Monday, September 21, 2015

The great Syrian trek across a disintegrating union

I don’t much like writing about  the economics of human tragedy, but the great import of events in Europe compels me. The European Union has never looked so fragile.

The news is mainly about the conflicts between Germany and its eastern neighbors: Hungary, the Czech and Slovak republics, Poland and the Baltic states. Most of the latter are making themselves look very mean and petty, refusing to offer sanctuary to more than token numbers of Syrian refugees, even though most would probably soon leave for Germany or Sweden anyway.

Germany is threatening to cut off EU funding to any states that don’t carry their share of the refugee burden. The eastern states are questioning whether Germany has any legal standing to make such a threat. If no one backs down, the very heart of the EU, its budget, could fail. The EU is after all an association of independent states, with no real powers of compulsion.

Another key component of the European project, the right to travel freely across Europe, is being rolled back. A number of states, including Germany, have reinstated checks at their borders with other members of the Schengen Zone. Another European treaty called the Dublin agreement, which governs the handling of refugees and asylum-seekers, has all but died.

Meanwhile, a lot of people are acting unbothered. The Greeks have re-elected Alexis Tsipras, making clear they want a government that will do the absolute minimum required of it to stay in the Euro Area after the maximum protest and resistance. The €13b of bailout funds Greece has received so far was only enough to roll over Greece’s debts through the end of this year, not even including the arrears Tsipras ran up during the crisis he manufactured in June and July. He is still being kept on a very short string. A fresh crisis could erupt any time from early next year.

Then there are the Catalans, who are seriously considering leaving Spain, even though that would automatically remove them from the EU. And the UK, where an “out” vote in the promised referendum on EU membership, probably in 2017, is looking ever more likely.

Is the EU about to fall apart? It’s time to step back and take stock.


Some background on the Schengen and Dublin agreements


There hasn’t yet been any real collapse of the Schengen Zone. The right of Schengen Zone residents and legal visitors to freely cross national borders within the zone is not being challenged.

Explicit national border checks within the zone are a new and alarming trend. But there has always been some amount of de facto national border checks within the Schengen Zone. If you’ve traveled much by train in Europe, you’ve probably seen police walking through just after a border crossing checking the documents of passengers who look neither well-off nor European.

The Dublin agreement does appear to be dying, but it has been falling slowly apart for a long time. This is the treaty that requires applicants for asylum to apply in the first EU country they enter, and allows EU countries to deport asylum seekers who entered the EU through another country to that first country of EU entry.

The point of the agreement was to force each EU country to take responsibility for securing its own borders (if any) with non-EU members, and to prevent ineligible people from abusing the benefits given to asylum applicants by applying in one EU country after another.

The agreement failed because it assumed all EU countries would treat asylum applicants with the same humane standards, but did nothing to ensure they all would. And because it offered no guarantees to countries on the front line of a refugee crisis that other EU states would share the burden.

The worst problem was Greece. To be fair, even before the Syrian crisis, Greece would have needed help from the rest of the EU to handle all the refugees and asylum seekers who enter the EU via its territory. People fleeing Iraq, Afghanistan, Libya and East Africa also tend to come that way.

But rather than press that case, Greece simply refused to invest in its capacity to offer asylum. In effect it discouraged asylum-seekers by treating them horribly. For migrants to Europe, Greece became a particularly perilous transit country, where they had to avoid leaving evidence they had been there. If they applied for asylum in another EU country and were found to have transited Greece, they would be deported back to Greece and usually on to Turkey.

Then in 2011, a landmark case was won in the European Court of Human Rights on behalf of one of the unlucky asylum applicants who was found to have crossed Greece and deported back there. The court ruled that it would be abusive to continue deporting asylum-seekers to Greece.

By then Greece was in crisis, so no serious pressure was put on it to improve its asylum capacity. And that’s where things still stood when the Syrian refugee crisis exploded.

This explains why most of the refugees are transiting across Greece and not applying for asylum there, unless they’re detained by Greek police and given no choice.

This also helps explain Macedonia’s anger at the large numbers of refugees crossing its border from Greece. Macedonian authorities’ violence towards transiting refugees was obviously horribly wrong, but it’s also horribly wrong that the refugees are being sent from Greece to tramp by foot over the Balkans.

If the EU system were operating as it should, Syrian refugees would be able to apply for asylum in Greece, without having to cross the former Yugoslavia, as they’ve been doing by the hundreds of thousands, at considerable risk to their own lives and especially those of their children.

And this background also helps explain Hungary’s paranoid reaction to the Syrian refugee crisis. Until recently, Hungary had tried to extend relatively humane conditions to asylum seekers, far better at least than in Greece. Thus, the Dublin agreement still applies to Hungary.

According to it, any asylum seekers who transit from Serbia across Hungary to anywhere else in the EU can and should be deported back to Hungary. Germany recently announced it would stop deportations under the Dublin agreement, and others are likely to follow. But the move was belated, after Hungary had already fenced its border with Serbia.



