And only last Friday workers in Italy took to the streets to protest the latest in a line of pension reforms there.

In the French context Jacques Chirac’s room for manoeuvre is limited because of France’s pledges to bring its public deficit under control. It has agreed to reduce the deficit from 4.1 percent of gross domestic product in 2003 to 3.6 percent this year and to bring it below three percent by 2005.

So it may be that talk of right and left here is a bit misplaced: the vote is against whichever government happens to be in office, fails to achieve economic growth, and finds the messy problem of health and pension reform on its hands.

Some observers seem to want to suggest that the reason for the disatisfaction is the pace of the reforms: voters are ’frustrated’ since the reforms are not proceeding quickly enough. This wouldn’t be my reading: they are ’frustrated’ that the reforms are happening at all. They accept the ’reality’ in the abstract, but don’t like that same reality once its implications are clear. They have been lead to believe that all of this can be achieved relatively painlessly, but in fact it isn’t that easy.

This at least could be the impression gained from the tens of thousands of German pensioners - some of them in wheelchairs, others leaning on walking sticks - who took to the streets yesterday to protest government pension reforms. In fact (in one form or another) Germany has some 20 million pensioners, and they form about a quarter of the population. It should not need underlining, of course, that they constitute a very important consituency among Germany’s active voters.

It’s not that I particularly welcome and relish in the reforms myself. I would rather they weren’t necessary. I think the welfare system we had was fine, brillant even, while it lasted, but it contained one fundamental flaw: it didn’t see the inversion in the pyramid. It didn’t forsee that rising generational cohorts would one day be followed by declining ones, and that this transition would in time start to threaten not only the foundations of the welfare system, but even the process of economic growth itself.

So, to end where I started, let’s go back to the Süddeutsche Zeitung, and their conclusion that the resounding defeat for the conservatives in the French regional elections is:

yet another example of the European malaise that has already taken hold in Germany, Poland and Italy. All face the same key domestic troubles -- a stagnating economy, unemployment and fear of an uncertain future, the paper wrote and added that if one is to believe the opinion surveys in these countries, people there are familiar with these problems and know that the creaking western European welfare state has to be reformed if it is to survive. Governments promising reform are elected, but then to fail to live up to their promises.

The level of activity doesn’t seem to high at present. One India-base observer had this to say (perceptively in my opinion):

Balaji E., General Manager, Ma Foi Consultants, a recruitment firm…….commenting on actual level of outsourcing from France,….says, “France has not been doing too well economically and has a relatively high unemployment rate. There isn’t much outsourcing happening now.”

He also reasons that Europe is typically an employee-driven market unlike the US. “A European country would face greater resistance in outsourcing jobs.”

Nonetheless France’s economic lethargy is only being masked right now by the even greater lethargy to be found in Germany. Having not exactly outperformed in the ’great China race’ French companies will like all their other EU and US counterparts find themselves cost-pressured to seek solutions. As and when they do Pondicherry, and numerous other former French colonial outposts, will be waiting. Could this at least turn out to be be the unexpected proverbial sting in the once great colonial tail? And could this once obscure village which the French - who arrived there in 1673 - converted into a flourishing trading centre be yet again reborn thanks to its newly revitalised cultural resource?

If I may lapse into editorial mode, I must say I’m with Trittin on this one. I’m far from an environmental extremist, but I like to breathe clean air as much as anybody does. And trading in emission rights seems a sound way to get the air a bit cleaner.

Indeed this sort of scheme is much loved by economists who otherwise cast a gimlet eye on state intervention. Tradeable emissions rights shove the ’externalities’ back where they belong: with those who create them. Firms that can’t reduce their emissions will be penalised; firms that can will earn money by doing so. And that’s as things should be.

I will confess, though, that I am less excited by the plan itself than by the fact that the Greens are pushing it. You see, many years ago I belonged to the Greens. (How many? Let us say only that it was well before Gerd Bastian topped himself and took Petra Kelly with him, but well after the party’s posters had begun to look professionally-done.) I wasn’t privy to the leadership’s thoughts on the matter; but among the rank and file with whom I ate tofu and marched against the Wackersdorf reprocessing plant, tradeable emissions rights would have been seen on a par with tradeable rights to eat babies.

There’s been much (sparkly crystal-clear all-natural mountain spring) water under the bridge since then, and there’s little these days on which I see eye to eye with the Greens. But clearly they have come a long way. Not only are they backing emissions rights trading, they’re taking the plan seriously enough to go the mattresses over it. What’s more, Trittin is making angry noises about state subsidies for the energy branch, especially the indefensible subventions to the indefensible brown coal industry.

It would be un petit peu exaggerated to claim that the Greens were on the verge of a liberal renaissance. But in recent days there have been some heartening glimmers of liberalism in the party. Exciting stuff, and I for one will cheer if the Greens move in that direction. After all, Germany sorely needs a liberal party.

One significant factor which may be in the minds of Italian citizens today is that Italian Prime Minister Silvio Berlusconi has been - along with Jose Maria Aznar - one of the firmest eurozone supporters of the Iraq war. (Interestingly Klinga over at Living in Europe draws attention to the way a similar atmosphere may also exist in Poland). But this concern over the risk of a possible attack comes on top of an already weak confidence situation following an apparent economic growth standstill and the high profile Parmalat scandal.

The Italian confidence report is in fact the second from Europe to show the effect of the bombings. An index measuring German investor and analyst sentiment published last week posted the biggest decline in 16 months.

With exports affected by the 20 percent plus euro appreciation, economic growth in Italy ground to a halt in the final quarter of last year. Indeed Italian industrial production continued to decline in January for the second consecutive month.

The euro’s gain against the dollar, which has made European goods sold to the U.S. more expensive, has weighed heavily on any recovery which may have been in the offing in Italy. Exports to the U.S - which are responsible for 10 percent of Italy’s total exports (the US is its third-biggest trading partner) - fell 27 percent year on year in January2004.

Meanwhile in France, which is the second-largest economy in the euro zone, consumer spending was unchanged in February from the previous month, according to the Paris-based statistics office Insee.

All of this means there is increased pressure over at the ECB. Leading EU politicians like Gerhard Schroeder and Jean-Pierre Raffarin have been urging the European Central Bank to lower interest rates in an attempt to revive growth. ECB officials including President Jean-Claude Trichet have previously rejected the calls, saying that borrowing costs are already low enough.

The Madrid bombings, however, have increased speculation about a rate reduction. The implied rate on the three-month Euribor interest-rate futures contract for June delivery has it seem fallen today to 1.93 percent today from 2 percent on March 11. That rate is now lower than the ECB’s benchmark refinancing rate of 2 percent. The markets themselves have today responded to an interview Trichet gave to the German paper Handelsblatt yesterday (see below) by selling the euro in anticipation of a rate cute.

To give us an idea of where all this may be leading Handelsblatt has an English version of the Trichet interview. In the interview he suggests that the bank might be ready to cut interest rates if domestic consumption does not strengthen as expected. The ECB’s next rate-setting meeting is on April 1. Many commentators had thought that it was unlikely we would see any rate move in the near future. Now, given the shift in rhetoric, it seems that the Bank’s governing council members are at the very least likely to debate the issue.

You keep complaining about weak consumer confidence. Could lowering the interest rate help to prop it up?

In the normal course of economic activity, recovery most often starts with net exports, then passes over to investment and then, as the third stage of the rocket, so to speak, arrives at consumption. The first two rocket stages have ignited and we continue to follow the relevant hard data. We now have to examine very carefully the ignition process of the third stage. It is clear that household consumption is not only driven by the impact of stronger exports and investment, but also by consumer confidence. We have ascertained that consumer confidence today is not necessarily at the level that would be justified by the basic economic data.

Why is that?

I see three reasons. First, the development of the labour market is not satisfactory. This in turn comes from the structural impediments which characterise Europe and from the previous phase of the cycle. We have good reasons to think that this situation will progressively improve. Second, there is the unfortunate phenomenon that public opinion very often discovers the problems at the moment they are tackled, when governments, parliaments and social partners carry out the structural reforms that are urgently needed. This late and brutal discovery could have a negative impact on confidence. Had the public been more aware of the underlying problems, the reforms, when decided upon and implemented, would have increased confidence. That is the reason why we believe that transparency, pedagogy and tireless explanations are an essential part of preparing structural reforms: we all have a role to play in this domain, including the ECB, to make clear to people the advantages of the reforms as regards growth, job creation and higher standards of living. And third, there is a further point which touches upon the primary objective of the ECB. In a number of countries part of the population has the feeling that the inflation rate could be higher in the future and that their purchasing power will not be appropriately preserved. This has a negative influence on consumer confidence. We, on our side, have all reasons to trust that we have inflation under control and that prices will be in line with our definition of price stability. And we tell the public that we, as the guardians of the currency, are defending their purchasing power, that they can trust us and that they can invest and consume with full confidence.

Unpatriotic or economically imperative? The uncompetitively high cost of labour in Germany is fast becoming a source of friction between business leaders and the government in the eurozone’s biggest economy.

Companies argue their only choice is to move jobs abroad, a solution which is set to become easier with the imminent eastwards expansion of Europe.

But Chancellor Gerhard Schroeder, fearing a mass exodus of jobs to low-wage countries at a time when German unemployment is already cripplingly high, has roundly slammed such deliberations as “unpatriotic”.

The debate seems to have hotted up in recent weeks, with companies, particularly in the high-tech sector, apparently mulling plans to relocate thousands of jobs abroad.

The powerful metalworking union IG Metall said that the electronics giant Siemens was considering relocating up to 10,000 jobs in its mobile and fixed telephony divisions and its automatisation, energy and transport businesses in order to cut labour costs.

Corresponding plans had been submitted to employee representatives in the activities concerned in recent weeks, the union said.

But it is not only the IT sector -- which is estimated to have lost around 70,000 jobs last year -- that is following the call of lower costs abroad.

The airline Lufthansa is to move large parts of its accounting department and its purchasing activities to Poland and car maker Volkswagen already builds around 13 percent of its vehicles in central and eastern Europe.

And the VCI chemicals industry association found that while the domestic research and development (R and D) budgets of its members were set to stagnate this year, the companies were planning to increase their R and D spending outside Germany.

The DIHK federation of chambers of commerce poured oil on the fire of the controversy this week by appearing to throw its weight behind some sort of campaign for companies to turn their backs on Germany.

DIHK President Ludwig Georg Braun advised companies “not to wait for better policies, but to act and take advantage of the opportunities offered” by the eastward expansion of Europe.

The comments immediately drew fire from the government, currently battling to bring down the chronically high level of unemployment in Germany.

Schroeder slammed the remarks as “unpatriotic”. And the new secretary general of Schroeder’s Social Democratic SPD party, Klaus Uwe Benneter, was similarly enraged.

“When industry leaders talk down Germany as an economic site in such a way, they’re acting irresponsibly,” he fumed.

Even the opposition CDU party was up in arms, with the head of the CDU’s social committee, Hermann-Josef Arentz, attacking Braun’s comments as “bare-faced cheek”.

But business leaders insist they have no choice.

The head of the BDI industry federation Michael Rogowski said moving production out of Germany was the only way companies could remain competitive and “secure those jobs that are left in Germany.”

High-tech companies such as the software giant SAP agreed.

“If we don’t move, then we can’t be competitive. We lose market share and then we lose part of the jobs in Germany as a result,” SAP chairman Henning Kagermann said in an interview with Financial Times Deutschland.

It was “an economic imperative” to move to low-wage countries.

The head of Siemens’ fixed-networks division ICN, Thomas Ganswindt, said that by moving activities abroad, “we’re following the markets. Globalisation means that we create value where there is demand for it, that is to say, where there is growth. At the moment, growth is taking place elsewhere.”

