Tuesday, May 25, 2010


The text below is a copy of an email I sent out last year (around this time) regarding the ongoing crisis between the international community and North Korea. In light of recent events, I thought I would provided it as a resource for anyone wanting a quick and perhaps hasty backstory synopsis of the current situation. I may be off on a few points but overall I think it's accurate. I didn't delve into any of the dirty shenanigans by the west which has contributed to this potential catastrophe, as the ill effects of yankee imperialism was a basic presupposition I shared with the emails recipient, so those sentiments were left unspoken.

Also, I drafted this email and sent it off in a rush, so the writing and content does not reflect my best efforts (I've left everything as is, typos and all), but I think its a good primer and starting point for better understanding this crisis, which I think is deadly serious.



1 message


Tue, Jun 2, 2009 at 6:04 PM

To: ----------


So, I’ve been looking at the Korea situation real heavy lately. I have always kept an eye on it and like you, have warned that it will boil over again someday. The 2nd Infantry Division has been on a permanent war footing ever since the armistice (interrupted for 11 years between 54 and 65) and the 1st Brigade, which is based in Korea not far from the DMZ, trains harder than any other conventional element in the US Army, with more live fires, ammo expenditure and field maneuvers than any other peacetime division.

A soldier will spend most of his tour in the field preparing to stem a North Korean advance just long enough for division reinforcements to arrive. They are deployed so forward that any surprise attack would kill a large percentage of them through the NK artillery barrage alone, so in a way, its almost a suicide mission should an attack occur and they are caught napping. For those guys, including their South Korean allies (KATUSA) who are embedded with them and any ROK troops or civilians who live within range of the shells (like the millions who live in Seoul), the threat is real and its always been a matter of when, not if, the "Second Korean War" will kick off.

I remember a veteran of the first Korean War I met while working at the club. He would stumble over to our bar after last call at the legion which was across the tracks behind us (right next to my old place) and after seeing him a few times, I struck up a conversation which became a routine anytime he dropped in. I remember one time a couple punks were making fun of him as he stood by the door speaking with me. He would sometimes get pretty excited when telling a story and he would often mimic shooting a machine gun or something, which probably looked pretty silly.

Anyhow, I told them both to #$%#$^^ and continued by saying this "funny old man" had killed better men with a cold bayonet and they should @#^#%@^ unless they wanted similar treatment from this guy. I know that sounds funny but it felt good to say that at the time. Right or wrong, this man thought he was doing the right thing and he has to carry around some heavy emotional baggage because of what his country asked him to do. He didn't deserve to be laughed at or dismissed...

...But, I digress. He talked a lot about the war and of course with my interest in history, I plugged him with questions. He mentioned how the Chinese would sound the bugle before a human wave attack and he said that would send shivers down his spine and scare him half to death before the fighting even started. He also said the Chinese (and the NK units I presume) were fearless and tough fighters who would continue advancing regardless of losses until the bugle sounded for them to retreat. He said it was almost like they were brainwashed or something, advancing like robots until they were knocked down by heavy machine gun fire or ordered to retreat.

Scary stuff for sure and if there is a war with NK, they won’t fight like some raggedy ass third world army (like Iraq or Taliban). Aside from the threat posed by WMD (a real threat this time) and artillery, they have the fifth largest standing army in the world and their front line units (70 percent of which are positioned close to the DMZ) are extremely disciplined, highly trained and relatively well equipped. They also have about 4 million (more according to some sources) men and women between the age of 15 and 60 ready to be called up as a trained reserve force. The special ops or SPF units (100, 000 strong) they have are also top notch and would wreak havoc behind the lines in South Korea. I remember reading a good memoir called, "Tears of my Soul".


It was written by a North Korean agent who blew up Korean Airlines Flight 858 killing 115 people. I read it years ago and I keep thinking back to that book, so it had obviously had an impact on me. She may have been a plant of course but on face value, the book provides a brief glimpse into that world. I'm convinced NK is not a paper tiger and even without the military threat, any destabilization in that country, such as sudden regime change, could very easily lead to the largest humanitarian disaster the US and her allies have ever faced.



second exchange



the book on bio war looks interesting; I will look forward to your review of it. I looked it up and it said 87 as a publishing date, so it may be a bit outdated but still valuable probably. Lots of documents seem to list it as a source.

As for NK, I am not so sure Kim Jong Il is a very rational actor, so trying to guess his intentions is difficult at best. This is the same guy who kidnaps film directors and dreams have possessing a bio weapon capable of ridding the world of Caucasians, so who knows what crazy schemes are rattling around in this guy’s noggin.

