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	<title>Anders Åslund &#8211; Berlin Policy Journal &#8211; Blog</title>
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		<title>We Need a Small War</title>
		<link>https://berlinpolicyjournal.com/we-need-a-small-war/</link>
				<pubDate>Wed, 26 Feb 2020 13:34:59 +0000</pubDate>
		<dc:creator><![CDATA[Anders Åslund]]></dc:creator>
				<category><![CDATA[Berlin Policy Journal]]></category>
		<category><![CDATA[March/April 2020]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Russian Foreign Policy]]></category>

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				<description><![CDATA[<p>Crimea, Syria, Libya―Russia appears to go from success to success. In reality, however, the country’s power is declining. Russia’s President Vladimir Putin appears to ... </p>
<p>The post <a rel="nofollow" href="https://berlinpolicyjournal.com/we-need-a-small-war/">We Need a Small War</a> appeared first on <a rel="nofollow" href="https://berlinpolicyjournal.com">Berlin Policy Journal - Blog</a>.</p>
]]></description>
								<content:encoded><![CDATA[<p class="p1"><strong>Crimea, Syria, Libya<span class="s1">―</span>Russia appears to go from success to success. In reality, however, the country<span class="s1">’</span>s power is declining.</strong></p>
<div id="attachment_11651" style="width: 1000px" class="wp-caption alignnone"><a href="https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online.jpg"><img aria-describedby="caption-attachment-11651" class="wp-image-11651 size-full" src="https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online.jpg" alt="" width="1000" height="563" srcset="https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online.jpg 1000w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online-300x169.jpg 300w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online-850x479.jpg 850w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online-257x144.jpg 257w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online-300x169@2x.jpg 600w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2020/02/Aslund_Online-257x144@2x.jpg 514w" sizes="(max-width: 1000px) 100vw, 1000px" /></a><p id="caption-attachment-11651" class="wp-caption-text">© Sputnik/Alexei Druzhinin/Kremlin via REUTERS</p></div>
<p class="p1">Russia’s President Vladimir Putin appears to be going from strength to strength, restoring Russia’s global influence, be it in Syria, the Middle East or Africa. But is that assessment correct? Has 2019 really been an <em>annus mirabilis</em> for the Kremlin and its foreign affairs ambitions? How much is due to Russia’s strength (and strategic capabilities), and how much to US/the West’s mistakes? Is he overextending his military escapades and getting stuck in a Libyan quagmire? And by changing Russia’s constitution, has Putin secured his life-long hold on power without having to incorporate Belarus?</p>
<p class="p3">For a start, Russia’s resources are quite constrained, and its economy is stagnant. The Kremlin pays great attention to foreign policy to secure the legitimacy of its regime, so it is quite good at it. Unfortunately, the Donald Trump administration has offered the Kremlin inordinate possibilities to expand its power, and Europe remains weak in foreign policy.</p>
<h3 class="p4"><b>60th in the World</b></h3>
<p class="p2">By any measure, Russia is a classical declining power. Much has been written about Russia’s demographic crisis, but Russia’s population has been roughly stable around the current official number of 145 million since 1991. High levels of immigration from poorer former Soviet republics have compensated for Russians’ low life expectancy and low birth rates, and the substantial emigration of its elite to the West. At the same time, the population in the developing world is growing, so that while Russia has the ninth largest population country in the world after Bangladesh but before Mexico, several countries, such as Ethiopia and the Democratic Republic of Congo, will soon overtake it.</p>
<p class="p3">Meanwhile, Russia’s economic standing has become slightly worse. Its GDP at the current exchange rate peaked at $2.3 trillion in 2013 and has since declined to $1.6 trillion. Much of this decrease is due to lower oil prices, but it also reflects a trend. The International Monetary Fund ranks Russia as the 12th largest economy in the world after South Korea and just before Australia and Spain. Similarly, by export volume Russia ranks 11th biggest in the world. GDP per capita is the best measure of level of economic development and in 2017, Russia ranked 60th in the world after all EU countries save Bulgaria, and just before the BRICS countries China and Brazil. Russia is a middle-income country with a GDP per capita of around $10,000 per capita.</p>
<h3 class="p4"><b>Putin</b><span class="s1">’</span><b>s Cronyism</b></h3>
<p class="p2">The country is an authoritarian kleptocracy, caught in an anti-reform trap. Its ruling elite, controlling the state, law enforcement, and state corporations, and Putin’s cronies have monopolized power and wealth. They would suffer from any political or economic reform, leveling of the playing field, and the opening of politics and economics to competition, while the vast majority of the population would benefit.</p>