The attractions of relocating are clear -- an IT employee in India, for example, earns around a third of the amount his German counterpart takes home.

But that was not the only problem. The head of IBM Germany, Walter Raizner, pointed the finger at Germany’s inflexible labour market laws.

Countries that had changed their laws were now closer to full employment than Germany was, Raizner said.

And DIHK President Braun rejected the allegation he was unpatriotic.

“True corporate patriotism lies in pushing for consistent policies of reform,” he argued.
Source Yahoo News

His disappointment with the book is primarily caused by its unwillingness to fundamentally challenge some of the myths of rationality of current US foreign policy. Quite to the contrary, Mr Pfaff has no inhibitions to call them all by their name, despite being aware that many of the myths of past and present American foreign policy and politics, particularly the notion of a “unique historical mission — whether or not divinely commissioned” — are not open to logical refutation.

That said, I think the last part of his essay is one of the most eloquent descriptions of the communicative disaster that happened particularly between Europe and the US in the last two years.

“Every country has a “story” it tells itself about its place in the contemporary world. We are familiar enough with the American story, beginning with the City on a Hill and progressing through Manifest Destiny toward Woodrow Wilson’s conviction we are “to show the way to the nations of the world how they shall walk in the paths of liberty…. It was of this that we dreamed at our birth.” The current version of the story says that this exalted destiny is fatefully challenged by rogue nations with nuclear weapons, failed states, and the menace of Islamic extremists. Something close to Huntington’s war of civilizations has begun. National mobilization has already taken place. Years of struggle lie ahead.

The “isolation” of the United States today is caused by the fact that its claims about the threat of terrorism seem to others grossly exaggerated, and its reaction, as Brzezinski himself argues, dangerously disproportionate. Most advanced societies have already had, or have, their wars with “terrorism”: the British with the IRA, the Spanish with the Basque separatist ETA, the Germans, Italians, and Japanese with their Red Brigades, the French with Palestinian and Algerian terrorists, Greeks, Latin Americans, and Asians with their own varieties of extremists.

America’s principal allies no longer believe its national “story.” They have tried to believe in it, and have been courteous about it even while skepticism grew. They are alarmed about what has happened to the United States under the Bush administration, and see no good coming from it. They are struck by how impervious Americans seem to be to the notion that our September 11 was not the defining event of the age, after which “nothing could be the same.” They are inclined to think that the international condition, like the human condition, is in fact very much the same as it has always been. It is the United States that has changed. They are disturbed that American leaders seem unable to understand this.

When American officials and policy experts come to Europe saying that “everything has changed,” warning that allied governments must “do something” about the anti-Americanism displayed last year in connection with the Iraq invasion, the Western European reaction is often to marvel at the Americans’ inability to appreciate that the source of the problem lies in how the United States has conducted itself since September 2001. They find this changed United States rather menacing. An Irish international banker recently observed to me that when Europeans suggest to visiting Americans that things have changed in Europe too, as a direct result of America’s policies, “it’s as if the Americans can’t hear.” A French writer has put it this way: it has been like discovering that a respected, even beloved, uncle has slipped into schizophrenia. When you visit him, his words no longer connect with the reality around him. It seems futile to talk about it with him. The family, embarrassed, is even reluctant to talk about it among themselves.”

For the first time, voter participation in regional elections has increased in France. Somewhere between 60 and 62% of registered voters participated, while the figure was some 57% in 1998. It is unclear to me whether this reflects the growing importance of regional government or the opportunity to protest the ruling UMP government.

It certainly has been a bad day for the conservative UMP. They appear to have taken on 23% of the vote, compared to 40% for the Socialist-Green coallition and roughly 17% for the Front National, making their overall share of the vote roughly stable over the last several elections. The Communists have made a significant recovery after their record low 3.4% of the vote in the last presidential election, receiving roughly 5% of the vote overall and over 8% in all the regions where it ran outside of any coallition. The far left coallition Lutte Ouvrière - Ligue Communiste Révolutionaire received a comparable number of votes to the mainstream Communists, but this is substantially lower than during the last presidential election and comparable to their 1998 returns in the regional elections. The UDF - a mainstream right-wing party allied with the UMP - picked up another 11% of the vote, making the overall vote for government-supported parties roughly 34%.

At present, the mainstream right is leading in only five regions in all of France. This election - like all French elections - takes place in two rounds, so it’s not over yet. However, the right’s position in this election is fragile in almost all parts of France.

Although the bulk of the power in France is still in the central government, this raises the prospect of something that hasn’t happened in France in quite a long time: a central government faced with meaningful opposition rule in the regions. Will the left and the far right use regional government to attack the government in Paris? France’s entire administrative structure, from 1789 to 1982, was designed to make that impossible. This may have a significant impact on the future of decentralisation in France.

The article claims that the document bears witness of a new strategic sobriety within Al Quaida, as it renounces to many of the religious references of previous terror-guides. Accordingly, the paper has allegedly been signed by a “Service Center for Mujahedin” and not, as was apparently customary, by a “Coalition against Jews and Crusaders”.

With respect to the Madrid bombings, Mr Musharbash explains that the document suggests the terror consultants had singled out Spain as first brick in a domino chain after a detailed analysis of Spanish domestic policy, particularly the tension between the Aznar-led government and a large part of the population with respect to the country’s Iraq policy. The article quotes from page 33 of the document (my retranslation from German) -

“We believe that the Spanish government will not be able to bear more than two, maximal three strikes until popular pressure will lead to a troop withdrawal from Iraq. If Spanish forces were to remain in Iraq despite these attacks, a victory for the Socialist party would be almost certain and a troop withdrawal would be on the electoral agenda.”

And With Spain on retreat, other countries might follow. Poland and Italy are the next bricks to fall, according to the terror guide (see Scott’s post below).

It’s evidently impossible to tell if the document is really authentic or not. The timing of its public appearance certainly adds to the ambiguity. But even assuming that it were authentic - the indication that terrorists are more aware of their limitations and the need to use their “assets” strategically, more “rationally”, does not in itself help to answer the question whether they are stronger or weaker now than before.

So let’s hope it is a sign of weakness.

As late as Summer 2000, I asked a business developer at EMI Germany about her thoughts with respect to mp3, file sharing and the future of her industry. At a time when mp3.com had already gone public, when the Napster battle was about to become nasty, a business developer at EMI Germany told me that the Internet was not yet a prominent part of their strategy. She was right, of course. The internet was only a big deal for their lobbying and legal departments. Despite some laudable efforts to change this – for major labels, the most important answer to the strategic challenges of digital distribution is still the law.

Certainly, even if the internet is not “one giant, out of control copying mashine”, as Hal Varian and Carl Shapiro wrote in “Information Rules”, its technological nature does trigger changes at the axiomatic core of economics. Brad DeLong and Michael Froomkin have laid this out in a paper called “Speculative Microeconomics for tomorrow’s economy” – I quote –

“This reciprocity-driven revenue stream may well be large enough that producers cover their costs and earn a healthy profit. Reciprocity is a basic mode of human behavior. People in the large do feel a moral obligation to tip cabdrivers and waiters. People do contribute to National Public Radio. But without excludability the belief that the market economy produces the optimal quantity of any commodity is hard to justify. Other forms of provision - public support funded by taxes that are not voluntary, for example - that had fatal disadvantages vis-a-vis the competitive market when excludability reigned may well deserve reexamination.”

In other words, we may enter a world in which Adam Smith’s prediction about the invisible hand might no longer hold true. Clearly that’s an earth-shattering thought, particularly given that economic history has taught us about the incentive nurturing nature of private property. And since we live in a world in which intellectual property is very likely more important than physical property, a reduced level of excludability is certainly not easy to even understand, much less to welcome. But welcome or not - information age societies will have to find a way to reconcile the advantages of internet driven “semiotic democratisation”, as Harvard’s William Fisher has called the slow digital lowering of entry barriers to cultural interchange, with a producer’s need to live from what they do. “Mass amateurisation”, blogs, open source, are a great way to socially benefit from positive external effects provided by volunteering human capital. But the same Human capital is usually also toiling in a day job to provide for the food for thought.

Don’t get me wrong. I very much welcome the end of the music industry’s “winner take all” market structure that reduced excludability is bringing about. I think it is great that the reduced expected return of any brand name piece of music distributed in the “classic” way is now opening up the market for labels that do a far better job at matching artists with people who love their music. But it must, in my opinion, also be clear that rights holders do have some legitimate concerns, which have to be addressed.

Unfortunately, the conventional, socialised, and certainly codified concept of property is not helping lawmakers to strike the new balance needed. However, it does help the music industry to protect their acquired position in the market. Telepolis’ Stefan Krempl (in German) may well be right to predict that last Monday was the day when an all-out copyright war was declared on Europe.

Not that the EU Parliament’s fast tracking of the Intellectual Property (IP) Enforcement Directive last Monday would have usually received much attention, but the events in Madrid that shocked Europe and the world certainly led to a complete premature burial of the subject in the major news outlets (see the list at the bottom of this wiki page for a press survey)

For the moment, the final amended version of the directive as agreed on in the first reading by the EU Parliament last Monday and accepted by the Council last Wednesday does not appear to be online – all I could find was an empty pdf-file

The most controversial issue regarding the content of the new directive is that is does not explicitly renounce to the criminal prosecution of non-commercial intellectual property rights infringements, like downloading songs from a p2p network for personal use. In fact, the directive leaves it open to national governments to hunt down file-sharers as they see fit. Adrian McMenamin, press officer for the European Parliamentary Labour Party states that “scare-tactics” have been used by the opponents of the directive – and he is certainly right that many of the most vocal opponents appear to not see the point of intellectual property protection at all - but I think it is rather naïve to claim that the directive does not create rather problematic incentives for national lawmakers. This directive certainly won’t make it easier to stand up for consumer rights in the face of a concerted right-holding effort. It seems, unfortunately, this directive will become another case study for “The Logic Of Collective Action”.

The most controversial formal issue regarding the directive is the Parliament’s rapporteur, the French UDF deputy Janelly Fourtou, the wife of Jean-René Fourtou, the current PDG of Vivendi Universal. While she is declaring “no financial interests” on her website, according to a vast variety of critics, she should have recused herself as rapporteur.

She should have, indeed. Just as she did in 1999, according to LeMonde , when she chose not to chair the environmental committee while her husband was CEO of the pharmaceutical company Aventis.

But it seems that this time the stakes were to high.

Frits Bolkestein, the commissioner in charge, may repeat as often as he wants that the intention of the directive is only to criminalise commercial infringements of intellectual property rights. But the ambiguity introduced into the directive by failing to clarify just that is certainly sufficient reason for concern when it comes to the true political intentions.

No doubt about it, revolutions are truly scary. And for just that reason, there are very few non-violent ones. After last Wednesday, chances of a socially problematic turn of the ongoing digital revolution have risen considerably for Europe.

A U.N.-mandated NATO presence in Iraq could be a face-saving formula for Spain’s incoming Socialist prime minister as allies put pressure on him not to withdraw troops from the country, diplomats said Tuesday.

Jose Luis Rodriguez Zapatero has said he will probably withdraw Spain’s 1,300 troops, who are a key component of the 9,000-strong multinational stabilization force in Iraq’s central-south division.

This would be a major setback for the United States, which wants NATO to take command of this division some time after sovereignty is returned to the Iraqi people on June 30. Even France and Germany, Europe’s fiercest critics of the Iraq war, had backed away from challenging Washington’s ambition.

“Spain’s position now complicates things for NATO,” said one diplomat at the U.S.-dominated military alliance.