Some insist this latest round of bluster was aimed at internal politics and the recent naming of his youngest son, Kim something-or-other, as his successor lends credence to that view.

On the other hand, the capability to pose a combined conventional and asymmetric threat to ROK, US forces and civilians caught inside the peninsula is huge and shouldn't be dismissed. Military forces in the region are at Watchcon 2, which is the second highest alert level, so NK definitely has their attention.

In my opinion, the NBC and terror threat is not the only thing to worry about. I can envision several USS Pueblo style reaction-counter reaction scenarios that could lead to a conventional first strike by NK at this point. I won't bore you to death with the nerdy fine print but since NK's "military first" campaign has kicked into gear, military activity and strength has reached record levels (post 2000) and its army doctrine centers around a strong, two front offensive capability aimed at quickly overwhelming the CFC forces while SOF units attack vital targets along the route of advance and behind the lines.

Their large fleet of outdated but quiet diesel electric subs would then wage sea denial missions long enough for NK to complete its objectives and the leadership to leverage (if not prearranged) for a China/Russia sponsored UN cease fire plan, which might include nominal or even complete withdrawal of NK forces back to the 38th followed by a pledge of international peacekeepers, which would put pressure on the Yanks to halt what would inevitably be a complete and total destruction of DPRK forces, first by air and then amphibious and airborne infantry assault.

It’s a ludicrous plan on Kims part of course with little hope of succeeding but with this nutcase, he might be just crazy enough to believe it could work or perhaps his reportedly ruthless son could push for this strategy once he takes the reigns. Throw in China, Russia and the Nuke deterrent on every side and you have a serious world crisis. I doubt even Tom Clancy could invent a worse scenario. Millions of lives hang in the balance at the moment so I hope cooler and wiser heads prevail.


The Russo-German Chronicles

"This report is republished with permission of STRATFOR"

By George Friedman

Discussions about Europe currently are focused on the Greek financial crisis and its potential effect on the future of the European Union. Discussions these days involving military matters and Europe appear insignificant and even anachronistic. Certainly, we would agree that the future of the European Union towers over all other considerations at the moment, but we would argue that scenarios for the future of the European Union exist in which military matters are far from archaic.

Russia and the Polish Patriots

For example, the Polish government recently announced that the United States would deploy a battery of Patriot missiles to Poland. The missiles arrived this week. When the United States canceled its land-based ballistic missile defense system under intense Russian pressure, the Obama administration appeared surprised at Poland’s intense displeasure with the decision. Washington responded by promising the Patriots instead, the technology the Poles had wanted all along. While the Patriot does not enhance America’s ability to protect itself against long-range ballistic missiles from, for example, Iran, it does give Poland some defense against shorter-ranged ballistic missiles and substantial defense against conventional air attack.

Russia is the only country capable of such attacks on Poland with even the most distant potential interest in doing so, and at this point, this is truly an abstract threat. In removing a system that was really not a threat to Russian interests — U.S. ballistic missile defense at most can handle only a score of missiles, meaning it would have a negligible impact on the Russian nuclear deterrent — the United States ironically has installed a system that could affect Russia. Under the current circumstances, this is not really significant. While much is being made of having a few U.S. boots on the ground east of Germany within 40 kilometers (about 25 miles) of the Russian Baltic exclave of Kaliningrad, a few hundred technicians and guards are simply not an offensive threat.

Still, the Russians — with a long history of seeing improbable threats turning into very real ones — tend to take hypothetical limits on their power seriously. They also tend to take gestures seriously, knowing that gestures often germinate into strategic intent. The Russians obviously oppose this deployment, as the Patriots would allow Poland in league with NATO — and perhaps even by itself — to achieve local air superiority. There are many crosscurrents in Russian policy, however.

For the moment, the Russians are interested in encouraging better economic relations with the West, as they could use technology and investment that would make them more than a commodity exporter. Moreover, with the Europeans preoccupied with their economic crisis and the United States still bogged down in the Middle East and needing Russian support on Iran, Moscow has found little outside resistance to its efforts to increase its influence in the former Soviet Union. Moscow is not unhappy about the European crisis and wouldn’t want to do anything that might engender greater European solidarity. After all, a solid economic bloc turning into an increasingly powerful and integrated state would pose challenges to Russia in the long run that Moscow is happy to do without. The Patriot deployment is a current irritation and a hypothetical military problem, but the Russians are not inclined to create a crisis with Europe over it — though this doesn’t mean Moscow won’t make countermoves on the margins when it senses opportunities.

