The world market’s positive response to the Euro-zone’s solution does not mean, however, that European finances are any more secure. Whereas this proposal is a first step in the right direction, the deal does not completely solve the short run problem of Greece’s finances or prevent the spread of the debt crisis. Even with its debt cut by about a fifth, Greece will have a great deal of trouble paying back a sum larger than its GDP. The government has an extraordinarily poor tax collection system and thus no reliable source of revenue other than debt sales. Because the Euro allowed Greece to borrow more at lower interest rates, the parties in power promised their voters benefits that could only be sustained by selling this debt. But now that this gilded age has passed, Greece has to either collect taxes or cut benefits.

Yet, any Greek government that pushes austerity too far would be effectively committing political suicide and dooming their country to a longer and more severe recession. A report by the European Central Bank showed Greece’s output this year will shrink by 5.5 percent, and it has been postulated that the nation will not return to growth until 2013. It will be extremely difficult for Greece to raise its revenue to the point where it can pay off even this fraction of its accrued debt, as doing so would further shrink its economy. This reality will inevitably lead to future problems regarding Greece’s finances.
Because a Greek default is a systemic risk to the Euro, economic powerhouses like Germany and France will continue to give Greece the deal of a lifetime. Greece, in turn, will continue to waffle and bargain on these agreements because it does not want to commit to austerity. At the end of the day, Europe will support Greece’s 450 billion dollar debt, because the alternative is to suffer the massive deleveraging that would result from Greece’s failure to pay. However, because it is politically unsavory to just bail Greece out, the larger countries will tiptoe around the issue and try and find other, less efficient, ways for Greece to “pay its own way.”

The second part of this deal is supposed to provide the EFSF with enough firepower to prevent larger economies like Spain and Italy from becoming insolvent. Because nations in the EU have already expanded the newly formed authority several times over, however, this new expansion is one that will not take the form of money. The EFSF will be given two new tools: the first allows the EFSF to insure the first losses of any new bonds within the Euro-zone (essentially, any non-catastrophic loss on a newly issued bond, give or take 20%, is now insured by the EFSF); and the second mandate allows the EFSF to create a series of special purpose vehicles financed by other investors and designated to specific counties to prevent the risk from spreading.

Yet, these new tools may give the EFSF less leverage than expected. Insurance does not work and is not comforting if every investor knows the institution backing the insured bond cannot reimburse the holder. Additionally, if Germany is not willing to place money in these special purpose vehicles why should Japan or the China, who have no immediate stake in the Euro-zone? The likely answer is that they will not. Thus, both the preventative measures and the stopgaps for the Euro-zone and Greek debt clearly have major flaws in their designs.

There was one option that could have lessened the cumulative sting of Greece’s new debts and secured the Italian and Spanish economies. But it was tabled because it would have negatively impacted creditor nations. Specifically Germany could have given the European Central Bank the ability to print a large number of Euros to support the EFSF. This option is completely within set of powers of the ECB, but the ECB’s ability to use those powers is limited by the nations of the Euro zone. The ECB states that its mandate is to “maintain price stability with inflation rates of below, but close to, 2% over the medium term.”

If the ECB were to scrap its mandate for a short period of time and inflate the Euro, the rest of the stopgap measure could work. Inflating the Euro coupled with the haircut would be especially painful for German banks, which hold large amounts of other European debt as well as Greek debt, but it would not force them to deleverage nor would ECB-led inflation fundamentally change the structure of the Euro zone. A moderate increase in the inflation rate would slightly lessen the real value of the debt held by the countries of the Euro-Zone and give the EFSF the firepower necessary to back up its new mandate to insure the potential first losses of new debt issued by countries of the Euro-zone.

Along with the already accepted measures, inflating the Euro is a quick and easy answer to the short-term problem of putting the Euro-zone on surer footing and making sure Greece can repay the remainder of its debt. The Germans have to realize that this may be the Euro-zone’s only way to insure that this deal does not become a meaningless one. While the German creditor banks may suffer some penalty from this policy of inflation, these losses will be miniscule compared with the financial meltdown that would occur if Italy defaults on its debt or the Greek deal has to be reworked. Both of these scenarios are not that far-fetched if the Euro-zone cannot insure that this deal is supported with something more tangible than the current proposal.

Still, the new deal is just a nicely dressed stopgap measure designed to do the bare minimum, make everyone happy, and avoid any major changes. Such a deal would be fine if the stopgaps could effectively insure Greek debt against further default and prevent the crisis from making Italian debt insoluble. Without the support of additional currency, however, the stopgap measures fail to do either. Germany is going to fight an inflation policy because such a policy would reduce its banks’ returns. Consequently, German interests have placed the rest of Europe at risk of a prolonged crisis that could be greatly helped with just a moderate amount of inflation.

In the long run, the Euro-zone will have to change its structure or face an endless cycle of smaller countries abusing their position with the larger. But for the short term, as long as the mentality of trying to “have everyone keep their cake and eat it too” prevails among the leaders Europe, no stopgap measure will ever give the Euro-zone economies the breathing space they need to introduce major reforms.