“Beyond the political question there is now a question of whether there will be sufficient military capability: you’ve seen how difficult it has been to get forces for Afghanistan.”

However, the two biggest contributors to the stabilization force -- Poland and Ukraine -- have vowed not to pull their soldiers back, and diplomats say Zapatero may change his mind if NATO takes over with a clear U.N. Security Council mandate.

Indeed, Zapatero’s first comments on the matter after his weekend election victory were ambiguous.

He repeated a campaign pledge to pull out the troops if the United Nations did not take charge by mid-year and promised wide political consultation before setting any plan in stone.

“Even this incoming Spanish government would not be willing to…abandon Iraq, and so putting its troops under a NATO umbrella could be a face-saving formula,” said one diplomat.
Source: Reuters
LINK

Firstly, there was a definite rise in participation from 2000 (68.71%) to 2004 (77.21%), representing approximately 2,500,000 extra voters. This is a return to the participation level of 1996 (77.38%), though, not a new record high, at least in percentage terms - it may be in actual numbers. However, this does buck the recent European trend of generally lower turnouts in elections.

As for the parties themselves, the total cast for those other than the PSOE and PP (the United Left (IU), nationalist and regionalist parties) remained roughly static numerically (approximately 3.8 million votes) but, as a percentage, dropped from 16.4% to 14.8% of the total. This is consistent with the idea that the majority of extra voters were for the PSOE, and it’s also worth noting that the only one of the smaller parties to make noticeable gains both in number of votes and vote share were the Catalan Republican Left (ERC).

The most noticeable effect of the higher turnout, however, is amongst the two main parties. As a whole, the PP have lost approximately 700,000 voters since 2000 - a drop of 6.7% in their number of votes, returning them to roughly the same level numerically as they got in 1996. However, the Socialists have gained close on 3 million extra voters, an extra 37.7%. This obviously skews the result heavily in the PSOE’s favour - if they’d merely captured the 700,000 voters the PP lost, they’d still have been almost a million votes behind the PP in the final count - it’s the extra 2.3 million votes they’ve picked up that have made the difference. And, as we saw earlier, there were approximately 2.5 million more votes cast in 2000 than in 2004.

If we remove the ’extra’ 2.3 million PSOE votes from the reckoning, then turnout drops to about 70%, the PSOE’s share of the vote drops to 36.6% and the PP’s rises to 40.9% and, if I remember correctly, a 4% or so lead for the PP was what the polls were showing last week before the Madrid bombings.

Obviously, this isn’t a conclusive proof, and I doubt very strongly that all those who voted on Sunday who hadn’t planned to before last Thursday voted for the PSOE. However, it seems likely that a majority of those who did vote having not planned to would have been voters for one of the left parties and this contributed strongly to the PSOE’s victory on Sunday. The bombings may have elected the election, but not in the way some think - they caused people to vote, but didn’t affect the way they voted.

Of course, this is just speculation, and there are no doubt other explanations for the voting patterns. It’s hard to say anything conclusively without decent polling data, but the results do show enough of interest in themselves to make looking at them a worthwhile exercise.

The first point which is worthy of note about this news is its origin: El Pais. This new priviledged source of information reflects the recent change of government (El Pais is associated with the new governing party PSOE, previously government information might have been leaked to the public via El Mundo, which is known for its support for PP). News in Spain is like this.

Secondly the Moroccan connection is confirmed, and seems to imply a further connection via Islamic Jihad with Al Qaeda.

Thirdly the origins of the explosives - remember Goma 2 is manufactured in Spain - seems still to be unknown.

While I am here posting I would like to clarify my post from yesterday. I was backing the Spanish electors (and saying that in my view they are not ’cowards’) and democracy, not endorsing any particular party.

I understand that Zapatero would wish to negotiate a greater role for the UN, and I agree with him. But if we get to that magic date (30 June), and the consensus formula has not been found - and I dearly hope that it will be - I do not think it would be responsible politics to remove Spanish troops. I think that my understanding of responsible government under democracy is to accept responsibility for the errors of your predecessors, even if you don’t agree with them. Iraq is in chaos, all parties to the intervention have some responsibility for that, and Spain cannot simply up and leave. This, as the Washington Post piece I post below indicates, would only make the job harder for the Poles and the Italians. This would also make the job of destabalising Iraq easier for Al Qaeda. It is a moot point whether Al Qaeda was a serious problem in Iraq before the invasion. It certainly is now, and no one should be thinking of leaving any time soon. Being serious about terrorism in the Spanish context means: solving the Basque ’problem’, opening a serious and sustained dialogue with Morocco (which would include the future of Ceuta and Melilla and the Sahara - without giving in on this one - the loss of life in the Gibraltar Straits and how to avoid this, and the position of Moroccan immigrants within Spain), and retaining a commitment to Iraq until such time as the country is able to maintain stability for itself. This latter situation I think is years, not months, away.

The beneficiary was Mr. Zapatero, who had promised even before the bombing to withdraw the troops on June 30 unless the force was sanctioned by the United Nations.

Mr. Zapatero could not be expected to alter his view that the original decision to invade Iraq was wrong. But the reaction of Spain, and Europe, to this massive and shocking attack on its soil is crucial -- as is its response to the continuing challenge in Iraq. The two are inextricably linked: Whatever the prewar situation, al Qaeda’s tactics now have made explicit the connection between the continuing fight in Iraq and the overall war on terrorism. Mr. Zapatero said his first priority would be to fight terrorism. Yet rather than declare that the terrorists would not achieve their stated aim in slaughtering 200 Spanish civilians, he reiterated his intention to pull out from Iraq in less equivocal terms than before the election.

The incoming prime minister declared the Iraq occupation “a disaster” -- yet he didn’t explain how withdrawing troops would improve the situation. Spain’s participation on the ground in Iraq is small, but a Spanish withdrawal will make it harder for other nations, such as Poland and Italy, to stay the course. The danger is that Europe’s reaction to a war that has now reached its soil will be retreat and appeasement rather than strengthened resolve. “It is clear that using force is not the answer to resolving the conflict with terrorists,” European Commission President Romano Prodi said yesterday. Should such sentiments prevail, the next U.S. administration -- whether led by President Bush or Sen. John F. Kerry -- may have no alternative to unilateralism.
Source: Washington Post
Link

Jose Luis Rodriguez Zapatero, whose Socialist party won Spain’s general elections, said Monday that he will recall Spain’s 1,300 peacekeeping troops in Iraq by June 30.

Zapatero had pledged this during his election campaign, which crystalized Spaniards opposition to last year’s U.S.-led invasion of the Middle East country, ostensibly to search for weapons of mass destruction, which have not been found.
Source: Fox News

Jose Luis Rodriguez Zapatero, whose Socialist Party unexpectedly won Spain’s election yesterday, plans to broaden his country’s fight against terrorism as the government said it has evidence pointing to al-Qaeda as the perpetrator of the Thursday bombings in Madrid.

Last week’s bombings killed 200 people in a country where terrorism had been mostly limited to the Basque nationalist group ETA. The attacks threw into question the security of Spanish citizens and raised concerns that tourism, which makes up 12 percent of gross domestic product, may suffer.

“My top priority is fighting all forms of terrorism,” Zapatero, a 43-year-old lawyer, said in his victory speech yesterday at party headquarters in Madrid. “My first initiative will be seeking the political support to focus all our resources in this direction.”

Zapatero, like the defeated Mariano Rajoy, 48, of the Popular Party, pledged to cut taxes to sustain the economy after a decade of growth. The Popular Party under Prime Minister Jose Maria Aznar cut income taxes twice since 1996 and expects the economy to grow 3 percent a year through 2007.

Zapatero’s economic policies include a mixture of tax cuts and increases. He aims to cut tax rates for businesses and change tax policy so that about 7 million fewer people will pay taxes. The party also says it will stop taxing capital gains below a certain level but increase it on large investments. And Zapatero plans to raise taxes on tobacco and liquor.

Zapatero opposed Spain’s involvement in the U.S.-led invasion of Iraq and says he will pull Spain’s 1,300 soldiers out of Iraq unless the United Nations gives a mandate requesting their presence.

“The war in Iraq was a disaster, the occupation of Iraq is a disaster,” he told Spain’s Cadena Ser radio station today, according to his Socialist party’s press office.

Zapatero probably will pull away from the U.S. and forge deeper ties with France and Germany, said Luis Benguerel, who helps manage the equivalent of about $80 million in European stocks at Interbrokers in Barcelona.
Source: Bloomberg

According to the BBC world service what he actually said went as follows:

“El máximo dirigente del PSOE aseguró que las tropas de España saldrán de Irak antes de finales de junio si la ONU no se hace cargo de la situación.”

For those who don’t speak spanish, he qualifies the statement with “if the UN do not take responsibility for the situation”. You can then read this as you want, which is probably the intention. Really at the moment he is not commiting himself to anything. This is obvious, he has still to negotiate and form a government. He has no majority in the parliament.

I should start by confessing that I am not at all sorry to see Rajoy disappointed of his expected post. This is odd, given that I am likelier to agree with the PP then with PSOE on many of the boring policy details that are 99% of a government’s job. But it’s hard to jump over one’s own shadow, and I cannot like a party that gives a home to some who still harbour a sneaking regard for Francoism. Even Aznar recently dismissed with contempt proposals to reinter victims of the Falangist regime, still lying in the mass graves in which the francoists dumped them. Not to say that the PP are not democrats. But they are rather like the US Republicans playing to racist southerners to beef up their electoral numbers. My feeling is that, if you can only win with the votes of those who still harbour some attachment to the tiny plump high-voiced Generalissimo, you shouldn’t want to win. (Indeed, I have another feeling that the new government, as one of its first acts, should dynamite the Valle de los Caidos; but then my feelings towards the relicts of Spanish fascism are perhaps a bit strong.)

And yet all that said, I wonder whether the Spanish electorate was not unduly harsh. They seem to feel that the government was playing politics by focusing on ETA. I’m not so sure. When bombs go off in Spain, sad to say, it’s not unreasonable for eyes to turn towards the pais vasco. And, in the immediate aftermath of an outrage like that in Madrid, I’m not entirely sure that the government is obligated to share all relevant information with the public. Surely the first order of business is forensic, and to the extent that public transparency could compromise investigations, the public will have to wait.

Nor do I believe, as Abiola Lapite appears to do, that in the PSOE’s victory the ’terrorists have won’. Mr Lapite may wish to recall that the previous PSOE government was not exactly kittenish towards terrorists (this Google search might help). And, though I myself was cheering on the attack on Iraq from the Sceptical Liberal Hawk camp, I rejected and continue to reject the thinking that equates opposition to the US invasion with surrender to al Qaeda. In the time since the invasion it should have become manifestly clear even to those for whom it wasn’t clear beforehand that Hussein had SFA to do with al Qaeda’s outrages. And pace Mr Lapite, it became quite clear last week that Mr Bush’s campaign hasn’t put paid to al Qaeda’s ability to commit further outrages.

How not to pick the IMF’s chief

Europeans believe in multilateralism. We know this is true, because they say so. Europeans are, they insist, quite different from those unilateralist Americans. Europeans would not foist a new managing director upon the International Monetary Fund. They are too aware of the malign consequences for the legitimacy and effectiveness of both candidate and institution.

Alas, the reality is different: what the Europeans have, they hold. The IMF is a bastion of European power. For historical reasons, the 15 members of the pre-enlargement European Union hold 30 per cent of the quotas (and so votes) in the IMF. This dwarfs the US share, which is close to 17.5 per cent. Including Japan, east and south Asia possess only 16 per cent of the votes. Excluding Japan, these countries possess less than 10 per cent. Yet again, the developing world will have to live under a European macroeconomic emperor, albeit one who rules with US consent.

