifiers like Isabel and Ferdinand. The Counter Reformation and subsequent Inquisition only fueled unification even further so that by the end of the 16th Century, Spanish absolutism had reached its pinnacle.

Four centuries of economic development and industrialization would eventually take their toll on absolute central authority, and regionalists would cloak their sectionalist agendas behind a mask of democratization. Still, the stage had already been set, and Spain and its regions were destined for a path dependent future set about by their dictatorial past. The rise of Francisco Franco would only confirm these fears and would stall any centrifugal forces from making any ground.

With a tumultuous, absolutist history like this, it comes to no surprise that Spain's 1978 constitution, even with its seemingly federalist concessions, continued to concentrate power in the center. Fast forward three and a half decades later and the consequences of a path dependent future are ever more clear: a discontented Catalonia wants to secede from its Spanish mother government because it believes that the central government will fail on all accounts to remedy the recession and remedy Spain's federalist flaws. In the eyes of President Mas, both problems are intrinsically connected and fundamentally unsolvable under the current state of affairs.

But when it comes to Spain's federalist flaws, Mr. Mas is simply wrong. Spain may be on a path dependent course that has stifled regionalism, but the country can become conscious of its own flaws and attempt to correct them. This approach is precisely what Mr. Mas and Spanish Prime Minister Mariano Rajoy must take in order to preserve their fragile union.

Still, empowering the regions is no simple task and will require both leaders to work together to forge consensus. One area they could begin is with Spain's upper legislative chamber, the Senate, which badly needs reforms to revitalize its increasingly irrelevant role as a political body. Unlike its American equivalent, the Spanish Senate is largely a revisionary chamber that lacks many formal legislative powers of any kind. While most of its members are directly elected by the people, a large number are also appointed by each of the regional governments, who often times put in place legislators who share their very same regional sympathies. This makes the Senate the more "territorial" of the two legislative chambers in Spain; still, without any real authority of any kind, the Senate's territorial voices often fall on deaf ears and fail to accomplish much of anything.

Thus, it only makes sense to empower the upper chamber and give it new authority to do more than just review and rubberstamp decisions of the lower chamber, the Congress of Deputies. Giving the Senate power to initiate legislation related to the regions would be a good start, but other, farther reaching changes may also be necessary to bring an end to regional strife. Sure, reforms like these might stifle legislative progress and lead to national gridlock, but they will ensure that regionalism actually has a voice at the national level. 

Ensuring that the upper chamber is entirely appointed by regional governments will also be key as well. Losing electoral accountability may generate popular backlash in the short term, but it will give regional parties an even greater voice in Madrid and will make the entire chamber far more accountable to regional interests.

Still, success won't simply come by tampering with the Senate. More power must be devolved to the regions, even if nationwide policymaking is hurt in the process. While far reaching authority over health and education is already in the hands of virtually every regional government around the country, power over taxation still remains at the center in Madrid. Changing revenue sharing agreements might remedy some of these problems, but strict constitutional changes allotting broad regional authority to tax income and other revenue-generating areas of the economy are a must if Spain is to stay unified.

But as it is now, Spain has reached a political crossroads. More than half a millennia ago, the country came together to defeat the insurgent Moors who had occupied their territory for centuries. Now, the beleaguered nation must hold itself together by ceding power to its subnational units. Only time will tell if it's able to do so.

Ontario's Political Tidal Wave

Ontario politics is amid a sea of change. After disgruntled Liberal Premier Dalton McGuinty decided to call it quits and resigned his post, the future of the provincial government is in limbo. While the centrist Liberals will most likely remain in power for the remainder of their term, their prospects of winning at the polls for an unprecedented fourth time are low.

Premier Dalton McGuinty, leader of the Ontario Liberal Party

But is this really much of a surprise? After all, Mr. McGuinty and his party have been in government since 2003 and have weathered two economic downturns in the process. Failure to deliver on campaign promises, like tackling the province's ballooning budget deficit, has also taken a toll on his party's support. Just a year ago, the Liberals saw their parliamentary majority vanish at the polls as the centrist Progressive Conservatives (PCs) and left-leaning New Democrats (NDP) took advantage of a poor economy to propel themselves to a combined majority. Still, the two opposition parties weren't able to reconcile their differences and the Liberals were forced to form a minority government.

