By engulfing Italy, the euro crisis has entered a perilous new phase—with the single currency itself now at risk
Jul 14th 2011 | from the print edition
FOR more than a year the euro zone’s debt drama has lurched from one nail-biting scene to another. First Greece took centre stage; then Ireland; then Portugal; then Greece again. Each time European policymakers reacted similarly: with denial and dithering, followed at the eleventh hour with a half-baked rescue plan to buy time.
This week the shortcomings of this muddling-through were laid bare (see article). Financial markets turned on Italy, the euro zone’s third-biggest economy, with alarming speed. Yields on ten-year Italian bonds jumped by almost a percentage point in two trading days: on July 12th they breached 6%, their highest since the euro was created. The Milan stockmarket slumped to its lowest in two years. Though bond yields subsequently fell back, the debt crisis has clearly entered a new phase. No longer confined to the small peripheral economies of Greece, Ireland and Portugal, it has hurdled over Spain, supposedly next in line, and reached one of the euro zone’s giants. All its members, but especially Germany, face a stark choice.
Consider the stakes. Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding, 120% of its GDP, three times as much as Greece, Ireland and Portugal combined—and far more than the €250 billion or so left in the European Financial Stability Facility (EFSF), the currency club’s rescue kitty. Default would have calamitous consequences for the euro and the world economy. Even if the more likely immediate prospect is sustained stress in the Italian bond market, that will surely prompt investors to flee European assets, making the continent’s recovery ever harder. Meanwhile in the background there is the absurd pantomime of Barack Obama and congressional Republicans feuding over how to raise the federal government’s debt ceiling to stave off an American “default” (see article). That may have distracted American investors briefly; once they realise how much is at stake in Italy, it will not help.
The proximate cause of this week’s scare lies in Italian politics, and a row in which Silvio Berlusconi, the prime minister, hurled playground insults at Giulio Tremonti, the finance minister, over a new austerity budget. Add in the underlying concerns about the Italian economy’s feeble growth rate, and investors are understandably worried about the Italian government’s ability to shoulder its huge debt.
In theory, these concerns should be easy for a grown-up government to address. After all, Italy, for all its faults, is not a big Greece. Its debt burden has been high but stable for years. Its primary budget (ie, before interest payments) is in surplus. It has a record of cutting spending and raising taxes if it needs to do so: in 1997, when it was trying to get into the euro, its primary surplus was 6% of GDP. By European standards its banks are decently capitalised. High private saving means that much sovereign borrowing is funded at home.
In practice, though, there is seldom a clear line between illiquidity and insolvency: if the price Italy must pay to borrow rises high enough for long enough, its debt will eventually spiral out of control. And Italy’s prospects are being overwhelmed by the contradictions and uncertainties in Brussels, Frankfurt and Berlin, where respectively the Eurocrats, the European Central Bank (ECB) and Germany’s chancellor, Angela Merkel, have all vainly tried to follow two contradictory goals—namely, avoiding any formal default on Greek debt, while also avoiding an open-ended transfer from richer European countries to the insolvent periphery (see article).
To be fair to Mrs Merkel and Europe’s other leaders, they have not chosen to muddle through merely out of cowardice, though there has been plenty of that, but because the euro-zone countries are profoundly divided. They cannot agree on who should bear the cost of today’s crisis: should it be creditors (through a write-down), debtors (through austerity) or the Germans (through transfers to the south)? And they have not decided whether the long-term answer is a fiscal union, or not. Investors are thus unclear about how badly they may be hit. With Europeans in such a muddle over little Greece, no wonder investors are so terrified by big Italy.
Cometh the hour, cometh the Eurobond
What is to be done? This newspaper has long argued that muddling-through must be replaced by a comprehensive strategy based on three components: debt reduction for plainly insolvent countries; a recapitalisation of the European banks that will suffer from that restructuring; and the building of a firewall between the insolvent and the rest.
Debt reduction must begin with Greece, the country that is most obviously bust. However the restructuring is pitched, Greece will be in default, so a plan to recapitalise banks hit badly by this, starting with Greece’s own, will be needed too. The results of stress tests, due on July 15th, should show how much more help is required. There may have to be a similar restructuring for Portugal and Ireland.