It appears that the most likely European candidate is Rodrigo Rato, the Spanish finance minister. In truth, Mr Rato is a tolerably well-qualified candidate. He has the political weight. Alhough not an economist by training, he has also had substantial experience in the management of what was, until recently, an emerging market economy. For all that, Mr Rato will not be the best qualified person in the world, partly because he is not, but also because an intra-European selection will fail to demonstrate that he is.

Selection of the head of the IMF by a group of countries that will never use its credit is bound to undermine the legitimacy of the candidate and the credibility of the institution. Yet, apart from giving European policy makers the pleasure of throwing their weight around, their insistence upon making the selection among their number will give Europe no benefits whatsoever. No sane European should care whether the IMF’s head is European, since it impossible to run the institution to meet narrowly European objectives. To demonstrate this the managing director tends to accommodate the concerns of powerful developing countries. The result is not an IMF that is far too tough, but one that is often too weak.

The IMF needs considerable reform: its voting structure is out of date; its resources are too small; and its ability to lead the global debate on macroeconomic adjustment and exchange rates is too weak. These challenges will not be met overnight. But the Europeans could make a wonderful start by recognising that the most effective candidate would be one chosen by a disciplined and transparent global search.

It is, in this case, easy to find superb candidates in developing countries, since it is in these countries that policy-makers have done what the IMF demanded. Such a policy-maker would have a credibility that few, if any, Europeans possess. If Europe really did wish to show it is a different sort of great power, this would have been a wonderful place to start, in its own interests and the world’s.
Financial Times

In the first place this type of argument is ridiculous. Anyone who was actively ‘anti-war’ - the people carrying the ‘paz’ placards - was already going to vote PSOE well before the bombing happened. Now the PSOE won because a lot of people who previously weren’t going to vote PSOE decided to do so.

So what changed? Well what actually seems to have happened was that a lot of former PSOE voters who had been abstaining since the Gonzalez corruption scandals went back and voted. It was the high level of participation that gave PSOE the victory.

It is not plausible that all these people were suddenly looking for a radical and dramatic change in Spains external policy. Any who were will, in any event, be disappointed. Rodriguez Sabbatero is totally pragmatic.

I think to understand what happened you need to go back to the Prestige and other similar issues. These voters were tired of having the feeling they were being lied to. In fact, while the PP definitely placed excessive emphasis on Eta (a mistake anyone could have made, eg I did too), there is no real evidence of any active attempt to mislead people during the last week. What happened was that in the critical moment they reaped the whirlwind they had sown on previous occasions.

I don’t think there is any evidence whatsoever that most Spaniards want a ‘softer’ policy on terrorism. Quite the contrary, they want a more effective one. One which is less focused on scoring political points: either internally or externally.

I am surprised no-one here has mentioned Spain’s relations with Morocco. This is important. The difference between full blown OBL Al Qaeda, and North African Islamic Jihad may seem like an excessively subtle one to many, but it could be important. (See Collounsbury’s important comment in this regard here, and his blog in general).

Rather than simply concentrating on the invasion of Iraq, you might like to think about the ‘re-invasion’ of Perejil. You might like to think about the daily tragedy of the ‘Pateros’ and how this is seen in Morocco. You might like to think about the impact of the anti Moroccan riots in El Ejido a couple of years ago, and how the Mosque was violated, the Koran torn up and urinated on. You might like to think about a lot of things.

Clearly the fanatics who carry out this and other atrocities are unlikely to be swayed one way or the other by such issues. Maybe, however, those young people who form the recruiting ground for the next generation of terrorists will be. We need an anti-terrorism policy which has two fronts.

In this regard there is plenty to welcome about what is happening in Spain. In the first place the response inside Spain to the probable Moroccan connection has not been as negative for the community of Moroccan immigrants as might have been expected.

Spain is a society of contradictions, and this is just one of them. Of course there have been plenty of cases of minor incidents, but on the whole there is no ’reaction’ against the Moroccan community.

Reading yesterdays election results is a complicated matter. On the whole I am not pessimistic internally. In particular the new government will have doing something about the situation of Spain’s 2 million plus illegal immigrants somewhere high up the agenda.

The fact that to date there is no evidence connecting Eta with the bombing means that moving toward a more definitive solution of some of Spain’s internal divisions may now be possible, the incoming government is committed to a process of structural reform.

On external policy I wouldn’t expect any dramatic change, the difference are likely to be more on the level of style and presentation. The Al Qaeda link puts important questions on the table for the whole of Europe, not just for Spain. So I see a Spain which is now more anchored in the bosom of an EU which is more focused on the question of how to combat this kind of international terrorism, and who knows, possibly a Europe and a United States who are now more together. Would this be too much to ask?

On these pages we have had considerable debate about the question of Turkish membership of the EU. But remember behind Turkey comes the issue of Morroco, and in this area I don’t rule anything out completely. Despite all the attention focused on the Iraq war question, I see much of this as looking to the past. We have to think of the present situation in Iraq, as Frans says the bombings in Karbala, the way to end the violence there, we have to look to a more coherent all EU approach, to a better climate of coordinated relations with the United States, in sum, to a much more effective anti terrorism policy. To end on a positive note: I sense we may have a Spain which is now more open to active dialogue with Morocco. At least I certainly I hope so.

Yesterday 11 million people marched the streets of Spain, united in one objective: the condemnation of terrorism. (I say ’people’ not ’Spaniards’ since many of those who marched - and I am not only talking about the Basque country here - would not consider themselves to be Spanish: here is the first problem, here is the first need for metis not bie). The problem is that beneath this apparent unanimity lay two opposing conceptions of what terrorism is, of what it represents, of how it can best be fought: indeed one might almost talk of two separate theories of reality. That was the force of my allusion to Antonio Machado yesterday: his ’two Spains’ was a reference to the right/left divisions of the Spanish civil war. This division still exists, and it can be found in the language of both sides, but given that our reality today is a more complex one, then this division too is also more complex.

My feeling is that at no time since the civil war has Spain been so divided against itself than it is today. Now this may well not be the moment, but somewhere along the road political responsibilities for what at the very least could be considered ’negligence’ in allowing this to happen need to be identified.

However before examining in more detail why certain obscure Greek concepts may have more than a passing interest for those who want to understand what is going on, we could consider adding a third one: kerdos. Kerdos is traditionally associated with the following: ’gain, profit; desire for gain; craft employed for gain; craftiness’.

Let me be clear: what I am suggesting here is that the techniques being deployed by virtually all parties to the Eta/Al Qaeda debate right now have more to do with kerdos than they do with metis, and herein lies Spain’s problem. It is impossible to disentangle the opinions held as to the nature and author of Thursday’s crime from one or another desired outcome in Sunday’s elections: and this is very, very dangerous.

Now I myself responded on Thursday to the bombing with an immediate assumption that this was the work of Eta. I still think - as I have been explaining in my posts - that this was the most reasonable hypothesis to get hold of in the first moment. But it is important to stress the word hypothesis here, and that the only working scientific methodology I know of is one which involves opening your hypotheses to confirmation or refutation (What is the title of Popper’s book: conjectures and refutations, isn’t it. You need a conjecture to get the game going, and it should be strong, reasonable, and daring). Of course if your version of what happened is a matter of dogma, of faith, of political wordview, you will handle the problem differently. That is the main point I am trying to argue in this post. And that, incidentally, is why I welcome all my ’contrarians’ in the comments section: since if the reality we have in front of us is complex, and the context is one of a globalised, informationally horizonless world, what we need is metis, and a plurality of viewpoints to produce a more complex vision of our ’object’.

So what is the ’evidence’ that has been accumulating which might lead us to confirm or refute the original hypothesis. Well as far as the Eta theory goes I have to admit there is very little on the confirmation side (which does not in itself mean the theory is wrong: NB).

So then we have the rival theory.

First out of the gate on this front was Arnaldo Otegui, leader of the Basque separatist group, with strong ties to Eta, Batasuna. (At this point it is worth considering the objections raised by some that even using the expression ’separatist’ rather than terrorist is to make some sort of concession. I cannot accept this view at all. Sometimes it is much more important to focus on the level of species and not on that of genus - think maybe of the different varieties of cats - and I don’t for the life of me see the disadvantage of doing this here. In fact prioritising metis over bie, I would argue that this is the only way to realistically defeat terrorism, and that we need to classify the different terrorist groups according to their objectives if we are to hope to devise strategies which are sufficiently complex to get to grips with them).

Now I have been arguing, and continue to argue, that investigating more deeply Otegui’s intervention can provide us with some important information. Why was he so sure this was not Eta? Why did he raise immediately the ’Arab Resistance’ connection? What did he know, and how did he know it? Maybe, as some suggest, he knew nothing, but I think determining whether this is so is important, and if I were an investigating judge I would be summoning Otegui to come and testify before me right now.

Next we have the stolen van with the arabic tape. It is hard to know what to make of this. If you have a ’conspiracy’ version, then this is a plant. OTOH if you don’t buy the conspiracy, then this is firm evidence, especially since the detonators found are of the same type as those used in the bombing.

Then there is the letter to the London Arab newspaper: again people only interpret this in the context of their bigger hypothesis. People regard the group making the claim as either fraudulent or credible depending on their bigger picture.

Then again we have the fact that the detonators and explosives are not of the kind Eta have been using in recent years. The detonators were of copper, while Eta’s detonators have always previously been made of aluminum. The explosive was not Titadine, but Goma 2. Goma 2 is a gelatinous, nitroglycerin-based explosive that is typically used in mining, but has been linked to ETA only rarely since the Spanish authorities began to tightly guard supplies of it in the 1980’s.
Again this is hardly conclusive, but it certainly is a negative to some extent for the strong Eta hypothesis, since it can hardly be read as a confirmation. OTOH, if you hold the conspiracy theory that Eta are responsible, but want to make it look like Al Qaeda, well this would be one way to do it.

There is an additional detail here which is important. One part of the problem in building the bigger picture is that of the credibility of the participants. Angel Acebes - Minister of the Intererior - has been running behind events, and is being forced to repeatedly correct. This may simply be because the information is continually changing, or it may form part of a ’defend every ditch’ ’kerdos type’ strategy.

Credibility hasn’t been enhanced by the fact that Acebes stated that the explosive was manufactured and stolen in Spain, yet journalists have contacted the Guardia Civil (the relevant police authority) and been informed that no such theft appears in their records, at least for the last year.

While we are on this topic, government credibility has also not been enhanced by the widely publicised revelation that Ana Palacios (Spain’s Foreign Minister) circulated all Spanish Embassies on the day of the attack urging them to forcefully defend the Eta theory, and to do their best to minimise the importance of any rival interpretations. This is hardly attempting to use Spain’s overseas network to try and clarify facts, and is rather an attempt at a kerdos-type political strategy.

Indeed in looking at all this, it is hard not to feel reminded of the Prestige affair. Institutionally information is not being well-handled, and the economist inside me is asking how exactly Spain is going to fare in the new ’informationally driven’ society given what we are seeing each time complex information bundles need to be processed.

Then there are the recent denials from Eta itself. This taken alone would have no great importance, after all we aren’t going to start believing everything the terrorists themselves tell us, now are we? However, again, there are some interesting details. The person making the call was apparently the same person who announced only 3 weeks ago that Eta had declared a ’special truce’ in Catalonia and the Basque Country. On that occasion this person, and his version of events, was accepted as entirely credible by José Maria Aznar and many leading PP ministers, and even believed above the word of pacifistic and democratic opponent Carod Rovira. So, following the earlier logic, some importance should be attached to this, although clearly not of the definitive kind. I will not follow Aznar in accepting the terrorist version over the democrat one. However the denial is being given considerable credibility in non-Eta Basque nationalist circles, so if our interest is not scoring political points, but finding out who did it, we should at least listen to this.