For its part, the Obama administration is not focused on Poland at present. It is obsessed with internal matters, South Asia and the Middle East. The Patriots were shipped based on a promise made months ago to calm Central European nerves over the Obama administration’s perceived lack of commitment to the region. In the U.S. State and Defense department sections charged with shipping Patriots to Poland, the delivery process was almost an afterthought; repeated delays in deploying the system highlighted Washington’s lack of strategic intent.

It is therefore tempting to dismiss the Patriots as of little importance, as merely the combination of a hangover from a Cold War mentality and a minor Obama administration misstep. Indeed, even a sophisticated observer of the international system might barely note it. But we would argue that it is more important than it appears precisely because of everything else going on.

Existential Crisis in the EU

The European Union is experiencing an existential crisis. This crisis is not about Greece, but rather, what it is that members of the European Union owe each other and what controls the European Union has over its members. The European Union did well during a generation of prosperity. As financial crisis struck, better-off members were called on to help worse-off members. Again, this is not just about Greece — the 2008 credit crisis in Central Europe was about the same thing. The wealthier countries, Germany in particular, are not happy at the prospect of spending taxpayer money to assist countries dealing with popped credit bubbles.

They really don’t want to do that, and if they do, they really want to have controls over the ways these other countries spend their money so this circumstance doesn’t arise again. Needless to say, Greece — and countries that might wind up like Greece — do not want foreign control over their finances.

If there are no mutual obligations among EU member nations, and the German and Greek publics don’t want to bail out or submit, respectively, then the profound question is raised of what Europe is going to be — beyond a mere free trade zone — after this crisis. This is not simply a question of the euro surviving, although that is no trivial matter.

The euro and the European Union will probably survive this crisis — although their mutual failure is not nearly as unthinkable as the Europeans would have thought even a few months ago — but this is not the only crisis Europe will experience. Something always will be going wrong, and Europe does not have institutions that could handle these problems. Events in the past few weeks indicate that European countries are not inclined to create such institutions, and that public opinion will limit European governments’ ability to create or participate in these institutions. Remember, building a super state requires one of two things: a war to determine who is in charge or political unanimity to forge a treaty. Europe is — vividly — demonstrating the limitations on the second strategy.

Whatever happens in the short run, it is difficult to envision any further integration of European institutions. And it is very easy to see how the European Union will devolve from its ambitious vision into an alliance of convenience built around economic benefits negotiated and renegotiated among the partners. It would thus devolve from a union to a treaty, with no interest beyond self-interest.

The German Question Revisited

We return to the question that has defined Europe since 1871, namely, the status of Germany in Europe. As we have seen during the current crisis, Germany is clearly the economic center of gravity in Europe, and this crisis has shown that the economic and the political issues are very much one and the same. Unless Germany agrees, nothing can be done, and if Germany so wishes, something will be done. Germany has tremendous power in Europe, even if it is confined largely to economic matters. But just as Germany is the blocker and enabler of Europe, over time that makes Germany the central problem of Europe.

If Germany is the key decision maker in Europe, then Germany defines whatever policies Europe as a whole undertakes. If Europe fragments, then Germany is the only country in Europe with the ability to create alternative coalitions that are both powerful and cohesive. That means that if the European Union weakens, Germany will have the greatest say in what Europe will become. Right now, the Germans are working assiduously to reformulate the European Union and the eurozone in a manner more to their liking. But as this requires many partners to offer sovereignty to German control — sovereignty they have jealously guarded throughout the European project — it is worth exploring alternatives to Germany in the European Union.

For that we first must understand Germany’s limits. The German problem is the same problem it has had since unification: It is enormously powerful, but it is far from omnipotent. Its very power makes it the focus of other powers, and together, these other powers can cripple Germany. Thus, Germany is indispensable for any decision within the European Union at present, and it will be the single center of power in Europe in the future — but Germany can’t just go it alone. Germany needs a coalition, meaning the long-term question is this: If the EU were to weaken or even fail, what alternative coalition would Germany seek?

The casual answer is France, as the two economies are somewhat similar and the countries are next-door neighbors. But historically, this similarity in structure and location has been a source not of collaboration and fondness but of competition and friction. Within the European Union, with its broad diversity, Germany and France have been able to put aside their frictions, finding a common interest in managing Europe to their mutual advantage. That co-management, of course, helped bring us to this current crisis. Moreover, the biggest thing that France has that Germany wants is its market; an ideal partner for Germany would offer more. By itself at least, France is not a foundation for long-term German economic strategy. The historic alternative for Germany has been Russia.

