Germany

The Leveraged Buyout of the GDR

Matthew Stevenson — Sat, 24 Mar 2012 09:03:47 -0400

Until the European Central Bank purchased a call option on the future assets of the Greek government (which remains out-of-the-money), the largest leveraged buyout of a sovereign state had taken place in 1990, when the West German government acquired the German Democratic Republic (GDR), thought at the time to consist largely of liabilities. By most accounts the Bonn government paid over the odds for East Germany, estimated to have cost the West more than $1 trillion.

The resulting peaceful unification of Germany has been one of the great achievements of postwar European integration. In recent months, Germany has faced the opportunity for another buy-out of a European neighbor, this time of Greece, but it has showed little appetite for the purchase. Does East Germany provide a model for the Greek bailout? ,

To take stock of what the West Germans got for their investment, my son Charles, aged 16, and I recently biked around the principle cities of the East—Dresden, Leipzig, Weimar, Potsdam, and East Berlin—that for a long time fell on the dark side of the Iron Curtain.

Berlin is unified and elegant, Dresden is a restored cultural monument, and Leipzig (where J.S. Bach lived) is a city of vast commercial and artistic ambitions. If our bike ride along the ragged edges of the Iron Curtain taught us anything, it was that the GDR was worth the money.

To get to Dresden, we loaded the bikes onto an overnight express from Basel to Prague and slept until the train joined the River Elbe, historically the frontier between Western and Eastern Europe. In the last days of World War II, American and Russian armies met on its riverbanks at Torgau, just north of Dresden.

At the end of the Cold War, the city synonymous with World War II fire bombings was a tired European backwater, with only a fraction of its royal splendors rebuilt and a trickle of Bulgarian tourists.

Starting with the main railroad station in the early 1990s, the German government has transformed Dresden into a showroom for tourists and industry. The station is elegant and grand, a hybrid of the classical and the new, and Charles and I toured an ultramodern Volkswagen plant where the VW Phaeton, a bourgeois saloon car, is assembled largely by hand.

We steered our bikes around the revived cathedral square, rolled past the elegant opera house, and wandered around the grounds of the royal palace. The city museum—like Kurt Vonnegut’s novel Slaughterhouse Five (a reference to his prisoner-of-war location, from which he witnessed the February 13, 1945 bombings)—tells how the city was engulfed in fireballs, the effect of detonating explosives detonated at an altitude of 2000 feet, which then sucked the air and life out of Dresden.

To get to Leipzig, we biked northwest along the River Elbe, through industrial suburbs, apartment complexes, shopping centers, and finally a pristine landscape of orchards, villages, and river scenes. Only occasionally did we see the remnants of the GDR, the crumbling concrete so synonymous with the central committee’s five-year plans. Otherwise, the East has been gentrified.

The 1989 revolution that brought down the Berlin Wall and the East German government started in Leipzig, with vigils in front of the Stasi headquarters and with larger rallies at the St. Nikolai Church.

The Stasi building has been preserved as a memorial to its victims. The display cabinets are arranged around the offices of the secret police, complete with exhibits of wigs, tape recorders, phone taps, uniforms, typewriters, metal desks, maps, shoe phones, and devices suitable to steam open letters.

Were its practices and legacies not alive and well in Homeland America, I would consign the Stasi to some dead-letter file, to be archived with Hitler’s SA in the dark nights of German history. The Stasi museum had the feel of an amateur theater production that had opened in East Germany and, after 9/11, moved to Broadway.

From the museum director, I bought Anna Funder’s memoir of the GDR, Stasiland. She writes: “In Hitler’s Third Reich it is estimated that there was one Gestapo agent for every 2000 citizens, and in Stalin’s USSR there was one KGB agent for every 5830 people. In the GDR, there was one Stasi officer or informant for every sixty-three people.”

In the U.S., the ratio of Homeland Security employees to the general population is one for every 1500 citizens.

Weimar is the path not taken in German history—toward representative government and the celebration of intellectual enlightenment over what Bismarck called “iron and blood.”

Charles and I found the assembly hall that lent its name to the post-World War I governments that were wiped away in the 1923 currency inflation. We rode to the houses of the poets Goethe and Schiller, each of whom found artistic freedom in the city that has the feel of a small university town, with libraries and parks. Nevertheless, the choreographers of Nazism and Communism arranged their own Weimar stage sets to tell the story that democracy leads to weakness, chaos and bankruptcy.

Potsdam and East Berlin are monuments to vanished empires. Prussia’s Hohenzollern dynasty settled on Potsdam for its imperial palaces and amusements (one ballroom we saw is lined with thousands of seashells), and East Berlin was the people’s court of Stasiland.

Funder writes of her visit to the condemned East German parliament: “Like so many things here, no one can decide whether to make the Palast der Republik into a memorial warning from the past, or to get rid of it altogether and go into the future unburdened of everything, except the risk of doing it all again.”

Riding along the remnants of the Berlin Wall, which is preserved as an art gallery in several sections, I was curious about “ostalgie”—nostalgia for the simpler ways of the GDR, absent unified Germany’s cult of material ambition.

Funder quotes a conversation about the Wall’s legacy: “It was an historical necessity. It was the most useful construction in all of German history! In European history.... Because it prevented imperialism from contaminating the east. It walled it in.”

The highlight of the ride came between Leipzig and Weimar, where we spent much of our time exploring the Napoleonic battlefields of Jena and Auerstädt, where in 1806 France doomed Prussia to the fate of a second-rate European power until Bismarck redeemed the nation in the 1870 Franco-Prussian war.

In tracking down the routes of Napoleon’s marshals, we rode through farm villages, towns, and small cities, many of which are rebuilding town squares or repainting important buildings—all part of the East German renovation. When Erich Honecker was the East German party chief, buildings were only painted up to the first floor, allegedly because that’s all he could see from the backseat of his limousine.

It was just up the road in Leipzig where Napoleon lost his empire, in the 1813 Battle of Nations. It was perhaps the first attempt at a European Union. But Austria, England, Prussia, and Russia all decided that Napoleon was a nuisance on the continent, and sent him packing to Elba—even if they had to repeat the exercise at Waterloo.

A similar coalition has tendered its offer to keep Greece in the grand alliance. Having East Germany in the money should give the EU confidence in its convictions, proof that it can be more cost effective to buy a nation than to put one through liquidation.

Photo by Matthew Stevenson. Near Leipzig, formerly in East Germany, a railroad station that will soon be renovated.

Matthew Stevenson is the author of Remembering the Twentieth Century Limited, a collection of historical essays. He lives in one of the wine regions of Switzerland. His next book is Whistle-Stopping America.

Who’s Racist Now? Europe’s Increasing Intolerance

Joel Kotkin — Mon, 18 Oct 2010 12:42:15 -0400

With the rising tide of terrorist threats across Europe, one can somewhat understandably expect a surge in Islamophobia across the West. Yet in a contest to see which can be more racist, one would be safer to bet on Europe than on the traditional bogeyman, the United States.

One clear indicator of how flummoxed Europeans have become about diversity were the remarks last week by German Chancellor Angela Merkel saying that multi-culturalism has “totally failed” in her country, the richest and theoretically most capable of absorbing immigrants. “We feel tied to Christian values,” the Chancellor said. “Those who don’t accept them don’t have a place here.”

One can appreciate Merkel’s candor but it does say something the limitations about the continent’s ability, and even willingness, to absorb immigrants. It’s quite a change from the generations-old tendency among Europeans, particularly on the left, to denigrate America as a kind of hot bed for racism. Yet even before the latest report of potential terrorist attacks in several western European cities, the center of Islamophobia – and related ethnic hatreds – has been shifting inexorably to the European continent.

Of course, America has always had its bigots, and still does. And of course, Islamists who threaten or commit violence need to be arrested and thrown behind bars. But, to date, neither major political party has been able to make openly white-supremacist politics a successful leading platform. After all, what was the last time anyone took Pat Buchanan , who has made comments similar to those of Merkel, seriously? Despite the brouhaha over the Arizona anti-illegal alien law, only 5% of Americans consider immigration the nation’s most pressing issue, according to a September Gallup poll.