Well, that’s the list. And there isn’t much that is on it which confirms my original view. OTOH, I feel there is some evidence that Eta may well be divided, that some people associated with the Eta environment may well be involved, with or without the assitance of a more-global terrorist network. Only the hours and days to come will make this clearer.

Finally a word on tomorrows elections. My feeling is of course that what happened on Thursday and it’s consequences will determine the outcome. This should, naturally, not be the case. There is no additional information contained in Thursday’s massacre which should lead people to vote one way or the other over and above what ought to have been clear and obvious to them during the weeks and months previous to the attack. Indeed the fact that the contrary may be true, and that many will vote ’under the influence’ is not only a victory for kerdos over metis, but a victory for the terrorists themselves over the democratic process.

Postscript: Unless there is some really new information which can help us to better decide who is responsible I will not post again until after the initial election results tomorrow evening.

Those who have any interest in the Greeks, and the role of metis in Greek culture may be interested in reading the article which initially fired my own interest some years ago now:

Marcel Detienne and Jean-Pierre Vernant: Cunning Intelligence in Greek Culture and Society.

A second question relates to the means of communication. Firstly one detail: it is in situations like this, probably for the immediacy of the images it can provide, and the direct contact it facilitates between events and audience, that television really has no competitors. As I write I am listening to Spanish TV to see what additional details may emerge. Googling is no alternative. It is hard to distinguish the truly novel, and the truly interesting, from amongst the enormous quantity of written material available.

The other point about the means of communication in Spain is that they are not homogeneous. Depending on which part of Spain you live-in your appreciation of events is different. One example: despite listening to as many news broadcasts as I can, the first mention on national state TV (TVE1) of the existence of the e-mail to the Arab newspaper in London that I heard was when the Minister of Labour denounced it in an interview around 10:00 this morning. Subsequently it has been mentioned with apparent normality. Catalan regional TV had been giving details of the letter, and analysing its significance since 10:00 last night. As one journalist on the TV behind me has just commented: we seem to be living in two countries.

This difference also applies to the theory of who is responsible: one part of Spain seems to believe the opposite of what the other part believes, almost as a point of principal.

This is an old idea and was expressed by the Spanish poet Antonio Machado in the following way:

Españolito que vienes al mundo,
te guarde Dios,
una de las dos españas
ha de helarte el corazón

Which means, roughly translated:

Little Spaniard,
coming into the world,
May God watch over you,
for one of the two Spains
has to freeze your heart..

Those who saw the Almodovar film Live Flesh (Carne Tremula) and the young child coming into the world, born to a prostitute on a municipal bus, may understand better this evocation.

It was as if Spain was condemned to relive this division over, and over, and over again.

Now even assuming the case that this tragedy has been the work of Al Qaeda (which I don’t fully accept at this moment in time), this division continues to reproduce itself in the fact that one part of Spain wants to believe this to be true, while the other doesn’t.

Personally I am for the moment hanging on to the Eta connection, partly in the absence of more conclusive proof, and partly since contemplating the other eventuality seems something so enormous, that I am reluctant to embrace it simply for the magnitude of the consequences. Maybe many Spaniards are like me: simply in awe of the possibility.

However there are reasons for believing that Eta may have had a hand in what happened. Firstly for a reason which leadsKevin Drum to discount their involvement:

you’d think that even fanatical Basque terrorists would realize that four days before an election is not a good time to do something like this.

No Kevin: I fear this is not how Eta works. Many like me jumped to the conclusion that it was Eta, simply because of the timing. Everyone was anticipating some act of defiance or other from them before Sunday, this was the only way you could read their truce in one part of Spain: as an explicit menace to the other part.

Then there were the explosives:

Yet in the chaotic aftermath of the bombings, antiterrorism officials cautioned that other evidence seemed to implicate ETA.

One Spanish official who spoke on the condition he not be named said the dynamite-like explosive used in the attacks, Titadine, had been used before by ETA, which stands for Euskadi Ta Askatasuna, or Basque Homeland and Freedom.

Most recently, the official said, the police found the same explosive in a vehicle they intercepted last month as it was driven to Madrid by ETA militants. The police also found bomb-laden backpacks like those used in yesterday’s attacks when they foiled a bombing at a Madrid train station on Christmas Eve, an event they linked to ETA.

Yesterday’s bombings also came after months of intelligence reporting that ETA was planning a major attack, several Spanish officials said. The timing of the violence — with national elections scheduled for Sunday — seemed to suggest ETA’s hand as well, they said.
New York Times

John Chappell at Iberian Notes floats another idea:

Here’s the paranoid conspiracy theory that is cropping up in my mind. ETA plants the bombs, and this was clearly an ETA-style job, but tries to make it look like Al Qaeda, or at least bring up the suspicion as best they can--and note that the first person to link the alleged “Arab resistance” group and the massacre in Madrid was none other than ETA mouthpiece Arnaldo Otegui. Their strategy: Piss off the people against Aznar and the PP, their sworn enemies, for getting us in the sights of Al Qaeda. That’s a terribly narrow and selfish attitude to have--“Aznar and Bush got these people killed” for daring to use force to stop terrorism. Enough people might have that very attitude, though, that there’s a backlash at the polls on Sunday against the PP and they lose the election. That’s something ETA would very much like to see.

The ’conspiracy idea’ certainly shouldn’t be completely discarded, although what we need to be able to take it seriously is evidence. The logic though doesn’t convince me at all. If Eta has attempted to influence the course of the Spanish elections, then I am more or less convinced that this would be to try and ensure a return of the PP. They would do this of course, not because they are sympathisers, but because they want confrontation, and what they don’t want is a government in Madrid who would be more sympathetic to the demands of the moderate nationalists, who would then be able to attract many of their ’soft supporters’. This is precisely what the socialist leader Rodriguez Sabatero seemed to be offering, and this is why, IMHO, they would do nothing which might help him get elected.

I agree with John that one should be absolutely distrustful of any statement made by someone like Otegui, and my reading would be that he intervened so rapidly because he did have some kind of information (even if second hand information) and this could point to the existence of a splinter in Eta which might, or might not, be hand-in-hand with Al Qaeda.

In the end I don’t really buy this version of the conspiracy theory, since one of the objectives of a terrorist organisation would seem precisely to be having the responsibility attributed to them. The denial of Otegui may be serious, in the sense that they fear the backlash in the Basque Country, and this may reinforce the splinter hypothesis, since if what you were looking for was a massive destruction of human life it is not clear why you would shy away from the consequences of your actions. But here there are a lot of ’mays’ and ’seems’, and enormous assumptions to the effect that what may lack all logic in fact obeys some rules of coherence: so perhaps it is simply better I speculate less, and await the arrival of more confirmed facts.

Europe in terrorism spotlight

By Erik Kirschbaum

The Madrid train bombings have shattered any complacency that Europe could be immune to mass attacks on civilians and the continent should gird itself for more, European newspapers say.

“The mass terror of Madrid was aimed at the heart of Spain, but we’re all in the crosshairs of terrorism,” wrote Germany’s mass circulation Bild. “Who is still safe today? Terror is like a hydra with a thousand heads.”

Thursday’s bomb attacks on rush-hour commuter trains killed at least 198 people and wounded 1,430 in Europe’s worst attack for 15 years. Spanish newspapers compared the scale and impact of the bombings to the September 11, 2001 suicide hijack attacks which killed nearly 3,000 people in the United States.

As investigators tried to pin down if Basque separatists or Muslim militants were behind the attacks, newspapers pondered what they meant for Europe.

“The most devastating terror attack since September 11, 2001 will change the consciousness of the people, and not only in Spain,” said Financial Times Deutschland.

Fear of mass attacks was no longer the preserve of the Americans, said Italian daily La Repubblica in an editorial.

“Whoever thought the American “devils” were the only ones in the sights of Islamic terrorism was wrong. We are all in the same boat,” it said.

“This is a European war that the EU…must fight in a much more unified way than in recent months. Afterwards we can decide if what happened yesterday was a result of the Iraq war,” read an editorial in Italian daily Corriere della Sera.

“TERROR INFLATION”

Some newspapers were simply were shocked that such a scene of horror could be witnessed in Europe at all. “This is Madrid, not Baghdad!” the Norwegian daily Aftenposten said in a banner headline, quoting a Spanish witness.

“It was like a modern version of the gruesome wartime images painted by Goya,” wrote the Guardian.

In an editorial, the Guardian said the attacks, geared to extracting the maximum possible casualties, were an example of “terror inflation”.

“For such a group to claim it is in business, it is no longer sufficient for casualty rates to be in their 10s. They have to be in the hundreds,” it said.

Israeli mass circulation Yedioth Ahronoth told Europeans: “Welcome to the real world”. Commentator Sever Plotzker said the Madrid attacks were the latest in a trail of mass attacks which have hit Kenya, Turkey, Russia and Iraq. “For some reason, Western Europe thought that it was immune,” Plotzker wrote.

Writing in Berlin tabloid B.Z., leading conservative columnist Michael Stuermer had a stark warning.

“Anyone who once believed that the big terror attacks only happen against the Americans has to have a re-think now. Terrorism isn’t a spectator sport for us in Europe.”

The question for some journalists: what could be the next target? Greek newspapers feared they had the answer.

“Thursday’s explosions in Madrid are weighing on Greece’s security plans for the Athens Olympic Games,” said Eleftherotypia.

“Greece has asked NATO to provide special security equipment and the possibility to transport injured people via air bridges to NATO hospitals.”
Source: Reuters
LINK

Killing civilians en masse and at random, Thursday’s Madrid bombings bear the signature of the modern militant age ushered in by al Qaeda, whoever actually planned them.

Security analysts said that if ETA separatists planted the rush-hour bombs that killed at least 180 people, they were drawing at least partly on al Qaeda’s inspiration and tactics.

Despite Spain’s insistence on blaming the Basque group, some experts were reluctant to rule out Islamist involvement.

“This kind of operation is the style of terrorism of our century…That’s the new modus operandi coming from militant Islamists,” said German security analyst Rolf Tophoven, contrasting the indiscriminate mode of the attacks with ETA’s traditional targeting of bankers, politicians or police.

Roland Jacquard, head of the International Terrorism Observatory in Paris, said Thursday’s bombings suggested the influence of “the World Trade Center effect” on the strategies of traditional militant groups -- a reference to the U.S. September 11 attacks for which al Qaeda is blamed.

Manuel Coma, security expert at Spain’s Royal Elcano Institute, suggested Osama bin Laden’s al Qaeda network had caused a kind of global terror inflation.

“Since September 11, there has been a qualitative leap. Small attacks are no longer adequate. They (ETA) have to aim higher to have influence,” he said. A fourth analyst, Sebestyen Gorka, said any evidence of Islamist involvement or influence on a traditional European guerrilla group like ETA would mark a major precedent.

It would completely reverse an older trend whereby groups like the Irish Republican Army transferred their expertise to militants in the developing world like Colombia’s FARC, assisting with technology and training, he said.

Arguing for ETA’s involvement were the timing of the attacks, three days before Spanish elections, and a series of recent arrests and explosives seizures which suggested a major attack by the Basque group was in the offing.

SHIFT IN TACTICS

But the bombings departed from traditional ETA tactics in the lack of prior warning and the very scale of the operation, which killed over eight times more people than the group’s previous deadliest attack.

Also striking was the use of multiple, simultaneous explosions, 10 in all, borrowing a favoured tactic of al Qaeda.

