The Good Guys Have A Real Chance in Ukraine

As the two months of street demonstrations escalate in Kiev and spread throughout Ukraine, the anti-government forces’s chances of unseating unpopular president, Viktor Yanukovich, grow. A victory of the loose alliance of pro-Western and nationalist forces in Ukraine would be Vladimir Putin’s first defeat after successfully running circles around Europe and the United States for years.

Putin had counted on Russian bailout funds and low gas prices to deflate Yanukovich’s street opposition. That did not work, but worse for Putin, the Ukrainian crisis is coming to a boil as his Sochi moment approaches. He must be on his best behavior through the February Olympic games – not a good time for Putin to deploy his strong arm tricks on behalf of  Yanukovich.

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Will Kiev Streets Thwart Putin's Grand Design?

A fateful drama is playing out in central Kiev. Tens of thousands of demonstrators occupy Independence Square and block entrances to government buildings. They demand “revolution.” They clamor for the resignation of President Victor Yanukovich’s government  as punishment for his surprise decision to reject the European Union’s offer of association status and to look instead eastward for partners. Yanukovich’s use of the riot police has been met with ever larger numbers of demonstrators.

An experienced observer like Anders Aslund predicts that this is the beginning of the end of Yanukovich. If so, it will be the Ukrainian people, not President Obama or professional European diplomats, who will have dealt Vladimir Putin his first major foreign policy defeat. Putin has risked a lot of skin in the Ukrainian game, defiantly calling the Kiev demonstrations a “pogrom.”

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Someone Must Eventually Say No. Warnings on the Europe Crisis

Yesterday’s Wall Street rally was indicative of a world investment community desperate for a shred of good news. The U.S. employment figures were better than expected and a consortium of central banks, the Fed included, agreed to prop up European banks with temporary funding.

Everyone now knows the meaning of “moral hazard” – a term foreign to the business vocabulary twenty years ago. It first came to the fore with the Asian Crisis of the summer of 1997. Buyers of bonds of the emerging Asian economies, expecting a lender of last resort, sought to profit from high interest Asian bonds and fixed dollar exchange rates. The two most recent episodes of moral hazard are the U.S. mortgage disaster and the toxic debt of  Ireland, Greece, Portugal, and now Italy. In both cases, investments were made assuming a lender of last resort. Things are different from 1997: We have no credible lenders of last resort who can make whole creditors who stand to lose not billions but trillions.

Moral hazard and lenders of last resort are addictions. We realize their costs only after the fact, and then we must agree to yet another bailout. Otherwise the costs are too high.

We now stand at a watershed in Europe. Creditor countries and Eurocrats tell Germany, the European Central Bank, and the IMF that the costs of yet another bailout are small compared to the alternative. Apparently, the world’s central banks yesterday caved in, at least partially. Only the German voter and perhaps the European Central Bank are left standing against the bail-out consensus. It is argued that somehow the European Union needs time to discipline the spendthrift Greeks, Portuguese, and Italians. But the central bank signal to them is “continue as is. Pretend to change your ways. You are too big too fail, so don’t worry.”

Overlooked in all the confusion is that the central bank loans and European emergency funds are tiny compared to the total bailout costs. Sufficient funding can only be had if private lenders participate. But so far, there are no signs of interest on their part. A more likely result is that private speculators will test the resolve of European governments and central banks to back toxic debt.

Once Soros and others enter the ring, my bets are on the private speculators. Taxpayers around the globe will pay dearly, and we will learn again that moral hazard has substantial costs. We will then immediately forget this lesson until the next catastrophe.

The Polish Plumber Who Never Came: A Lesson for us (Berlin Journal #4)

Germany and Austria delayed free immigration from the Eastern European Union states for six years. Other EU countries began the free movement of labor from countries like Poland, Czech Republic and Hungary much earlier. German and Austrian labor unions particularly feared being flooded with cheap Polish plumbers and other craftspersons.

The six years are up, and there are few Polish plumbers in sight in Germany.  Even though Germany is undergoing a shortage of skilled labor, German firms have little success in recruiting in Poland and Hungary. Polish and Hungarian workers have concluded their own economies are more dynamic and offer them more promising careers. In Germany and Austria, they do not earn well, and their living conditions are better at home. Polish workers in particular are reluctant to leave an economy that is growing rapidly.

Poland and Germany show how easily our  illegal immigration problem could be solved by dynamic growth south of the border. If Mexico, El Salvador, and Columbia could match Poland’s growth, their citizens would stay put to take advantage of more rewarding careers at home.