The situation in Europe is quite different. Openly racist, anti-immigrant and Islamophobic groupings are on the rise, and they are wreaking havoc on once subdued European politics. Traditional mainstream parties are declining, and the new racist parties can be seen in broad daylight in Austria, Switzerland, Denmark, Sweden and the Netherlands, where populist firebrand Geert Wilders has suggested banning the Koran. In Italy the anti-immigrant Northern League is already hugely powerful.

It is true that as many Europeans as Americans–about half–think immigration is bad for their countries. The big difference is what Europeans are willing to do about it. Just consider French President Nicholas Sarkozy’s farcical effort this fall to expel the hapless Roma.

Yet for most Europeans the big issue is not purse-snatching gypsies but fear and loathing toward the expanding presence of Muslims–who are at least three times as numerous in the E.U. as in the U.S. Over half of Spaniards and Germans, according to Pew, hold negative views of Muslims. So do roughly 40% of the French. In contrast, only 23% of Americans share this sentiment.

More disturbing, Europe is actually putting these ethnic hostilities into law. An early sign came this winter, when the usually phlegmatic Swiss voted to prohibit the building of new minarets. More recently a ban on burqas – the admittedly unattractive female body suits favored by some orthodox Muslims – passed in France, home to Europe’s largest Muslim community. The same measure is now being considered in Spain.

These actions reflect a broad, and deepening, stream of European public opinion. A recent Pew survey found that over 80% of the French support banning the burqa, as do over 70% of Germans and a large majority of Spaniards and British.

In contrast, nearly two-thirds of Americans find the burqa ban distasteful. Burqas don’t exactly stir admiring glances in the shopping mall, but few Amercians think we need to ban them. The basic ideal of “don’t tread on me” means “don’t tread on them” as well – at least until they start blowing themselves up at Wal-mart.

This nuance escapes some of our own knee-jerk racial obsessives, like the Atlanta Journal Constitution’s Cynthia Tucker, who equates opposition to a mosque at Ground Zero as proof of a “new McCarthyism” aimed against Muslims. But you don’t have to be a bigot to have second thoughts about erecting a mosque at the very spot where innocents were slaughtered by radical Islamists.

Critical here are profound differences between the U.S. and Europe in the role played by ethnicity, race and religion. On the continent national culture is precisely that — the product of a long history of a particular ethnic group. Small minorities, such as Jews in Holland or Armenians in France, are tolerated but expected to submerge their ethnic identities. France has many artists and writers who may be Jewish, but you don’t see many French Woody Allens or Larry Davids who exploit their otherness to help define the national culture.

Muslim attitudes in Europe are not exactly helpful either. European Muslims often seem more interested in breaking the national mold than adding to its contours. More than 80% of British Muslims, for example, identify themselves as Muslims first before being British. This is true of nearly 70% of Muslims in Spain or Germany. Similarly, up to 40% of Britain’s Islamic population believe that terrorist attacks on both Americans and their fellow Britons are justified.

This alienation also reflects an appalling social and economic reality. In European countries immigrants can receive welfare more easily than join the workforce, and their job prospects are confined by education levels that lag those of immigrants in the United States, Canada and Australia. In France unemployment among immigrants–particularly those from Muslim countries–is often at least twice that of the native born; in Britain Muslims are far more likely to be out of the workforce than either Christians or Hindus.

Partly due to a less generous welfare state, American immigrant workers with lower educations have, for the most part, been more economically active than their nonimmigrant counterparts. The contrast is even more telling among Muslim immigrants. In America most Muslims are comfortably middle class, with income and education levels above the national average. They are more likely to be satisfied with the state of the country, their own community and their prospects for success than are other Americans—even in the face of the reaction to 9-ll.

More important still, more than half of Muslims identify themselves as Americans first, a far higher percentage than in the various countries of Western Europe. More than four in five are registered to vote, a sure sign of civic involvement. Almost three-quarters, according to a Pew study, say they have never been discriminated against–something that is definitely not the case in Europe where a majority, according to Pew, complain of discrimination.

Over time, these differences between Europe and America may become even more pronounced. America is becoming increasingly diverse, but it is also growing demographically, and Muslims make up a very small part of that. There’s little fear in Anerica of the kind of Muslim envelopment that appears to threaten a rapidly aging, and soon to be depopulating, Europe.

Of course the U.S. still has its bigoted Islamophobes, just as it has its own small cadre of vicious Islamists. One law of history appears to be that morons will be morons. But America’s culture seems strong enough to resist the anti-immigrant hysteria emerging throughout Europe. This is one case where la difference between America and Europe may prove a very good thing indeed.

This article originally appeared at Forbes.com.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo by World Economic Forum

The New World Order

Joel Kotkin — Mon, 27 Sep 2010 12:28:56 -0400

Tribal ties—race, ethnicity, and religion—are becoming more important than borders.

For centuries we have used maps to delineate borders that have been defined by politics. But it may be time to chuck many of our notions about how humanity organizes itself. Across the world a resurgence of tribal ties is creating more complex global alliances. Where once diplomacy defined borders, now history, race, ethnicity, religion, and culture are dividing humanity into dynamic new groupings.

Broad concepts—green, socialist, or market-capitalist ideology—may animate cosmopolitan elites, but they generally do not motivate most people. Instead, the “tribe” is valued far more than any universal ideology. As the great Arab historian Ibn Khaldun observed: “Only Tribes held together by a group feeling can survive in a desert.”

Although tribal connections are as old as history, political upheaval and globalization are magnifying their impact. The world’s new contours began to emerge with the end of the Cold War. Maps designating separate blocs aligned to the United States or the Soviet Union were suddenly irrelevant. More recently, the notion of a united Third World has been supplanted by the rise of China and India. And newer concepts like the BRIC nations (Brazil, Russia, India, and China) are undermined by the fact that these countries have vastly different histories and cultures.

The borders of this new world will remain protean, subject to change over time. Some places do not fit easily into wide categories—take that peculiar place called France—so we’ve defined them as Stand-Alones. And there are the successors to the great city-states of the Renaissance—places like London and Singapore. What unites them all are ties defined by affinity, not geography.

1. New Hansa

Denmark, Finland, Germany, Netherlands, Norway, Sweden

In the 13th century, an alliance of Northern European towns called the Hanseatic League created what historian Fernand Braudel called a “common civilization created by trading.” Today’s expanded list of Hansa states share Germanic cultural roots, and they have found their niche by selling high-value goods to developed nations, as well as to burgeoning markets in Russia, China, and India. Widely admired for their generous welfare systems, most of these countries have liberalized their economies in recent years. They account for six of the top eight countries on the Legatum Prosperity Index and boast some of the world’s highest savings rates (25 percent or more), as well as impressive levels of employment, education, and technological innovation.

2. The Border Areas

Belgium, Czech Republic, Estonia, Hungary, Iceland, Ireland, Latvia, Lithuania, Poland, Romania, Slovakia, U.K.

These countries are seeking to find their place in the new tribal world. Many of them, including Romania and Belgium, are a cultural mishmash. They can be volatile; Ireland has gone from being a “Celtic tiger” to a financial basket case. In the past, these states were often overrun by the armies of powerful neighbors; in the future, they may be fighting for their autonomy against competing zones of influence.

3. Olive Republics

Bulgaria, Croatia, Greece, Italy, Kosovo, Macedonia, Montenegro, Portugal, Slovenia, Spain

With roots in Greek and Roman antiquity, these lands of olives and wine lag behind their Nordic counterparts in virtually every category: poverty rates are almost twice as high, labor participation is 10 to 20 percent lower. Almost all the Olive Republics—led by Greece, Spain, and Portugal—have huge government debt compared with most Hansa countries. They also have among the lowest birthrates: Italy is vying with Japan to be the country with the world’s oldest population.

4. City-States

London

It’s a center for finance and media, but London may be best understood as a world-class city in a second-rate country.

Paris

Accounts for nearly 25 percent of France’s GDP and is home to many of its global companies. It’s not as important as London, but there will always be a market for this most beautiful of cities.