European stockmarkets fell sharply on fears of Islamist involvement, even though the Spanish government firmly rejected that possibility.

“There are characteristics of each,” a U.S. official told Reuters, referring to ETA and al Qaeda.

“You have multiple attacks, multiple explosions in different locations in a short period of time which is very al Qaeda-ish.”

Islamist militants have ample motives to attack Spain, which has arrested a number of al Qaeda suspects. They have targeted Spanish interests before, for example in the May 2003 suicide bombing of a Spanish restaurant in Casablanca, Morocco.

“Spain is an Islamic target. It sides with Britain and the United States in the war on terror, and I have seen statements from Islamic militants claiming parts of Spain for the Islamic world,” said Richard Evans, editor of Jane’s Terrorism and Insurgency Centre.

“It would be premature to rule out at this stage the possible involvement of Islamic militants.”

If ETA committed the attacks, several analysts said this pointed to a split in its ranks and the emergence, after many senior leaders were caught, of what Jacquard called a “third generation” -- younger, less experienced but more radical.

“The only explanation I have is that it’s a weakened but more radical ETA behind this. In other words, the older members have all been arrested and these are very young, very radical people left over,” Joachim Krause of the University of Kiel told Germany’s N-TV channel.

“They’ve perhaps taken al Qaeda as a role model, or other terrorists that turn to spectacular attacks, as in New York and Washington. They’ve seen that’s how to get media attention.” (Additional reporting by Jeremy Lovell in London, Tabassum Zakaria in Washington and Erik Kirschbaum in Berlin)
Source: Reuters News
Link

Spanish Terrorist Train Bombings Kill About 50 People in Madrid Three bomb attacks on trains full of morning commuters killed about 50 people in Madrid, Spanish television station TVE reported. Spain’s Red Cross said at least 200 people were injured.

Police said it was too early to say whether they suspect ETA, the Basque terrorist group that government and police officials say has been increasing terror attacks in the weeks leading up to Spain’s general election on Sunday.

Three bombs went off between 7:30 a.m. and 8 a.m. near three train stations, a National Police spokeswoman said. The stations were El Pozo, Santa Eugenia, and Atocha, which is Madrid’s main hub serving southern cities.

“It was horrendous,” said a woman who was on one train, speaking to government-run TVE television news. “There was the explosion and then people started to run full of blood.”

Television showed images of dozens of victims with heads or arms bandaged, limping and clinging on to rescue workers. The camera showed one train car ripped in half.

Some of the train cars destroyed were on the line connecting Guadalajara, northeast of Madrid, to the capital city.

An Interior Ministry spokesman made no immediate comment.

ETA, which has killed more than 830 people in its campaign for Basque independence, planned to bomb electricity towers to disrupt the wedding of Spanish Prince Felipe to Letizia Ortiz, a former television news presenter, La Vanguardia reported last week, citing unidentified court officials.

Spanish police averted a bomb attack by ETA, stopping a truck carrying explosives on the way to the capital almost two weeks ago, Agence France-Presse reported, citing Spain’s Interior Minister Angel Acebes.

In December Spanish anti-terrorism police arrested people trying to bomb trains on Christmas Eve, they said in December.
Source: Bloomberg
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Rodrigo Rato’s position as Europe’s frontrunner to replace Horst Köhler as head of the International Monetary Fund was strengthened on Tuesday at a meeting of European Union finance ministers in Brussels.

British officials signalled support for Mr Rato, the Spanish finance minister, and he also won the endorsement of Luxembourg’s influential prime minister, Jean-Claude Juncker.

With Germany, France and Italy so far failing to put up a strong candidate, many EU diplomats believe Mr Rato, from Spain’s ruling centre-right Popular party, will emerge as Europe’s candidate to become IMF managing director.

The vacancy was discussed briefly at Tuesday’s council of EU finance ministers, but further discussions about a single European candidacy for the vacancy will resume at their next meeting in Ireland on April 2.

Gordon Brown, UK chancellor of the exchequer, has told colleagues he regards Mr Rato as the best man to replace Mr Köhler, who is expected to become German president in May.

Meanwhile Mr Juncker, who is also Luxembourg’s finance minister and tipped as a possible president of the European Commission, said he would “applaud it” if Mr Rato’s name went forward.

No other strong candidate has yet emerged, although a number of other names were circulating at Tuesday’s meeting.

Klaus Regling, the German director-general of the European Commission’s economics department, has been mentioned, but he fell out with Berlin over its budget deficit problems. Pascal Lamy, the French EU trade commissioner, has also been discussed in some quarters, though it is unlikely France would gain a second high-profile international job so soon after Jean-Claude Trichet was appointed president of the European Central Bank.

With Mr Rato the favourite for the IMF job, Spain appears to have fallen behind in the separate battle for the vacant seat on the six-member executive board of the European Central Bank.

Germany, which had originally backed the little-known Spanish candidate José Manuel Gonzáles-Páramo, is now thought to have dropped its support, partly in response to pressure from France.

France is thought to support the candidacy of Peter Praet, director of the Belgian central bank. Mr Trichet is also thought to regard Mr Praet as strongest candidate.

Ireland’s Michael Tutty, vice-president of the European Investment Bank, is the third candidate.

A final decision on the ECB vacancy will be taken at the EU summit in Brussels on March 25-26.
Source: Financial Times
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From today’s Le Monde:

Mass resignation of French researchers

The overwhelming majority of French laboratory administrators decided at mid-day on Tuesday the ninth, during a general assembly at Paris City Hall, to resign their administrative duties […] Only a dozen or so, among the roughly 800 or 900 lab directors and research group administrators present at the meeting, were against this decision.

“Resignation is neither an end in itself nor an end to this movement - it’s a necessary step”, claimed Alain Trautmann at the opening of the general assembly. During the meeting of lab administrators, some 1,500 researchers were assembled in front of City Hall to show their support for their resigning bosses. […]

In an interview in Tuesday’s Libération, the primeminister, Jean-Pierre Raffarin, declared that for his part, “we are not bargain-hunting for the future of the country.” Pre-empting the decision taken by the lab administrators, Mr Raffarin insisted that “quitting is never a success (…) I would have to be saddened because I don’t want France’s international scientific renown to be threatened like this (…) When we put 3 billion euros on the table for research [over the next three years], we’re offering a lot more than we are to a great many other professional categories.”

But those 3 billion euros, announced on Saturday by the primeminister’s office, did not sway the researchers. “If those 3 billion are for real, we’ll be very happy”, according to the spokesman of the Saving Research committee. “But for the moment, it is nothing more than a restatement of Jacques Chirac’s promise to devote 3% of GDP to research. What he should have given us (…) was concrete answers and not more promises.”

According to a poll conducted by CSA for La Croix, this movement has the approval of four out of five Frenchment (82%). 47% claim to “support” the movement and 35% have “sympathy”, with only 12% expressing “indifference” and 5% “opposed” or “hostile”.

The idea of academics marching against the government and getting any public support at all would be considered a joke in the US. My faith in France is hardly restored, but at least it’s nice to see somebody manning the barracades against idiots at Matignon and Elysée and getting a bit of airplay and popular backing.

I ought to resist ending this post this way, but what the hell:

Chercheurs de tous les pays, unissez-vous! Vous n’avez rien à perdre que vos chaînes

Turkey should be kept outside the European Union to act as a “buffer” protecting Europe from Syria, Iran and Iraq, according to Frits Bolkestein, the EU single market commissioner.

Mr Bolkestein argues that the former Soviet republics of Moldova, Belarus and Ukraine should also be excluded, to insulate Europe from Russia.

His views come in a new book, The Limits of Europe, in which he warns that a geographically overstretched Europe would become “little more than a glorified customs union”.

The Dutch liberal is one of the most vocal sceptics of Turkish membership among the 20 EU commissioners who must recommend in October whether to start accession talks with Ankara.

However, a majority on the Commission is expected to approve the Turkish bid, provided Ankara continues its reforms and helps to reunite the island of Cyprus.

Germany’s Christian Democrats, the conservative opposition, are among those campaigning to exclude Turkey from the EU, while many French politicians are sceptical or hostile. Valery Giscard d’Estaing, who chaired the European convention, said in 2002 that Turkish membership would mark “the end of the European Union”.

The issue is expected to be one of the most politically sensitive in the European parliament’s June elections.
Source: Financial Times
LINK

By the way, astute readers of last Friday’s post will once more notice how in Turkey too ’disinflation’ is accelerating nicely.

The centre-right New Democracy party on Sunday night won a clear victory in Greece’s general election, putting an end to a decade of Socialist rule.

New prime minister Costas Karamanlis, who has never previously held a cabinet post, faces difficult decisions in the next few weeks over the future of Cyprus and Greece’s lagging preparations for the Athens Olympic games.

But George Papandreou, the Socialist leader, pledged to support the new government on both issues. Conceding defeat, he said: “The Cyprus issue is at a very difficult point and we’ll do everything we can to get a just and viable solution and we’ll support the effort for the Olympic games.”

Mr Karamanlis will take office less than two weeks before the March 22 deadline set by Kofi Annan, the United Nations secretary general, for reaching a Cyprus settlement. The Olympics take place in August.
Source: Financial Times

Jörg Haider, the far-right political leader, brought his party an unanticipated victory in his home province Sunday, increasing the odds for a national comeback.

Most analysts had predicted a loss for his Freedom Party after a string of defeats elsewhere over the past two years. In recent polls, it was more than 10 percentage points behind the Socialists.

Beyond assuring Mr. Haider’s reappointment as governor in the province, the victory increased chances that he would be able to revitalize his party.

Many blame Mr. Haider for the party’s national demise. He has been notorious for past remarks that sounded sympathetic to the Nazis and contemptuous of Jews, a visit with Saddam Hussein on the eve of the Iraq war and a friendship with Libya’s leader, Col. Muammar al-Qaddafi.

Such tactics have scored points in the past, when Mr. Haider and his party exploited disillusionment with more established political rivals.

His party became part of the national government in 2000, but he stepped down as party leader in 2000 to ease the diplomatic pressure on Austria. His subsequent attempt to run things from the sidelines provoked early elections in 2002, alienating huge numbers of supporters.
Source: New York Times

The man the parties have chosen is Horst Köhler, currently head of the IMF. Apparently Washington doesn’t pay much attention to contemporary German comic opera, and the leading local paper called the appointment a surprise:

The International Monetary Fund began the contentious process of choosing a new leader after a surprise announcement yesterday by its managing director, Horst Koehler, that he was resigning to run for president of Germany.

The reporter has been around long enough to remember that Köhler’s selection was the result of a pretty botched process in 1999.

Koehler’s selection as managing director four years ago came after a power struggle among rich countries that was widely deplored as epitomizing the arbitrary nature of the process. Following the announcement in November 1999 by IMF Managing Director Michel Camdessus that he would retire, the German government made it clear that the time had come for a German to take the helm after two Frenchmen had held the job. Berlin’s first nominee, Caio Koch-Weser, emerged as Europe’s choice, but when the U.S. government blocked his selection by the IMF board, German officials indignantly insisted on Koehler, then the head of the European Bank for Reconstruction and Development. Rather than risk a breach with the Germans, other nations acquiesced.

The Schroeder government was new at the time and was less than subtle in pushing through a German as IMF head. Much was made at the time of American arrogance (pre-GWB, even) at blocking a European nominee. This was wrong on two counts: first, technically, as the largest shareholders and contributors, the Americans are well within their rights to block anyone they jolly well feel like blocking. Second, and more importantly, the Schroeder government had deliberately ignored American signals that said “Some German, ok, but this particular person, definitely not.”