The task of building a firewall around the solvent core, including Spain and Italy, has to be shared between the countries at risk and the euro zone as a whole. Italy needs to pass its budget speedily—and also push through long overdue structural reforms. Its challenges are not only, or even mainly, about fiscal austerity, but about making the economy grow. As for the euro zone, short-term help may have to come from the ECB buying Italian bonds (difficult politically because the next head of the ECB will be Mario Draghi, the boss of Italy’s central bank). Soon though the euro zone may well have to expand the EFSF and allow it to issue jointly guaranteed “Eurobonds”.
That is a huge political leap—especially for Mrs Merkel. Germany is firmly opposed to any solution that could imply open-ended transfers to feckless southerners; so are several other northern European countries, not least because guaranteeing others may raise their own borrowing costs. It is not a pleasant option. But the alternative could be the end of the euro. That is the horrible lesson of this week.
Welcome many of the consequences of the humbling of News Corporation; but be very wary of others
Jul 14th 2011 | from the print edition
NOT since the East India Company was finally brought to heel in the 19th century has political power over an influential private enterprise in Britain been so brutally enforced. On July 13th, with MPs poised to approve by a staggering majority a motion telling Rupert Murdoch’s News Corporation to retract its bid for full control of BSkyB, Britain’s dominant satellite broadcaster, the company caved in and did just that. Meanwhile, David Cameron announced an inquiry into nefarious practices at the late News of the World, Britain’s bestselling Sunday newspaper until it closed its doors in shame on July 10th, and into press ethics and regulation more broadly.
The terms of trade have shifted swiftly and sharply against Mr Murdoch in a way that Hosni Mubarak might appreciate (see article). Only a couple of weeks ago Mr Murdoch’s papers, which have around two-fifths of Britain’s national print market, gave him extraordinary access to the same politicians who now all condemn him as evil incarnate; that power, it has become clear, also helped his lieutenants at News International, the British newspaper arm of News Corp, to thumb their noses at the police investigating various phone-hacking claims. Yet ever since the allegation on July 4th that the News of the World had hacked into the phone of Milly Dowler, a murdered schoolgirl, things have disintegrated. Nothing Mr Murdoch has done—from closing down the News of the World to giving up the bid for BSkyB—has stopped the onrush.
That is partly Mr Murdoch’s fault. He still has not forced those involved in the scandal to step down during the investigation—notably Rebekah Brooks, the editor of the News of the World during the Dowler case and the chief executive of News International during the alleged cover-up. But it is also because the scandal has kept widening. Possible victims now include bereaved service families, the previous prime minister and the next king. Other Murdoch papers may also have been at fault; and there are suspicions that unrelated newspapers used dodgy methods too. Worst of all, the police are in the dock—both for failing to investigate the matter fully and, in some cases, for a cosily corrupt relationship with the press.
The consequences of this tawdry tale will be far-reaching, and so they should be. The law must be enforced, and those who broke it, or connived in covering up infringement, should be conspicuously punished. Mr Cameron’s public inquiry looks fierce enough. Having rightly attracted heavy criticism for hiring Andy Coulson, the editor of the News of the World when hacking was heaviest, the prime minister will presumably be more careful about whom he employs in future. Mr Murdoch’s clout will lessen. The press in general will be held to higher standards than it is now, and so too must the police. The natural rhythm of a British scandal, visible in the parliamentary-expenses row, will assert itself: wrongdoers will go to prison; there should be a usefully ethical counter-reaction.
So most of the consequences will be good ones, but not all. Two risks stand out. The first is that the scandal may well change the shape of News Corp in ways that are less than ideal; the other is that it could knock the stuffing out of Britain’s fierce, messy and vital press by provoking over-regulation. The first is to be regretted, but basically left to the law and the market; the second should be resisted.
Mr Murdoch is rightly criticised for fostering an attack-dog populist culture in British journalism (and elsewhere). But it has not been all bad. Long ago, he helped a dying Fleet Street burst its unionised bonds. A media baron who is a devotee of newspapers, a breed that is rapidly becoming extinct, he has patiently pumped money into “quality” titles such as the Times of London and America’s Wall Street Journal. If he sold his British papers to, say, a Russian oligarch or Richard Desmond, the cost-cutting mogul behind the Express and the Red Hot TV porn channel, how many journalists would cheer?