For some Euro watchers, this arrangement between Europe and China is only the latest example of “the scramble for Europe”. Borrowing the phrase from the 19th century competition between European states to acquire colonies in Africa, skeptics use the term broadly to argue that the surge in Chinese acquisitions of European companies and related investments will undermine European competitiveness. In the words of a French official, “It’s a real war, with highly subsidized companies coming to open markets with unusually low prices and undercutting the competition.” Moreover, this may lead to a split EU policy on China, with “cash-strapped deal-seekers”, like Portugal, Italy, Greece, and Spain (PIGS), simply seeking investments, while “frustrated market-openers” like Germany and France seek a united European consensus to protect domestic firms both in Europe and abroad in China.

Especially in the eyes of countries like Germany and France, China’s investment patterns in Europe present a concern. A disproportionately large percentage of China’s global investments are in Eastern Europe (10%) and PIGS (30%) – the traditionally weaker EU economies. Combined with the fact that Chinese firms have been beating out European firms for large public-sector contracts in Bulgaria, Croatia, Greece, Poland, Romania, Serbia, and Slovenia, this leads wealthier EU states to eye China’s intentions warily.

Undoubtedly, this arrangement has real benefits for weaker EU states, which can now obtain infrastructure at fire sale prices. However, the lack of transparency of many Chinese corporations is a cause for concern. Although EU law forbids state-run companies from bidding for public contracts, many Chinese multinationals that bid for these contracts have close ties to government, maintain a shadow party structure, and most importantly, obtain government subsidies, which give them a further leg up on their European competitors. Furthermore, Chinese firms can keep costs lower than their European competitors by importing low-cost laborers from China and paying them significantly less.

Why is this a problem for European unity? While poorer EU members see only the benefits of discounted costs, wealthier EU members see anti-competitive practices as harmful for domestic firms. Furthermore, when European firms from wealthier nations go abroad, they are frustrated by China’s lack of reciprocity. While European firms are nominally allowed to bid for projects in China, they rarely win, as the rules are skewed almost always to favor domestic firms. Therefore, the vast majority of China’s internationally known mega-projects such as the Three Gorges Dam, Olympic stadiums, and bullet trains are administered instead by the National Development and Research Commission (NDRC). So while the “market-openers” cry foul and attempt to overhaul existing EU legislation, the “cash-strapped deal-seekers” do not see it in their interest to comply with any policy to change the status quo.

To argue that China actively seeks to weaken the EU by reaching agreements with individual member states to create a divisive “China lobby” within the union may be a stretch. China has little to gain from the dissolution of the EU. Nonetheless, Europe must put its economic house in order, encourage China to open up its market to foreign firms, and finally mitigate the unfair advantages that Chinese firms have while bidding in Europe. To achieve the first goal, the EU must evolve beyond its original intent and become a monetary and a fiscal union. Though this would most likely face serious resistance from many EU states, the debt crisis in Europe today is a direct result of a failure on the part of the EU states to coordinate fiscal policy. It is important to remember while China demands certain conditions for its purchase of euro bonds, this originated from a lack of European coordination that precipitated this disaster. By allowing each state to pursue its own interest independently, each state ended up collectively worse off than if they had coordinated their policies together. Moving towards a fiscal union will benefit the EU in the present by giving investors confidence in EU bonds, and will benefit the EU in the future by making it easier to head off the type of debt crises that we see today, reducing the need for the type of outside intervention that Europe is soliciting from China now.

In addition, more regulation will be required to prevent foreign firms from using subsidies to gain unfair advantages in bidding. Since there already exist a myriad of regulation in China, the European Financial Stability Fund suggests that the EU should reciprocate, especially in fields such as defense, critical technologies, media, and education.

While Chinese investments have exposed weaknesses in the EU’s structure, these are all manageable issues that, in time, can be resolved. Although the alarmist reports in the media have painted a portrait of newly ascendant China righting past wrongs by reverse-colonizing Europe, the truth is that China is neither belligerent nor friendly – it is simply in pursuit of its own self-interest, and Europe should respond accordingly by strengthening existing ties between states.

In his address at the Munich security conference, Prime Minister Cameron grounded his argument on the view that a multicultural society can engender terrorism, namely through Islamist extremism. While Cameron was careful to emphasize the distinction between the religion of Islam and the political ideology that Islamist extremism represents, he drew a clear causal linkage between Islamist extremism and multiculturalism. Cameron argued that the reason why so many “young Muslims are drawn to [extremist ideology] comes down to a question of identity.” In Cameron’s view, multiculturalism has resulted in the failure “to provide a vision of society to which they feel they want to belong” due to a lack of a “clear sense of shared national identity.”

In response to the perceived threat multiculturalism poses to security interests, Cameron proposed reforms to undermine the spread of Islamist extremism and to foster a greater sense of shared national identity. One such reform seeks to reevaluate Muslim organizations that receive public money, as some organizations espouse beliefs contrary to the British commitment to values such as “freedom of speech, freedom of worship…and equal rights regardless of race, sex, or sexuality.” A second proposed reform to build national identity is the National Citizen Service project, a two-month program that allows British youth from diverse backgrounds to interact by living and working together.

While it remains an imperative for any country to protect itself against real or perceived security threats, it is equally important for a country to ensure that it does not place entire communities under undue public scrutiny. The approach taken by Prime Minister Cameron in his address unfortunately tends toward the latter. While the clear goal is to build a safer nation, it confounds debates of multiculturalism with issues of extremism and terrorism. By linking terrorist extremism with multiculturalism, the British government has reverted to a cultural debate that unfairly places the entire Islamic culture and ethnic community within the U.K. under public scrutiny.

