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BRITAIN must get something back from Europe before it agrees to a new EU blueprint, David Cameron told German Chancellor Angela Merkel yesterday.

The PM opened secret negotiations ahead of next month's crunch summit on treaty changes to save the teetering euro — which the UK still has the power to block.

Mr Cameron set out his demands when he flew to Berlin yesterday. Downing Street refused to say exactly what he asked for, but a senior No10 source told The Sun: "The PM made it clear to Mrs Merkel that Britain has certain interests it would like to take forward to see treaty change happen."

The PM's wish list is known to include:

A RETHINK on plans for a European transaction tax, which he fears would devastate the City unless the levy was applied worldwide;

A PLEDGE that the 17 Eurozone countries will not gang up on Britain and marginalise us;

A REBALANCE of powers so some employment red tape and unfair fishing and farming rules are scrapped.

Mr Cameron and Mrs Merkel also clashed on his plea to let the European Central Bank bail out struggling Italy, Spain and Portugal.

He sees it as the only way to stop the debt crisis spiralling further, but Germany believes it would fail.

In public the two smiling leaders tried to paper over their differences, calling each other "good friends".

But tensions soared again as German finance chief Wolfgang Schäuble claimed the pound was doomed and Britain would join the Euro "more quickly than many people believe".

Diplomats have also predicted Mr Cameron will fail to win any return of powers from Brussels — which Lib Dem boss Nick Clegg also firmly opposes.

But ex-Tory Premier John Major last night backed Mr Cameron's stand against the financial transaction tax, dubbing it "a heat-seeking missile" targeted directly at the City of London.

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Monday, December 5, 2011
Financial Regulatory Reform


Updated: Sept. 20, 2011

The near-collapse of the world financial system in the fall of 2008 and the global credit crisis that followed gave rise to widespread calls for changes in the regulatory system. A year and a half later, in July 2010, Congress passed a bill expanding the federal government's role in the markets, reflecting a renewed mistrust of financial markets after decades in which Washington stood back from Wall Street with wide-eyed admiration.

In its broad outlines, the bill resembled the sweeping reform legislation President Obama had proposed in June 2009.  Its progress was marked by fierce industry lobbying and partisan battles, as almost all Republicans voted against the measure. In the year since its passage, the stock market is up, banking profits have grown and institutions that invest on behalf of average Americans are praising the tougher stance in Washington.

Dodd-Frank aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff. It creates a bureau to protect consumers from financial fraud, cuts fees banks charge for debit-card use, and sets up a means for the government to better supervise the nation’s largest financial institutions to avoid expensive and catastrophic failures. And it calls public exchanges on which derivatives and other complex financial instruments are traded.

But there remain signs that the tightened regulatory measures could still be undone, creating uncertainty about whether the actions that have helped to stabilize Wall Street will be in place when the next crisis hits. Two dozen bills in Congress seek to dismantle parts of the Dodd-Frank Act. Business groups have argued that too many new regulations could snuff out the start of an economic recovery. And Republican candidates for president have used the law as a symbol of government overreach that is killing jobs.

Since Republicans took control of the House in the 2010 midterm elections, they and the financial industry have stepped up their efforts to rein in the new law, which itself left hundreds of important decisions to be worked out in one of the most complex rule-making processes ever undertaken by the government.

By September 2011, only a small portion of the law has taken hold. Of the up to 400 regulations called for in the act, only about a quarter had even been written, much less approved.

Key targets of the bill's opponents include reining in the powers of the Consumer Financial Protection Bureau, reconsidering limits on debit card fees and restricting the budgets and growth of the S.E.C. and the Commodity Futures Trading Commission. And some of the most powerful players in the derivatives market — which is closely controlled by just a small group of banks — argued that the government should allow a slow pace of changes for rewriting derivatives contracts.

Read More...Senate Republicans are refusing to consider nominations for posts at several financial regulatory agencies. Lawmakers have taken aim at agencies for budget cuts. Administration officials say that banking and business lobbyists have spent more than $50 million in 2011 to try to change the law, most of which has still not taken effect because regulators have not finished drawing up the new rules.