<p class="p3">A serious reform would probably cause a major political destabilization, jeopardizing Putin’s policy of political and macroeconomic stability with budget surpluses, minimal public debt, large current account surpluses, and vast and rising currency reserves. Meanwhile, his regime ignores growth, efficiency, innovation, or the standard of living of the population.</p>
<p class="p3">When it comes to foreign policy, military power is the foremost measurement of power, and here Russia excels. According to the Stockholm International Peace Research Institute (SIPRI), Russia has the third largest military expenditures in the world after the United States and China, though three other countries have similar military expenditures. Furthermore, Russia remains a superpower because of its nuclear arms, with the United States as its only competitor.</p>
<p class="p3">The disparity between Russia’s current military and economic powers is great and potentially explosive, and its economic regression aggravates this tension. To the Kremlin, the temptation is great to utilize its military strength, as long as it lasts. Quite logically, Russia has pursued three wars since 2014 – the annexation of Crimea, the incursion in eastern Ukraine, and the military intervention in Syria, as well as a number of minor military interventions in Africa. It would be foolhardy not to expect more Russian-initiated wars.</p>
<h3 class="p4"><b>Putin and His Many Wars </b></h3>
<p class="p2">Putin’s first two terms in power, between 2000 and 2008, can be summarized as representing political stability and a rising standard of living. Russia enjoyed a wonderful growth rate, averaging 7 percent a year from 1999-2008, but since then, it has grown at average of only 1 percent a year. During the last five years, the population’s disposable real incomes have fallen by a shocking 2.5 percent a year.</p>
<p class="p3">Instead of modernizing Russia during the good years, Putin consolidated his political power. Economic and political stability remains, but the Kremlin considers significant economic growth neither likely nor essential. Strange as it may sound, the low growth rate has not been a serious topic of public discussion for years, while Putin praises the economic stability all the time.</p>
<p class="p3">Putin’s regime is best characterized as a personal authoritarian system. Such a regime usually ends with the death or ouster of the incumbent. It has no spiritual source of legitimacy, such as monarchy, ideology, party, nationalism, or religion. Putin seems well aware of his need for another source of legitimacy beside stability. Yet he has clearly excluded political or economic reforms as too dangerous and possibly destabilizing. The Kremlin keeps itself well informed through opinion polls, and the FSB intelligence service is more focused on collecting intelligence than on repression.</p>
<p class="p3">An oft-quoted Russian saying runs, “We need a small victorious war.” The tsarist Minister of Interior Vyacheslav von Plehve uttered these words in 1904 before he was assassinated. The Russian foreign policy elite continues to cherish this idea, and few have embraced it more than Putin. His popularity rose on the back of the housing bombings in the fall of 1999 and the ensuing second Chechen war.</p>
<p class="p3">In October 2003, the arrest of the leading oligarch Mikhail Khodorkovsky amounted to a war on the oligarchs. In August 2008, Putin pursued a five-day war in Georgia, which took his popularity rating to a new peak of 88 percent, according to the independent polling institute Levada Center. In February 2014, he instigated the swift occupation of Crimea, and on March 18 of that year, he annexed it. This nearly bloodless action took his popularity to the same high level as in August 2008. The ensuing war in eastern Ukraine, however, has been neither small nor victorious.</p>
<h3 class="p4"><b>The Skills of an Old Imperial Power</b></h3>
<p class="p2">Russian television has turned increasingly propagandistic, and it has little good to report about the domestic situation. Therefore, news programs tend to focus on misery in other countries and Russia successes abroad, just like the Soviet television used to. As a consequence, foreign policy gains importance in the eyes of the population.</p>
<p class="p3">In his excellent book Destined for War, the eminent Harvard Professor Graham Allison discusses the risk of war between the United States and China, presuming that China will overtake the United States economically and militarily. A subtheme in his book is that Austria-Hungary was a declining power at the beginning of World War I. It started the war by declaring war on Serbia, and the Russian Empire, then a rising power, defended Serbia.</p>
<p class="p3">Today, it is Russia that is a destabilizing declining power. Its impressive military is set to decline because of its stagnant economy but, as an old imperial power, Russia possesses great strategic thinking and considerable diplomatic skills. It wants to be represented at each important international table, and it knows how to make its presence felt. The danger that Russia poses lies in its interest in aggression abroad to boost the regime’s domestic popularity, while the rulers understand that its military strength is set to decline with its economy. Therefore, the Kremlin is inclined to take ever greater risks.</p>