One year and one federal election later, the Ontario Liberals are even worse off. Current polls have them behind both the PCs and NDP by a whopping fifteen points. Worse yet, their bastion of support has been broken in the 416, better known as inner-city Toronto. Could this be a realigning election if there's even such thing as one in Canada? If it is, what has caused this huge shift in support?

Well, barring any considerations about Canadian political culture, there is one possible explanation: the rise of the federal NDP to prominence. With the late Jack Layton putting the social democratic party on the map, progressive-minded people in Toronto and other areas of the country have come to see the NDP as more representative of their interests than the Liberals. They have translated this federal support into provincial support and have provided Ontario NDP with the insurance of national party coattails, something all too foreign to any Canadian citizen.

Winning a large amount of support in metropolitan areas is certainly a first for the Ontario NDP, who have always focused most of their efforts on winning in the northern, more rural areas of the province. These areas are far from progressive in the cosmopolitan, forward thinking sense. Rather, they are filled with rabid rural populists who carry culturally conservative tendencies and abhor elitism.

Up until now, the PCs have failed to capitalize on this cultural conservatism and have seen themselves shut out of the north in practically every election. Much of this stems from the fact that they never absorbed the grassroots populism of the overtly anti-tax Reform movement that swept across Canada during the 1990s. Even under the likes of Premier Mike Harris, who once called himself "Ontario's Margaret Thatcher", the PCs stuck to their 'Red Tory' roots of appealing to a Rockefeller Republican-like constituency of upscale urbanites. 

But the tides are changing, and just a year after the PCs failed to secure more than two ridings in the north, they've now jumped out to an early lead. There are two possible explanations for this. The first is that well-to-do Liberal voters in the north have simply defected to the PCs in desperation. Aside from that, there's also a chance that some overtly populist voters disgusted with what has become more of a court party than a country party have jumped the NDP ship and have joined the PCs. My guess is that while the PCs have benefited more from their Liberal rivals, some former NDP voters have also joined their caravan.

Hours south in Toronto, the PCs and NDP are knotted up in what will be a close race. Of course, the Liberals are in a squandering third with the NDP picking up much of their vote.

Still, beyond any support the NDP will pick up, what effect will Ontario's next provincial election have on their party? Well, if the party comes to increasingly rely on a progressive-minded Toronto constituency for its support, there's a very good chance that its platform, and more importantly, its Program for Government will change.

Let's just look at one area in particular: environmental policy. At the moment, the Ontario NDP depend on the support of blue collar northerners whose economic well being is centered around exploiting natural resources. These northerners are particularly hostile to any form of environmental regulation and see any encroachment of government in this manner as endangering their way of life. The NDP have been highly sensitive to these fears and have made every effort to avoid environmental issues altogether. During the 2011 campaign, they didn't even mention climate change once and neglected to put forward any plan to protect the environment whatsoever. Compare that to the Liberals and PCs who had entire sections in their manifestos highlighting the hallmarks of renewable energy and controlling climate change. 

But alas, when it comes to the Ontario NDP and climate change, no one gets it better than Hugh Mackenzie:

The Ontario NDP has essentially turned its back on the environmental movement to go for the populist hit.

Still, political parties are fluid institutions, especially in Canada, and with the NDP picking up a large chunk of support from forward-thinking, environmentally-friendly Torontonians, there's little doubt that the party will have to change when it comes to climate change. But change will come in many other policy areas as well and could remake the NDP altogether.

This could spell trouble in the future should the party want to continue to be the perennial standard-bearers of the forgotten north. Recent polls indicate that their stranglehold on the north is already starting to crack and could all but fall apart in the years to come.

But regardless of what happens in the north, Ontario's next provincial elections are likely to be highly contested by all major parties. While only the PCs and NDP stand a realistic chance of winning and going into government, the Liberals could find themselves as power-brokers able to make or break any new government. Still, with the Liberals on the way out, Ontario might not be approaching a political tidal wave, but it's certainly going through a sea of change.

Obama, Romney trade jokes at Al Smith Catholic Dinner

Amid a heated presidential campaign, Mitt Romney and Barack Obama apparently decided to put their differences aside for one night as they dined together at a Catholic charity fundraiser. Or did they? Tell us what you think.

 

Romney Path to Victory still elusive despite surge

Can Mitt Romney win this November? Does he have enough momentum to overcome Barack Obama? Will he emerge victorious on election day? While some Republicans are hopeful that their robotic candidate will come out on on top, the polls say otherwise. Despite a huge surge in support that has seen Romney rise above his opponent nationally, the former Massachusetts Governor is indeed still behind in the electoral college column.

