Greece: The First Developed Country in History to Default to the IMF

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Its failure to make a €1.73 billion euro payment to the International Monetary Fund by June 30 makes Greece the first developed country in history to default to the IMF.  It could also mark the beginning of the end for the European Union as the world has known it.

Brinkmanship by Greece’s hard-left Syriza government—rejecting its creditors’ demands to cut public sector wages, pensions, and other domestic spending while honoring its international debt obligations—continued down to the wire, and beyond. 

This default triggers a 30-day grace period, after which there could be serious consequences for Greece beginning in August, or sooner.  Greece’s other multilateral, government-backed international creditors—the European Central Bank (ECB) and European Commission—may now be forced to declare Greece in default in accordance with the terms of the current €130 billion euro bailout package that they and the IMF (the “Troika”) gave to Greece in 2012.  

That bailout was needed because the first one, a €110 billion euro package awarded by the Troika in 2010, failed to revive economic growth and put Greece back onto the path of fiscal stability.  The fact is that Greece has now essentially defaulted three times in the last five years, although the Troika institutions have tried to paper over the previous two defaults (which were euphemized as “haircuts” for investors), because they agreed to them. 

This third default, however, will be less orderly than the previous two.  Failure to make a €3.5 billion payment to the ECB on July 20 could be the final nail in the coffin and force Greece to leave the eurozone.

Heritage Foundation analysts criticized the IMF decision to proceed with the first bailout in 2010, which violated the IMF’s “exceptional access framework” lending caps. They also noted the certain predictability the first bailout would fail to solve the Greek debt problem in spite of the IMF’s bending the rules.  

The whole point of those IMF rules was to stop additional lending and force the Greek government to make the fundamental reforms and government spending cuts that must happen for a true economic recovery to begin.  But those reforms were barely being put into effect before the Syriza government—elected just last January—began rolling them back.

This week the Syriza government imposed capital controls and forced a week-long shutdown of the banking system, to head off a run by Greeks to grab what few euros are left in the vaults.   Meanwhile, Greece’s inexperienced and reckless Prime Minister Alexis Tsipras announced a referendum vote on Sunday, July 5, when Greek citizens can vote to accept the “austerity” measures being imposed by Brussels and Frankfurt—five days after the Troika deadline. 

There is an almost universal consensus among economists and policy analysts that Greece’s entry into the eurozone was a tragic mistake, especially for the citizens of Greece. At first the euro and the low interest rates it enabled provided a financial windfall.  

Unfortunately, the Greeks did not handle that unique opportunity prudently, but instead acted profligately.  Strong public sector unions demanded bloated government payrolls and generous early-retirement benefits. For their part, Greece’s protected and self-interested private business elites enjoyed the Eurozone benefits in tourism and shipping—then made tax evasion into an art form. The heavily indebted middle class saw this example and followed suit.

Greece is ranked 130th of 178 countries in the 2015 Wall Street Journal/Heritage Foundation Index of Economic Freedom, bettering only Ukraine and Belarus among its European counterparts. The rule of law is weak and corruption is pervasive. Despite some past efforts to create a more business-friendly regulatory environment, the labor market remains rigid and slow to adjust to market realities.

Getting out of the eurozone that it should never have been permitted to enter will be extremely painful for Greece. But at the end of the day, independence from the eurozone could be a blessing—albeit one accompanied by lower living standards for a while.  

A “Grexit” from the eurozone will also spur further soul-searching by Greece’s similarly indebted and economically less efficient EU neighbors in the southern tier.  And that will spell more trouble for the EU grand project, and the bureaucrats in Brussels.

James M. Roberts is a research fellow for economic freedom and growth at The Heritage Foundation. 

Image: Flickr. 


TopicsEconomics RegionsEurope

The Trillion Dollar Question: Is America's War on Terror Really Winnable?

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In September 2004, President George W. Bush made a rare acknowledgment about the realistic outcomes of the war on terrorism in an exchange with Matt Lauer:

Lauer: Do you really think we can win this war on terror in the next four years?

Bush: I have never said we can win it in four years.

Lauer: So I’m just saying, can we win it? Do you see that?