<p class="p3">Through its war with Ukraine, Russia alienated the United States, Europe, and all the former Soviet Republics. Putin seeks an evasive victory and is not ready to return to any respect of international law. The Kremlin is trying to compensate by reaching out to other countries—to China, the BRICS, the Pacific nations, the Middle East, Africa, and Latin America.</p>
<h3 class="p4"><b>The Gerasimov Doctrine</b></h3>
<p class="p2">The Russian authorities are well aware of their resource constraints. A year before they launched their war in Ukraine, Russia’s powerful chief of the general staff, General Valery Gerasimov, published an article that has become known as the Gerasimov Doctrine. The author noted that, as nobody declared war any longer, the line between war and peace had been blurred. Focusing on the Ukrainian Orange Revolution and the Arab Spring, his salient argument was that “the role of nonmilitary means of achieving political and strategic goals has grown, and, in many cases, they have exceeded the power of weapons in their efficacy.”</p>
<p class="p3">The Gerasimov Doctrine acknowledges that Russia’s economic resources are limited and military hardware is expensive. Therefore, Russian warfare has to rely more on unconventional or hybrid military techniques, such a cyber, disinformation, economic warfare, corruption, subversion, and assassinations. Especially cyber has dissolved the dividing line between war and politics, and Russia possesses particular strengths in its intelligence and special services. The Kremlin has abandoned many of the old constraints, while rationally focusing on its relative strengths. Not without reason, Gerasimov noted that the US has jeopardized many international rules—so why should Russia abide?</p>
<p class="p3">These factors shed light on Russia’s new foreign policy. It is highly imaginative and surprising. Neither the Russian annexation of Crimea nor its intervention in Syria were predicted. The Kremlin respects financial constraints and is anxious to keep its costs of warfare down. It uses outsourcing, just like the United States, with mercenaries, cyber war, corruption by oligarchs, and information war. Russian mercenaries seem to pop up anywhere. Modern social media and electronic means are used extensively because they are cheap and effective. The Russian security services are also keen on engaging with organized crime and using corruption as a means of warfare. Most worrisome is that Russia appears to raise its risk acceptance all the time.</p>
<h3 class="p4"><b>Western Sanctions</b></h3>
<p class="p2">The West has been slow in catching up with Russia’s new tactics. The news website Buzzfeed has suggested that no fewer than 14 people have been murdered by the Russians in the United Kingdom, starting with Alexander Litvinenko in 2006, but only after the attempted poising of the former GRU officer Sergei Skripal in March 2018 did the British authorities wake up. No less than 29 allied countries responded with expulsions of Russian diplomats that month, which certainly surprised the Kremlin.</p>
<p class="p3">After the Russian military aggression against Georgia in August 2008, the West did virtually nothing. Within a year, newly-elected President Barack Obama even launched his “reset” with Russia. The Kremlin took note. The Georgian war did not cost it anything. Encouraged, the Kremlin went ahead with the annexation of Crimea in February-March 2014, but now the Western attitudes had hardened. In a coordinated move, the United States and the European Union imposed substantial sanctions on the people and enterprises involved. These sanctions have remained effective, isolating Crimea economically.</p>
<p class="p3">The West also did something new. It sanctioned several close business friends of Putin, something that Putin reacted to quite sharply in public. He even pushed through a law allowing state compensation for oligarchs who had their assets frozen by Western sanctions. Such personal sanctions, freezing assets and prohibiting travel, are clearly hurting the Kremlin.</p>
<h3 class="p4"><b>A Very Bloody War</b></h3>
<p class="p2">Yet Russia was not deterred. It tried to arouse unrest in the eastern and southern half of Ukraine to create a “New Russia.” However, the Ukrainian armed forces reacted by getting organized with amazing speed, prompting the Kremlin to send regular Russian military forces into Ukraine in July 2014. In response, the United States introduced serious sectoral sanctions, hitting three sectors of the economy, finance, defense technology, and oil technology.</p>
<p class="p3">The EU hesitated, but on July 17, 2014, a sophisticated Russian missile shot down a Malaysian airliner with 298 people over rebel-controlled territory. The next day, the EU imposed the same kinds of sectoral sanctions as the United States. The Russian military attack stalled, but three percent of Ukraine’s territory in its two easternmost regions, Donetsk and Luhansk, remains under Russian-backed occupation, and a total of 13,000 Ukrainians have been killed in this very bloody war.</p>