The Schroeder government insisted on pushing their first nominee, despite clear misgivings from the US side and lukewarm support from fellow EU countries. They bet that the Clinton administration was bluffing in its opposition, and that it would not want the confrontation an open veto would bring. They were wrong.

Anyway, all’s well that ends well in comic opera, and Köhler seems to have rendered yeoman service at the IMF.

Two things about the succession will be interesting. First, the intra-European jockeying for the IMF job. The Post story names potential candidates from Britain, France, Germany, Spain and Italy. Big European countries want a big European position. The Post also cites speculation about Leszek Balcerowicz, perennial Polish minister of finance. This would be a very interesting pick, someone from a country more used to receiving IMF funds -- and directives -- than contributing them.

(An interesting dark horse candidate could be Sirkka Hamalainen, former head of the Bank of Finland and former member of the ECB executive board. If the big countries can’t agree among themselves, the way might open for a respected compromise candidate from a small country. On the other hand, at 65, she might not want to take on the arduous duties of heading the IMF.)

The second interesting thing about the succession is that the US-EU duopoly is being challenged. Some of the developing countries -- or emerging markets, depending on your point of view -- who have been coordinating their actions in the WTO negotiations, are also objecting to the cozy system for dividing up IMF and World Bank leadership positions. Don’t bet on a change this time, but the cracks in the system are starting to show.

So what happens next? Well as I have been saying, how this ends is difficult to see. We are still trying to get to grips with the causes.

Of course two groups of people have it fairly easy. Firstly those who argue that this is all down to George Bush, and then, on the other hand, those who would want to say that the Indians are the culprits.

As always, both these arguments do contain a grain of truth. It’s clear that GWB has not excelled in terms of his economic stewardship, and it’s clear jobs are going to India. However I think pretty quickly both these simple solutions run out of steam given the depth of what is taking place. Some argue that Bushes stimulus could have been better directed: possibly, but there was still plenty of kick going into the US economy in the second half of 2003. And those famous tax cuts are still out there in the future, so while they may well be colouring the debate about the future of social security, they are hardly the key operative factor right now. Likewise high-end service jobs. In the future this is going to be important, but it is hard to see that this is having a major impact on the global economy in the here and now. So my argument is that something much bigger is happening, something which makes normal debates about economic management seem somehow totally inadequate.

My starting point is that, in terms of the global economy, we are seeing a profound transformation on three fronts: demography, technology, and development.

The OECD economies are ageing (and I’ll leave this one here for today), we are living through a profound technological revolution, and thirdly the relative state of development of some of the worlds key economies is changing, and fast. On occasion I have called this globalisation phase 2.

What I really want to focus on in this post is one of the fundamental characteristics of this transformation: its deflationary implications. A year or so ago, it was much more fashionable to talk about deflation than it is now. Recently things have gone pretty quiet. Nonetheless the IMF (under Ken Rogoff as chief economist) did see fit to publish a background paper (warning PDF, and fairly technical, the Economist had a couple of easier articles here, and here). So let’s go and take a reality check, why not: on deflation. Or rather disinflation, since this is the name the current global condition is popularly known by. In order to do that we could go on a quick inter-continental whistlestop tour.

And what better place to start than Chile:

Chile’s annual inflation rate fell to zero for the first time since 1939 as companies such as General Electric Co. lowered prices following a 22 percent rally in the currency last year that made imports cheaper.

Consumer prices were unchanged in February from January -- after falling the four previous months -- and unchanged from February 2003, the National Statistics Institute said.

“We’re passing on our lower costs,” said Pablo Palavecino, manager of General Electric de Chile SA’s appliance line in Santiago. “Prices are a lot less.” An imported refrigerator sells for 999,000 pesos ($1,655), down 17 percent from last year, he said.

Investors such as Andres Ergas at BanChile Administradora General de Fondos SA said the central bank will keep its benchmark lending rate at a record low of 1.75 percent at a policy meeting next week in a bid to prevent slowing inflation from turning into deflation. Central bankers have said they’re concerned about deflation, which could slow the South American country’s expansion by prompting consumers to delay spending on expectations that prices will keep declining.

Ergas said the lack of a pickup in inflation toward the central bank’s target of an annual rate of between 2 percent and 4 percent would likely prompt policy makers to cut interest rates again.
Source: Bloomberg

This is striking, isn’t it. A Latin American country with zero inflation and a 1.75% funds rate which is under review for reduction. Of course a big part of this picture is currency-appreciation-driven, and the currency appreciation in turn is driven by China’s demand for copper. So Chile’s miraculous disinflation is fairly lop sided, but still. It remains a striking situation. Where it an isolated case, then perhaps we could shrug our shoulders and say, well, that’s life. So to make some comparison, now lets go a bit nearer home, to my country of birth, the United Kingdom:

Will CPI inflation ever rise back to 2% or above?

Since December, the Bank of England’s official remit is to target a 2% inflation rate as measured by the harmonised consumer price index (CPI). Conveniently, the Bank forecasts inflation to rise to around the 2% target by its two-year forecast horizon (assuming unchanged interest rates), from 1.4% currently.

Perhaps the strongest reason to expect CPI inflation to rise to 2% is that the Bank of England is now charged with making sure that this happens. After all, the Bank is a highly credible institution that almost exactly attained its former 2.5% objective for RPIX inflation (on average) over the 1997 to 2003 period. And, if everyone believes that the Bank will hit its new target too, cost and price setters should behave accordingly and the target should in fact be met, barring large unforeseen shocks.

However, things may not be that easy. After all, the last time CPI inflation stood at or above 2% was in May 1998; and it has averaged a mere 1.2% over the last five years. Thus, if past inflation performance is any guide to future inflation performance, and even factoring in that the Bank is now charged with aiming for 2% CPI inflation, there would seem to be a considerable risk that the 2% target will NOT be reached.
Source: Morgan Stanley Global Economic Forum

Again striking isn’t it. The UK CPI hasn’t been up to 2% since May 1998, and in fact the annual average is only 1.2%. And the current rate seems to be riding on the back of what I at least am prepared to recognise as a housing driven asset bubble. So if this is the case, the big question is what happens to the CPI the day the bubble bursts, it hasn’t exactly got very far to fall. I am sure this fact is exercising Mervyn King’s mind a lot these days.

OK, so now why don’t we go to China?

Who Benefits from Productivity?

One can witness Chinese productivity first hand at the local Wal-Mart store. Yes, the Chinese economy is becoming more productive. I estimate that China’s total factor productivity (TFP) - how much more output with the same inputs - is 3-4% per annum ……… My guesstimate is that Chinese wages are rising at half the rate of labor productivity, which includes the impact of more capital per worker, and is about twice as much as TFP. Why can’t Chinese wages rise at the same pace as labor productivity, which would capture all the TFP to benefit Chinese workers?

The problem is that the competition for jobs in China is fiercer than the competition for goods in the world market. For the Chinese to gain jobs faster than average rates in the world economy, they need to sell their labor cheaply, i.e., passing on the TFP to western consumers in the form of lower prices so that they would buy more Chinese goods, i.e., more Chinese labor. The relative balance would change only when most Chinese are employed. When China reaches the tipping point, either its currency would appreciate, as in Korea and Taiwan in the 1980s, or its inflation would be higher than the global average, as in Hong Kong in 1980s and 1990s…………..

Some believe that appreciating the Chinese currency would effectively deliver a raise to the country’s workers. Would this work? Would western consumers pay more for Chinese goods if China’s currency were to go up? I doubt it. China’s export price is determined by the relative balance between the number of Chinese workers and western consumers. How could manipulating the exchange rate change this reality? If western consumers refused to pay more in the event of a yuan appreciation, wouldn’t the result be to push down wages in China in order for its labor market to reach some sort of equilibrium?

Throughout the industrialization of the West, productivity also mostly benefited consumers; deflation prevailed due to productivity gains. What is occurring in China is not unusual. It is the vast pool of surplus labor that keeps down labor’s pricing power, and also makes consumers who are workers price-sensitive. Thus, productivity gains are competed away by businesses in endless price wars………….

The global economy is experiencing much higher productivity growth rates because information now spreads to developing countries much easier than before, which provides more people in the developing world with the skills to join the global economy. Thus, the global economy behaves like an emerging economy that gains productivity from moving labor from low-productivity rural sectors to high-productivity urban sectors…………

Combating inflation is a central goal of modern central banking. But inflation is becoming less of a threat. The US economy has experienced disinflation for two decades. The same trend pushed Japan into deflation.
Source: Andy Xie, Morgan Stanley Global Economic Forum

Now here I have edited Andy Xie down to what I consider to be the bear essentials of the case. These essentials are:

That we have a global environment which is strongly disinflationary, and heading for deflationary. (He doesn’t make this point but I will: interest rates are at near-historic minimum all over the place, and we are now - as Stephen Roach keeps reminding us - in the upswing phase, more price downsize is only to be expected later).

Technological change is driving down prices in some key sectors. Huge reserve armies, and massively increased connectivity are pushing them down in others: the whole global economy is behaving like a single emerging economy.

The situation in China is normal if you look at what happened in the European economies during a comparable period of technological change and industrialisation: the late 19th century.

I think I’ll leave it there, but the picture should be plain enough. I don’t buy the ’consensus’ explanation. There is something more to all this than good housekeeping practices across the central banks. These US employment stats today are only a reminder. Now go have a nice weekend everyone.

Hyundai Motor Group will build its planned European car plant in Slovakia, dealing a blow to Poland, which had also competed for the investment.

The decision by South Korea’s largest carmaker ends months of aggressive lobbying by the two countries to win one of the biggest foreign investments in central Europe this year.

The plant - to be located in Zilina, northern Slovakia - is the latest step in Hyundai’s rapid global expansion, following the opening of factories in the US and China over the past two years.

Officials at Kia Motors, a subsidiary of Hyundai, said on Tuesday it will invest a total of E700m ($870m) in the plant and begin construction this year. The company said the factory aims to achieve annual output of 200,000 cars and start mass production in 2006.

Hyundai is the latest in a series of car manufacturers to build factories in central Europe, attracted by the region’s low labour costs and its closeness to the big markets of western Europe.

For Poland, the defeat adds to doubts about the country’s competitiveness compared with neighbouring countries, following its loss of a €1.5bn joint investment by Toyota, the Japanese carmaker, and PSA Peugeot-Citroën of France to the Czech Republic two years ago.

Both Poland and Slovakia had offered incentives such as tax relief, free land and new infrastructure, to lure Hyundai. Poland had proposed Kobierzyce, near Wroclaw in the country’s south-west, as its site.

Hyundai, 10 per cent owned by Germany’s DaimlerChrysler, is one of the world’s fastest-growing car companies, having exported more than 1m cars for the first time last year, representing more than 60 per cent of total sales.

Until now, Hyundai had focused its expansion on the US and, more recently, China, but the opening of a plant in Slovakia would signal the start of its push to become a serious competitor in Europe, led by the Kia brand.

About a third of Hyundai’s exports went to Europe last year and the company aims to double its sales on the continent by 2005. The South Korean company, the world’s seventh-largest carmaker, has set itself a target of breaking into the top five by the end of the decade.

Once dismissed as a manufacturer of cheap and low-quality vehicles, Hyundai is attempting to emulate the success of its Japanese rivals in western car markets by improving quality while maintaining price competitiveness.
Source: Financial Times
LINK

Now before we go any further, I would like to make a retraction. I think it’s only a small one, but still the point is worth making. Back after the last G7 meeting I mildly mocked the joint declaration for highlighting currency ’volatility’ as the major problem. My point was that I didn’t see much volatility in a movement in one direction only. In fact I was wrong. What we are seeing at this moment is ’volatility’ as the dollar/euro value constantly readjusts back-and-forth. So even though I would stick my neck out, and go for a continuing upward pressure on the euro, the ups and downs are not without their consequences. This makes business forward planning much more complicated, and obviously is no help to those trying to export.