Bush: I don’t think you can win it. But I think you can create conditions so that those who use terror as a tool are less acceptable in parts of the world—let’s put it that way.

This surprising remark came long after President Bush had repeatedly made the maximalist pledge that all global terrorists, as well as their ideology, would be defeated and destroyed. This was the purported strategic objective that was supposedly guiding U.S. counterterrorism strategies. As the February 2003 National Strategy for Combatting Terrorism proclaimed: “Objective: Destroy terrorists and their organizations. Once we have identified and located the terrorists, the United States and its friends and allies will use every tool available to disrupt, dismantle, and destroy their capacity to conduct acts of terror.” Moreover, this guidance was supposedly working; as Bush stated  on August 30, 2004, the month before speaking with Lauer: ”I have a clear vision and a strategy to win the war on terror.”

The President’s recognition, said during the height of the presidential campaign, was immediately denounced by Sen. John Kerry’s campaign, which released mildly humorous statements: “Bush Flip-Flops on Winning the War on Terror” and “Bush: Against Winning the War on Terror Before He Was for It.” Kerry’s running mate, John Edwards, proclaimed, “Saying we can’t win one day and flipping around the next day sends exactly the wrong message to the American people, to the world–and most importantly–to the terrorists who seek to harm us.”

The next day, August 31, while addressing the American Legion National Convention, Bush changed course and reverted to articulating the same implausible strategic objective that he had made the previous three years: “We meet today at a time of war for our country, a war we did not start, yet one that we will win…make no mistake about it, we are winning, and we will win. We will win by staying on the offensive. We will win by spreading liberty.”

This brief moment of clarity and honesty made eleven years ago is almost quaint in comparison to how Obama administration officials now describe progress in the war on terrorism. They no longer pretend the war can be won, or that it will even end. The expansion and growth of terrorist organizations that the United States claims it will destroy, and state of perpetual warfare are just something that Americans should accept and get used to. As CIA Director John Brennan noted this April, “It’s been a war that has been in existence for millennia…So this is going to be something, I think, that we’re always going to have to be vigilant about.” In short, the war on terror has always been with us, and it always will be.

I have a new piece in Foreign Policy that proposes a The National Commission on the War on Terrorism, which would consist of ten former officials, diplomats, and experts—with no personal or financial interest in the outcome—who would comprehensively review, evaluate, and offer new policy recommendations. Such commissions are rarely meaningful or impactful. However, current government officials and congressional members are too personally and professionally vested to objectively evaluate current strategies, demonstrate strategic learning, or implement any new policies. In short, U.S. counterterrorism strategy is both failing and frozen. The National Commission on the War on Terrorism would cost less than $4 million, and could be included in an authorization bill today. It would then be formed in the fall, with its conclusions and recommendations made publicly available in January 2017, just in time to inform Obama’s successor and the 115th Congress. It is a low-cost initiative to rethink the war on terrorism, and one that this Congress should pursue.

This piece first appeared on CFR’s blog Power, Politics and Preventative Action here.

Image: U.S. Marines Flickr. 

TopicsSecurity RegionsMiddle East

Newsflash: Working Is the Best Antidote for Poverty

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Warren Buffett recently opined that economic growth no longer benefits low-income workers. His solution? Not to hike the minimum-wage—which he knows eliminates jobs—but to expand the Earned Income Tax Credit (EITC).

Buffett is wrong. Economic growth has considerably benefited low-income workers, while the EITC has problems as an anti-poverty tool. It has even larger problems with out of control erroneous payments. To help low-income workers, conservatives should focus on fixing these problems and mitigating federal disincentives to work and marriage that trap too many in poverty.

Popular opinion holds technology has made finding work harder for the less skilled. This is only partly true. True, technology has shifted employment away from routine tasks that computers can automate. The economy now needs fewer secretaries or assembly line workers than a generation ago—a painful transition for many.

However, automation also reduces costs and leaves Americans with more money to spend elsewhere. This has boosted both living standards and employment in non-routine jobs. Today’s economy also needs many more home care aides and IT staff than a generation ago.

On balance these changes have benefited most workers. Earnings have increased up and down the income ladder since the late 1970s. These changes have particularly benefitted the least skilled, who disproportionately work in non-routine manual jobs. Their skills are needed by more employers than before.