<p class="p3">The West had never sanctioned such a large economy before, about three times as large as the Iranian economy. If Russia had defaulted, it could have caused a global financial crisis, a risk that prompted the West to limit its financial restrictions. Therefore, the West did not sanction Russia’s participation in the international payment system or its central bank reserves. Nor did the West sanction ordinary trade.</p>
<p class="p3">The severity of the Western sanctions on Russia must not be exaggerated, but they are a significant constraint on Russia. The International Monetary Fund has estimated that the Western financial sanctions have cost Russia 1-1.5 percent of GDP each year.</p>
<h3 class="p4"><b>What More To Do</b></h3>
<p class="p2">A few Western countries have provided Ukraine with some military equipment and training, but all the fighting has been carried out by Ukrainians and a limited number of foreign volunteers. Ukraine has obtained its Association Agreement with the EU, but this does not envision accession to the EU. NATO has been supportive, but it has not offered any possibility of accession either.</p>
<p class="p3">Even before Donald Trump became US president, he made it clear that he favored Russia and Vladimir Putin over Ukraine and opposed military support to Ukraine. Yet initially his possibilities to act were constrained. In the summer of 2017, the suspicious US Congress almost unanimously adopted the Combating America’s Adversaries Through Sanctions Act (CAATSA), which codified the existing sanctions on Russia so that Trump could not end them. However, Trump minimized coordination of sanctions with allies and constrained new sanctions, though he did not stop them. The United States no longer drives sanctions on Russia.</p>
<p class="p3">Some EU countries oppose sanctions on Russia (Italy, Cyprus, Greece, Hungary, and Austria), but the majority support them and keep them going. Germany, Austria, the Netherlands, and Belgium have pushed ahead with Nord Stream 2, which will allow Russia to reduce the transit of its gas through Ukraine, depriving the country of about 2 percent of its GDP annually.</p>
<p class="p3">The West remains disorganized with regard to countermeasures on cyber, disinformation, and corruption. Much more can be done. Western retired politicians should be prohibited from working for Russian state or crony companies for a long time after leaving office. Former German chancellor, Gerhard Schröder, has been legally bought by Putin. The same is true of several former Austrian chancellors. This should be prohibited.</p>
<p class="p3">The best weapon against corruption is far-reaching transparency. The fifth EU anti-money-laundering directive of June 2018 requires the public registration of the ultimate beneficial owners of all significant assets. That would do the trick in Europe. The United States is considering similar legislation. The great risk is that with Brexit, the United Kingdom will become a black hole of dark Russian money.</p>
<p class="p3">Countermeasures like these will help the West restrict Russia’s interference and aggression. Its small wars may be going well, but Russia, the world’s largest country, is in decline.</p>
<p>The post <a rel="nofollow" href="https://berlinpolicyjournal.com/we-need-a-small-war/">We Need a Small War</a> appeared first on <a rel="nofollow" href="https://berlinpolicyjournal.com">Berlin Policy Journal - Blog</a>.</p>
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		<title>Progress of Sorts</title>
		<link>https://berlinpolicyjournal.com/progress-of-sorts/</link>
				<pubDate>Wed, 09 Sep 2015 11:13:52 +0000</pubDate>
		<dc:creator><![CDATA[Anders Åslund]]></dc:creator>
				<category><![CDATA[Berlin Policy Journal]]></category>
		<category><![CDATA[September/October 2015]]></category>
		<category><![CDATA[Ukraine]]></category>

		<guid isPermaLink="false">http://berlinpolicyjournal.com/?p=2501</guid>
				<description><![CDATA[<p>Ukraine has made significant headway reforming its economy since the revolution. But quite a bit remains to be done, and the short-term outlook is grim.</p>
<p>The post <a rel="nofollow" href="https://berlinpolicyjournal.com/progress-of-sorts/">Progress of Sorts</a> appeared first on <a rel="nofollow" href="https://berlinpolicyjournal.com">Berlin Policy Journal - Blog</a>.</p>
]]></description>
								<content:encoded><![CDATA[<p><strong>Ukraine has made significant headway reforming its economy since the revolution. But quite a bit remains to be done, and the short-term outlook is grim.</strong></p>
<div id="attachment_2498" style="width: 1000px" class="wp-caption alignnone"><a href="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut.jpg"><img aria-describedby="caption-attachment-2498" class="wp-image-2498 size-full" src="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut.jpg" alt="© REUTERS/Vasily Fedosenko " width="1000" height="563" srcset="https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut.jpg 1000w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut-300x169.jpg 300w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut-850x479.jpg 850w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut-257x144.jpg 257w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut-300x169@2x.jpg 600w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/BPJ_04-2015_Aslund_cut-257x144@2x.jpg 514w" sizes="(max-width: 1000px) 100vw, 1000px" /></a><p id="caption-attachment-2498" class="wp-caption-text">© REUTERS/Vasily Fedosenko</p></div>