The Russian Option

A great deal of potential synergy exists between the German and Russian economies. Germany imports large amounts of energy and other resources from Russia. As mentioned, Russia needs sources of technology and capital to move it beyond its current position of mere resource exporter. Germany has a shrinking population and needs a source of labor — preferably a source that doesn’t actually want to move to Germany. Russia’s Soviet-era economy continues to de-industrialize, and while that has a plethora of negative impacts, there is one often-overlooked positive: Russia now has more labor than it can effectively metabolize in its economy given its capital structure. Germany doesn’t want more immigrants but needs access to labor. Russia wants factories in Russia to employ its surplus work force, and it wants technology. The logic of the German-Russian economic relationship is more obvious than the German-Greek or German-Spanish relationship. As for France, it can participate or not (and incidentally, the French are joining in on a number of ongoing German-Russian projects).

Therefore, if we simply focus on economics, and we assume that the European Union cannot survive as an integrated system (a logical but not yet proven outcome), and we further assume that Germany is both the leading power of Europe and incapable of operating outside of a coalition, then we would argue that a German coalition with Russia is the most logical outcome of an EU decline.

This would leave many countries extremely uneasy. The first is Poland, caught as it is between Russia and Germany. The second is the United States, since Washington would see a Russo-German economic bloc as a more significant challenger than the European Union ever was for two reasons. First, it would be a more coherent relationship — forging common policies among two states with broadly parallel interests is far simpler and faster than doing so among 27. Second, and more important, where the European Union could not develop a military dimension due to internal dissensions, the emergence of a politico-military dimension to a Russo-German economic bloc is far less difficult to imagine. It would be built around the fact that both Germans and Russians resent and fear American power and assertiveness, and that the Americans have for years been courting allies who lie between the two powers. Germany and Russia would both view themselves defending against American pressure.

And this brings us back to the Patriot missiles. Regardless of the bureaucratic backwater this transfer might have emerged out of, or the political disinterest that generated the plan, the Patriot stationing fits neatly into a slowly maturing military relationship between Poland and the United States. A few months ago, the Poles and Americans conducted military exercises in the Baltic states, an incredibly sensitive region for the Russians. The Polish air force now flies some of the most modern U.S.-built F-16s in the world; this, plus Patriots, could seriously challenge the Russians. A Polish general commands a sector in Afghanistan, something not lost upon the Russians. By a host of processes, a close U.S.-Polish relationship is emerging.

The current economic problems may lead to a fundamental weakening of the European Union. Germany is economically powerful but needs economic coalition partners that contribute to German well-being rather than merely draw on it. A Russian-German relationship could logically emerge from this. If it did, the Americans and Poles would logically have their own relationship. The former would begin as economic and edge toward military. The latter begins as military, and with the weakening of the European Union, edges toward economics. The Russian-German bloc would attempt to bring others into its coalition, as would the Polish-U.S. bloc. Both would compete in Central Europe — and for France. During this process, the politics of NATO would shift from humdrum to absolutely riveting.

And thus, the Greek crisis and the Patriots might intersect, or in our view, will certainly in due course intersect. Though neither is of lasting importance in and of themselves, the two together point to a new logic in Europe. What appears impossible now in Europe might not be unthinkable in a few years. With Greece symbolizing the weakening of the European Union and the Patriots representing the remilitarization of at least part of Europe, ostensibly unconnected tendencies might well intersect.

Monday, May 24, 2010

Global Warming Skeptics vs. Science 101

Republished from the Union of Concerned Scientists Website

Certainty vs. Uncertainty

Understanding Scientific Terms About Climate Change

Uncertainty is ubiquitous in our daily lives. We are uncertain about where to go to college, when and if to get married, who will play in the World Series, and so on.

To most of us, uncertainty means not knowing. To scientists, however, uncertainty is how well something is known. And, therein lies an important difference, especially when trying to understand what is known about climate change.

In science, there's often not absolute certainty. But, research reduces uncertainty. In many cases, theories have been tested and analyzed and examined so thoroughly that their chance of being wrong is infinitesimal. Other times, uncertainties linger despite lengthy research. In those cases, scientists make it their job to explain how well something is known. When gaps in knowledge exist, scientists qualify the evidence to ensure others don't form conclusions that go beyond what is known.

Even though it may seem counterintuitive, scientists like to point out the level of uncertainty. Why? Because they want to be as transparent as possible and it shows how well certain phenomena are understood.