Singapore

In a world increasingly shaped by Asia, its location between the Pacific and Indian oceans may be the best on the planet. With one of the world’s great ports, and high levels of income and education, it is a great urban success story.

Tel Aviv

While much of nationalist-religious Israel is a heavily guarded borderland, Tel Aviv is a secular city with a burgeoning economy. It accounts for the majority of Israel’s high-tech exports; its per capita income is estimated to be 50 percent above the national average, and four of Israel’s nine billionaires live in the city or its suburbs.

5. North American Alliance

Canada, United States

These two countries are joined at the hip in terms of their economies, demographics, and culture, with each easily being the other’s largest trade partner. Many pundits see this vast region in the grip of inexorable decline. They’re wrong, at least for now. North America boasts many world-class cities, led by New York; the world’s largest high-tech economy; the most agricultural production; and four times as much fresh water per capita as either Europe or Asia.

6. Liberalistas

Chile, Colombia, Costa Rica, Mexico, Peru

These countries are the standard--bearers of democracy and capitalism in Latin America. Still suffering low household income and high poverty rates, they are trying to join the ranks of the fast-growing economies, such as China’s. But the notion of breaking with the U.S.—the traditionally dominant economic force in the region—would seem improbable for some of them, notably Mexico, with its close geographic and ethnic ties. Yet the future of these economies is uncertain; will they become more state--oriented or pursue economic liberalism?

7. Bolivarian Republics

Argentina, Bolivia, Cuba, Ecuador, Nicaragua, Venezuela

Led by Venezuela’s Hugo Chávez, large parts of Latin America are swinging back toward dictatorship and following the pattern of Peronism, with its historical antipathy toward America and capitalism. The Chávez-influenced states are largely poor; the percentage of people living in poverty is more than 60 percent in Bolivia. With their anti-gringo mindset, mineral wealth, and energy reserves, they are tempting targets for rising powers like China and Russia.

8. Stand-Alones

Brazil

South America’s largest economy, Brazil straddles the ground between the Bolivarians and the liberal republics of the region. Its resources, including offshore oil, and industrial prowess make it a second-tier superpower (after North America, Greater India, and the Middle Kingdom). But huge social problems, notably crime and poverty, fester. Brazil recently has edged away from its embrace of North America and sought out new allies, notably China and Iran.

France

France remains an advanced, cultured place that tries to resist Anglo-American culture and the shrinking relevance of the EU. No longer a great power, it is more consequential than an Olive Republic but not as strong as the Hansa.

Greater India

India has one of the world’s fastest-growing economies, but its household income remains roughly a third less than that of China. At least a quarter of its 1.3 billion people live in poverty, and its growing megacities, notably Mumbai and Kolkata, are home to some of the world’s largest slums. But it’s also forging ahead in everything from auto manufacturing to software production.

Japan

With its financial resources and engineering savvy, Japan remains a world power. But it has been replaced by China as the world’s No. 2 economy. In part because of its resistance to immigration, by 2050 upwards of 35 percent of the population could be over 60. At the same time, its technological edge is being eroded by South Korea, China, India, and the U.S.

South Korea

South Korea has become a true technological power. Forty years ago its per capita income was roughly comparable to that of Ghana; today it is 15 times larger, and Korean median household income is roughly the same as Japan’s. It has bounced back brilliantly from the global recession but must be careful to avoid being sucked into the engines of an expanding China.

Switzerland

It’s essentially a city-state connected to the world not by sea lanes but by wire transfers and airplanes. It enjoys prosperity, ample water supplies, and an excellent business climate.

9. Russian Empire

Armenia, Belarus, Moldova, Russian Federation, Ukraine

Russia has enormous natural resources, considerable scientific-technological capacity, and a powerful military. As China waxes, Russia is trying to assert itself in Ukraine, Georgia, and Central Asia. Like the old tsarist version, the new Russian empire relies on the strong ties of the Russian Slavic identity, an ethnic group that accounts for roughly four fifths of its 140 million people. It is a middling country in terms of household income—roughly half of Italy’s—and also faces a rapidly aging population.

10. The Wild East

Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan

This part of the world will remain a center of contention between competing regions, including China, India, Turkey, Russia, and North America.

11. Iranistan

Bahrain, Gaza Strip, Iran, Iraq, Lebanon, Syria

With oil reserves, relatively high levels of education, and an economy roughly the size of Turkey’s, Iran should be a rising superpower. But its full influence has been curbed by its extremist ideology, which conflicts not only with Western countries but also with Greater Arabia. A poorly managed economy has turned the region into a net importer of consumer goods, high-tech equipment, food, and even refined petroleum.

12. Greater Arabia

Egypt, Jordan, Kuwait, Palestinian Territories, Saudi Arabia, United Arab Emirates, Yemen

This region’s oil resources make it a key political and financial player. But there’s a huge gap between the Persian Gulf states like Saudi Arabia and the United Arab Emirates and the more impoverished states. Abu Dhabi has a per capita income of roughly $40,000, while Yemen suffers along with as little as 5 percent of that number. A powerful cultural bond—religion and race—ties this area together but makes relations with the rest of the world problematic.

13. The New Ottomans

Turkey, Turkmenistan, Uzbekistan

Turkey epitomizes the current reversion to tribe, focusing less on Europe than on its eastern front. Although ties to the EU remain its economic linchpin, the country has shifted economic and foreign policy toward its old Ottoman holdings in the Mideast and ethnic brethren in Central Asia. Trade with both Russia and China is also on the rise.

14. South African Empire

Botswana, Lesotho, Namibia, South Africa, Swaziland, Zimbabwe

South Africa’s economy is by far the largest and most diversified in Africa. It has good infrastructure, mineral resources, fertile land, and a strong industrial base. Per capita income of $10,000 makes it relatively wealthy by African standards. It has strong cultural ties with its neighbors, Lesotho, Botswana, and Namibia, which are also primarily Christian.

15. Sub-Saharan Africa

Angola, Cameroon, Central African Republic, Congo-Kinshasa, Ethiopia, Ghana, Kenya, Liberia, Malawi, Mali, Mozambique, Nigeria, Senegal, Sierra Leone, Sudan, Tanzania, Togo, Uganda, Zambia

Mostly former British or French colonies, these countries are divided between Muslim and Christian, French and English speakers, and lack cultural cohesion. A combination of natural resources and poverty rates of 70 or 80 percent all but assure that cash-rich players like China, India, and North America will seek to exploit the region.

16. Maghrebian Belt

Algeria, Libya, Mauritania, Morocco, Tunisia

In this region, spanning the African coast of the Mediterranean, there are glimmers of progress in relatively affluent countries like Libya and Tunisia. But they sit amid great concentrations of poverty.

17. Middle Kingdom

China, Hong Kong, Taiwan

China may not, as the IMF recently predicted, pass the U.S. in GDP within a decade or so, but it’s undoubtedly the world’s emerging superpower. Its ethnic solidarity and sense of historical superiority remain remarkable. Han Chinese account for more than 90 percent of the population and constitute the world’s single largest racial-cultural group. This national cultural cohesion, many foreign companies are learning, makes penetrating this huge market even more difficult. China’s growing need for resources can be seen in its economic expansion in Africa, the Bolivarian Republics, and the Wild East. Its problems, however, are legion: a deeply authoritarian regime, a growing gulf between rich and poor, and environmental degradation. Its population is rapidly aging, which looms as a major problem over the next 30 years.

18. The Rubber Belt

Cambodia, Indonesia, Laos, Malaysia, Philippines, Thailand, Vietnam

These countries are rich in minerals, fresh water, rubber, and a variety of foodstuffs but suffer varying degrees of political instability. All are trying to industrialize and diversify their economies. Apart from Malaysia, household incomes remain relatively low, but these states could emerge as the next high-growth region.

19. Lucky Countries

Australia, New Zealand

Household incomes are similar to those in North America, although these economies are far less diversified. Immigration and a common Anglo-Saxon heritage tie them culturally to North America and the United Kingdom. But location and commodity-based economies mean China and perhaps India are likely to be dominant trading partners in the future.