So what will it take for him to pull ahead of Barack Obama? After all, the election is less than a month away and Mr. Romney has very little time to push himself over the victory line.

Well, to begin, he needs to shore up his support in tossup states (pictured in grey) that will most likely go Republican. Some of them like North Carolina have more socially conservative electorates while others are full of cosmopolitan suburbanites who care little for social issues. Appealing to both camps will be key to ensure that these states go red in 2012.

Next, he must do everything in his power to win over Granite State voters in New Hampshire and seniors in Florida. While both electorates are vastly different, they are truly up for grabs and could be decisive come November. Colorado and Virginia certainly fall under this "pure tossup" category as well and will no doubt be part of any Republican victory.

Finally, Mr. Romney must go on the offensive in tossup states where he finds himself consistently behind in the polls. Some like Nevada will take only a little push while others like Michigan, Wisconsin, and Pennsylvania seem a little more out of reach.

But most importantly, Mr. Romney must win Ohio, and with polls showing him consistently two to three points behind his opponent, eking out a victory will certainly take some work. But victory in the Buckeye state will be essential to victory nationwide. After all, no presidential candidate in the past fifty years has prevailed without winning Ohio. Furthermore, without Ohio, Mr. Romney's path to the White House will be even more limited than it already is. Suffice to say, any presidential victory will require the state of Ohio.

But to put Ohio in the Republican column, Mr. Romney will have to extend his support beyond his Cincinnati suburbanite bastion in the west and must concentrate his efforts on other parts of the state, most importantly the working class areas in the north and east. Convincing these voters that the Republican ticket represents their interests will be difficult, but they are equally disgusted with Mr. Obama and his college professor elitism. Thus, with efficacy and favorability for both candidates low, turnout in these areas will be key to any success.

So with only a month to go until polls open, Mr. Romney should remember the old saying, "As Ohio goes, so goes the rest of the nation".

Tory Separatism? Why Britain's Conservatives should support Scottish Independence

Will Scotland really secede from the UK? Will secession even serve its interests? Or instead, will unionism prevail and stomp out any efforts at independence? Contrary to the lofty hopes of nationalist highlanders, the prospects for Scottish independence are low. Despite constant doses of austerity coming out of London and a highly unpopular Tory government, the Scottish are not ready and may never be ready to secede from the UK. Opinion polling alone reveals this reality and shows an electorate highly divided over its future. While nearly a third of the population supports independence, over half are opposed to any changes.

Scottish First Minister Alex Salmond (left) meeting with PM David Cameron 

This spells trouble for Alex Salmond and his Scottish National Party who came crusading into government last year with the goal of delivering independence to the politically subjugated country. Trends seemed to be going Mr. Salmond's way, and at the time that the SNP government came to power, almost 40% of the population expressed support for independence.

But Mr. Salmond's honeymoon is over and the popularity of his government has soured. In only a year's time, he has let all prospects for independence slip through his fingers, and while the prevailing mood of the nation can certainly change, the chances that any referendum will pass are low.

Still, it's not Mr. Salmond and the SNP who should be worried. Rather, David Cameron and his seemingly unionist Conservatives should take the falling popularity of independence as a missed opportunity to rid the UK of its most Tory-hostile region. Sure, "preserving the union", which sounds much more like an 1850s Republican campaign slogan, may be a valiant goal, and secession may prove embarrassing internationally, but in the long term, it only has probability of playing in the Conservatives' favor.

Of the 59 seats in the House of Commons from Scotland, only one went Tory in 2010 and the vast majority of contests were blowouts where Conservative candidates didn't even stand a chance. Compare that to Lib Dem victories in 11 constituencies and, more importantly, Labour's 41 Scottish seats. It doesn't take a genius to realize that retaining Scotland only hurts David Cameron when it comes to winning at the polls and forming a government. In fact, had Scotland not been part of the United Kingdom during the last general election, the Tories would have captured a single party majority government and would have avoided all the inevitable friction they have been forced to endure with the Liberal Democrats. Issues like Europe would have never plagued the government and further brought down its approval numbers.