Decision makers in our society use scientific input all the time. But they could make a critically wrong choice if the unknowns aren't taken into account. For instance, city planners could build a levee too low or not evacuate enough coastal communities along an expected landfall zone of a hurricane if uncertainty is understated. For these reasons, uncertainty plays a key role in informing public policy.

Taking into account the many sources of scientific understanding, climate scientists have sought to provide decision-makers with careful language regarding uncertainty. A "very likely" outcome, for example, is one that has a greater than 90 percent chance of occurring. Climate data or model projections in which we have "very high confidence" have at least a 9 out of 10 chance of being correct.

However, in this culture of transparency where climate scientists describe degrees of certainty and confidence in their findings, climate change deniers have linked less than complete certainty with not knowing anything. The truth is, scientists know a great deal about climate change. We have learned, for example, that the burning of fossil fuels and the clearing of forests release carbon dioxide (CO2) into the atmosphere. There is no uncertainty about this. We have learned that carbon dioxide and other greenhouse gases in the atmosphere trap heat through the greenhouse effect. Again, there is no uncertainty about this. Earth is warming because these gasses are being released faster than they can be absorbed by natural processes. It is very likely (greater than 90 percent probability) that human activities are the main reason for the world's temperature increase in the past 50 years.

Scientists know with very high confidence, or even greater certainty, that:

Human-induced warming influences physical and biological systems throughout the world

Sea levels are rising

Glaciers and permafrost are shrinking

Oceans are becoming more acidic

Ranges of plants and animals are shifting

Scientists are uncertain, however, about how much global warming will occur in the future (between 2.1 degrees and 11 degrees Fahrenheit by 2100). They are also uncertain how soon the summer sea ice habitat where the ringed seal lives will disappear. Curiously, much of this uncertainty has to do with—are you ready?—humans. The choices we make in the next decade, or so, to reduce emissions of heat-trapping gasses could prevent catastrophic climate change.

So, what's the bottom line? Science has learned much about climate change. Science tells us what is more or less likely to be true. We know that acting now to deeply reduce heat-trapping emissions will limit the scope and severity of further impacts – and that is virtually certain.

Learn more about how scientists define certainty and uncertainty.

This is part of a series of articles meant to strengthen the communication of climate science, by scientists, to the American public. The series includes short articles on scientific terminology, the impacts of climate change, and new discoveries by leading researchers

©2010 Union of Concerned Scientists

Tuesday, May 18, 2010

The Gordian Knot of Euro Style Capitalism

"This report is republished with permission of STRATFOR"

By Marko Papic, Robert Reinfrank and Peter Zeihan

Rumors of the imminent collapse of the eurozone continue to swirl despite the Europeans’ best efforts to hold the currency union together. Some accounts in the financial world have even suggested that Germany’s frustration with the crisis could cause Berlin to quit the eurozone — as soon as this past weekend, according to some — while at the most recent gathering of European leaders French President Nicolas Sarkozy apparently threatened to bolt the bloc if Berlin did not help Greece. Meanwhile, many in Germany — including Chancellor Angela Merkel herself at one point — have called for the creation of a mechanism by which Greece — or the eurozone’s other over-indebted, uncompetitive economies — could be kicked out of the eurozone in the future should they not mend their “irresponsible” spending habits.

Rumors, hints, threats, suggestions and information “from well-placed sources” all seem to point to the hot topic in Europe at the moment, namely, the reconstitution of the eurozone whether by a German exit or a Greek expulsion. We turn to this topic with the question of whether such an option even exists.

The Geography of the European Monetary Union

As we consider the future of the euro, it is important to remember that the economic underpinnings of paper money are not nearly as important as the political underpinnings. Paper currencies in use throughout the world today hold no value without the underlying political decision to make them the legal tender of commercial activity. This means a government must be willing and capable enough to enforce the currency as a legal form of debt settlement, and refusal to accept paper currency is, within limitations, punishable by law.

The trouble with the euro is that it attempts to overlay a monetary dynamic on a geography that does not necessarily lend itself to a single economic or political “space.” The eurozone has a single central bank, the European Central Bank (ECB), and therefore has only one monetary policy, regardless of whether one is located in Northern or Southern Europe. Herein lies the fundamental geographic problem of the euro.

Europe is the second-smallest continent on the planet but has the second-largest number of states packed into its territory. This is not a coincidence. Europe’s multitude of peninsulas, large islands and mountain chains create the geographic conditions that often allow even the weakest political authority to persist. Thus, the Montenegrins have held out against the Ottomans, just as the Irish have against the English.