<span class="dropcap normal">K</span>iev is abuzz with intellectual and political discussion. As after any revolution, the debate now is about what is wrong and how to fix it. Policy people acknowledge that reforms are proceeding too slowly, while the business world’s verdict is that corruption is as bad as before, but less organized since the old Yanukovych hierarchy broke down.</p>
<p>The economic situation is indeed frightful, with GDP dropping by 17.2 percent in annualized terms in the first quarter and 14.7 percent in the second quarter – and though the decline in output is beginning to level off, forecasts for the year as a whole predict a decline of 9-12 percent. Annual inflation peaked at 61 percent in April before dipping to 55 percent in July.</p>
<p>But much has gone right, more than Ukrainians usually realize.</p>
<p>Soon after the democratic breakthrough in February last year, Ukraine carried out presidential and parliamentary elections. Pro-European reformers won both, laying a political base for serious democratic and market economic reforms. Until the parliamentary elections on October 26, 2014, the old vested interests dominated the parliament, blocking most reform legislation; now reform has a political mandate.</p>
<p>On December 2, a new government was appointed. It is younger and more qualified than any previous Ukrainian government. Tellingly, in the last government of ousted pro-Russian president Viktor Yanukovych only two ministers spoke English; now only two ministers in the current government do not. The typical new minister is a 38-year old investment banker with a Western MBA. Most are clearly not corrupt, and are strongly committed to sensible reforms. The sort of radical anti-corruption reforms Ukraine needs are usually carried out by young, well-educated outsiders without connections to the old regime. Of Ukraine’s 20 new ministers, only five had been ministers before December 2014, and only the prime minister served under the old regime. Ukraine finally has a credible reform team.</p>
<p>&#8230;</p>
<div class="i-divider text-center bold"></div>
<p style="text-align: center;"><strong>Read the complete article in the Berlin Policy Journal App – September/October 2015 issue.</strong></p>
<p style="text-align: center;"><a href="https://play.google.com/store/apps/details?id=com.berlinpolicyjournal"><img class="alignnone wp-image-1099 size-full" src="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/02/google_store_120px_width.gif" alt="google_store_120px_width" width="120" height="44" /></a><a href="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/bpj_app_September_October_2015_245px_width-1.jpg"><img class="alignnone wp-image-1100 size-full" src="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/02/app_store_120px_width.gif" alt="app_store_120px_width" width="120" height="44" /><br />
<img class="alignnone wp-image-2394 size-full" src="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/bpj_app_September_October_2015_245px_width-1.jpg" alt="bpj_app_September_October_2015_245px_width-1" width="245" height="331" srcset="https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/bpj_app_September_October_2015_245px_width-1.jpg 245w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/09/bpj_app_September_October_2015_245px_width-1-222x300.jpg 222w" sizes="(max-width: 245px) 100vw, 245px" /></a></p>
<p>The post <a rel="nofollow" href="https://berlinpolicyjournal.com/progress-of-sorts/">Progress of Sorts</a> appeared first on <a rel="nofollow" href="https://berlinpolicyjournal.com">Berlin Policy Journal - Blog</a>.</p>
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		<title>Myths of Austerity – and Paul Krugman</title>
		<link>https://berlinpolicyjournal.com/myths-of-austerity-and-paul-krugman/</link>
				<pubDate>Tue, 02 Jun 2015 12:49:18 +0000</pubDate>
		<dc:creator><![CDATA[Anders Åslund]]></dc:creator>
				<category><![CDATA[Eye on Europe]]></category>
		<category><![CDATA[Austerity]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[Paul Krugman]]></category>
		<category><![CDATA[The Euro]]></category>

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				<description><![CDATA[<p>Seen from the other end of the Atlantic, the solution to the euro crisis always seemed obvious to some – not least NYT columnist Paul Krugman. Yet the Nobel Prize-winning economist has been wrong on virtually everything he has said about European fiscal policy. </p>
<p>The post <a rel="nofollow" href="https://berlinpolicyjournal.com/myths-of-austerity-and-paul-krugman/">Myths of Austerity – and Paul Krugman</a> appeared first on <a rel="nofollow" href="https://berlinpolicyjournal.com">Berlin Policy Journal - Blog</a>.</p>
]]></description>
								<content:encoded><![CDATA[<p><strong>Seen from the other end of the Atlantic, the solution to the euro crisis always seemed obvious to some – not least <em>New York Times</em> columnist Paul Krugman. Yet the Nobel Prize-winning economist has been wrong on virtually everything he has said about European fiscal policy.</strong></p>