But beyond just electoral ramifications, Scottish independence is central to the Conservative agenda in one more very obvious way: austerity. If austerity is indeed the Conservative consensus when it come to tax and spend policies, then there's little doubt that the huge sums of grant money sent to Edinburgh every year don't fit into that equation very well. In fact, public spending is a whopping 22% higher in Scotland than the rest of the UK, and the very fact that the Scots spend almost £2,000 more than they take in makes it crystal clear just how much they have been the perpetrators of annual deficits, public debt, and fiscal irresponsibility.

So are we supposed to believe that David Cameron's party of restraint should support this recklessness? Has union with Scotland not brought about this recklessness? Furthermore, do the Conservatives have anything other than token prestige to lose from independence?

I contend not. Independence, as paradoxical as it may seem, will only serve their interests and help them at the polls. It will also be central to bringing down the UK's public deficit. So at the end of the day, Mr. Cameron and his party should eat their peas, swallow their pride, and support Scottish independence once and for all.

Understanding the European Sovereign Debt Crisis

Introduction

Will the Euro survive? Is it destined for the chopping block? Or maybe, will crisis ensue indefinitely? While there’s no simple answer to any of these questions, there’s little doubt that the European project is flawed by design and needs countless rounds of reform that will restore confidence.

Summary

With inception of the Euro, structurally flawed southern European countries like Greece joined the common currency and took advantage of artificially low interest rates to grow at record rates. This growth soon artificially inflated their economies and created an economic bubble that subsequently increased unit labor costs and led manufacturers to outsource their production to less developed countries (LDCs). Exports soon fell, and a trade imbalance ensued. Lack of fiscal restraint soon combined with this trade imbalance and created record levels of debt. This debt ultimately proved unsustainable when markets collapsed in 2008, and bond yield rates shot up as a result. Without the European Central Bank (ECB) as a lender of last resort, there was no way of guaranteeing this debt, and a crisis of epic proportions ensued.

Coming out of this crisis will require a number of measures. While populist revolt against an ever widening democratic deficit might frustrate some efforts at reform, policymakers should focus on top-down, continent-wide stimulus in the form of quantitative easing and increased public spending to help restore growth. The European Commission should also demand drastic structural reforms at the member-state level to ensure that any progress will last. Member-states should then consider transitioning toward continent-wide Euro-bonds to lower bond yield rates and spread risk across transnational lines. Protecting banks against capital flight will be important as well, and policymakers should do everything in their power to set up a deposit-insurance mechanism. Aside from that, they should also use their resources to recapitalize banks and ensure that they are solvent. Finally, the European Commission should set up its own financial regulatory agency to make the European regulatory apparatus more uniform and robust. All of these measures amount to the beginnings of a banking union, which will ultimately lay the foundations for a fiscal union and a return to growth.

Causes of the Crisis

Was Greece’s growth all that remarkable or was it really dependent on its membership to the European Union, and more importantly the Euro itself? There’s no definitive answer to this question, but nonetheless it’s very clear that Greece, like many other less structurally sound southern European economies saw its own economy artificial inflate during the 2000s. What appeared to be genuine economic growth was really the creation of an economic bubble that eventually burst at the end of 2007.

The Bubble

However, instead of this bubble just being the housing market like in the United States or only a certain subset of the economy, Greece’s bubble was its entire economy. When it burst, air in the form of capital escaped far more quickly than in the United States, plunging the country into a depression on the scale of the 1930s.

While it’s impossible to isolate one factor responsible for the creation of this countrywide economic bubble and subsequent depression, there are certainly a number of factors responsible. As Greece and other southern European economies joined the more prosperous and structurally sound north around 2000 to form the Euro, the monetary union initiated a process that had the effect of balancing out the economies of north and south. The south began to appear to itself be more prosperous, and what seemed to be remarkable growth soon followed.

Labor and Trade

With this growth came an increase in wages and a subsequent increase in unit labor costs. By 2005, wages in southern Europe had risen by nearly 25%. This meant that it had become considerably more expensive to manufacture goods in countries like Greece, and outsourcing, which had already been going on for decades, increased dramatically as result.

At the same time, the illusions of growth gave people a false sense of prosperity and mass consumption in the form of goods and services accelerated. Since wages had increased and southern European economies had become less viable, these new goods weren’t coming from domestic production. Rather, the vast majority was coming from China, Indonesia, and other, less developed countries (LDCs) outside of the Eurozone, creating a trade imbalance. All of Greece’s economic and furthermore, that of southern Europe was based on this unsustainable consumer spending and when the global economy collapsed towards the end of 2007, all domestic demand for foreign goods evaporated into thin air. What followed was a collapse in growth as well, one far more severe than in northern Europe, where the likes of Germany were still economically viable and were still running trade surpluses with strong manufacturing sectors.