Despite this patchwork of political authorities, the Continent’s plentiful navigable rivers, large bays and serrated coastlines enable the easy movement of goods and ideas across Europe. This encourages the accumulation of capital due to the low costs of transport while simultaneously encouraging the rapid spread of technological advances, which has allowed the various European states to become astonishingly rich: Five of the top 10 world economies hail from the Continent despite their relatively small populations.

Europe’s network of rivers and seas are not integrated via a single dominant river or sea network, however, meaning capital generation occurs in small, sequestered economic centers. To this day, and despite significant political and economic integration, there is no European New York. In Europe’s case, the Danube has Vienna, the Po has Milan, the Baltic Sea has Stockholm, the Rhineland has both Amsterdam and Frankfurt and the Thames has London. This system of multiple capital centers is then overlaid on Europe’s states, which jealously guard control over their capital and, by extension, their banking systems.

Despite a multitude of different centers of economic — and by extension, political — power, some states, due to geography, are unable to access any capital centers of their own. Much of the Club Med states are geographically disadvantaged. Aside from the Po Valley of northern Italy — and to an extent the Rhone — southern Europe lacks a single river useful for commerce. Consequently, Northern Europe is more urban, industrial and technocratic while Southern Europe tends to be more rural, agricultural and capital-poor.

Introducing the Euro

Given the barrage of economic volatility and challenges the eurozone has confronted in recent quarters and the challenges presented by housing such divergent geography and history under one monetary roof, it is easy to forget why the eurozone was originally formed.

The Cold War made the European Union possible. For centuries, Europe was home to feuding empires and states. After World War II, it became the home of devastated peoples whose security was the responsibility of the United States. Through the Bretton Woods agreement, the United States crafted an economic grouping that regenerated Western Europe’s economic fortunes under a security rubric that Washington firmly controlled. Freed of security competition, the Europeans not only were free to pursue economic growth, they also enjoyed nearly unlimited access to the American market to fuel that growth. Economic integration within Europe to maximize these opportunities made perfect sense. The United States encouraged the economic and political integration because it gave a political underpinning to a security alliance it imposed on Europe, i.e., NATO. Thus, the European Economic Community — the predecessor to today’s European Union — was born.

When the United States abandoned the gold standard in 1971 (for reasons largely unconnected to things European), Washington essentially abrogated the Bretton Woods currency pegs that went with it. One result was a European panic. Floating currencies raised the inevitability of currency competition among the European states, the exact sort of competition that contributed to the Great Depression 40 years earlier. Almost immediately, the need to limit that competition sharpened, first with currency coordination efforts still concentrating on the U.S. dollar and then from 1979 on with efforts focused on the deutschmark. The specter of a unified Germany in 1989 further invigorated economic integration. The euro was in large part an attempt to give Berlin the necessary incentives so that it would not depart the EU project.

But to get Berlin on board with the idea of sharing its currency with the rest of Europe, the eurozone was modeled after the Bundesbank and its deutschmark. To join the eurozone, a country must abide by rigorous “convergence criteria” designed to synchronize the economy of the acceding country with Germany’s economy. The criteria include a budget deficit of less than 3 percent of gross domestic product (GDP); government debt levels of less than 60 percent of GDP; annual inflation no higher than 1.5 percentage points above the average of the lowest three members’ annual inflation; and a two-year trial period during which the acceding country’s national currency must float within a plus-or-minus 15 percent currency band against the euro.

As cracks have begun to show in both the political and economic support for the eurozone, however, it is clear that the convergence criteria failed to overcome divergent geography and history. Greece’s violations of the Growth and Stability Pact are clearly the most egregious, but essentially all eurozone members — including France and Germany, which helped draft the rules — have contravened the rules from the very beginning.

Mechanics of a Euro Exit

The EU treaties as presently constituted contractually obligate every EU member state — except Denmark and the United Kingdom, which negotiated opt-outs — to become a eurozone member state at some point. Forcible expulsion or self-imposed exit is technically illegal, or at best would require the approval of all 27 member states (never mind the question about why a troubled eurozone member would approve its own expulsion). Even if it could be managed, surely there are current and soon-to-be eurozone members that would be wary of establishing such a precedent, especially when their fiscal situation could soon be similar to Athens’ situation.

One creative option making the rounds would allow the European Union to technically expel members without breaking the treaties. It would involve setting up a new European Union without the offending state (say, Greece) and establishing within the new institutions a new eurozone as well. Such manipulations would not necessarily destroy the existing European Union; its major members would “simply” recreate the institutions without the member they do not much care for.