<div id="attachment_1930" style="width: 1000px" class="wp-caption alignnone"><a href="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut.jpg"><img aria-describedby="caption-attachment-1930" class="wp-image-1930 size-full" src="http://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut.jpg" alt="(c) " width="1000" height="562" srcset="https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut.jpg 1000w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut-300x169.jpg 300w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut-850x478.jpg 850w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut-257x144.jpg 257w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut-300x169@2x.jpg 600w, https://berlinpolicyjournal.com/IP/wp-content/uploads/2015/06/IP_03-2015_Stand_Aslund_cut-257x144@2x.jpg 514w" sizes="(max-width: 1000px) 100vw, 1000px" /></a><p id="caption-attachment-1930" class="wp-caption-text">(c) REUTERS/Nacho Doce</p></div>
<p>The American economic debate around the European financial crisis has been dominated on the left by the idea that austerity itself is the fundamental problem. <a href="http://www.nytimes.com/2014/12/30/world/europe/greek-patience-with-austerity-nears-its-limit-.html">A recent <em>New York Times</em> article</a> captured this view perfectly: “Nowhere have austerity policies been more aggressively tried – and generally failed to live up to results promised by advocates – than in Greece.”</p>
<p>This single sentence contains six key myths about austerity: that austerity is intrinsically wrong; that austerity policies were pursued most aggressively in Greece; that austerity has been bad for economic growth; that austerity is unpopular; that Greece is a victim of German austerity; and finally, that Europe should learn from the US and abandon austerity.</p>
<p>To begin with, we need to define austerity. A typical definition includes measures taken by a government to reduce an excessive budget deficit, usually by either cutting expenditures or raising revenues. I prefer the more technical term “fiscal adjustment” – after all, the issue is not how much expenditures are cut or revenues increased, but to what degree the budget deficit evolves as a share of GDP.</p>
<p>To provide a relevant case study, compare Greece, the worst economic disaster in the euro crisis, with Latvia. These two countries had the largest fiscal deficits, required the largest fiscal adjustments, and saw the largest output declines. Latvia&#8217;s fixed exchange rate to the euro and Greece&#8217;s adoption of the common currency in 2001 allow us to sidestep that complication.</p>
<p>Nevertheless, monetary policy in the two countries differed greatly. Greece had access to ample liquidity from the European Central Bank (ECB), while Latvia did not, putting Greece at a major advantage in 2008-09.</p>
<p><strong>A Simple Prescription: More Money</strong></p>
<p>In cases such as these, those arguing against austerity are engaging in base populism, and assuming the existence of money where there is none. Incredibly, this is what Nobel Prize winner and <em>New York Times</em> columnist Paul Krugman has done <a href="http://www.thedailybeast.com/articles/2012/05/06/paul-krugman-austerity-is-so-wrong.html">throughout the European financial crisis</a>. In a <a href="http://www.nytimes.com/2013/02/01/opinion/krugman-looking-for-mister-goodpain.html">2013 opinion piece</a>, he noted that he had “argued that worries about the deficit are, in fact, grossly exaggerated.” Indeed he had: in 2008-10, when Latvia, Estonia, and Lithuania were hit by a liquidity freeze and reacted by carrying out successful fiscal consolidations, Krugman complained loudly about the terrible consequences of their austerity. Yet when they all three recorded high economic growth after two years, he refused to concede defeat.</p>
<p>From 2008-13 no fewer than seven EU countries faced a lack of access to financing and had to turn to the IMF and the EU for emergency loans. Here too, Krugman has prescribed simply providing more money.</p>
<p>What Krugman fails to explain is whence the necessary funding for large budget deficits should come. He discusses money as an infinite resource, not recognizing budgetary or financial constraints. In the case of Greece in particular, Krugman’s disregard for both the risk of sovereign default and the absence of funding is perplexing.</p>
<p><a href="http://krugman.blogs.nytimes.com/2013/02/22/paul-de-grauwe-and-the-rehn-of-terror/">Krugman also </a><a href="http://krugman.blogs.nytimes.com/2013/02/22/paul-de-grauwe-and-the-rehn-of-terror/">claimed</a> that “the rush to austerity in Europe largely reflected the surge in sovereign debt spreads after Greece got in trouble; the bigger the spread, the harsher the austerity … But it turned out that the spreads didn’t reflect underlying fiscal fundamentals.” Yet at present, Greek 10-year bond yields hover around 10 percent, while former EU crisis countries such as Italy, Portugal, and Spain have bond yields below 2 percent. It looks like austerity does work, albeit sometimes slowly.</p>
