Global Update

Matters of State and Fossil Fuels
I have been a bit neglectful and need to catch up on international developments.  First up is the matter of the Keystone XL pipeline proposal. Contrary to what we may think, this is not a domestic matter--that is why the project's analysis is coming from the State Department. Nevertheless, we should not forget that the State Department's primary mission is to serve the interests of the homeland, so the fear that we could miss out on the economic benefits would be a paramount concern.

The question is whether to link up a pipeline to the existing refineries in the South Central U.S. with the Canadian tar sands oil production.  A previous round of analysis criticized the route planned for potential damage to wildlife; the route has been changed to mitigate the damage. The essence of the current report is that the tar sands are ripe to be developed now, regardless of whether the pipeline is built.  Given that conclusion, it would appear inevitable that the decision will be to go forward with it, seeking perhaps to mitigate further harm from the production, through improvements in industrial methods at the site or in the refineries.

Much of the environmental movement will be disappointed when President Obama signs off on the initiative; opposition to it has been a rallying point for domestic organization to drive public policy toward limiting climate change effects from fossil fuels.  There's been an attempt to draw a line in the sand, to say that a decision to proceed is "game over" for the effort to limit the growth of greenhouse gases. 

Frankly, the movement will need to find a new game, and we should expect that the rising sea level will wipe away this line and future ones, as well.  350 parts per million of CO2 is just a number at this point; there is a point at which the growth of damage from climate change stops being linear and becomes exponential, but the climate models are not that precise that we know 340 is not too high, nor 360.  The key to eventual success to limit permanent damage to our global ecosystem is not the absolute number but the trend:  the rate of change in the level must be slowed.  If that trend--the second derivative turning, then staying, negative--can be continued long enough, then the level will reduce.  This will be a struggle of several decades, of a scope much broader than the U.S., and it is a mistake ever to view a single outcome as decisive at this point.

Venezuela:  Can It Turn the Page on Hugo?
Hugo Chavez died Tuesday, March 5.  The second greatest figure in Venezuelan history (after the Liberator, Simon Bolivar) left an uncertain legacy for his nation and an unlikely future for the movement centered around his cult of personality, called "Chavismo".

Reviews of his country's status at the time of his death varied widely, depending on the ideology of the reviewer.  Inflation was either too high, or normal for a third-world country with vast oil money flowing in; the poor were either rising in economic status or deluded into thinking they were; the country either is free, open, and democratic, or cynically stage-managed by the Chavez ruling clique, etc.  Two facts seemed unambiguous:  there is too much crime, and Chavez was indisputably able to rally the lower-class and working-class to vote for him--even in the last campaign, when he was near death, out of the country, never appeared in public, and had a worthy challenger.

Chavez seemed to have a Teflon-like ability to deflect the criticism and maintain popularity.  He was a successful populist, or, if you prefer, demagogue.  His great success was the ability to rise up, after having been jailed as a failed leader of a military coup attempt, and win the presidency through electoral means. The glow of popularity is expected to last long enough to get his designated successor Maduro through a special election, but he looks to me like the designated scapegoat, the one who will be blamed as the public awakens from their infatuation with Chavez and realizes that friendship with a few impoverished socialist republics is no substitute for a truly healthy economy or good relations with their Yankee relations to the north.

As for the US, we should awaken from our Bushite-era paranoid conviction that Chavez was another Castro and re-establish a healthy relationship with the republic, whatever leadership it takes on in the years to come.

Obama in the Middle East
It was good timing that President Obama visited Israel now; I feel that Israel, currently struggling to form a new government behind Benyamin Netayahu, may be at a stage in which his efforts could positively affect public opinion in the country.  It is also well that he met with Al Fatah President Abbas in the Palestinian West Bank; it gives the West Bank Palestinians' faltering bid for nationhood a boost (as did  the United Nations General Assembly vote last fall to give them official observer status) and will reinforce their sense of responsibility and (I hope) their willingness to engage with the Israelis.