Interest Rates

Still, trade imbalances can’t be the only cause for blame. Greece’s membership to the Eurozone played just as large a role as well. Membership in the seventeen state partnership provided Greece with a common currency and with it, a common monetary policy controlled by the European Central Bank (ECB). During the 2000s, the ECB like other central banks worldwide kept interest rates relatively low and markedly lower than what market forces in southern European countries like Greece would have had under normal conditions. With lower interest rates, borrowers in Greece were more inclined to borrow large amounts capital from banks, and banks soon followed suit by lending out large sums of money. This accelerated southern European economic growth, or rather inflation of the southern European bubble. Still, lower interest rates were much less a cause than a catalyst of the collapse, increasing the size and scope of Greece’s economic woes.

Public Spending and Debt

Public spending and fiscal responsibility, or lack thereof, was also to blame. When it was revealed in 2009 just after George Papandreou’s socialist government had taken office that Greece’s annual deficits were far larger than officially published, bond markets reacted with fury. Fears of Greek default essentially shut the country out of the bond markets and forced it into a flurry of austerity. Greek austerity, like that of other southern European economies, however, would be much deeper than David Cameron’s spending cuts or Nicholas Sarkozy’s belt tightening. International factors, both private (lack of access to the bond markets) and public (demands of the troika consisting of the International Monetary Fund (IMF), European Commission, and ECB) made spending cuts far more severe than in northern Europe. Secondly, political stagnation and diffusive interests at the ECB made it impossible for the central bank to be a lender of last resort.

With its inability to borrow money and subsequent spending cuts, Greece saw its prospects for growth vanish, and perpetual recession ensured. While austerity was necessary to ensure investors that government can repay its debts, austerity has simply destroyed growth.

Impending Solutions

Restoring any growth not only to countries like Greece, but also across Europe won’t be simple. A series of steps must be taken in order to ensure that more than just austerity is pursued. That being said, growth in the form of stimulus can’t come at the member-state level as lack of access to the bond markets makes it impossible for the likes of Greece and other southern European countries to borrow money.

Stimulus

Therefore, any economic stimulus must come at the supranational level. The ECB has already begun this effort with quantitative easing, but just keeping interest rates low is far from enough to restore growth. Furthermore, fears of inflation as well as political divisions have limited what the ECB can accomplish, necessitating new, more innovative approaches.

These new approaches should take the form of legislation similar, but possibly larger, than President Obama’s American Recovery and Reinvestment Act, commonly known in the United States as the stimulus bill. Similar to America’s stimulus bill, Europe’s fiscal stimulus should be union-wide, and should be carried out by the European Commission. This will ensure that any injection of public funds is not only targeted, but also uniform and collaborative on a continent-wide scale.

Politically speaking, pursuing such policies is somewhat problematic. The already present democratic deficit would only enlarge, fueling the fires of populist backlash. In Greece, this backlash has come in the form of the far left SYRIZA and far right Golden Dawn, both of which experienced electoral breakthroughs in this year’s parliamentary elections. Their newfound presence has not only realigned the entire political landscape; it has also fragmented any future policymaking and has polarized the Greek electorate.

Structural Reforms

This political fragmentation will only complicate any recovery. No matter how problematic top-down authority is, lack of political cohesiveness in countries like Greece shows just how necessary leadership at a continent-wide level is. While euro-wide stimulus will certainly begin the process of growth, structural reforms, both at the national and supranational level will be needed. The Fiscal Stability Treaty (FST) is the first of these structural reforms, and its strict budgetary rules will be helpful in preventing future crises, but implementing the agreement might require more than blind threats of losing access to the European Stability Mechanism (ESM), the union’s bailout fund. Demanding more than just deficit reduction will also be necessary, and the troika must also use its role to ensure that structural reforms on the scale of the FST are actually carried out by member-states.

Euro-bonds

Long-term reform at the national level will only help so much, however. Supranational measures will need to be taken in order to preserve the Euro. Among these is the creation of a continent-wide banking union, and with it continent-wide Euro-bonds, which would help spread borrowing risk across transnational lines. This would have the effect of equalizing bond yield rates, raising the borrowing costs of northern countries and lowering them for southern European countries. With lower borrowing costs, southern European countries and their governments would have an easier time regaining access to the bond markets and reassuring investors that their economies are safe for investment.