For the moment a disintegration of News Corp seems unlikely. The firm faces more accusations and legal challenges in Australia and America, and if any of its directors were to be found guilty of a criminal charge, that would present huge regulatory problems. Yet that could take years. It will also surely be harder for the Murdochs, only a minority shareholder in News Corp, to run the company as a family fief. But boardroom fights, shareholder lawsuits and even fratricidal competition are the stuff of capitalism. Let the law take its course.
Drinking in the last-chance saloon
There is a much greater public interest in having the British press regulated in a fair way. Newspapers currently answer to the Press Complaints Commission (PCC), a self-regulatory body set up by the industry in 1991. The PCC is meant to enforce a code of conduct of its own devising, and deal with grievances brought to its attention; but its attempts to hold the tabloids to account have been pathetic. Many critics unsurprisingly now want Britain to move to statutory control.
That would be a mistake. In the short term papers are bound to be better behaved—not least because they will see lawbreakers go to prison. And there is also a principle at stake: the media in a democracy must not be licensed by the state, especially one as centralised as Britain’s. The press may have misbehaved badly; but it is the press, notably the Guardian, that has brought the behaviour at News International to light. Instead of the PCC, a new press body should be set up free from financial dependence on the industry, with a tougher code of conduct, powers to investigate compliance with it and others to penalise lapses from it. Ideally that would be coupled with reform of Britain’s libel laws, which have done nothing to restrain the tabloids but have sheltered the rich and powerful (including newspaper tycoons) from investigation.
Lawbreaking companies and marauding journalists are a fact of life: they should be punished. But as with the East India Company the real abuse of power—and the real threat to democracy—comes when commercial interest becomes intertwined with the state. A noisy press, no matter how unpopular it seems at the moment, is the best protection against that.
The UN General Assembly was scheduled to vote today to approve the Republic of South Sudan as the 193rd member of the world body. The powerful Security Council on Wednesday recommended admission for the world's newest country, in which 7,000 UN peacekeepers and 900 civilian police will be deployed. Bloomberg (7/13)
The United Nations General Assembly has admitted South Sudan as 193rd member.
South Sudan is the first country to join the UN body since Montenegro in 2006, and the day was described by assembly president Jospeh Deiss as "historic and joyous moment".
"Welcome, welcome South Sudan to the community of nations," said UN Secretary General Ban Ki-Moon.
The vote was unanimous and was immediately followed by applause in the General Assembly.
In a meeting on Wednesday, the United Nations Security Council voted unanimously to recommend South Sudan's membership of the world body.
South Sudan became independent on Saturday, after its people voted to secede in January's referendum.
South Sudan says it was launching its own currency and the South Sudan pound note will be in circulation by next Monday.
The south's independence follows decades of conflict with the north in which some 1.5 million people died.
The two countries have still to decide on issues such as drawing up the new border and how to divide Sudan's debts and oil wealth.
The federal judge presiding over Roger Clemens’s perjury trial declared a mistrial because the prosecution revealed information Thursday that he had previously deemed inadmissible.
The United States District Court Judge Reggie Walton abruptly stopped the trial and scolded the prosecution for playing a videotape of the 2008 Congressional hearings on performance-enhancing drug use in baseball. The part of the tape that worried him included comments made by Rep. Elijah E. Cummings, a Maryland Democrat, about the credibility of Andy Pettitte, Clemens’s former best friend and teammate, who is expected to be one of the star witnesses for the government.
Kenya has agreed to open a new refugee camp near its border with Somalia, as thousands are fleeing the region's worst drought in 60 years.
Prime Minister Raila Odinga said the Ifo II camp, which can fit up to 80,000 people, would open within 10 days.
Some government ministers had feared opening the camp would encourage more Somalis to cross the border.
Announcing the move, Mr Odinga said: "Although we consider our own security, we can't turn away the refugees."
However, he said Kenya would not take responsibility for the logistics.
"It's up to the UNHCR [United Nations High Commissioner for Refugees] to work on the modalities and how they can move into Ifo II," Mr Odinga said.
The UNHCR had been urging Kenya to open the camp for the past two years but the government stopped work on it earlier this year, citing security concerns as one of the reasons.