Many knowledgeable Americans think otherwise. This is because demographics and the economy have changed considerably since the 1980s. Household sizes have shrunk, the population has aged, and benefits now make up a much larger share of workers’ total earnings. Ignoring these shifts produces misleading conclusions.

Fortunately the Congressional Budget Office produces earnings figures accounting for these shifts. Their data shows that between 1979 and 2007, labor market earnings for the middle fifth of non-elderly households increased by a third, after adjusting for inflation. Compensation for the bottom fifth increased by about half.

The recession has partly eroded these gains, but most low-income households still enjoy higher material living standards than their predecessors. Anyone who doubts this should look at how consumption patterns have changed over the past generation. Goods that were once middle-class luxuries have become widespread among lower-income families.

In the 1980s, fewer than half of Americans in the bottom quintile had air-conditioning in their homes. Two-thirds did not have a drying machine. Just a third used a microwave. Virtually none had computers.

Today low-income Americans live in homes a fifth larger than in the 1980s. Most have drying machines. Only 1-in-6 go without air conditioning. Just 1-in-13 lack microwaves. 98 percent have televisions. Half own a computer. Half own smartphones—technological marvels unimaginable in the era of Commodore 64s. Small wonder the vast majority of Americans tell pollsters they live better than their parents.

Borrowing cannot explain these changes. Federal Reserve data show that low-income families spend little more of their income on debt-payments now than in the 1980s. Less-skilled Americans enjoy higher standards of living primarily because the rising tide of economic growth has lifted their boats, too.

Of course this does not make poverty pleasant. But policymakers should put connecting the poor to the labor market at the center of their anti-poverty efforts. In this regard, the EITC is better by far than raising the minimum wage or the vast majority of federal anti-poverty programs, which do not require work.

However, supporters have considerably oversold the EITC’s effectiveness. It’s true that policies promoting work can be an extremely effective tool to combat poverty. It’s also true that the EITC is intended to promote work. But contrary to conventional wisdom, the literature has consistently shown that the ETIC actually discourages work in two-income households.

And a new study offers compelling evidence that single mothers who are already in the workforce —a group that has historically increased participation in response to the EITC—worked less after the recent most recent EITC expansion in 2009.

Furthermore, the EITC’s complicated eligibility requirements consistently put the program at the top of the Office of Management and Budget’s “high-error” list. According to data from the Treasury Department, the IRS made almost $18 billion in improper EITC payments last year and $134 billion in improper payments over the last 10 years. This isn’t to say that policymakers should abandon the EITC. But the program needs reforms before conservatives should advocate expanding it.

Instead conservatives should focus their efforts on removing roadblocks the federal government places in front of those trying to get ahead. Americans who work full-time and get married are dramatically less likely to live in poverty than those who do not. Unfortunately most federal welfare programs discourage both full-time work and marriage. Even the EITC reduces benefits for single mothers who marry their children’s fathers.

Congress should restructure federal benefits to remove these marriage penalties. It should also make working—or work-related activities—a prerequisite for able bodied adults to collect federal benefits. Those who do not participate in the labor market cannot share in the benefits of its growth.

James Sherk is a Research Fellow in labor economics in the Center for Data Analysis and Paul Winfree is the Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Image: Official White House Photo

TopicsEconomics RegionsAmericas

Why ASEAN Can't Stand Up to China

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China’s negotiations with ASEAN on a Code of Conduct for the South China Sea are dragging into their thirteenth year. At the same time, China has undertaken a massive land reclamation campaign to change the status quo in the South China Sea, leaving critics to lament ASEAN’s inability to form a united policy toward China.

Ambiguity about China’s rise is a “black sheep” in the integration of Southeast Asia. Although ASEAN plans to achieve the economic pillar of building a regional community by the end of 2015, integration on the political-security pillar has been slow, partly due to the ASEAN principles of non-interference and non-confrontational bargaining that slow consensus building. ASEAN’s continuation of the same policies towards China since the 1990s has been unsuccessful in keeping China from pushing the region toward instability and threatening ASEAN’s integration. For example, when China forced a confrontation with the Philippines over the Second Thomas Shoal only nine days before a round of Code of Conduct consultations in 2014, China showed it had little regard for ASEAN’s goal of a cooperative regional order.