<p>Furthermore, austerity policies have not been attempted most aggressively in Greece: all three Baltic countries pursued more aggressive fiscal adjustments, especially Latvia.</p>
<p>The Latvian government faced the global financial crisis head-on. When it arrived in late 2008, the World Bank calculated a baseline scenario in which Latvia would head to a budget deficit of 21.4 percent of 2010&#8217;s GDP, with public expenditures comprising 58 percent of GDP. The Latvian government carried out a fiscal adjustment of 8.8 percent of GDP in 2009 and 5.9 percent of GDP in 2010, amounting to a fiscal adjustment of 14.7 percent of GDP over the course of two years, totaling 17.5 percent of GDP over four years, according to IMF calculations.</p>
<p>Greece did the opposite. According to the IMF, its fiscal adjustment in the initial crisis year of 2010 was a paltry 2.5 percent of GDP, and in 2011 only 4.1 percent, a total of only 6.6 percent of GDP over two years. Greece’s total fiscal adjustment over four years was only 11.1 percent of GDP. In Greece, the rigor of the attempted therapy fell far short of the severity disease, precluding any cure. Needless to say, financial confidence was not restored, and economic decline continued.</p>
<p><strong>Getting Ahead of the Curve</strong></p>
<p>The key to resolving financial crisis is getting ahead of the curve, pursuing a sufficiently swift fiscal adjustment so that the budget deficit as a share of GDP drops. This is exactly what Latvia did. In its fourth year of fiscal adjustment Latvia had an insignificant budget deficit of 0.8 percent of GDP, according to Eurostat. Because of its inadequate fiscal adjustment, the Greek government never managed to get ahead of the curve and reduce its budget deficit as a share of GDP, especially since the size of its GDP was also declining – a common problem in a severe crisis. Market confidence was never restored. From 2010-13, according to Eurostat, Greece had an average budget deficit of 10.5 percent of GDP, peaking at 12.2 percent of GDP in 2013. (Note that IMF statistics assessing the Greek budget deficit at only 3.8 percent of 2013 GDP failed to include the bank recapitalization costs included in statistics from Eurostat.) By my definition, this was no austerity.</p>
<p>Indeed, the front-loaded fiscal adjustment of austerity works best for improving economic growth. It restores all forms of confidence and financial balance, and drives structural reforms, making it possible to pursue vested interests.</p>
<p>In 2008-10 Latvia suffered an output decline of 24 percent, as much as Greece did in the six-year span from 2009-14. However, thanks to its front-loaded fiscal adjustment, Latvia was able to restore its public finances after two years. The country has shown solid economic growth, averaging 4.3 percent per year from 2011-14, according to Eurostat.</p>
<p>The most striking development is the expansion of exports. Throughout Europe, exports hit a nadir in 2009 and recovered afterward. Eurostat reports that Greek exports increased modestly, growing 45 percent from 2009-13, while Latvia’s exports skyrocketed by 85 percent during the same time period. Latvia’s radical reforms unleashed a supply effect. Export growth is a reflection of structural reforms and other efforts enhancing supply, which Latvia pursued far earlier than Greece.</p>
<p>The consequences of tepid Greek fiscal stabilization have been a devastating six years of declining output, even as the Latvian economy has revived. In 2013 Latvia’s GDP at constant prices was 4 percent lower than in 2008, while Greece’s was 23 percent less than in 2008, according to the IMF. A cumulative difference in GDP development of 19 percentage points over six years cannot be a statistical blip – it is real.</p>
<p><strong>Austerity Is Far From Unpopular</strong></p>
<p>At the height of the euro crisis, Jean-Claude Juncker, then prime minister of Luxembourg, accidentally summarized everything wrong with political thought on the crisis when he said: “We heads of government all know what to do, we just don’t know how to get reelected when we do it.” This feels self evident, but is in fact patently untrue.</p>
<p>Juncker’s words reflected an unfortunate contempt of elites for their voters, suggesting that citizens are short-sighted while political leaders are enduringly wise. The financial crisis in Europe has shown that the opposite is true: governments that pursued short-term and irresponsible fiscal policies in the vain hope of temporary growth improvements have been thrown out, while quite a few fiscally responsible governments have been reelected.</p>
<p>During the five years from September 2008 to August 2013, 19 of the 28 EU governments were kicked to the curb, while eight remained in power, namely the governments of Estonia, Finland, Germany, Latvia, the Netherlands, Poland, Sweden, and Luxembourg. These eight countries have center-right governments, which <a href="http://www.bloomberg.com/news/articles/2013-09-29/europe-s-voters-wisely-stick-with-frugal-leaders">pursued responsible fiscal policies</a>.</p>
<p>More often than not, radical front-loading of fiscal adjustment has proven popular with voters, who want to see political leadership. Latvia’s Prime Minister Valdis Dombrovskis was reelected twice, while George Papandreou lost massively.</p>