By framing the cause of extremist political ideologies in terms of allowing different cultural groups to coexist, the government pointed to entire Muslim communities as the cause of the problem. This may lead to misguided, retaliatory attacks against an entire community of Muslims, young and old, immigrant and non-immigrant. If the goal, as Cameron himself stated, is to address an extremist political ideology and not the Islamic religion, then the government should seek to keep debates regarding security interests separate as possible from the discussion of multiculturalism. In declaring the failure of multiculturalism across the board, Cameron further insinuates that it is the presence of multiple cultures, not only the one in question, that create a challenge to national interests. Since it is the goal of the government to build a stronger overarching sense of identity among its citizens, the government should take care to ensure that its declarations will not be construed as blanket statements regarding entire cultural communities, which will cause backlash and further weaken ties with its citizens.

Elsewhere in Europe, German Chancellor Angela Merkel has questioned the merits of multiculturalism in the context of the economic woes of the prominent immigrant Turkish population that resides in Germany. About 4 million Turks currently live in Germany, the earliest of whom were first invited to Germany as guest factory workers in 1961 under a labor agreement between Turkey and Germany. The economic troubles of the Turkish populations stem from the lack of sufficient training to participate in the skilled German economy. The failure of these groups to master the German language further limits opportunities for employment. As a result, many immigrants rely on the welfare system for support. Recent surveys conducted by the Friedrich Ebert Foundation reveal that the German populace holds negative perceptions of such immigrant populations. The surveyors found that thirty-three percent of Germans believe that foreigners have “come to abuse the welfare state,” and these immigrant populations may “overrun” the country.

Merkel’s critical view of multiculturalism bears some weight, as the degree to which immigrants adopt the language of their non-native country can impact employment prospects. Nonetheless, this underlines the deeper issue that the German government should be emphasizing – the need to cultivate the skills of Turkish populations required for greater economic and job opportunities. While individuals of certain backgrounds may place an undue burden on welfare systems, the solution is not to do away with immigration or cultural differences, but to ensure that populations are equipped with the basic skill sets that traverse cultural differences and are central to entering the domestic work force. In Merkel’s address, she rightly emphasized that it seeks to remain an open country and not one that “gives the impression to the outside world that those who don’t speak German immediately or who were not raised speaking German are not welcome here.” Merkel should seek to frame a policy approach that focuses on the tangible skills immigrant populations need to find employment, as opposed to a policy approach framed within the view that multiculturalism has failed. Skills cultivated should include basic knowledge of the German language and a strong education. Again, it is unproductive to revert to the belief that multiculturalism is the issue. Having allowed such populations into its nation, Germany should continue to support these populations through a policy approach that addresses those specific skill sets that immigrant populations lack, rather than one that casts an unfavorable light on their culture.

The doctrine of multiculturalism rests on a belief that individuals of different cultural backgrounds can co-exist peacefully. While the world has witnessed a turn away from multiculturalism, particularly among European countries, it is important to consider whether the root of the economic and security woes of these nations truly lies in multiculturalism. In the U.K., as the government seeks to address security concerns related to Islamist extremism, the hope is that multiculturalism debate will not become synonymous with fostering extremism, but rather, that political ideologies foster extremism. In Germany, the hope is that economic woes of particular cultures will not immediately lead to the disbanding of multiculturalist notions, but will rather highlight the deeper need to address basic deficiencies in human capital. To protect against a tide of anti-Muslim, anti-Turkish, or anti-immigrant reactions on the whole, it is important that governments differentiate between multiculturalism and the deeper causes of the challenges they face.

When news broke that the summit leaders decided to defer serious policy decisions to next year and to the IMF, however, the pundits who had themselves helped to raise expectations about the Summit then proceeded to criticize it mercilessly. The only tangible consensus was the need for greater consensus, and the Summit produced few actionable solutions as to how the G-20 countries could and should lead the world out of the Great Recession. The question must be asked: Why did this heralded meeting fail so miserably?

Unfortunately, the Summit was doomed from the onset. This is because the U.S., while decrying Chinese currency policies, was also employing currency devaluation tactics of its own. While this “quantitative easing” is not only fiscally irresponsible and detrimental to global economic recovery, it also threatens the shaky foundation of trust between G-20 nations in the aftermath of the global financial crisis.

Now, while the term “currency devaluation” has been prominent in the news, what does it exactly mean? Like all goods, currencies’ values are subject to the laws of supply and demand. Chinese currency devaluation occurs when China purposefully prints more yuan to buy U.S. dollars and other currencies, thereby increasing the yuan’s supply in the market relative to others, decreasing the yuan’s value.  This policy also entails a potent vice: as the yuan’s value decreases, the value of domestic Chinese savings also decreases. Therefore, many view currency devaluation as merely temporary. It leaves a country vulnerable to the caprices of the international market while rendering domestic consumers incapable of supporting their own economy.

In an address to the G-20 countries, President Obama said that this current yuan devaluation was an “irritant” to the international community, and he forcefully called on China to end the policy. However, China has simply not budged. In light of the Federal Reserve’s recent quantitative easing (QE-2) to buy $600 billion of U.S. treasury bonds, China thought, reasonably, that the United States was devaluing its currency to obtain a marketable advantage. Even though Chinese devaluations are far more potent in scope and effect, the hypocrisy of the American position incited political rhetoric and unproductive finger-pointing.