This article originally appeared in Newsweek.

Legatum Institute provided research for this article.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University and an adjunct fellow with the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Illustration by Bryan Christie, Newsweek

G-20 Summit: There is No One Size Fits All

Susanne Trimbath — Fri, 25 Jun 2010 12:42:44 -0400

There is one thing you need to remember as you listen to the debate about economic and fiscal policy at the G-20 Summit this weekend in Toronto: There is No One-Size-Fits All. There is not even a “One-Size-Fits Twenty.”

Back in 2001, I summarized the few things about finance and economics that most scholars agree will support a growing economy and healthy capital markets:

“Four strategies can be shown to generally promote stable national financial systems: 1) having independent rating agencies; 2) having some safety net; 3) minimizing government ownership and control of national financial assets; and 4) allowing capital market participants to offer a wide-range of services.”

As of today:

1) Our rating agencies are independent of government, but not from the financial institutions who buy the ratings (who also buy the government, but I’ll leave that story to Matt Taibbi over at Rolling Stone …); 2) we bankrupted the Federal Deposit Insurance Corporation in late 2009, before the end of the recession (and that doesn’t even count all the bailouts of Wall Street and Main Street); and 3) the government took ownership positions in all US major financial institutions during the bailout.

I’ll come back to #4 to another time – Congress has vowed to ruin even that one before the 4th of July recess by passing the Wall Street Reform Act.

The United States delegation to the G20 Summit consists of President Obama, his economic advisor Larry Summers and (your friend and mine) Treasury Secretary Tim Geithner. At least one of them should know better than to go around insisting that every nation at the meeting should have the same policy as the United States: damn the torpedoes, full speed ahead! In other words, just as Federal Reserve Chairman Ben Bernanke is firing up the helicopters, keep dropping dollar bills on the economy until something starts growing. In a letter sent to the G-20 leaders in advance of the Summit in Toronto, they made it clear that the rest of the G-20 countries should do the same. While President Obama writes in the letter that the G-20 should “commit to restore sustainable public finances in the medium term” the underlying context is that there should be more fiscal stimulus in the short term.

I’m not the only economist to have said this before: When it comes to developing robust capital markets and a vibrant economy, there is no "one size fits all". This lesson should be familiar to the US delegation. To make it clear, let’s look at the numbers.

	2000	2001	2002	2007	2008	2009
Consumer Inflation Rate
Canada	2.7%	2.5%	2.3%	2.1%	2.4%		0.2%
France	1.7%	1.7%	1.9%	1.5%	2.8%		0.4%
Germany	1.5%	2.0%	1.4%	2.3%	2.6%		0.0%
United Kingdom	2.9%	1.8%	1.6%	4.3%	4.0%		2.2%
United States	3.4%	2.8%	1.6%	2.9%	3.8%		-0.4%

Economic Growth Rate
Canada	5.2%	1.8%	2.9%	2.7%	0.4%		-2.5%
France	3.9%	1.9%	1.0%	2.3%	0.4%		-2.2%
Germany	3.2%	1.2%	0.0%	2.5%	1.3%		-5.0%
United Kingdom	3.9%	2.5%	2.1%	3.0%	0.7%		-4.8%
United States	3.7%	0.8%	1.6%	2.0%	0.4%		-2.4%

The numbers in question are 2007 through 2009, those associated with the current recession. I include 2000-2002 in the table to show what happened in the last recession, for a little perspective. The players in question are US, UK, France and Germany – I include Canada as a courtesy because they are the host country for the summit,. The first thing you’ll notice is that the US is the only one among the group that did not see positive prices increases last year – hence, their continued willingness to employ the cash-dropping helicopters.

French Finance Minister Christine Lagarde is outspoken this week on the subject of getting the federal budget under control in France instead of expanding economic stimulus programs: she believes what’s best for France is to get the deficits under control, which means reducing the budget and not more spending. On this one, I’m with Minister Lagarde: Vive La Différence!

There’s one more thing you need to know about economic growth and that is this: It takes more than a 2.4% increase to make up for a 2.4% decrease. Think of this way: if you start at 1,000 and reduce by 50%, you are left with 500. Now, at 500 if you get a 50% increase, you are only back to 750. To get from 500 back to 1,000, you need a 100% increase. As I wrote back in January: “At this rate, it will take 11 quarters (nearly 3 years) to catch up.” More government spending, however, will not provide a healthy long-term solution.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. She will be participating in an Infrastructure Index Project Workshop Series throughout 2010. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

Photo by carlossg

The Downside of Brit-Bashing

Joel Kotkin — Wed, 16 Jun 2010 15:56:12 -0400

Obama may be spanking BP’s brass today. But the other crisis—Europe’s economic mess—reminds us why it’s important that the U.S. and U.K. stick together.

The controversy over the BP spill threatens to drive US-UK relations to a historic low point. When recently in London, several people worried that the President may be engaging in “Brit-bashing” at the expense of our historically close ties. This theme has been widely picked up in the UK press.

“It’s the gushing geyser of Obama's anti-British rhetoric,” screams Melanie Phillips this week in the Daily Mail,” that now urgently needs to be capped.” Indeed, however much President Obama wants to beat up the Tony Hayward, who certainly deserves to be both tarred and feathered, he might want to consider how “Brit-bashing” may not be in our long-term interest. This is particularly true at a time hat the world’s other big crisis—the collapse of the euro—offers a unique opportunity to shore up our now beleaguered “special relationship.”

The British Empire may be little more than a historical relic, but the current euro crash could make those old ties between mother country and her scattered former colonies, including America, more alluring. After a decade marked by sputtering movement towards greater integration with Europe, the United Kingdom, particularly its beating heart—London—might be ready to drift away from the continent and back towards America and Canada and the rest of the world beyond.

This process will be accentuated by the fact that while Europe’s population and economy, particularly on its southern and eastern tiers, seems set to decline even further, the future of North America—largely due to mass immigration and its large resource base—continues to appeal to British investors and companies. In addition, the rise of other parts of the world, notably Russia, India and China, suggests that Britain’s future, like that of North America, rests increasingly outside of Europe.

Social forces in Britain today will accentuate these trends. In London today you do hear many European languages, but the big money you see around posh places in Mayfair more often speaks not Italian or French, or even German, but Hindi, Arabic , Russian and, increasingly, Chinese. London today is not so much a British city as a global one, with a percentage of foreign-born residents—roughly one-third—equivalent to that of such prominent American multi-racial capitals as New York or Los Angeles.

Just take a look at the over 200,000 people who became UK citizens last year, up from barely 50,000 annually a decade earlier. The EU accounted for barely three percent of the total; all of Europe, including the former Soviet bloc, represented eight percent. In contrast the biggest source of new subjects was from the Indian subcontinent—roughly 30%—and Africa, which provided another 27 percent.

This ethnic transformation—much like the one taking place and widely celebrated by Obamanians in the United States—helps tie Britain, despite its proximity to the continent, more to the rest of the world. The UK may not be ready for its own version of Barack Obama, but a post-European future seems increasingly likely through ties of both blood and money. To be sure, in the coming year the level of immigration may decline under the Tories, whose party competes for voters with nativist groups. But economics—and the disastrous state of the Euro—may prove an even larger factor in the country’s transformation.

Already there is growing concern that the sovereign debt issues of places like Greece, Spain, Italy and Portugal—the so-called swilling PIGS—could force Britain, with its already weak economy, to raise interest rates and cut its budgets more than might be advisable. Last month London’s FTSE 100 has lost fifteen percent of its value as a result of the euro crisis, a steep fall made only marginally tolerable by the even worse results on the continent. Future euro-moves could prove even more threatening. Wide ranging attacks on financial speculation, so popular in an increasingly hegemonic Germany, are like a gun aimed at Britain’s economic core. After all, the UK’s exports are built not around cars, steel or fashions but its role as the world’s banker, consultant and business media center. “The euro zone,” complains one columnist in the right-leading Daily Telegraph, “may be leading us into a double-dip recession.”