Though creative, the proposed solution it is still rife with problems. In such a reduced eurozone, Germany would hold undisputed power, something the rest of Europe might not exactly embrace. If France and the Benelux countries reconstituted the eurozone with Berlin, Germany’s economy would go from constituting 26.8 percent of eurozone version 1.0’s overall output to 45.6 percent of eurozone version 2.0’s overall output. Even states that would be expressly excluded would be able to get in a devastating parting shot: The southern European economies could simply default on any debt held by entities within the countries of the new eurozone.

With these political issues and complications in mind, we turn to the two scenarios of eurozone reconstitution that have garnered the most attention in the media.

Scenario 1: Germany Reinstitutes the Deutschmark

The option of leaving the eurozone for Germany boils down to the potential liabilities that Berlin would be on the hook for if Portugal, Spain, Italy and Ireland followed Greece down the default path. As Germany prepares itself to vote on its 123 billion euro contribution to the 750 billion euro financial aid mechanism for the eurozone — which sits on top of the 23 billion euros it already approved for Athens alone — the question of whether “it is all worth it” must be on top of every German policymaker’s mind.

This is especially the case as political opposition to the bailout mounts among German voters and Merkel’s coalition partners and political allies. In the latest polls, 47 percent of Germans favor adopting the deutschmark. Furthermore, Merkel’s governing coalition lost a crucial state-level election May 9 in a sign of mounting dissatisfaction with her Christian Democratic Union and its coalition ally, the Free Democratic Party. Even though the governing coalition managed to push through the Greek bailout, there are now serious doubts that Merkel will be able to do the same with the eurozone-wide mechanism May 21.

Germany would therefore not be leaving the eurozone to save its economy or extricate itself from its own debts, but rather to avoid the financial burden of supporting the Club Med economies and their ability to service their 3 trillion euro mountain of debt. At some point, Germany may decide to cut its losses — potentially as much as 500 billion euros, which is the approximate exposure of German banks to Club Med debt — and decide that further bailouts are just throwing money into a bottomless pit. Furthermore, while Germany could always simply rely on the ECB to break all of its rules and begin the policy of purchasing the debt of troubled eurozone governments with newly created money (“quantitative easing”), that in itself would also constitute a bailout. The rest of the eurozone, including Germany, would be paying for it through the weakening of the euro.

Were this moment to dawn on Germany it would have to mean that the situation had deteriorated significantly. As STRATFOR has recently argued, the eurozone provides Germany with considerable economic benefits. Its neighbors are unable to undercut German exports with currency depreciation, and German exports have in turn gained in terms of overall eurozone exports on both the global and eurozone markets. Since euro adoption, unit labor costs in Club Med have increased relative to Germany’s by approximately 25 percent, further entrenching Germany’s competitive edge.

Before Germany could again use the deutschmark, Germany would first have to reinstate its central bank (the Bundesbank), withdraw its reserves from the ECB, print its own currency and then re-denominate the country’s assets and liabilities in deutschmarks. While it would not necessarily be a smooth or easy process, Germany could reintroduce its national currency with far more ease than other eurozone members could.

The deutschmark had a well-established reputation for being a store of value, as the renowned Bundesbank directed Germany’s monetary policy. If Germany were to reintroduce its national currency, it is highly unlikely that Europeans would believe that Germany had forgotten how to run a central bank — Germany’s institutional memory would return quickly, re-establishing the credibility of both the Bundesbank and, by extension, the deutschmark.

As Germany would be replacing a weaker and weakening currency with a stronger and more stable one, if market participants did not simply welcome the exchange, they would be substantially less resistant to the change than what could be expected in other eurozone countries. Germany would therefore not necessarily have to resort to militant crackdowns on capital flows to halt capital trying to escape conversion.

Germany would probably also be able to re-denominate all its debts in the deutschmark via bond swaps. Market participants would accept this exchange because they would probably have far more faith in a deutschmark backed by Germany than in a euro backed by the remaining eurozone member states.

Reinstituting the deutschmark would still be an imperfect process, however, and there would likely be some collateral damage, particularly to Germany’s financial sector. German banks own much of the debt issued by Club Med, which would likely default on repayment in the event Germany parted with the euro. If it reached the point that Germany was going to break with the eurozone, those losses would likely pale in comparison to the costs — be they economic or political — of remaining within the eurozone and financially supporting its continued existence.

Scenario 2: Greece Leaves the Euro

If Athens were able to control its monetary policy, it would ostensibly be able to “solve” the two major problems currently plaguing the Greek economy.