Mr. Obama’s pick for director of the Consumer Financial Protection Bureau, a centerpiece of the Dodd-Frank Act, is Richard Cordray, a former Ohio attorney general. Mr. Cordray was hired as the bureau’s director of enforcement by Elizabeth Warren, a Harvard law professor and bankruptcy expert whom Mr. Obama credited with giving him the idea for the agency.

While Ms. Warren has been working since September to prepare the agency for its July 21 opening, Republicans made clear that they did not want her appointed to a permanent position. A group of 44 Republican senators vowed they would not let any nomination come to a floor vote unless significant changes were made in the structure, power and scope of the consumer agency.

It is not yet clear that the forces fighting to preserve all the elements of Dodd-Frank will, in fact, win out. It is also not clear that Mr. Cordray will be confirmed by the Senate.

Background

The Dodd-Frank Act, which was signed into law by Mr. Obama on July 21, 2010, was hailed as marking the end of more than a generation in which the prevailing posture of Washington toward the financial industry was largely one of hands-off cheering, evidenced by steady deregulation. While the measure did not fully restore the toughest restrictions imposed after the Great Depression, it was meant to be a clear turning point, highlighting a new distrust of Wall Street, fear of the increasing complexity of technology-driven markets, and renewed reliance on government to protect the little guy.

The bill expanded federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight, and imposing regulation for the first time on "black markets" like the enormous trade in credit derivatives.

It created a council of federal regulators, led by the Treasury secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies.

It also created a powerful new regulator, appointed by the president, to protect consumers of financial products, which will be housed in the Federal Reserve. The choice of a director for the consumer protection bureau became the first battleground of the post-passage struggle. Mr. Obama appointed Elizabeth Warren, a Harvard bankruptcy expert who had proposed the agency, to be its head, but in acting capacity, after it became clear that Republicans would block a confirmation vote. In 2011, Senate Republicans went further, saying they would allow no vote on any director until the bureau's independence had been reduced.

The law also imposed new regulations on derivatives, the complex financial instruments credited with amplifying the credit crunch. Most trading will be required to take place through open marketplaces and banks would have to segregate or spin off their derivative-trading wings, although some exceptions were created in the final round of deal-making during the conference committee.

The final measure also included the so-called Volcker rule, which the banks had fought almost as strongly as the derivative restrictions. The rule, named for Paul A. Volcker, the former Federal Reserve chairman who proposed the measure in early 2010, restricts the ability of banks whose deposits are federally insured from trading for their own benefit, although not as strictly as Mr. Volcker had suggested.

Passage of the Bill

 The House first passed a bill in December 2009. In May 2010, after months of wrangling, the Senate passed a broadly similar bill with four Republicans joining all but two Democrats in support. It took a month for the House and Senate to work out the differences. The House gave final passage on June 30, by a vote of 237 to 192, with all but three Republicans in opposition.

In the Senate, three Republicans — Olympia J. Snowe and Susan Collins of Maine and Scott Brown of Massachusetts — supported the bill, giving the Democrats the votes they needed to overcome a Republican filibuster and pass the bill on July 15 by a tally of 60 to 39. One Democrat, Russ Feingold of Wisconsin, opposed the measure, saying it did not go far enough.that they still wanted tougher policing of Wall Street. The bill was also criticized by liberal economists who said it did not go far enough.

Winning final passage was complicated for Democrats by the death of  Senator Robert C. Byrd of West Virginia after the conference agreement was reached. To hang on to the votes of moderate Republicans they dropped a tax on big banks and hedge funds that was meant to pay for the cost of the bill, estimated at $20 billion over five years. The tax was replaced by a plan to redirect $11 billion in funds repaid from the federal bank bailout, and changes to F.D.I.C. rules that would raise more revenue.

Shifting Responsibilities for Regulators

Part of Mr. Obama's proposal was a provision to give the Federal Reserve greater supervisory authority over large financial institutions whose problems pose potential risks to the economic system. The suggestion drew fire from Republicans and from existing regulators whose role would be diminished, as well as from liberal critics who pointed out that the Fed had failed to head off the collapse of 2008..

The bill drafted by Senator Christopher J. Dodd, the chairman of the Senate Banking Committee, sought to restrict the Fed's authority to about 35 bank holding companies, each with $50 billion or more in assets, which would put about 4,900 smaller bank holding companies and 850 state-chartered banks that are members of the Fed system under the control of the F.D.I.C. But the provision was stripped from the bill during floor debate, by a vote of 90 to 9, in a big victory for the Fed.