But declining euro-enthusiasm is not limited to those considered conservative “nutters” by Britain’s continentally-minded sophisticates. You don’t have to be an unreconstructed Thatcherite to resist tying the country to the future feeding of widely irresponsible “Club Med” countries or kowtowing to Berlin. Rather than the Germans and their PIGS, Britain may be better off linking with both the BRIC countries—Brazil, Italy, India and China—as well as a rebounding North America.

As the ultimate capitalist entrepot, Britain’s trump lies in being hugely attractive to Americans. In this respect, beating up BP, however justified, may also be squandering an opportunity to solidify a relationship that is needed on so many fronts from battling Islamic extremism—the Brits and the Canadians are our only strong reliable allies—to preventing German-style controls over the global entrepreneurial economy.

Herein lies our opportunity. Although not “anti-European,” Britons tend to be “deeply skeptical about the institutions of the European Union,” notes Steve Norris, a former MP, onetime chairman of the ruling Conservative party and two times that party’s candidate for Mayor of London. As he puts it: “The British do not want a federal Europe in which significant powers pass from sovereign parliaments to Brussels.”

Although Labour also resisted rapid integration into Europe, the current government under the new Prime Minister David Cameron, Norris notes, has made it clear that it is even more resistant to this trend. This may prove an embarrassment to Cameron’s historically Europhile deputy prime minister, the Liberal Independent’s Nick Clegg, but the movement away from Europe seems increasingly inevitable.

For one thing, the future of the euro may depend on expanding Brussels’ control of member nation’s budgets, something few British MPs of any party are likely to embrace. Attempts by France and Germany to expand the power of Brussels to save the Euro are likely to chase away even the most devoted Europhiles in Britain.

All this is good news for a strengthened US-UK alliance—something that should not be threatened by excessive “Brit bashing.” For all its many shortcomings, Great Britain remains one of the globe’s great outposts of both civilization and dynamic market capitalism. Its economic power may be a shadow of what it once was, but its cultural, political and role as a transactional center keep the place globally relevant.

A Britain both more Atlanticist and global also can play a more positive role by adding its weight to ours in slowing a shift to protectionism, battling terrorism and in resisting the now ballyhooed trend towards state-based capitalism. And that would bode well for Britain itself, allowing the country to play to fundamental strengths that derive from its unique historical legacy.

This article originally appeared in The Daily Beast.

Photo by Public Citizen

Contemporary China's Mirror Image: Imperial Germany

KirkRogers — Sun, 25 Apr 2010 01:38:54 -0400

China has emerged as the bad boy on the global scene, pushing around executives at Rio Tinto, attacking Google, and humiliating Barack Obama at the Copenhagen Climate Talks. Speculation is growing about China’s rising power and the country’s leaders are displaying a discouraging sense of hubris. There is growing fear that the autocratic Middle Kingdom will soon dominate the world.

These fears have parallels with another rising power of a century ago: Imperial Germany. Both emerged quickly on the global scene and did so with an enormous chip on their shoulders. Like China today, Germany was a little late coming to the industrial revolution, though its cultural contribution to European civilization and in turn to American civilization was enormous (Ralph Waldo Emerson was passionate student of Goethe). Only after its final unification and triumph over the French in the Franco-Prussian War of 1871 could Otto von Bismarck, the great 19th century pragmatist, force Germany’s sundry states into union.

Again like China, once united and in control of its own destiny, Germany grew quickly, harboring ever more delusions about its place in the sun. In the years leading to the First World War Wilhelm I, the competent Bismarck confidant, died of cancer. This allowed vainglorious Wilhelm II to assume the mantle of the state in 1888. Prussian militarism by then was backed by a massive industrial machine operating in complete fealty to the state. Germany’s new Emperor and his clique felt that it had something to prove.

China, once the most advanced nation on earth, similarly has a passel of historical resentments ranging from the Opium War to the complete denigration of its standing in the world. Like Germany, China has viewed itself as an advanced culture whose time had now arrived. Like Germany in the late 19th Century, it has incorporated technologies from others about as fast as it could get its hands on them.

When Deng Zhao Ping awoke China from its Maoist/Stalinist nightmare that ripped through the country under the guise of the Cultural Revolution, they were confronted with the disintegration of communist governments around the world. Chinese leaders knew that the only way to for them to hold power was to have their economy grow. This approach parallels the economic pragmatism in late Imperial Germany under Bismarck and the Hohenzollerns, who pushed economic growth as a means of promoting social welfare while simultaneously doing all they can to consolidate power in their hands. Bismarck created the first social security system not out of a deep seated concern for the proletariat but to emasculate the socialist party.

China by the same token has not adopted capitalism because they want to move the country towards rule of law and greater democracy but as a means of justifying their continued presence at the country’s helm. China, much like Imperial Germany, has witnessed unbelievable growth because of these centralized policies.

On the eve of WWI, Germany was the second largest economy in the world after shooting ahead of Britain and trailing America. China just accomplished a similar feat in an even shorter time frame. China passed contemporary Germany a couple of years ago and is poised to do so with Japan in the coming year. China is cultivating a modern-style imperial prescence in Iran, Africa and Latin America in an effort to secure the natural resources that the country lacks much like Germany did. Ironically, China is doing more to raise living standards in Africa than any western aid program has been able to do.

German industrial bosses were elites, most bore the titles of nobility. China’s bosses have been compared to the Emperor’s corrupt courtesans. The vast wealth of the Thyssen and Krupp steel dynasties can still be seen today in the massive industrial museums lining the Ruhr Valley. As in Imperial Germany, the military dominates large swaths of the economy. Germany in the late 19th and early twentieth century used its coal and iron resources to build the munitions factories that lined the despoiled Ruhr and Rhine. Holding even tighter on the reigns, China has developed an a strong state-dominated economy, forcing, for example, foreign firms to enter a joint venture with a state-owned corporation, which will quickly steal what it can of the western company’s intellectual property.

The two governments bear disturbing similarities. Germany also had a vast bureaucracy attempting to tamp down any sedition amongst its masses. China is doing much the same. The most interesting parallel however is the rampant nationalism propagated in both Imperial Germany then and contemporary China.

Of course, there are also some significant differences. China, for example, is much larger than Germany ever was. China is also not necessarily as instinctively expansionist . But it is extremely sensitive when it comes to Taiwan. The kerfuffle over arms sales to Taiwan last month provides more than enough evidence of this. Germany also had territories that it got very sensitive about as well. China’s attitude towards Taiwan and Tibet echoes the Kaiser’s sentiment towards occupying Strasbourg along the French border.

Is China going to attack its neighbors and plunge the Pacific Rim into World War Three? It seems highly unlikely. China still has a lot of growing left to do. Large swaths of the peasantry are still stumbling along at poverty levels. China is also well aware of the US military’s ability to project force should it try to attack Taiwan.

China may want to occupty Taiwan and there is none of the rhetoric among the leadership cadre about the need for Lebensraum that dominated conversations in German salons before the Great War. China’s leadership also appears far more competent than that of late Imperial Germany. But this may have to do with dumb luck. The Hohenzollerns up until Wilhelm II were all competent leaders. Could China be so unlucky as well? Could one idiot weasel his way up through the CP ranks? Who knows?

China has serious problems with restive minorities and a growingly arrogant and repressive regime. It has industrial might, a massive resentment of western powers and a desire to get its own place in the sun. It does not have the same geographical pressures that Germany had and it is still not in any position to take on the US in the military theater and its rulers realize that. Though its economy is inflating, much of the population living below the poverty line.

So far the technocrats over the last thirty years have been freakishly capable and have generally done a good job. The real trial of China’s claim to its place in the sun will be when a blustering fool like Kaiser Wilhelm weasels his way into the party chairmanship. Just as Germany was powerless to dispose of its ill-suited leader, China may very well be as well. If that happens, God help us all.

Kirk Rogers resides in Bubenreuth on the outer edges of Nuremberg and teaches languages and Amercan culture at the University of Erlangen-Nuremberg's Institut für Fremdsprachen und Auslandskunde. He has been living in Germany for about ten years now due to an inexplicable fascination with German culture.