While ASEAN lacks consensus on many political and security issues (China chief among them), ASEAN’s growing centrality in the Asia-Pacific demonstrates its continuing value for regional integration and institutionalization of dialogue. Through ASEAN, relatively weak states, like Laos and Cambodia, have aggregated power in the international system. Also, as champions of ASEAN highlight, the organization can help produce a stable regional order in a contentious part of the world, such as when it united behind the nonaligned movement during the Cold War.

Nonetheless, China has exploited divisions among ASEAN members and applied economic pressure, both positive and negative, to keep countries from coming to a consensus on maritime security in their own backyard. Moreover, weak leadership on political and security issues has left ASEAN without a united approach on China’s aggression in the South China Sea. This is a major reason why ASEAN remains divided on China—there is no leading nation to overcome economic, political, and cultural differences and forge an overarching consensus.

Leadership in ASEAN after the 1997 Asian Financial Crisis has been absent or very weak. ASEAN lacks a leader like the EU has in Germany.  Singapore and Thailand have provided limited leadership on economic issues, but Thailand’s ability to perform this role has weakened due to its internal troubles. The absence of a core leader, especially without strong internal mechanisms to mitigate differences among members, has been particularly problematic for security issues.

ASEAN’s lack of strong leadership has contributed to an environment in which many members have pursued different bilateral actions and policies towards China that are at odds with an ASEAN-centric approach to regional issues. A divided ASEAN has found its recent strategic environment shaped more by external interests than its own.

Without a leadership initiative on the part of one of ASEAN’s more neutral states, it is doubtful that ASEAN policy toward China will change dramatically. But does any ASEAN member have the potential to lead the organization, and by extension, create a consensus on China? A regional leader needs capacity (financial and human resources), internal commitment to undertaking a leadership role, and the buy-in of its regional and international neighbors. Jakarta remains the symbolic head, hosting the ASEAN secretariat, but Indonesia currently lacks the will to take a definitive leadership role.

ASEAN’s future is tied to China’s rise. With a range of political, economic, and military differences among ASEAN members, the organization needs a strong voice among member states to guide internal and external consultations, if its members hope to produce on ASEAN-centric approach to security issues. Without a committed and capable leader(s) on political-security issues, periodic eruptions of crises in the South China Sea could turn the status quo balance of power into chronic instability.

Amanda Conklin is currently working on Asian policy issues in the field of international affairs. She was Fulbright in Macau from 2012-2013. The views presented above are her own and do not reflect that of her employer.

Image: Flickr/ILO in Asia and the Pacific

TopicsGlobal Governance RegionsAsia

Explained: Why China and Japan Simply Don't Trust Each Other

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At the Asia-Pacific Economic Cooperation (APEC) summit late last year, Prime Minister Shinzo Abe and President Xi Jinping began to restore their nations’ relations, attempting to overcome differences over islands in the East China Sea. Again this year, the leaders of Asia’s two largest powers met at the Bandung Conference, demonstrating a slightly more relaxed and encouraging demeanor, suggesting that the maritime talks between their two governments were bearing some fruit. But it is not the territorial dispute itself that threatens improvement in the Japan-China relationship; it is their deep skepticism of each other’s ambitions in the region.

Chinese officials have not been shy in suggesting that the changing balance of power between their nation and Japan is the root cause of their diplomatic difficulty. The most recent statement of China’s perception of the change in regional influence comes from Foreign Minister Wang Yi. After his speech at Beijing’s World Peace Forum last week, China’s foreign minister was asked about the prospects for Japan-China relations, and Xinhua quoted him as follows: “the crux of China-Japan relations is whether Japan can sincerely accept and welcome China’s revival and rise.” Wang was further quoted as saying, “China’s development has brought important benefit to Japan, but Japan is not fully prepared in its mindset for an increasingly powerful China.” The solution, from Wang’s perspective, is simply that the Japanese have to accept China’s growing power.