While many economists and financial experts agree that China’s yuan is substantially undervalued (by an estimated range  of 20 to 40 percent), the U.S. can no longer force other states into submission. Since the global financial crisis occurred under an American-dominated economic system, much of the non-Western world, most predominantly China, now questions the free-market neoliberal agenda that American economic leadership entails. Obama’s “just trust us” mentality carries less weight than it would have in the 1990s.

Furthermore, the perceived duplicity of President Obama’s argument will only exacerbate relations with the United States’ East Asian neighbor. While it is certainly true that stabilizing trade imbalances would help put the U.S. and global economies on firmer footing in the long run, the United States’ perceived hypocrisy and harsh rhetoric has rendered China unwilling to acquiesce to Washington’s demands. After such a long and public battle with the U.S. on currency valuation, China is extremely unlikely to embarrass itself by unilaterally giving in on the heels of America’s own QE2 policy.

Therefore, given China’s imprisonment within the confines of power politics, the United States must assume the mantle of leadership and prove to the international community that it is the engine of economic stability. Unfortunately, while the U.S. is still the greatest economic and military power in the world, it has not been acting that way. With soaring debt and fiscal irresponsibility pervading the U.S. political system, it is understandable that China is not eager to follow the U.S. model. This is especially true with respect to the constant use of monetary policy in lieu of meaningful fiscal reform. QE-2 is merely the latest of the Federal Reserve’s attempts to prop up the entire economy by printing ever increasing sums of money.

While President Obama has claimed that QE-2 was a necessary component of his plan to decrease interest rates, increase capital flows, and ease consumer pain in a recession, this artificial money pump is merely a temporary bandage to cover a gushing wound. While the Federal Reserve contends that QE-2 will cause inflation of about 2 percent, independent estimations have that number as high as 5 percent, a dangerously high figure that could mire the U.S. in stagflation. The German finance minister has called the policy “clueless,” while Kevin Warsh, a Fed governor, identified “significant risks that bear careful monitoring.” As inflation increases, U.S. purchasing power decreases on the international stage, thereby reducing the stimulating effect of the American consumer. While U.S. exports may also increase, the world economy still revolves around the American consumer propping up global demand. Therefore, U.S. purchasing power must be augmented in order to promote global recovery, not weakened by quantitative easing policies.

Furthermore, QE-2 has put considerable pressure on other countries to devalue their currencies. To avoid massive foreign capital outflows, other countries may devaluate their currencies relative to the dollar. The United States could then justify further reciprocal devaluation, and the ensuing beggar-thy-neighbor behavior would leave the global financial system riddled with inflation and uncertainty. Even if this scenario did not occur, the mere fear of it happening would be sufficient to hamper any economic growth, for economic expectations themselves affect economic outcomes.

Therefore, as a preliminary step to reach any consensus with China, the U.S. must commit to fiscal austerity measures that prove it is serious about lasting economic stability, not temporary and unsustainable spurts of negligible growth. While this round of quantitative easing may have little net effect, it seems possible that the Federal Reserve could implement QE-3 in the near future. This possibility is the cornerstone of China’s current trepidations and resulting noncompliance. By stopping the inflationary spending and wrangling its deficits under control,  the U.S. will have an adequate bargaining position to begin negotiations with China. The U.S. will be able to tout its reforms and require similar ones as reciprocation, thereby increasing trust and stability in the international economic system.

President Obama was absolutely correct when he wrote to the G-20 leaders, “When all nations do their part—emerging no less than advanced, surplus no less than deficit—we all benefit from higher growth.” However, “all nations” must do their part, including the United States, for any one nation to move forward. Therefore, as the world’s greatest power, the United States cannot ask for international reform and then cower behind a failed system. Instead, it must lead the charge and then require reciprocation. The world economy cannot recover without the U.S., but the U.S. cannot recover without the world economy.

This faith is misplaced. COP 16 was able to achieve several of its aims because it focused on less contentious, lower profile objectives; few foreign heads of state even bothered to attend the conference. The complex, multilateral UNFCCC forum has proven effective for oft ignored constituencies like small island states and underdeveloped regions to air concerns. – however, the layered bureaucracy of negotiations has perversely stymied progress on the commission’s preeminent focus: emissions reductions. Rather than working solely through the thicket of the UNFCCC, the US should pursue bilateral negotiations with the key parties – specifically, top emitters China, India, and the EU – and then return to the COP, with agreements in hand, to register further scrutiny and establish truly multilateral solutions.

The parties that might suffer from future climate change are as diverse as they are numerous; offending polluters, however, are easily identified. Seven sovereignties, the US, EU, China, India, Canada, Russia, and Japan, produced nearly three quarters of global CO₂ emissions in 2007, according the UNFCCC; sixty percent came from America, Europe, China, and India alone. Evident, too, is the future emissions landscape: non-Annex B Kyoto (developing) states surpassed developed ones in annual CO₂ output in 2005 and their emissions share continues to grow. Rapidly industrializing China and India have seen their emission outputs grow an astounding 250 percent since 1990. Developing South Africa and Brazil, lightweight polluters today, will contribute the same emissions impact as Canada and Japan by 2040. Clearly, any new scheme to prescribe anthropocentric emissions must include concessions from developing and developed states alike.