Photo by Artshooter

America's European Dream

Joel Kotkin — Tue, 16 Feb 2010 00:35:25 -0500

The evolving Greek fiscal tragedy represents more than an isolated case of a particularly poorly run government. It reflects a deeper and potentially irreversible malaise that threatens the entire European continent.

The issues at the heart of the Greek crisis – huge public debt, slow population growth, expansive welfare system and weakening economic fundamentals – extend to a wider range of European countries, most notably in weaker fringe nations like Portugal, Italy, Ireland, Greece and Spain (the so-called PIIGS). These problems also pervade many E.U. countries still outside the Eurozone in both the Baltic and the Balkans.

But things are also dicey in some of the core European powers, notably Great Britain, which has soaring debt, high unemployment and very slow growth. Even solvent economies like France, the Netherlands and the continental superpower, Germany, have fallen short of expectations and are expected to experience meager growth for the rest of the year.

Europe's poor performance undermines the widespread view held by left-leaning American pundits, policy wonks and academics about Europe's supposedly superior model. This Euro-philia has a long history, going back at least to the Tories during the Revolution. In better times America usually moves beyond European norms instead of retreating to its cultural mother.

When the U.S. hits a rough spot, however, there's a ready chorus urging us to emulate the old continent. During the psychological meltdown that accompanied the Vietnam War, some pundits looked longingly at the relatively peaceful and increasingly affluent Europe as a role model. "There is much to be said for being a Denmark or Sweden, even a Great Britain, France or Italy," Andrew Hacker said in 1971.

In the 1980s, as the country struggled to recover its historic competitiveness, numerous pundits suggested adopting European models, notably French and German, to restore our economic standing – a notion widely echoed by Euro-nationalists such as former French President Francois Mitterand's eminence grise, Jacques Attali.

Two decades later, with the U.S. reeling from the Great Recession, there's been a rebirth of euro-mania. Author Parag Khanna, for his part, envisions a "shrunken" America that is lucky to eke out a meager existence between a "triumphant China" and a "retooled Europe." And Jeremy Rifkin, in his The European Dream, promotes the continent as a morally preferable model – more egalitarian, open and environmentally sensitive – a sentiment recently echoed in my old New America colleague Steven Hill's Europe's Promise: Why the European Way Is the Best Hope in an Insecure Age.

Yet over the past four decades Europe's core economies – the E.U. 15 – have lagged behind the U.S. in terms of both gross domestic product and job growth. Overall, the E.U. 15's share of the global GDP has declined to 26% from 35% while the U.S. has held on to its share, now roughly equal to that of its European counterparts. The big winners, of course, have been in East and South Asia.

Some of this has to do with the difficulties of maintaining an elaborate welfare state. In a productive, efficient and still largely homogeneous country such as the Netherlands or Sweden, an expansive system of social insurance and a vast public sector remains an affordable luxury.

In contrast, countries like Portugal, Greece and to some extent Spain have tried to create a Scandinavian-style welfare state based on Banana Republic economies. In addition, over-reliance on tourism and real estate speculation has proved no more viable there than in places like Las Vegas or Phoenix.

Europe's problems may prove even more profound in the long term. For example, Europe has some of the lowest birthrates in the world. Among 228 countries ranked in terms of birthrate, Europe accounts for 20 of the bottom 28. These include relatively prosperous Germany (No. 226) and Sweden as well as a range of the shaky fringe including Greece, Bosnia, Hungary, Latvia, Italy, Portugal and Spain.

The shrinking population problem is complicated by the fact that the one growing source of new Europeans consists of Muslim immigrants who generally have not integrated well into continental society. Many European countries – Denmark, the Netherlands and Switzerland, for example – are taking steps to shut their doors, something that may promote harmony and security but could exacerbate the long-term demographic decline.

With their state-driven economies pledged largely to support a growing population of aging boomers, it's hard to see what new sources of growth will propel the continent in the coming decades. Overall, according to the European Central Bank, the Eurozone's growth potential is now roughly half that of the United States.

Meager economic growth may also be affecting one of Europe's greatest achievements: its relative egalitarianism. The trend toward greater inequality, earlier evident in the U.S., has now spread to Europe, including such famously "egalitarian" countries as Finland, Norway and Germany, which was the only E.U. country to see wages fall between 2000 and 2008.

In Berlin, Germany's largest city, unemployment has remained far higher than the national average, with rates at around 15%. One quarter of the workforce earns less than 900 euros a month. In Berlin, 36% of children are poor, many of them the children of immigrants. "Red Berlin," with its egalitarian ethos, notes one left-wing activist, has emerged as "the capital of poverty and the working poor in Germany." [i]

As in the U.S., the burden of recession has fallen most heavily on younger people. An OECD analysis found that older European workers enjoyed the best gains during the past 30 years, while children and young people fared worse. For E.U. workers under 25 the unemployment rate is well over 20%, slightly higher than that of the U.S. but a remarkable statistic given the far less rapid expansion of the European workforce.

The situation is particularly dire in Europe's exposed southern tier. Young people who rioted in Athens in 2008 suffer unemployment rates in excess of 25%. By the end of 2009 unemployment for those under 25 stood at 44% in Spain and 31% in Ireland. Even in Sweden the youth unemployment rate has reached 27%.

If the pattern of the last decade holds, many of Europe's most talented young people will end up in the U.S., particularly once the recession comes to an end. By 2004 some 400,000 European Union science and technology graduates were residing in the U.S. Barely one in seven, according to a recent European Commission poll, intends to return. "The U.S. is a sponge that's happy to soak up talent from across the globe," observes one Irish scientist.

Of course, there is still much we can learn from Europe. Besides a sometimes enviable lifestyle, Europeans offer some intriguing health care models and have led the way in efficient fuel economy standards. But overall, profound differences in demographics and cultural traditions suggest that America cannot easily follow a European approach to social organization and planning.

Indeed as the U.S. and Europe confront the challenge of the rising Asian powers, their approaches likely will have to diverge. To maintain its economy and pay its debts, America will have to focus on creating jobs and opportunities for a growing population. Europeans will struggle with declining workforces, radically skewed demographics and an increasingly burdensome welfare state.

In the 21st century we will witness not so much a clash of civilizations, but a more subtle parting of the ways. Americans need to choose a path that makes sense for us, not one drawn from an aging society whose future seems unlikely to match its past achievements.

[i] "Income inequality and poverty rising in most OECD countries," OECD, Oct. 21, 2008; Nicholas Kulish, "In German Hearts, a Pirate Spreads the Plunger Again," New York Times, Nov. 6, 2008; Sally McGrane, "Berlin's Poverty Protect It From Downturn," Spiegel on line, March 4, 2009; Emma Bode, “Unemployment and poverty on the rise in Berlin," World Socialist Web Site, Aug. 30, 2008

This article originally appeared at Forbes.com.

Photo: leucippus @Flickr

Let Freedom Ring: Democracy and Prosperity are Inextricably Linked

Joel Kotkin — Tue, 27 Oct 2009 00:28:49 -0400

With autocratic states like China and Russia looking poised for economic recovery, it's often hard to make the case for ideals such as democracy and rule of law. To some, like Martin Jacques, author of When China Rules, autocrats seem destined to rule the world economy.

A columnist for the Guardian, Jacques predicted that by 2050 China will easily surpass America economically, militarily and politically. The belief in the power of autocracy even extends to such leading American capitalists as Warren Buffett and Bill Gates, who have nothing but high praise for what Gates enthusiastically describes as a "brand-new form of capitalism."

Fortunately a new study released Monday by my colleagues at the Legatum Institute refutes the notion that the road to worldly riches lies in autocracy and repression. In a careful study of everything from economic opportunity, education and health to security, freedom of expression and societal contentment, the Legatum "Prosperity Index" makes a powerful case for the long-term benefits of democracy, free speech and the rule of law.

Some of this stems from how Legatum measures prosperity. The survey takes into account both wealth and well-being, and finds that the most prosperous nations in the world are not necessarily those that just have a high GDP, but that also have happy, healthy, free citizens.