<p>Yet <a href="http://www.nytimes.com/2012/06/18/opinion/krugman-greece-as-victim.html">Krugman has continued to argue</a>. “Yes, there are big failings in Greece’s economy, its politics, and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart … No, the origins of this disaster lie further north, in Brussels, Frankfurt, and Berlin, where officials created a deeply – perhaps fatally – flawed monetary system.” Yet the euro has persisted, and all other EU countries have recovered.</p>
<p>Greece is instead the victim of its own long-simmering irresponsible fiscal policies. Since Andreas Papandreou became prime minister in 1981, Greece has stood out for its profligacy. According to Eurostat, from 1981-99 Greece had an average budget deficit of no less than 8.7 percent of GDP; Papandreou ruled for eleven of those years. His was a parasitical and oligarchic regime that used socialism to rebuild an old clientelist system (see also “<a href="http://berlinpolicyjournal.com/sisyphus-hasnt-even-gotten-started-yet/">Sisyphus Hasn’t Gotten Even Started Yet</a>” by Richard Fraunberger from our May/June 2015 issue). Multiple Greek governments grossly doctored their statistics, with a real average budget deficit of 6.1 percent of GDP during the years 2000-08. Not one single year did Greece fulfill its EU obligation to maintain the Maastricht ceiling, a budget deficit of less than 3 percent of GDP. It was consistently assessed the most corrupt country in the union. If the EU bears any blame, it is for failing to impose its formal standards earlier.</p>
<p>Rather than retreat, Krugman escalates. <a href="http://www.nytimes.com/2015/02/16/opinion/paul-krugman-weimar-on-the-aegean.html">In a recent op-ed</a>, he compared German policy towards Greece with British and French policy toward Weimar Germany after World War I, claiming that “austerity has devastated [Greece’s] economy as thoroughly as military defeat devastated Germany.” I beg your pardon? How can Germany giving Greece large loans at minimal interest rates be compared with the British and French demand for war reparations? The money is flowing in the opposite direction. Key EU demands of structural reform in Greece should instead combat corruption and oligarchy, eventually leading to growth.</p>
<p>Recent discussions have pushed the idea that Europe should follow America&#8217;s lead in abandoning austerity. But the US suffered a smaller decline in output in 2009 than the European Union, enjoying a steady growth of about 2 percent ever since.</p>
<p>And while a great deal of noise has been made about fiscal stimulus in 2009, the US has in fact pursued austerity itself.</p>
<p>Its budget deficit shrank from 9.8 percent of GDP in 2009 to 2.8 percent of GDP last year according to the Congressional Budget Office, showing that rigorous austerity works.</p>
<p><strong>Ignoring Europe&#8217;s Low Growth Problems</strong></p>
<p>In the end, Krugman has been wrong on virtually everything he has said about European fiscal policy. He has advocated large and lasting fiscal deficits, which have landed many countries in fiscal crisis without growth. He has ignored Europe’s low growth problems, which stem from poor business environments, overregulated labor markets, elevated taxes, and distortive public expenditures. He has turned his back on corruption and red tape. Syriza’s victory in Greece shows the danger awaiting the political establishment should it fail to stand up and do the opposite of what Krugman suggests.</p>
<p>We need to go back to basics in fiscal policy, as Europe has in fact been doing. If a country has a bigger budget deficit than it can finance, it needs to reduce the deficit and do so fast. In moments of crisis, political resistance is the lowest – and as sharp cuts in public expenditures cannot be distributed evenly, they should be concentrated around the least beneficial public activities. Such cuts are also likely to drive structural reforms contributing to economic growth.</p>
<p>At the same time, international financial support is vital to countries in serious financial crisis, and for that we fortunately have the IMF and the EU.</p>
<p><a href="http://www.businessinsider.com/steven-rattner-responds-to-paul-krugman-2015-2">Steven Rattner summed up the situation</a> appropriately: “…the thousands of words that [Krugman] has written about the euro crisis don’t suggest that he has spent any time trying to understand how the private sector actually functions (or doesn’t) within the eurozone. … For Krugman, the problems of Europe are all about the classic Keynesian slant of insufficient demand, brought on by miserly monetary policy and fiscal austerity insisted upon by Germany and its factotums in the eurozone’s command post in Brussels.”</p>
<p>In short, the whole Krugman argument to abandon fiscal responsibility can be dismissed – the ends we have observed show his thinking to be empirically wrong, and the means available render his ideas impossible.</p>
<p>The post <a rel="nofollow" href="https://berlinpolicyjournal.com/myths-of-austerity-and-paul-krugman/">Myths of Austerity – and Paul Krugman</a> appeared first on <a rel="nofollow" href="https://berlinpolicyjournal.com">Berlin Policy Journal - Blog</a>.</p>
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