The bill would enshrine Washington's role in policing Wall Street by creating a nine-member council, led by the Treasury secretary, to detect systemic risks to the markets and placing the Federal Reserve in charge of all of the nation's largest and most interconnected financial institutions. The bill includes a provision intended to curb Wall Street's influence over the Federal Reserve Bank of New York. Its president would be appointed by the president of the United States, not by a board that includes representatives of member banks.

Consumer Protection Agency

The bill passed by the House on Dec. 11, 2009 in a 223 to 202 vote would have created an agency to protect consumers from abusive lending practices, set rules for the trading of some of the sophisticated financial instruments that fueled the crisis, and take steps to reduce the threat that the failure of one or two huge banks or investment firms could topple the entire economy.

The Senate bill made the Consumer Protection Agency a branch of the Fed. The final bill does, too, but with provisions meant to preserve its independence, such as having its director be appointed directly by the president.

The agency is expected to push for measures like requiring lenders to provide plain-English disclosures, price comparisons with alternative products and clear tripwires before fees are assessed.

Derivatives

The chairwoman of the Senate Agriculture Committee, Blanche Lincoln of Arkansas, introduced a bill in April 2010 that would take a similar approach to clearinghouses and end-user exemptions. The bill would also require most derivatives to be traded on an open exchange.

Currently, the only way to trade many derivatives is to call up various dealers and ask for the price at which they are willing to buy or sell. The securities dealer profits from the difference between the prices at which it buys from one party and sells to another. Investors rarely, if ever, see details on the other side of the trade. Wall Street has signaled that it can live with a clearinghouse approach, but it is strongly opposed to exchange trading of derivatives, which would introduce price competition and lower the profits.

Wall Street bankers were stunned by the most aggressive portion of Ms. Lincoln's bill, one that was opposed even by the Obama administration. That proposal would essentially ban banks from being dealers in swaps or other derivatives by taking away their access to federal deposit insurance and their ability to borrow from the Federal Reserve if they kept those businesses.

Banks made that provision their top target in conference negotiations, but the measure appeared to help Mrs. Lincoln win a tough primary fight, and it stayed in the bill, although the rules were loosened somewhat in the final agreement.

The Volcker Rule

The "Volcker rule" or "Volcker plan," a measure named for Paul A. Volcker, the former Federal Reserve chairman who proposed it, would restrict the ability of banks whose deposits are federally insured from trading for their own benefit.

In January 2010, President Obama proposed that the Volcker rule be a part of the general financial regulatory reform push. Big losses by banks in the trading of financial securities, especially mortgage-backed assets, precipitated the credit crisis in 2008 and the federal bailout.

The measure's aim is to keep highflying traders and other gamblers inside of banks from getting their hands on or putting at risk the old-fashioned savings of average depositors. A main element to the plan would bar banks from making proprietary trades - using their own money to place directional market bets that are unrelated to serving customers. Another change would prevent institutions from investing their own money in hedge funds or private equity operations.

The ban on proprietary trading was one of the less contentious points of debate for members of Congress, who tended to agree that banks should not be allowed to use a guarantee of government deposit insurance- indirectly financed by taxpayers- to provide themselves with cheap capital that they then use for risky trading activities.

Banks and some members of Congress argued that the proposed definitions are too vague. But even the bank lobbyists have said that proprietary trading accounts for only a small fraction of their revenue- from an estimated 10 percent at Goldman Sachs to half that for big commercial banks.

Banks managed to wrangle limited exceptions to the rule that would allow them to continue some investing and trading activity. The agreement limits banks' investments in hedge funds or private equity funds to no more than 3 percent of a fund's capital; those investments could also total no more than 3 percent of a bank's tangible equity.

Too Big to Fail

The bill authorizes regulators to impose restrictions on large, troubled financial companies, and creates a process for the government to liquidate failing companies at no cost to taxpayers, which is similar to the F.D.I.C. process for liquidating failed banks. Regulators would have considerable leeway to impose restrictions on the largest financial companies, which could give smaller banks competitive advantages.