The top of the list, which ranks 104 countries, is dominated by flourishing democracies. The only exception in the top 20 is No. 18's Hong Kong, which ranks first in economic fundamentals and continues to be ruled, if not quite democratically, under a far more permissive system than the rest of mainland China. The next semi-autocratic state on the list is Singapore, at No. 23 – another Confucian-style autocracy with great economic and human capital fundamentals.

This linking of democracy and prosperity with well-being is by far the most significant aspect of the study. But what else determines the success of nations in the modern world?

1. Small democracies do best.

The denizens of the Greek city-states or their Renaissance counterparts would have recognized something of themselves in the small, well-managed countries that dominate the top of the list. The top five, Finland, Switzerland, Sweden, Denmark and Norway – as well as the Netherlands at No. 8 – certainly fit this description. These countries rank highly on the quality of life measurements, and, not surprisingly, their main cities also tend to dominate the most-livable-cities lists. With the exception of Switzerland and the Netherlands, these places do not perform as well in terms of basic economics, scoring between 10th and 18th. Although some might ascribe these rankings to successful social democratic policies, virtually all these mini-states have instated significant market-oriented reforms in recent years.

Other top players Australia (No. 6) and Canada (No. 7) are far larger than their European rivals. And though their citizens are not as socially coddled as in Scandinavia, they enjoy strong democratic institutions, high levels of social well-being and good governance and education.

And in purely economic terms Australia and Canada boast better economic fundamentals than the Scandinavian countries. One reason may be their enormous stockpiles of natural resources, now in high demand from countries like China and India. These countries also benefit by a large and often skilled migration from these and other Asian countries.

2. Among the mega-countries, the U.S. is still way ahead

Don't cry for me, America. In terms of the large countries, both in population and size, no one comes close to the No. 9-ranked U.S. Indeed there's not another country with over 100 million people on the list until you get to Japan at No. 16.

Like all big countries, America is a complicated place, with distinct areas of strength as well as disturbing weaknesses. The U.S. leads all countries in entrepreneurship and innovation and ranks second in the stability of its democratic institutions – the Swiss are No. 1. Less than optimal health and safety rankings, however, push America from the top. Its economic fundamentals are also sub-prime, ranking only 14th, which isn't surprising in light of persistent current account and now government deficits.

Despite its problems, the U.S. still outperforms its other large rivals, not only Japan but also the U.K. (No. 12), Germany (No. 14) and France (No. 17). Yet judged within the ranks, all four of these economies have to be considered successful in terms of delivering prosperity and a reasonably high quality of life to their citizens.

3. Breaking down the BRICs

The Index's most fascinating findings can be found a bit further down. The focus of the world's economy has been shifting to countries that have been – and in some cases remain – governed by Communist, military or single-party dictatorships.

Democracy's efficacy can be seen clearly in success enjoyed by the former European Communist states – the Czech Republic, Poland, Latvia, Estonia, Slovakia and Hungary – all of which land in the first third of the ratings. Similarly, Taiwan (ranked 24th) and South Korea (26th), long ruled by military-dominated dictatorships, show how democratization and rising prosperity can flourish together.

This pattern can also be seen among the "big boys" of the economic upstarts – the so-called BRIC countries. Here the leaders of the pack are both functioning democracies, Brazil (No. 41) and India (No. 45). These rapidly growing economies are kept out of the top tier by significant shortcomings in vital fields such as education, health and public safety.

The other two BRIC powers, China and Russia, neither of which can be considered anything close to open societies, lag behind. Russia's mineral wealth gets it a respectable 39th in economic fundamentals, but a lack of democracy, personal freedom and personal safety – as well as poor governance and corruption – drags it down to a paltry 69th. China, ranked a disappointing No. 75, also performs admirably on economic fundamentals, clocking in at No. 29, but is hammered for glaring shortfalls in democracy, personal freedom and governance as well as health and education.

4. Autocracy may seem to pay, but not in the long run

Throughout modern history, autocracy has proved effective in sparking fast growth, but a pervasive democratic deficit, poor governance and lack of personal freedom seem likely to constrain long-term progress. For one thing, the ruling elite in the dictatorship is under no strong compulsion to adjust to the needs of its population. Short of forestalling outright rebellion, nest-feathering tends to gain the upper hand.

As you get to the bottom of the list, the price of dictatorship rises higher still. In this nether-region, there is nary a democratic state. Some of the low-ranking Third World countries are obvious – like Cameroon (No. 100) or Yemen (No. 101) – but some potentially rich but despotically ruled nations do poorly as well.

Take, for example, No. 94 Iran, a country with enormous natural resources, a well-educated population and a rich cultural heritage. A reasonably enlightened Iran would likely sit in the top third of the list instead of skipping toward the bottom.

Even the bottom-ranked country, Zimbabwe, left its colonial period with a thriving agriculture sector and great mineral wealth. Here again despotic rule has shown itself an adept destroyer of economic promise.

In these times of acute self-doubt not only in America but across the democratic world, the Legatum ratings validate the idea that if democracy is not the inevitable wave of the future it represents by far the most efficient way to manage a society. In the end, democracy and prosperity prove not two distinct elements, but, in fact, inextricably linked to each other.

This article originally appeared at Forbes.com.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His next book, The Next Hundred Million: America in 2050, will be published by Penguin Press early next year.

Our Euro President

Joel Kotkin — Tue, 13 Oct 2009 00:30:38 -0400

Barack Obama's seemingly inexplicable winning of the Nobel Peace Prize says less about him than about the current mentality of Europe's leadership class. Lacking any strong, compelling voices of their own, the Europeans are now trying to hijack our president as their spokesman.

There's a catch, of course. In their mind, Obama deserves the award because he seems to think, and sound, like a European. In everything from global warming to anti-suburbanism to pacifism, Obama reflects the basic agenda of the continent's leading citizens--in sharp contrast to former President George W. Bush.

Indeed it's likely that if Obama wanted to run for presidency of the E.U., he could mail it in. Unfortunately for him, he presides over a country that faces a very different future from that of Europe.

This is not to say we cannot learn from Europe in certain areas--namely fuel economy and health care. Republicans dropped the ball on both of these issues, and as a result both our health care system and automobile efficiency pale next to those of the continent.

Still, the reality is that America and Europe are very different, which would necessitate disparate policy approaches. Our growing divergence with Europe spans everything from demographics to economic needs and basic values. In all these areas, the gap is likely to increase over time.

This is why the Obama Administration's Europhilia, now likely to become more pronounced, represents a dangerous temptation. For one thing, Europe's generally ultra low birth rates--compared with those in the U.S.--imposes structural limits on how their economies can grow and even if they even need growth.

If our core problems come from over-consumption and irrational financial-sector exuberance, Europe's sluggishness stems from the lack of an expanding workforce and consumer base. This means Germany--by far the most important E.U. country in terms of population and gross domestic product--must rely on exports to maintain its generally slow growth rate. More important, as the current generation in their 50s retire, the workforce is likely to shrink dramatically in almost all European countries, making even modest growth difficult.

In a rapidly aging society like Germany's and those of other E.U. countries you can make a case for slow growth, limited work hours, early retirement and a strict regulatory regime. But for America, with its growing workforce and population, slow economic growth simply is not socially sustainable.

More broadly, we are talking about two different mindsets. As one writer puts it, Europeans "emphasize quality of life over accumulation" and "play over unrelenting toil." In contrast, most Americans seem ill-disposed to relax their work ethic, which has been central to the national character from its earliest days.

Of course, the European approach is celebrated by some Americans, particularly those who already have achieved a high level of affluence. It plays very well in "little Europes" of America, cities like San Francisco, Portland and Boston, places with relatively few children and generally slow-growing populations.

But most Americans do not seem ready for a lifestyle buffeted by regulations and limitations. Still attached to their aspirations, they seem no less satisfied with their way of life than do Europeans. Even amid the recession, 70% of Americans still embrace the idea that they can get ahead through hard work.