The trouble with past and present climate negotiations has been a collective action problem over the use of a common-pool resource or CPR. With binding regulation absent,  nation-states faced with a CPR (the atmosphere), which they can exploit for profit, opt to continue unencumbered CO₂ emissions growth, rather than cooperate. Each country refuses to hamstring itself unilaterally, instead waiting for assurances that others will limit emissions first.

As collective action is central to fundamental climate problems, so has it been instrumental in early negotiations breakdowns. The 1997 Kyoto Protocol sought to address greenhouse buildups through emissions quotas for developed states only; these nations, receiving no guarantee that developing countries would abet such an effort by limiting their own growth, each refused to ratify the treaty or failed to meet their emissions guarantees. COP 15 faced a similar problem: with so large a cohort comprising each negotiating faction at the forum, agitator states were quick to fault opposition by raising failed obligations or regulatory asymmetries, and only trivial legislation advanced.  Meanwhile, defector states continued to enjoy unencumbered economic growth. The swiftest means to end this climate gridlock is through bilateralism. If the US cannot trust the collective to negotiate in decorous good faith, it must work with specific influential states, from across the pollution spectrum, to expedite an accord. By focusing on China, India and the EU in particular the US may streamline negotiations. Since these few actors contribute so greatly to the greenhouse crisis, they can circumvent the collective action shortfall by acknowledging their respective responsibilities and accordingly accepting regulation. The US should negotiate to this end bilaterally and through direct diplomatic channels, rather than via international institutional forums, to cut bureaucratic delay.

America’s first focus for co-opting must be China.  Responsible for 22.3% of global carbon output, China’s rapid economic expansion has have made it both the most egregious emitter in the world. The 9.5 percent annual emissions growth of China’s huge industrial sector cannot be married with any initiative to limit anthropocentric carbon.  It is not, however, unreasonable to assume that China would be receptive to a climate treaty, especially one that would restrict the developing with the developed (namely, America itself). China has shown itself capable of bold environmental rhetoric and aggressive action: days before COP 15, Beijing committed to reducing “carbon intensity” (carbon output per unit GDP) 40 to 45 percent by 2020, and China’s 34.6 billion dollar green investment sector, the largest in the G20, grew over 50 percent from 2008 to 2009.

Similarly, India, which itself has pursued an ambitious pre-Copenhagen carbon intensity pledge, would agree to a bilateral pact with western powers for both sides to crop emissions were it confident that China would not continue aggressive ‘dirty’ expansion at its expense. Smaller developed polluters like Japan, Russia, and Canada, and developing ones like South Africa and Brazil each refuse to hinder their own economies with carbon regulation until the others act.  To wit, America itself rejected the Kyoto protocol and partially obstructed COP 15, refusing to commit to act without assurances from the developing world.

Thus America should proceed piecewise, starting from the top. By securing bilateral pacts from India and China – roping in the largest and fastest growing polluters at the outset – the US could all but guarantee that an agreement would hold up in a multilateral forum. Such treaties should stress mutual interest, featuring investment in each nation’s already sizable sustainable technology sectors to ameliorate inevitable businesses losses from carbon restriction. Negotiating with developing states, America must demand the concession of binding emissions ceilings, and not carbon intensity commitments to ensure that carbon reductions will be substantive and meaningful.  In recompense, the developed world should offer to expand green financing for sustainable development in industrializing states, as has begun with the “Green Fund” from COP 16. America would need to domestically soften its harsh stance towards hard emissions caps, a reasonable development to expect in a scheme encompassing developing and developed polluters. With China and India in the fold, it is reasonable to assume that the EU would fall in line with an agreement: the economic union has already committed to reduce carbon emissions unilaterally by 20 percent from 1990s levels by 2020, even offering to increase reductions to 30 percent with similar commitments from the international community.

Only once the key players are all in agreement ought an accord advance to the UNFCC. A truly multinational conference like the UN COP is appropriate and necessary for smaller interest groupings  to voice their objections to a potential accord – however, these parties must not be allowed to paralyze negotiations altogether, as at prior climate conferences. Climate change, being natural rather than humanistic in nature, is an intrinsically temporal phenomenon: human attitudes and positions may soften and coalesce over time, but the warming timetable is less forgiving. Progress is imperative. Finding a viable agreement must take priority over achieving a perfect one.

The US should look to the UNFCCC to formally legalize the next major global climate agreement, but it should not wait for the COP to decide the terms of the arrangement. Rather, it should pursue a series of bilateral treaties with influential high-volume polluters, and then bring those accords forward for international inspection. In this fashion, America can catalyze the creation of a tenable, balanced climate pact to credibly curtail anthropocentric greenhouse emissions.

Currently, Britain faces a budget deficit that is 11 percent of its GDP, slightly greater than that of the United States. Much like the U.S., Britain accumulated much of its debt as a result of the housing and investment bubble that collapsed in 2008, the recession, and associated government stimulus spending. For conservatives, the resulting record deficit presents a ripe political opportunity to cut spending and lower the deficits. The Tories, then, are citing the budget deficit as to the primary reason to downsize the welfare state, claiming that there is no alternative to such cuts.  On October 20th, Chancellor Osborne unveiled his ambitious plan to eliminate the budget deficit by 2014-2015. This goal would require budget cuts to the tune of around £81 billion, thus rapidly increasing the pace of fiscal retrenchment. Most of these cuts would entail reductions in public services and welfare spending coupled with an increase of 2.5 percent in the value added tax (VAT).