Deposit Insurance

But reassuring investors will take more than just Euro-bonds. The European Commission must also create a Euro-wide equivalent of the American Federal Deposit Insurance Corporation (FDIC) to protect against capital flight. During times of economic crisis, people often times withdraw their money from banks, fearing that they will collapse and their investments will disappear. While small scale withdrawals during a mild downturn often pose no problem, during prolonged times of crisis, these withdrawals increase substantially, putting considerable strains on banks to continue lending money. Should these withdrawals continue unabated over a long period of time, banks will lose large sums of capital and will not only be unable to lend out more money; they will be unable to guarantee the deposits of all of their investors. Should public fear overwhelm a bank, a bank run will ensue, and the bank will lose all of its capital, and with it, all of its investors money. Thus, guaranteeing any deposits is absolutely necessary, and the Commission must act decisively to create its own FDIC that will help quell public concerns.

Bank Recapitalization

While long-term reforms, like protecting investors, are essential to any recovery, more immediate measures must also be taken as well. Among these is recapitalizing the banking sector. In 2008 when the banking sector first collapsed, governments worldwide rushed to shore up insolvent institutions, infusing hundreds of billions, if not trillions of dollars into the banking sector. In Europe, this occurred at the member-state level where member states, rather than the ECB or Commission decided how banks were “bailed out”. What followed was a set of policies that lacked any cohesiveness, and this lack of coordination complicated any continent-wide recovery. Furthermore, the already large public deficits in southern European economies led investors to believe that southern European governments, like much of the banking sector, was itself on the verge of default. As southern European governments then lost access to the bond markets, they were unable to continue recapitalizing banks, and fear in the form of capital flight ensued.

Little over four years later, the problem still remains unsolved. Luckily, Europe has another good American model it can follow that has proved successful. The Troubled Asset Relief Program (TARP), America’s own private bailout mechanism, immediately stabilized the banking sector and put the entire country back on the path of growth. Unlike in Europe where each country implemented its own bailout without conferring with its partners, TARP was a top-down policy coming from the highest level of authority: the federal government. In fact, state governments weren’t involved at all in its implementation, and the Federal Reserve and Treasury Department played the largest role in dishing out funds to troubled financial institutions.

Suffice to say, Europe needs its own version of TARP, and over the past year, it has begun to move in that direction. Recent agreements amongst European leaders to permit the ESM to buy troubled assets are certainly a good sign, but leaders must also move swiftly to separate sovereign public debt from banking debt. Having both coupled together will only increase strains on cash strapped member states and will push many steadily away from the bond markets. Should member states leave the bond markets, they will need access to the ESM to stay afloat. But if the ESM is also diverting some of its funds away towards buying up troubled assets, it might not have enough capital to bailout troubled member states. Furthermore, having both bailout mechanisms coupled together will only perpetuate market fears of public and private default. Therefore, the Commission must also separate its sovereign bailout fund from its banking one. Doing so will help stabilize the banking sector and more importantly, the public bond markets, and will finally create just what Europe needs: its own version of TARP.

Financial Regulation

Preventing a future crisis will also be important as well. With neoliberal ideas thoroughly discredited, the need for more financial regulation, and more specifically, more continent-wide financial regulation is clear. Therefore, not only will the Commission need to streamline financial regulations across the entire Eurozone; it will also have to make its own regulatory agency.

However, unlike in the cases of deposit insurance or bank recapitalization where the United States provides a very good model for Europe, in the area of financial regulation, the United States too has failed. Its plethora of regulatory bodies has created something of a pluralism of agencies, making regulation of the financial sector rather difficult. Furthermore, neoliberalism has sucked away considerable regulatory authority from agencies like the Securities Exchange Commission (SEC) over the past three decades. To put it simply, lack of uniformity in financial regulation and prevailing economic theories in the United States as in Europe helped bring on a crisis of massive proportions.

Thus, the Commission must create its own regulatory agency aimed at strengthening financial controls and centralizing regulatory authority. Making regulations more robust will restore a degree of confidence and assure future investors that the financial sector is secure. While more political centralization will no doubt increase the ever widening democratic deficit, making the European Union’s regulatory apparatus more uniform will put the Eurozone on a path of long-term stability. Placing a single figurehead atop the new agency will be key as well and will give it the increased power it needs to achieve its goals.