Too little planning, too late


EU countries are now trying belatedly to agree on burden-sharing. But that’s a lot more difficult when the issue is so direct and tangible.

The crisis has exposed important historical differences between the former Western Europe and Eastern Europe. Much has been made since the 1980s of the deeper common cultures of Mitteleuropa, and for good reasons. But other, unshared histories also matter.

The former communist countries were not colonizers. So their people feel no moral responsibility for the fragility and brutality of the regimes that came after colonialism. Except Hungary, the former communist countries were imperial subjects not imperialists. They are fiercely proud of having come through imperialism with civil society and democratic culture intact, and they credit that to their national cultures.

People in former communist countries are not accustomed, neither in good senses nor bad senses, to large-scale immigration. By bad senses I mean mainly how people in the former Western Europe accept as inevitable the existence of their immigrant slums and put them out of their minds. People from the former Eastern Europe don’t have any such slums in their cities, and they are terrified by them.

Even within the societies of Western Europe, liberals sympathetic to refugees are far from holding secure majorities. Few liberals dare to speak honestly and openly about the scale of the refugee influx, fearing that would only strengthen the hands of xenophobes.

Seriously, how will so many people be integrated into European societies? The apparent unwillingness to discuss that is death to whatever hopes there could be of calming down and communicating with the people of former communist Central and Eastern Europe.

I don’t have any exclusive information, but it’s not hard to work out a few basic realities.

1) There is no end in sight to war in Syria and Sunni Iraq. Anyone who thinks Russia might team up with the United States to end the war is fooling themselves. Russia on the contrary will prolong the war by defending Bashar al-Assad from the pro-Western rebels of northwest Syria. Russia will let the US continue to struggle to contain Islamic State.

2) Around half of Syria’s 22 million people have been displaced from their former homes. Most are still inside Syria, and it’s not clear how many of those intend to leave, or will decide later that they want to leave. Millions more are in neighboring countries, mostly in camps in Turkey and Jordan. All of those are highly likely to want to migrate to Europe.

3) The main factors in these people’s decisions will be: a) the cost of travel to Europe, b) the risk of being turned back, c) the risk to life, and d) the degree of attachment to and hopes for return to Syria. Those appear to me to add up to an undiminishing stream of refugees for the foreseeable future, as stories of success filter back, attachment and hopes are worn down, and earlier immigrants send money home to bring their relatives. Then there’s Iraq, Afghanistan, Libya, East Africa. I would assume Europe will receive at least three million refugees over the next five years, possibly as much as twice that.

4) As long as EU countries offer varying amounts of support to refugees, refugees will go where support is the best, which is currently Sweden and Germany. No system of distributing refugees among countries can work unless benefits and treatment are seen to be equal, or the countries that offer better benefits are willing to harshly and systematically deport refugees back to their assigned countries. It would make no sense for Germany to have a big fight with eastern countries to force them to take refugees, only to allow those refugees to use the eastern countries as a staging ground for immigration to Germany.

5) The past failures of Arab immigration to Europe were both cultural and economic. Especially in France, neither the locals nor the immigrants tried very hard to integrate with each other, and politics favored protecting native jobs while paying immigrants to sit at home in ghettos.

Summing all that up, I’d say there’s no reason why the refugee crisis must destroy the EU. Germany with its relatively liberalized economy is best prepared to employ large numbers of immigrants. But the lack of concrete plans being made even in Germany should be deeply alarming. Unless Europeans start honestly facing up to what’s happening and discussing in all seriousness how they’re going to handle it, there will be more and angrier fighting over it, locally and internationally, and the EU itself could be mortally wounded.

Monday, September 7, 2015

China’s pace of spending reserves is extraordinary

The arm of Chinese government that manages foreign-exchange reserves has just released its count of where they stood at the end of August, which is down by nearly $94b from the end of July. Here’s Bloomberg and here’s the Chinese data.

And the actual pace at which China is spending reserves was even faster than that. The dollar significantly weakened during August: the DXY index fell by 1.6%. That should have increased the dollar value of China’s FX reserves, by nearly $20b if about one-third of them were in non-dollar assets. So it looks like China actually spent at least $110b of reserves in August.

Since China is so big, and has such a big stockpile of FX reserves, $110b in a month might seem like not such a big number. It is. China’s GDP was about $10.6 trillion in the four quarters ending in June, or a bit less than $900b in an average month. That means that in August China spent down its FX reserves at a pace of around 12% of GDP. That’s a very big volume of demand for foreign currency that’s not being met by market sellers.

By comparison, Russia spent $31b of FX reserves in December 2014 at the peak of its selling, a pace of about 17% of its (pre-devaluation) GDP. The ruble ended up losing half its value.

Obviously such comparisons aren’t direct, and Russia is in a much worse situation. But a devaluation of more than 10% in China seems to be the most likely outcome now.