Unfortunately, the implications of such intensified fiscal austerity could be disastrous for the British economy. To begin, the cut in public spending would result in a loss of 490,000 public sector jobs, the equivalent of three million jobs in the United States, representing nearly 8 percent of the total government workforce. The Justice Department and the Foreign Office are two of the many major government agencies that will lose a substantial portion of their workforce. Such unprecedented cuts in vital government agencies will end up harming the British people even further. To make matters worse, economists have predicted that the budget reductions could translate to the loss of as many as half a million jobs in the private sector. Given that the unemployment rate is already at 8 percent, Britain cannot afford another shock to the labor market. Advocates of fiscal austerity have claimed that deficit cutting instills confidence in businesses and customers by demonstrating the government’s proactivity in economic matters.  In a recent report, however, the International Monetary Fund asserts that this claim is, in fact, a myth. It explains that trying to balance a budget in the short term in the face of falling inflation and high unemployment could lead to further economic depression, which would then, ironically, scare off more business.

Proponents of fiscal austerity point to Britain’s recent economic upswing – its economy grew at a rate of .8 percent during the last quarter, twice as much as was predicted. This, they claim, is an indication that a stimulus is no longer needed and fiscal realignment can commence. However, upon closer examination, it becomes apparent that the economic fundamentals for long-term growth are just not there. Although GDP expansion was spread throughout the manufacturing, construction, and service sectors, much of the recent growth was in temporary sectors. In addition, the data for this past quarter was skewed by shoppers increasing their volume of purchases in anticipation of the VAT increase in January. Commercial and residential construction, growing in large part due to the government stimulus, will stall with the enactment of fiscal austerity, depressing the growth rate even further. A report published by the IMF concluded that countries have underestimated the contractionary ramifications of fiscal tightening. The report suggested that a cut in the amount of 1 percent of the GDP in the fiscal budget could reduce GDP growth by .5 percent and increase unemployment by .33 percent within a two-year time frame. The plan advocated by Osborne calls for reduction of government spending by approximately 6 percent of the GDP, translating into an increase in unemployment by 2 percent and a decrease in the growth rate by 3 percent. All of these indicators point to a single idea – that enacting such stringent fiscal austerity during a time of fragile economic recovery would be disastrous for both people and the economy.

It is equally important to understand the macroeconomic failings of the austerity measures in terms of stability and demand. Traditionally, fiscal tightening has been  accompanied by cuts in interest rates, strong export demand, and currency devaluation. Britain, as it currently stands, cannot adopt the standard paradigm. Artificially depressing the pound is out of the question, and export demand has been flagging for the past few months. Interest rates are already at their lowest level in more than fifty years; it is impossible to lower them any further. In essence, the British government is betting that a forced decrease in public sector growth will be made up by a vibrant private sector.  If the past few months are any indication, however, the private sector is still reeling from the effects of the financial crisis, and regardless of the astronomically low interest rates, investment does not seem to be picking up enough to offset the impact of large governmental budget reductions.

To be sure, Britain will eventually have to balance its budget through tax increases and spending cuts; the operative word is ‘eventually.’ The current economic climate is not conducive to such draconian fiscal tightening; such actions could prove calamitous for the country.  Jeffrey Sachs, a noted economist, provides a few suggestions for Britain to regain economic strength. First, Osborne must set aside short-term budget balancing and focus on achieving a manageable debt to GDP ratio in the next decade or so. In addition, the government must enact long-term transformations by promoting exports and revitalizing energy and transportation infrastructure. Finally, productivity-enhancing structural reforms to reduce household debt and combat entrenched joblessness are a necessity. These reforms should focus on changing the debt structure of mortgages, many of which are now worth more than the original outstanding loan. The reforms would allow for a more efficient allocation of capital, boosting investment. All of these propositions are echoed by the IMF, which concluded that in the long run, these structural reforms yield a much stronger positive effect than short term fiscal tightening.

Certainly, some fiscal readjustment, especially in welfare (unemployment and retirement benefits) is not a bad thing. However, the magnitude of these changes must be kept in perspective – in trying to completely eliminate the deficit in four short years, Osborne risks chronic economic stagnation. The Economist and the IMF have reported that Britain has underestimated the huge risk budget consolidation poses to domestic demand, actions that could halve the predicted growth rate. Indeed, The Economist points out that “they are at the risk of both overdoing and mismanaging short-term fiscal austerity.” The dangers of stagnated growth and weak domestic demand far outweigh the dangers of short-term budget deficits. Cuts can be made, but on a much smaller scale than what has currently been proposed.

Thirteen years ago, Japan prematurely embraced fiscal austerity. The result was  depressed growth rates and weak demand whose effects debilitate the private sector to this day. Britain is poised for disaster, ready to head down the same path as Japan. Hopefully, Chancellor Osborne will come to his senses before he resigns the British economy to several more years – or decades – of turmoil.

A: It is necessary to differentiate between tax offenses which represent a “minor offense” and are collectively known as “tax evasion,” and tax offenses which are collectively known as “tax fraud,” considered criminal offenses under Liechtenstein law and pursued appropriately by our courts. In the case of tax fraud offences, we have been assisting foreign countries in the enforcement of related laws for many years. With the so-called “Liechtenstein Declaration” of March 2009 Liechtenstein recognised the standards set out by the OECD for the exchange of information related to tax evasion with foreign tax authorities upon request (i.e. such information is not provided automatically). Any third-party state can now sign a bilateral agreement with Liechtenstein on the exchange of tax-related information. Only specific requests for specific information on a specific person are covered by these agreements.