Wang is not off the mark about Japan’s concerns about Chinese ambitions, and this too was amply demonstrated last week in Tokyo. Japan’s chief of the Joint Staff of the Self Defense Force, Admiral Katsutoshi Kawano agreed to an interview with the Wall Street Journal, and openly acknowledged his concerns about China’s behavior in the South China Sea. Admiral Kawano noted that China’s program of island building in the disputed islands of the South China Sea created serious concerns for Japan because of its dependence on the sea lanes through the Malacca Straits. “Of course, the area is of the utmost importance for Japanese security,” he said. “We don’t have any plans to conduct surveillance in the South China Sea currently but depending on the situation, I think there is a chance we could consider doing so.” In Tokyo, there is a profound sense that China could be positioning itself to challenge Japan’s strategic interests, and a new willingness to work closely with others to improve maritime stability.

Both perceptions are important, but they should not prevent leaders on both sides from recognizing the need for bolder diplomacy in the service of Japan-China cooperation in Asia. If China simply wishes for others to accept its rise, then it will be disappointed. As I argue in my new book, Intimate Rivals, the pace and scope of change being felt in Japan by the increasing impact of a transforming China have challenged successive governments in Tokyo. Granted, not all Japanese support an increased role for their military, but the majority of Japanese worry about how effective their government is and will be in protecting their interests —economic, maritime, and diplomatic— in the face of a far more assertive China.

Beijing should not sit back and wait for acceptance; it should actively seek to find ways of ensuring that its interests will not challenge and weaken those of its neighbors, including Japan. Japanese worries about Chinese behavior, especially in its expansive maritime claims of late, are important indicators of just how close Beijing is coming to pushing Japan into a far more active regional military role. For the past seventy years, Japanese leaders – virtually all of whom were conservatives, by the way – were comfortable that their security and their nation’s prosperity were not challenged in Asia. Even Washington seemed unsuccessful in fundamentally altering Tokyo’s preference for imposing limits, both in terms of capabilities and in geographical range, on its Self Defense Force.

Geostrategic change creates deep worry – not only about the policy challenges of the day but also about the perceptions of what is to come. Instead of insisting that Tokyo acknowledge its new power, Beijing would be better served by demonstrating what Foreign Minister Wang says it wants to do with it: creating a foundation for regional stability and peace. Open and free sea lanes are, of course, in the interests of all Asian nations, including China’s. A collaborative approach to ensuring they remain open to all would go a long way to ensuring the peace that Foreign Minister Wang so eloquently spoke of in his speech at last week’s forum. Building bases on islands close to those vital sea lanes will only cause others to fear China, and think the worst of its ultimate ambitions.

What caught my eye, however, was Wang’s use of the verb accept, and the attendant suggestion in his remarks that Japan had no choice but to come around. As China’s most respected diplomat and arguably the most effective of China’s former ambassadors to Japan, I wonder if he is truly unaware of how that word rankles policy elites in Tokyo. Few regional policymakers are in a position to simply accept the way Chinese power translates into policy consequences for their society. Across Asia, domestic interests will simply not allow acceptance of Chinese power if the exercise of that power undermines those interests.

Of course, there are some who already think that it is wiser to balance or even contain Chinese power. As I point out in Intimate Rivals, however, the story of Japan’s response to a rising China over the past decade or more has been to develop new frameworks of cooperation as well as to adopt new regulatory protections for Japanese citizens. Tokyo policymakers have largely sought to adjust to the complex currents of changes that accompany China’s transformation. Japan must continue to adjust to China’s newfound power. But it would be a mistake for Beijing to assume that policymakers will inevitably come around to accepting all that China does in the region. Interests will diverge, and the mechanisms that will allow Beijing and Tokyo to find common cause will need to be negotiated. In short, Beijing has significant influence over how Tokyo responds to its growing influence.

No one knows this better than China’s foreign minister: China’s disdain and Japan’s edginess are a sure recipe for a tense, contested Asia. Ultimately, it is Beijing’s behavior that will shape the direction that Tokyo’s adjustment takes. Rather than asserting its power, it would be wiser for China to consider what kind of neighbor the Chinese people want across the East China Sea.

This piece appears courtesy of CFR’s Asia Unbound and Forbes.

Image: Wikicommons. 

TopicsSecurity RegionsAsia