First, Athens could ease its financing problems substantially. The Greek central bank could print money and purchase government debt, bypassing the credit markets. Second, reintroducing its currency would allow Athens to then devalue it, which would stimulate external demand for Greek exports and spur economic growth. This would obviate the need to undergo painful “internal devaluation” via austerity measures that the Greeks have been forced to impose as a condition for their bailout by the International Monetary Fund (IMF) and the EU.

If Athens were to reinstitute its national currency with the goal of being able to control monetary policy, however, the government would first have to get its national currency circulating (a necessary condition for devaluation).

The first practical problem is that no one is going to want this new currency, principally because it would be clear that the government would only be reintroducing it to devalue it. Unlike during the Eurozone accession process — where participation was motivated by the actual and perceived benefits of adopting a strong/stable currency and receiving lower interest rates, new funds and the ability to transact in many more places — “de-euroizing” offers no such incentives for market participants:

The drachma would not be a store of value, given that the objective in reintroducing it is to reduce its value.

The drachma would likely only be accepted within Greece, and even there it would not be accepted everywhere — a condition likely to persist for some time.

Reinstituting the drachma unilaterally would likely see Greece cast out of the eurozone, and therefore also the European Union as per rules explained above.

The government would essentially be asking investors and its own population to sign a social contract that the government clearly intends to abrogate in the future, if not immediately once it is able to. Therefore, the only way to get the currency circulating would be by force.

The goal would not be to convert every euro-denominated asset into drachmas but rather to get a sufficiently large chunk of the assets so that the government could jumpstart the drachma’s circulation. To be done effectively, the government would want to minimize the amount of money that could escape conversion by either being withdrawn or transferred into asset classes easy to conceal from discovery and appropriation. This would require capital controls and shutting down banks and likely also physical force to prevent even more chaos on the streets of Athens than seen at present. Once the money was locked down, the government would then forcibly convert banks’ holdings by literally replacing banks’ holdings with a similar amount in the national currency. Greeks could then only withdraw their funds in newly issued drachmas that the government gave the banks to service those requests. At the same time, all government spending/payments would be made in the national currency, boosting circulation. The government also would have to show willingness to prosecute anyone using euros on the black market, lest the newly instituted drachma become completely worthless.

Since nobody save the government would want to do this, at the first hint that the government would be moving in this direction, the first thing the Greeks will want to do is withdraw all funds from any institution where their wealth would be at risk. Similarly, the first thing that investors would do — and remember that Greece is as capital-poor as Germany is capital-rich — is cut all exposure. This would require that the forcible conversion be coordinated and definitive, and most important, it would need to be as unexpected as possible.

Realistically, the only way to make this transition without completely unhinging the Greek economy and shredding Greece’s social fabric would be to coordinate with organizations that could provide assistance and oversight. If the IMF, ECB or eurozone member states were to coordinate the transition period and perhaps provide some backing for the national currency’s value during that transition period, the chances of a less-than-completely-disruptive transition would increase.

It is difficult to imagine circumstances under which such support would not dwarf the 110 billion euro bailout already on the table. For if Europe’s populations are so resistant to the Greek bailout now, what would they think about their governments assuming even more risk by propping up a former eurozone country’s entire financial system so that the country could escape its debt responsibilities to the rest of the eurozone?

The European Dilemma

Europe therefore finds itself being tied in a Gordian knot. On one hand, the Continent’s geography presents a number of incongruities that cannot be overcome without a Herculean (and politically unpalatable) effort on the part of Southern Europe and (equally unpopular) accommodation on the part of Northern Europe. On the other hand, the cost of exit from the eurozone — particularly at a time of global financial calamity, when the move would be in danger of precipitating an even greater crisis — is daunting to say the least.

The resulting conundrum is one in which reconstitution of the eurozone may make sense at some point down the line. But the interlinked web of economic, political, legal and institutional relationships makes this nearly impossible. The cost of exit is prohibitively high, regardless of whether it makes sense.


All data and information provided on this site is for informational purposes only. The Brazen Head Press blog makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.

Fair Use Notice

This site contains copyrighted material, the use of which has not always been specifically authorized by the copyright owner.

The material is being made available in an effort to advance understanding of world affairs and is being offered for non-profit research and educational purposes only.

I believe this constitutes a 'fair use' (and fair dealing for Canadian and Commonwealth based copyrights) of any such copyrighted material as provided for in section 107 of the US Copyright Law (or the Fair Dealing clauses found in the Canadian Copyright Act and similar Commonwealth based law statutes).

If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner.

This is a completely non-commercial site for private personal use. No fee is charged, and no money is made off of the operation of this site.

Search This Blog