On the substantive question all eyes need to be on the US labour market. The minor dollar ’rally’ this week was based on the expectation of a cut in euro interest rates, and a relatively stronger US labour market which would be pushing Greenspan in the direction of raising rates. Well we’ve seen that euro rates are staying put, so now we have to watch how the US data evolves over the next few weeks. My guess is that the $1.30 level will be being tested again before too long, but you never know, I may have got it wrong.

Meantime, and for a change, I’m linking to myself: I just got the latest copy of the Sprout, and here is my article for this month:

German Finances: Much Ado About Something

Germany’s claim that it has its budget deficit under control and that its economy will quickly return to strong growth has recently been put into question by European Commission member Pedro Solbes. In his last assessment of Germany’s updated stability programme, Solbes welcomed Berlin’s pledge to lower its budget deficit, but stressed that differences remained over the “possible rates of growth”. The Commissioner even went so far as to suggest that the economic forecasts produced by Chancellor Gerhard Schröder’s government are unrealistic, and that in all likelihood Germany will breach the European Union’s stability pact for a fourth successive year in 2005.
Behind all this lies a long-running sore of a problem which divides the Commission and the national governments, a problem where Solbes plays the part of ‘villain in chief’ for his role as defender of the growth and stability pact. Now that this problem has once more resurfaced it may be worth revisiting it roots.
At the heart of Solbes’ most recent jab at Schroeder lies one stark and self-evident fact: Germany is growing old. Forty years ago, just 17 percent of Germans were aged 60 or older. Today, 23 percent are. Forty years from now, the share will be nearer to 40 percent. At least this will be the case if current estimates turn out to be anywhere near accurate. In fact the truth is that we don’t really know what the exact position will be, but there are grounds – if we look at likely medical and other advances – for thinking that life expectancy may well be significantly longer than we are currently calculating for.

Now much has and will be written about this topic, but here I would like to focus on three key components of what is going to be an extremely complex situation: demography, technology, globalisation.

As I have said Germany has an ageing population. This is bound to have an important labour market impact as the potential labour force declines, and its average age rises. So what can be done? Well broadly there are three remedies on the table. Firstly increase immigration to replace the lost workers, and in so doing attempt to redress some of the inevitable damage to the support ratio. This road seems highly unpopular, and is unlikely to be explored in any great depth if recent history is anything to go by. Indeed even culturally proximate groups, like the citizens of the new eastern accession countries seem less than fully welcome judging by recent decisions to have an ever receding transitional period for full freedom of movement.

Secondly you can lengthen the working life, from 65 to 70, and then from 70 to 75. The longer life expectancy scenario seems to make this attractive, but the response from those expected to extend their working lives does not appear to be too encouraging.

Thirdly you can increase participation rates: that is the percentage of those below retirement age who continue working. Yet here, once more there seem to be problems. Society at large may agree that this is an interesting objective, but two factors seem to stand in the way. On the one hand the interests of the individual corporate entity. A personal detail here, my wife works for a German multi-national. And do you know what, right now on her boss’s desk lies a proposal to ‘recycle’ all those employees with over 25 years service. Recycle here is a euphemism for finding a way for them to go through the door. And who can blame the firm. This is a competitive world, and they need to survive. In an era of accelerating technical change, and ever-shortening product and system cycles, rapid reaction on the fly has more value than accumulated wisdom. This means youth. Those valued work-teams of yesteryear, embodying as they did all that accumulated tacit knowledge don’t seem worth what they were. That, of course, is what the structural reforms are all about: asset devaluation. Changing the valuation placed on acquired capacities, in line with the way technical change ‘creatively destroys’ their value. Nowadays the boss doesn’t cut the quip in the elevator about his most valued asset not being the building but his workforce. No, today’s boss likes to tell his subordinates that his most valued assets are his high-speed broadband connections to cheap bright young minds in China and India. So make no mistake about it, youth brings comparative advantage, and the locus of that advantage is moving, eastwards: this is where the globalisation part comes in. In this sense the split identity we have between the private and the social seems a hard one to resolve.

There is, of course, another way to increase participation rates, and that is to bring more women into the labour market. This objective seems laudable, but is it realistic in an environment where public welfare provision is likely to be severely curtailed? Absent state-financed care, looking after the elderly inevitably tends to fall on the female member of the family. Is caring for an elderly parent with Alzheimer compatible with a high level of active participation in the labour market: I think not. Here we are trying to say that two plus two makes six, and it doesn’t convince.

Which brings us back to immigration, and to Pedro Solbes. One of the few viable strategies for facilitating increased female participation in an environment of dramatic ageing like the one which Germany has in front of it, is to increase the supply of cheap migrant labour, to globalise the internal labour market. On the other hand, as Solbes would I am sure point out, one of the explicit reasons for ‘flexibilising’ the stability pact was to promote growth, we have flexibilised, and the growth still isn’t coming. Of course we continue to hear that ‘I promise it will, but next year’. I’m with Solbes on this, don’t give me pipe dreams, tell me what we are going to do in the here and now to get to grips with the problem. If we don’t do this we may well end up seeing one of those nasty financial crises which would be our worst nightmare. Isn’t it time we had a frank and open debate on all this? When you are living in denial maybe the first step forward is to recognise that you are.

For the first time in the history of transatlantic trade relations, the European Union will on Monday impose trade sanctions on US goods, in an attempt to force Washington lawmakers to repeal controversial corporate tax breaks.

EU customs officials will levy an additional 5 per cent tariff on a wide range of American products. The duty on imports of natural honey, for example, will rise from 17.3 per cent to 22.3 per cent. Roller skates will be subject to a 7.7 per cent duty up from 2.7 per cent.

The punitive tariffs will also apply to textiles, agricultural products, steel and glass, books and newspapers, sugar and toys - even nuclear reactors. And they will rise, by 1 percentage point each month, until they affect US exports worth $666m a year.

The aim is to force the US Congress to change the foreign sales corporation provision (FSC), which grants tax breaks to US exporters and was ruled illegal by the World Trade Organisation in 2002.

But to John Disharoon, vice president of the trade committee at the American chamber of commerce to the EU, Monday is simply “a sad day for trade relations between the US and Europe”. He says: “Nobody wants to see sanctions. It adds to the negative climate.”

European companies share some of Mr Disharoon’s concerns. But according to one trade expert, there is “no sense of disaster” among European trade officials, business lobbies and observers. The European Commission is keen to play down the significance of the trade sanctions. It insists that Brussels has shown patience and diplomacy in the run-up to March 1, and that Washington as well as US companies have had ample warning and enough time to prepare for the sanctions.

“We’ve been extremely patient, but there is no way now we can avoid these sanctions, which hopefully will concentrate a few minds on the urgency of this legislation,” Pascal Lamy, EU trade commissioner, told reporters in Washington on Friday following two days of meetings with US lawmakers. He added: “The day the necessary legislation is there, I will remove the sanctions.” Officials close to Mr Lamy have argued for months that there would be no backlash from US lawmakers.

Monique Julien, a trade expert at Unice, a business federation that claims to represent some 16m European companies, says: “If you look at the record on the European side there has always been an attempt at conciliation. Sanctions were repeatedly postponed but at the end of the day, it is a question of [upholding] the credibility of the WTO dispute settlement system.”

But even Europeans admit that - at some point - the Commission and its counterpart in Washington might have to rethink the way they approach trade disputes. Like many trade experts, Ms Julien is worried about the “multiplication” of recent EU-US trade spats - of which the dispute over FSC is only the most visible example.

In the past two months the EU has moved closer to trade sanctions in a string of cases, many of which are linked to US anti-dumping legislation and practices. In a dispute over the so-called Byrd amendment, which allows US companies to keep the anti-dumping proceeds raised from foreign competitors, sanctions could come this summer.

Nick Clegg, a British Liberal Democrat member of the European Parliament and trade expert, warns that “everything is being shuffled off to the WTO, and if that trend continues it begins straining the credibility of the institution”.

Although he applauds Mr Lamy’s approach in the FSC case, Mr Clegg believes that at some point it could become necessary for the EU and the US to settle their disputes through direct negotiations. “If we continue along the same trajectory, there needs to be some kind of political decision to clear the decks in a comprehensive way.

“I think more and more businesses, especially big companies with transatlantic links, are asking: is this really the best way to handle the biggest trade relationship in the world?”
Source: Financial Times
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For many this will undoubtedly be good news. The important point to bear in mind, however, is that this number is an average for the entire eurozone, so while there will be those whose inflation is significantly above the figure, there will also be those significantly below. One thinks immediately of Germany here. Of course this is only a ’flash’ estimate, we await confirmation, and a detailed breakdown. But could it be that German inflation is begining to hover dangerously close to that 0% watermark? This latest data will undoubtedly raise the pressure on the ECB to lower interest rates when it meets later this week. However the decision is far from being a foregone conclusion. There are still a wide variety of views available - one for every taste and preference - on which way the eurozone economy is headed, and on which is the greatest present threat and danger, inflation or its converse: deflation.

Also please note that on Thursday US Federal reserve governor Bernanke was saying that US inflation was “under very good control”. He, at least, has his priorities clear.<

Hopes of a cut in European interest rates next week to relieve the pain inflicted by the strong euro rose yesterday after official figures showed inflation on the Continent dropped to a four-year low this month.

The euro fell on the news, which was compounded by an unexpected upward revision to the latest US growth figures that boosted hopes of a sustainable economic revival for the world’s largest economy.

Eurostat, the European Union’s statistics agency, said its “flash” estimate of inflation in the 12-nation area slid unexpectedly to 1.6 per cent, the lowest since November 1999 and well below the European Central Bank’s 2.0 per cent target.

Jean-Pierre Raffarin, the French prime minister and Gerhard Schroder, the German chancellor, added to pressure on the ECB by calling for a rate cut to stem the euro’s 14 per cent advance against the dollar in the past six months.

Robert Prior, a European economist at HSBC, said: “This will lead to further speculation that the ECB will cut interest rates, possibly as early as next week.”

But he said that although recent economic data had been weak - GDP slowed to 0.3 per cent - the euro’s recent fall would probably encourage the ECB to delay any rate cut until further evidence came in.

Martin Essex, senior economist at Capital Economics, said a rate cut next week could not be ruled out but added: “We believe the ECB will wait until later in the year by which time inflation will have fallen further and the impact of the euro will have become clearer.”

The euro fell as low as $1.2374 and has now lost more than five cents from last week’s record high of $1.2930.

Separate figures showed the US economy rose at a 4.1 per cent annual rate in the fourth quarter of 2003, just above the 4 per cent gain initially reported a month ago.

Taken together with the third quarter’s meteoric 8.2 per cent surge, growth in the second half of the year was the strongest back-to-back quarters since the first half of 1984.

Business spending on equipment and software was more robust than first thought, firms added to inventories at a faster pace and exports were stronger.

On Wall Street, the Dow Jones rose 3.78 to 10,583.92. Falling back from an earlier rally of stocks, which had been buoyed by a report on industrial production in Japan, which sent the Nikkei 225 to its biggest gain in more than two months.

However analysts said the strong GDP number was unlikely to force the hand of the Federal Reserve to raise interest rates in light of comments on Thursday by Ben Bernanke, a Fed governor, who said inflation was “under very good control”.

Later figures yesterday showed US consumer confidence declined this month, while an index of mid-West manufacturing slipped.
Source: The Independent