Conclusion

Still, the fact remains that any solution is far from simple, and with interests so diffused across Europe, it’s nearly impossible to predict what will happen in the near future. Germany’s upcoming elections early next year have put any reforms at a standstill and will likely impede any progress. While opinion polling gives Angela Merkel’s Christian Democratic Union (CDU) a strong change of winning, should she go down in defeat, the European project may very well go down with her. Regardless of what happens, the idea of Europe will always exist and remain a fixture of civilization everywhere. 

Georgia to have a 'dreamy' future after all?

It's been less than a week since Georgia's legislative elections, but the repercussions are already being felt worldwide. From the halls of Capitol Hill to the offices in Brussels, global actors everywhere have descended into a state of hysteria. What exactly is everyone in the West so worried about? After all, the UN declared the elections to be free and fair and saw virtually no fraud of any kind. Is that not a good sign? Has the will of the people not been heard?

Incoming PM Bidzina Ivanishvili of the Georgian Dream

Maybe so, but at what cost? Even if President Mikheil Saakshvili's pro-western government has fallen by fair means, has democracy brought a more promising coalition to power? Will this new government truly bring an end to authoritarianism and high-level corruption? Will stability and economic growth on a mass-scale be restored? Better yet, will this new government establish itself as a beacon of western liberty or will it instead ally with its illiberal, Russian neighbor to the north?

While anyone would want to believe in the promise of incoming Prime Minister Bidzina Ivanishvili and his Georgian Dream party, the prospects of a 'dreamy' future are indeed dim. For one thing, Mr. Ivanishvili has called for closer ties with the Kremlin, which troubles the West and suggests that he holds favorable views towards Russia. This favoritism most likely came about as a result of spending a decade in the motherland where he amassed a $6 billion fortune. Doing business in post-Soviet Russia was a slippery game that required close ties to state officials and oil oligarchs, and Mr. Ivanishvili was no different than anyone else in his approach to economic life. He knew very well that close ties to political leaders in charge of privatization was paramount to any economic success, and he made sure to keep himself well connected during his working years.

This approach ultimately paid off, and Mr. Ivanishivili left Russia with a fortune larger than life. Political power and deference to the Russian state had made him wealthy beyond imagination, but had also cemented in him an ideology that would forever shape his approach to public life. In his eyes, all prosperity is the product of close ties with the state and never involves independent entrepreneurship  If close ties bring individual financial succes, then public-private collaboration does the same for an entire country. Thus, the only path to success for Georgia is one where the state leads the way while business follows from behind. But beyond just providing growth, this approach also leaves a regime highly prone to corruption. Suffice to say, no matter what campaign promises Mr. Ivanishivili has made, his own belief in public-private collusion will only make his country riper for corruption.

This spells trouble to a decade of progress made on President Saakshvili's watch when an anti-democratic government was toppled and bribery and kickbacks became a thing of the past. But even with all that progress. Georgia still paled in comparison to its competitors on all measures, sporting a lackluster Corruption Perceptions Index of 4.1 out of 10.

So if both leaders are equally prone to corruption, what new charges can we bring against Mr. Ivanishvili? Shall we question his party and how cohesive it is? Better yet, is his party even unified at all?

Far from being a tight-knit group of legislators with similar goals and beliefs, Mr. Ivanishvili's Georgian Dream is much more a broad coalition of former opposition outliers vying for power through whatever means necessary.Without any common ideological cause, it's only a matter of time until infighting supplants feigned cooperation and makes governance of any kind virtually impossible. Thus, rather than bringing much needed stability to Georgia, Mr. Ivanishvilli and the Georgian Dream, through its own disunity, will fragment the political system and bring instability and ultimately political stagnation. Stagnation within the parliament will only be compounded by the presence of President Saakshvili, who will almost certainly do everything in his power to foil Mr. Ivanishvili's efforts at effective governance. This will destabilize the government even further and lead to its fall from public grace.

But the real losers in this story will be the Georgian people who will be powerless against the recklessness of a volatile government. No matter his motives, Mr. Ivanishvili's calls for closer ties with the Kremlin will almost certainly damage his credibility with the West. Furthermore his very outlook on public life will ensure that corruption doesn’t go away any time soon. Finally, the divided nature of his party and presence of President Saakshivili will make policymaking of any kind next to impossible. All the while, the Georgian people will suffer and find themselves stuck in an endless bad dream of despair.