UNHCR chief Antonio Guterres on Monday held talks with Kenya's Internal Security Minister George Saitoti to appeal to him to open the camp.
The BBC's Kevin Mwachiro says the announcement the camp will open could not come at a better time. He says more than 1,300 refugees are crossing into Kenya from war-torn Somalia every day.
Aid workers say conditions at the nearby Dadaab camp - which is made up of three settlements - are desperate, as about 370,000 people are crammed into an area set up for 90,000 people.
'Security threat'
On Wednesday, Kenya's Assistant Internal Security Minister Orwah Ojodeh told the BBC a new camp would not be a solution to the hunger crisis.
Instead, food relief should be provided inside Somalia as hunger, not insecurity, was the reason most refugees were heading for Kenya, he said.
Extended drought is causing a severe food crisis in the Horn of Africa, which includes Kenya, Ethiopia, Djibouti and Somalia. Weather conditions over the Pacific means the rains have failed for two seasons and are unlikely to return until September.
Food shortages are affecting up to 12 million people. The UN has not declared a famine but large areas of the region are now classified as in crisis or emergency, with malnutrition affecting up to 35-40% of children under five.
The humanitarian problem is made worse by ongoing conflicts, which means that until July militant groups had only allowed aid organisations limited access to large parts of southern Somalia and eastern Ethiopia.
Since the beginning of 2011, around 15,000 Somalis each month have fled into refugee camps in Kenya and Ethiopia looking for food and water. The refugee camp at Dadaab, in Kenya, has been overwhelmed by 370,000 people.
Farmers unable to meet their basic food costs are abandoning their herds. High cereal and fuel prices had already forced them to sell many animals before the drought and their smaller herds are now unprofitable or dying.
The refugee problem may have been preventable. However, violent conflict in the region has deterred international investment in long-term development programmes, which may have reduced the effects of the drought.
Development aid would focus on reducing deforestation, topsoil erosion and overgrazing and improving water conservation. New roads and infrastructure for markets would help farmers increase their profits.
The result of climate conditions, conflict and lack of investment is that 6.7 million people in Kenya and Ethiopia are currently existing on food rations, and relief agencies estimate 2.6 million in Somalia will need assistance a new emergency operation.
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But Immigration Minister Otieno Kajwang said he was embarrassed that the government was refusing open the Ifo II camp.
This was despite the fact that the UN had given Kenya tens of thousands of dollars for the camp, he said.
Mr Kajwang blamed the failure to open the camp on security chiefs and officials in President Mwai Kibaki's office.
"The problem is that our provincial administration [officials based in Mr Kibaki's office] and our security officers look at the huge influx as a threat to national security," he said.
"On the other hand, we see it as a crisis that must be managed. It is our responsibility under international law and our own law."
Mark Bowden, the UN humanitarian affairs co-ordinator for Somalia, told the BBC that Somalia was not yet facing a famine, but was "close" to one.
"The next few months are critical," he said.
'Breadbasket'
The BBC's Will Ross in the Kenyan capital, Nairobi, says the UN World Food Programme (WFP) is exploring every possibility to increasing its presence in Somalia.
However, the WFP says it will not be able to return to areas controlled by the militant Islamist group al-Shabab unless it receives security guarantees.
Last week al-Shabab said it was lifting its ban on foreign aid agencies, provided they did not show a "hidden agenda".
Our reporter says there is clearly a desperate need for more food distribution in Somalia.
The International Committee of the Red Cross (ICRC) is reporting a dramatic rise in malnutrition rates even in the part of Somalia normally considered to be the breadbasket of the country, our reporter says.
Somalia's Prime Minister Abdiweli Mohamed Ali told the BBC a refugee camp has opened in the capital, Mogadishu.
The government had set aside money to help drought victims, but it had "meagre" resources.
"We are appealing to the international community to take the matter seriously and to act quickly to save as many lives as we can," he told the BBC's Focus on Africa programme.
Some 10 million people are said to be affected by the Horn of Africa's worst drought in 60 years.
Somalia, wracked by 20 years of conflict, is worst affected. Some 3,000 people flee each day for neighbouring countries such as Ethiopia and Kenya which are struggling to cope.
South Sudan's Vice-President Riek Machar (r) was warmly greeted in New York 
Life and death