Q: Liechtenstein has historical and cultural ties to Germany. As foreign minister, could you talk about your relationship with Angela Merkel’s government?

A: Liechtenstein has had an excellent relationship with Germany for many decades. As the question suggests, that relationship is founded on a common language and a similar cultural-geographical position in the European landscape. It is reflected in a wide range of joint initiatives carried out by the two countries and a close cooperation in areas such as justice and environmental protection.

At a certain time during Chancellor Merkel’s tenure, the relationship between our countries was clouded by an unusually aggressive stance towards Liechtenstein by the incumbent German Finance Minister. The discussions were on a specific incident – the criminal sale of data to the German authorities by a Liechtenstein citizen – which was the basis for a broad campaign against “tax evaders” by German authorities. With the above-mentioned policy change the dispute eased to a large extent. It has been possible to arrive at an agreement on tax-related data, and a double taxation agreement is set to be concluded in the near future. We are looking forward to continuing the regularly excellent relationship with Germany.

Q: Liechtenstein is a member of the European Economic Area (EEA) and the European Free Trade Association (EFTA) but not the European Union (EU). What is the relationship between Liechtenstein and the EU and why has the country not joined the EU?

A: Liechtenstein has now been a member of the EEA for 15 years, and that membership has proved to be an especially suitable model for Liechtenstein’s integration into Europe, especially  given the size of the country. Its EEA status entitles Liechtenstein to pursue and benefit from all four “freedoms” – freedom of persons, freedom of goods, freedom of capital and freedom of services – and this in turn makes Liechtenstein an outstanding environment for both residents and businesses. Liechtenstein is obliged to grant those same freedoms to other EEA member states, which include all 27 EU countries and not just Liechtenstein, Iceland, and Norway. The EEA does not, however, include political cooperation, which is restricted to EU countries, nor cooperation on tax-related issues. The latter requires the adoption of other legal instruments, for example the Schengen Agreement or the Anti-Fraud Agreement. Liechtenstein has already given the green light to both agreements, while EU ratification is still outstanding.

Given the advanced level of Liechtenstein’s integration into Europe, an EU membership is currently not discussed in Liechtenstein. For its part, the EU has never made a statement on the way in which it would handle accession requests from small states.

Q: The monarchy of Liechtenstein has significant amounts of power, even the constitutional authority to veto (almost) any law. How is Liechtenstein’s government consistent with representative democracy?

A: Liechtenstein is a constitutional, hereditary monarchy on a democratic and parliamentary basis. The power of State is embodied in the Reigning Prince and the People and is exercised by them in accordance with the provisions of the Constitution (article 2 of the Constitution of 1921). The Constitution stresses that the head of state (the Prince), the government, and the parliament are to work together in adopting laws. The right of Liechtenstein citizens to request a referendum and to introduce a bill is comparable to the one of Swiss citizens.

Though it is true that every law and significant element of foreign policy requires approval from the head of state, it is nevertheless extremely rare that the Prince exercises his power of veto. The contents of new laws are agreed with him well in advance. This situation is comparable to countries that have a president as their head of state – just think of the level of power and status given to the President of the United States. The only significant difference is that Liechtenstein’s head of state is not elected, but defined by the right of succession – the so-called “House law” – of the Liechtenstein Royal Family. The citizens of Liechtenstein passed the country’s constitution by a significant majority, and under specific circumstances, the constitution even allows for the removal of the head of state on the initiative of the people.

These recent policy decisions have alarmed the West, prompting the EU and US to reaffirm their commitment to supporting Turkey in the hopes that the nation will nip its newfound turn away from the West in the bud. Turkey has overestimated the extent to which the West will tolerate Turkish assertiveness and has ignored the perils of the country’s new Middle Eastern partnerships. If Turkey continues to distance itself from its longtime, economically dominant allies and to further entangle itself in the fragmented and chaotic Middle Eastern political sphere, Turkey may soon find itself with few friends and unexpected enemies.

Upon its rise from the ashes of the Ottoman Empire as a modern nation, Turkey began a political transformation that would orient it toward the West and away from the Middle East. In a series of reforms known as Kemalism, former military general Mustafa Kemal Atatürk radically altered the essence of Turkish identity, creating a Westernized, democratic and secular nation that broke the regional mold of authoritarianism. It quickly joined NATO as the Cold War began, cementing its position as an ally of the West by becoming the first Muslim-majority nation to recognize Israel and by sending troops to Korea during the Korean War.

As late as the mid-2000’s, Turkey still appeared to be heavily allied with the West. The majority of its trade still occurred with the United States, and in 2005 it began economic and legal preparations for its formal EU bid. Prime Minister Recep Erdoğan’s government has gone to extensive lengths to reform the country’s legal, economic, and political system to conform to EU standards. His Islamist political party has moderated its views, attempted to quell the influence of the military (modern Turkish history is rife with military coups), and spent countless visits to the EU and US attempting to convince them of Turkey’s very real economic potential. Yet Turkey’s dreams of EU membership are slipping away, due to the concerns of several powerful EU members, particularly France and Germany, who have articulated fears both real and imagined of the dangers of Turkish membership in the world’s most exclusive club of nations.