There are other critical differences. Americans remain more religiously minded. One analyst, David Hart, has spoken of Europe's "metaphysical boredom." Half or more of Europeans never attend church, compared with barely 20% in the U.S.

Among younger Europeans, the loss of traditional Christian identity--with its focus on long-term commitments, sacrifice and responsibility--is virtually complete: According to one Belgian demographer, barely one in 10 young adults in the E.U. maintains any link to an organized religion. In contrast roughly 60% of Americans, according to a Pew Global Attitudes survey, believe religion is "very important," twice the rate of Canadians, Britons, Koreans or Italians and six times the rate of French or Japanese.

Some observers, both in America and abroad, see this spiritualism, particularly among evangelical Christians, as reflecting a kind of social retardation. Yet belief in America is remarkably varied, extending beyond groups that are easily classified as liberal or conservative. In America, a broad "spiritual" focus--dating from the earliest founders and continuing through the transcendentalists and Walt Whitman--persists as a vital force. Even President Obama, whose base tends to be secular, has made much of his religious ties.

In Europe, the only truly rising faith appears to be the secular religion of the environmental zealots. Often almost theocratic in its passion, the green movement tends to be hostile to even modest population growth and economic progress. It's no coincidence that the last American to win the Nobel Prize was the climate change high priest himself, former Vice President Al Gore.

To be sure, Americans also care about the planet, but they seem more disposed to see technological innovation, not abstinence, as the best way to confront ecological problems. The kind of highly restrictive regulatory environment common in Europe--and sadly in such places as California—simply is not well-suited for a country that must produce much more wealth and millions more jobs in order to sustain itself.

Even though they may espouse secular ideals, this more growth oriented mentality also attracts a sizable number of talented and ambitious young Europeans to the U.S., as well as Australia and Canada. Although influential social commentator Richard Florida has claimed that the bright lights and "tolerance" of Europe are luring large numbers of skilled Americans, actual migration trends tell quite the opposite story. By 2004 some 400,000 E.U. science and technology graduates were residing in the U.S. Barely one in seven, according to a recent European Commission poll, intends to return.

Perhaps the president should speak to these young Europeans. They still buy the notion of America as a country open to innovation and striving for upward mobility. Europe, in contrast, perhaps as the result of two debilitating wars in the last century, understandably craves peacefulness and social stability over all else.

When he goes to Oslo next month, Obama should remember that America's future is not to become a bigger version of Norway, a tiny country fat with fossil fuels that can afford its air of moral superiority. We are also not latter day versions of Britain, France, Germany or Russia--all of them worn empires exhausted by history.

Ultimately America is about hope and aspiration. It is, if you will, a country based on an ideal, not a race or cultural legacy. As the British writer G. K. Chesterton once put it, the U.S. is "the only nation...that is founded on a creed." That creed is not so much religious as aspirational, and it will become more important as we attempt to cope with our own growing diversity as well as the rising powers from the developing world.

So even as he enjoys his popularity on the continent, Obama must be careful not to succumb to those who urge him to reshape America in Europe 's image. Take this prize, Mr. President, and then shelve it.

This article originally appeared at Forbes.com.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His next book, The Next Hundred Million: America in 2050, will be published by Penguin Press early next year.

Official White House photo by Pete Souza

Germany's Role in the Green Energy Economy

KirkRogers — Fri, 02 Oct 2009 21:37:59 -0400

Germany likes to brag about its green credentials. It is a source of pride and it is justified to a certain extent. The country, which is located on the same latitude as Canada, had the largest number of installed solar panels as of 2007.

The key to growth clearly has not been abundant sunshine, but massive subsidies. Germany sponsors its solar industry with generous tax credits that take the form of feed-in tariffs, i.e. payment above the going market rate for energy from renewable sources like solar panels, it can run anywhere from twice to three times the market rate for a conventionally produced kilowatt. These tariffs can run high. They are being lowered slowly but perhaps a bit too slowly. As we have recently seen with the disasters impacting Spain’s renewable energy industry, dependence on subsidies can create a potential catastrophic downturn once the spigot is turned off.

Would a similar model be appropriate for sponsoring renewable energy in the US? Probably not, in large part the technology is already developed. The Germans and now the Chinese have already subsidized their industries. The legwork has been done and anti-greenhouse legislation will sustain the market without massive subsidization.

The first factor is that most of the investment in research and development has created the pre-conditions for grid parity within the next few years for southern countries. Even Germany will achieve it by 2012 according to the German business newspaper Handelsblatt. The economies of scale are sinking unit costs dramatically and production technologies like thin film are allowing solar cell manufacturers to produce ever more efficient panels with less and less silicon. Several silicon production plants are set to come on line in China soon.

The US, whose fiscal situation is parlous compared to China and even Germany, wants to waste years developing already available technologies from scratch. It could try the European approach but would probably be much better off to follow the same path that it followed with the automobile or the motion picture: allow other countries to get the basic technology in place and concentrate its exceptional energy on marketing and scaling up the technologies from abroad.

China’s entry into the market seems destined to create a dramatic collapse in the price of what was until a few years ago essentially a cost plus industry. China has low labor costs and inflation busting economies of scale. China’s entry into the silicon wafer market already has depressed prices for the once dear raw material. They are also working on a massive power plant with First Solar of the United States.

Some are predicting that China’s entry into the renewable energy market will have the same effect as its entry into the consumer electronics market, i.e. it will make the expensive affordable and then cheap. German solar cell production companies have suffered much like its chip producers but to the general benefit of the economy. China will drive production costs further down. Germany is still coming to terms with this.

A recent article in Die Zeit illustrates the growing discrepancy between renewable energy policy and the market potential. The feed-in tariffs have the perverse effect of making solar energy far more expensive than it actually needs to be. The government subsidies are essentially shielding domestic producers from China making the consumers pay the higher rates. Germany needs to focus on its traditional strengths in producing industrial machinery and carve a niche for itself. The US would be better off to maintain trade relations with China and let Adam Smith’s invisible hand work its magic. It would be far cheaper than trying to use protectionist measures to protect domestic manufacturers.

All this is predicated on the assumption that the price of oil will only increase in price in the coming decades as China and India motorize their masses. This in turn will drive up conventional power costs. Even at its current price of around $70 a barrel, oil is still 7 times more expensive than it was just a decade ago. Some are predicting that that last year’s prices of almost a $150 a barrel represent a taste of what will confront the world when the economy begins to grow again

This, however, will be a gradual process, based on undulating prices. The hysterical claims of Peak Oil have been delayed again and again by technological improvements. The latest finds off of Brazil and the Gulf of Mexico represent dramatic examples. Massive new gas reserves in North America represent another countervailing force. In the end, fossil fuels will be more expensive, but they will make renewable energy more competitive only at reasonable price points.

Politics will also play a role. Climate change and the perceived need to combat it has gained enormous currency among world leaders including German Chancellor Angela Merkel. Regardless of what one thinks of the arguments calling for action, we will probably see some sort of carbon tax in the future, whether it be cap and trade or some other means of increasing the costs of carbon emissions. Conventional fuels like coal, oil, and natural gas are only going to get more expensive for political if not economic reasons. The growing consensus, regardless of its veracity, is set to create huge costs for non-renewable sources of energy.

Over time, this will make renewable energy more attractive and unit costs will shrink as economies of scale start to kick in. The European cheerleaders of climate legislation are not doing it out of the goodness of their heart. They want to see a return on the billions spent on developing renewable technology. The US would be ill-advised to simply try to create technologies that are already up and running. Take the technology, commercialize it and thank the Europeans for footing the bill.

The US would be well advised to keep their renewable energy markets open. The Europeans will come and are coming. The solar energy trade fairs in Germany focus on the immense potential available in the US market. Several large German producers are expanding aggressively on the American market bringing with them the technologies that they have created. China will also start to flood the market with cheap silicon wafers and further reduce solar panel costs. The US does not need to subsidize this technology lavishly. It simply needs to allow the companies that have it to sell it on their market. The initial support provided by countries like Germany was more than enough to get the technology to the point where it is ready to survive on the free market.