I would view the effort as an attempt to signal that the US is willing to facilitate the peace process, if the two main participants, Israel and Al Fatah, are willing to take the risk.  There is a third possible participant, which I would see as Egypt, representing Hamas in the Gaza Strip.  That is, if Egypt's government headed by Mohammed Morsi can establish itself as being at least as responsible as Al Fatah has done in recent years.

Trying to accomplish anything in the Holy Lands is a long process, and comparable in difficulty and long-term importance to what the Obama administration is trying to do in Asia (which I would describe as "build up the economies and capabilities of our allies and provide a check on any bullying tendencies by the Chinese, while encouraging Chinese development in positive directions").  Some success, even limited success of something like extending cease-fire by Hamas, slowing or stopping aggressive settlement development by Israel, and preventing the Syrian mess from blowing up into a bigger war, would counter the loss of influence in the region which will come from bringing our troops home from Afghanistan.  A complete withdrawal from Afghanistan is now looking to be the likeliest outcome there, rather than a significant residual force or a tiny tripwire force.

Cyprus:  FAQ
There's only one question: What's the fuss about, and why should I care?
Cyprus has a mushrooming deficit threatening default on its debt obligations.  Rather than doing that, it worked out an arrangement with the European Central Bank (with the International Monetary Fund and representatives of the European Community) to raise revenue--to recapitalize Cypriot banks--by giving a haircut to domestic deposits greater than the insured amount (100,000 Euros or about $125,000).  This is the price requested by the "troika" of international agencies to provide the support needed to stop the pain.

There are other onerous provisions, but this one was worked out after an initial foray by Cyprus. That one,  which would have taxed all deposits, was unanimously rejected by its Parliament.  This deal will not harm the smaller depositors, but instead puts all deposits over the insured deposit limit of 100K Euros--particularly in the second-largest Cypriot bank--at risk of loss (there will be some sort of paper offset, worth about as much as the paper).  There will be very tight limitations on withdrawals from all accounts, to prevent a massive run on deposits--something that had already started before this deal. From Cyprus' point of view, what finally emerged appears to be a better deal, as the ones who will be hurt are mostly wealthy Russians and Ukrainians who wanted to park the money in a Eurozone country that didn't ask too many questions.  Until now.

Still, why should we care?  Well, there is the danger that loss of value on Eurozone insured deposits could affect deposits throughout the region, and that the contagion could even spread beyond Europe, directly through a loss of confidence in banks throughout the developed world, or indirectly through loss of confidence in the European recovery in general.  The "breaking of the buck" for money market funds in 2008 was a critical step in the freezing of credit and loss of investor confidence in the US which led to the Great Crater.

This hit upon deposits--money-laundered or not, made in good faith--is a fairly extreme step and its effects are uncertain, but Europe has demanded--from Greece, and from Italy and Spain--pain for the gain of backstopping their shaky national finances.  This sort of pain was the only thing Cyprus could offer that compared with the size of bailout required (its domestic economy being much smaller than a country like Greece).   It's yet another scar which the Euro countries will bear if they end up surviving their battle with themselves, and the Eurozone surviving remains the most likely outcome. 

OK, one more question:  why does the European Union and the Eurozone get involved with a time-bomb country like Cyprus?
Sorry, I can't give you an answer to that, except maybe as a favor to Greece and a calculated snub to the Turks.  Cyprus has been divided for some 30 years into a Greek sector--75% or more of the land, the people, and the economy--and a Turkish sector, recognized by no one, but stubbornly supported out of Ankara.

It was one thing to let Cyprus into the EU, but to include it in the Eurozone compounded the error.  It provided a boost to Cyprus--in the form of funds flowing in that would not otherwise have happened--but it appears the sense of prosperity resulting from that was deceptive, and may end up being toxic, if Russia takes the hit to its oligarchs personally.