In addition to European hesitation about Turkey’s EU bid, two other events have greatly influenced Turkey’s turn toward the East. In late 2008, Turkey sponsored peace talks between Syria and Israel that many hoped would be the beginning of a multilateral regional peace agreement. The talks ended with the Turkish government believing the negotiations to have been somewhat successful; Israeli Prime Minister Benjamin Netanyahu, however, failed to inform Turkey of the Gaza incursion that was to begin four days later. Upon hearing news of the raid, Erdoğan was reportedly furious; at the Davos Conference in January of 2009, he revealed what many have termed a hotheaded temper, referring to Israel’s actions in Gaza as “barbaric” and “a crime against humanity.” Relations between Israel and Turkey were further damaged in May of this year, when Israeli Defense forces stormed the Mavi Marmara, a Turkish aid ship intent on breaking the Israeli blockade on Gaza. Nine Turkish activists, including one with dual US citizenship, were killed, with Turkey claiming its activists were fired on indiscriminately and Israel claiming its own soldiers acted in self-defense. In the ensuing diplomatic crisis, the US angered many in Turkey with its tepid response; while the practical military arrangements of the Turkish-Israeli alliance remain largely intact, their diplomatic relationship is in tatters.

It is because of these events, along with the increasing Islamization of the Turkish government, promoted by Erdoğan’s own party, that Turkey has been led to pursue a foreign policy that not only corresponds more directly with Middle Eastern goals but also goes directly against its previously solid Western alliances. In June of 2010, the Turkish government claimed to have secured US approval to broker a nuclear swap deal between Turkey, Brazil, and Iran, in which the former two nations would exchange Iranian low-grade nuclear material with higher-grade fuel that could be used for research and other peaceful purposes. This agreement directly conflicted with a UN resolution placing further sanctions on Iran, which Brazil and Turkey were later the only two nations to vote against, showcasing the manner in which both nations had overplayed their diplomatic hands. Additionally, Erdoğan’s government has pursued closer political relations with Syria, Iran, and Sudan, and refused to acknowledge either the genocide charges against Sudanese leader Omar al-Bashir, the countless acts of violent political repression committed by Iranian President Mahmoud Ahmadinejad or by Syrian President Bashar al-Assad. It has, however, simultaneously and hypocritically condemned the Israeli government for its treatment of the Palestinian people.

But if Turkey ventures much further into the Middle Eastern camp, it may find itself trapped in a quagmire of sectarian conflict from which it will not easily emerge. Turkey’s alliance with Iran, a nation many Middle Eastern states view as a greater long-term threat than even their eternal enemy Israel, has already disturbed Turkey’s Arab neighbors. Its alliances with Syria and Iran, when taken together, upset many Sunni nations, who see it as an attempt to establish a Shi’ite consensus that might rival their own majority Sunni sect. Yet if Turkey attempts to appease both East and West, it will find itself similarly trapped. Its alliance with the US will put it at odds with Iran should America or Israel attempt to strike militarily to prevent Iran from gaining nuclear capabilities. Its alliance with Israel puts it directly at odds with its newfound allies in Syria and Iran, neither of whom recognize Israel’s right to exist or appreciate Turkey’s longstanding practice of swapping military intelligence with the nation. Furthermore, the region in which Turkey borders Syria and Iran is dominated by the Kurds, whose main separatist group, the Kurdistan Worker’s Party (PKK), has been in a civil war with the Turkish government since 1984. Should Turkey displease either nation, either would be in a prime position to support the PKK in its struggle against

Turkey for an independent breakaway state, creating a massive headache for the Turkish government and further jeopardizing its EU bid.
It seems that Turkey has been cornered into a diplomatic dead end. Yet these events are recent, and with a few deft diplomatic moves by the EU and the US, the nation might be encouraged to pursue a less aggressive, more beneficial foreign policy. For one, the US and Britain could use the potential predicaments Turkey faces in the Middle East as reasons why Turkey should turn away from its fast-paced foray into the East and focus on its alliance with the West. These nations can provide incentives for such a move by offering to continue to push for Turkey’s EU membership bid, even if that means convincing Germany and France that the Union is not, in fact, a “Christian-only” club, as they seem to believe. The US should work with the EU to encourage Erdoğan’s government to resolve Kurdish separatist violence in the southeast, as well as tensions that still exist with Cyprus and Turks of Armenian descent. The US might also nudge Turkey in the direction of the West by continuing to encourage Israeli-Turkish cooperation; despite recent diplomatic woes, the two maintain economic and military connections, and Israel’s nuclear capacity and military might continue to appeal to Turkey. Finally, the US should make clear the impossibility of a long-term Turkish alliance with both Iran and America. Between its dogged quest for nuclear capacity and its funding of Hezbollah in Lebanon and violent insurgencies in Iraq, Iran under President Ahmedinejad represents the greatest threat to both US interests and peace within the Middle East today. A single allying agreement with Iran will not severely damage Turkey’s relations with the West, but a long-term partnership will. Turkey is at a crossroads between continents and civilizations, yes, but between nations too. Hopefully Turkey will dismantle the ticking time bomb it has set for itself, and resolve its discordant foreign policy in favor of the West. If not, it may find itself, like many in the middle, alone.