Republicans have vowed to undo this part of the bill, saying it would create an expectation among investors that they would be bailed out. It would be better, they argue, to leave the process to the bankrupcty courts.

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The Neuroeconomics Revolution

Robert J. Shiller

21-11-2011

NEW HAVEN – Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of “neuroeconomics.”

Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial.

Then something exciting comes along from someone who was never involved with these methods – some new idea that attracts young scholars and a few iconoclastic old scholars, who are willing to learn a different science and its different research methods. At a certain moment in this process, a scientific revolution is born.

The neuroeconomic revolution has passed some key milestones quite recently, notably the publication last year of neuroscientist Paul Glimcher’s book Foundations of Neuroeconomic Analysis – a pointed variation on the title of Paul Samuelson’s 1947 classic work, Foundations of Economic Analysis, which helped to launch an earlier revolution in economic theory. And Glimcher himself now holds an appointment at New York University’s economics department (he also works at NYU’s Center for Neural Science).

To most economists, however, Glimcher might as well have come from outer space. After all, his doctorate is from the University of Pennsylvania School of Medicine’s neuroscience department. Moreover, neuroeconomists like him conduct research that is well beyond their conventional colleagues’ intellectual comfort zone, for they seek to advance some of the core concepts of economics by linking them to specific brain structures.

Much of modern economic and financial theory is based on the assumption that people are rational, and thus that they systematically maximize their own happiness, or as economists call it, their “utility.” When Samuelson took on the subject in his 1947 book, he did not look into the brain, but relied instead on “revealed preference.” People’s objectives are revealed only by observing their economic activities. Under Samuelson’s guidance, generations of economists have based their research not on any physical structure underlying thought and behavior, but only on the assumption of rationality.

As a result, Glimcher is skeptical of prevailing economic theory, and is seeking a physical basis for it in the brain. He wants to transform “soft” utility theory into “hard” utility theory by discovering the brain mechanisms that underlie it.

In particular, Glimcher wants to identify brain structures that process key elements of utility theory when people face uncertainty: “(1) subjective value, (2) probability, (3) the product of subjective value and probability (expected subjective value), and (4) a neuro-computational mechanism that selects the element from the choice set that has the highest ‘expected subjective value’…”

While Glimcher and his colleagues have uncovered tantalizing evidence, they have yet to find most of the fundamental brain structures. Maybe that is because such structures simply do not exist, and the whole utility-maximization theory is wrong, or at least in need of fundamental revision. If so, that finding alone would shake economics to its foundations.

Another direction that excites neuroscientists is how the brain deals with ambiguous situations, when probabilities are not known, and when other highly relevant information is not available. It has already been discovered that the brain regions used to deal with problems when probabilities are clear are different from those used when probabilities are unknown. This research might help us to understand how people handle uncertainty and risk in, say, financial markets at a time of crisis.

John Maynard Keynes thought that most economic decision-making occurs in ambiguous situations in which probabilities are not known. He concluded that much of our business cycle is driven by fluctuations in “animal spirits,” something in the mind – and not understood by economists.

Of course, the problem with economics is that there are often as many interpretations of any crisis as there are economists. An economy is a remarkably complex structure, and fathoming it depends on understanding its laws, regulations, business practices and customs, and balance sheets, among many other details.

Yet it is likely that one day we will know much more about how economies work – or fail to work – by understanding better the physical structures that underlie brain functioning. Those structures – networks of neurons that communicate with each other via axons and dendrites – underlie the familiar analogy of the brain to a computer – networks of transistors that communicate with each other via electric wires. The economy is the next analogy: a network of people who communicate with each other via electronic and other connections.

The brain, the computer, and the economy: all three are devices whose purpose is to solve fundamental information problems in coordinating the activities of individual units – the neurons, the transistors, or individual people. As we improve our understanding of the problems that any one of these devices solves – and how it overcomes obstacles in doing so – we learn something valuable about all three.

Robert Shiller, Professor of Economics at Yale University, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

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Services without Tears

Jeffrey D. Sachs

24-11-2011

NEW YORK – A famous claim in economics is that the cost of services (such as health care and education) tends to increase relative to the cost of goods (such as food, oil, and machinery). This seems right: people around the world can barely afford the rising health-care and school-tuition costs they currently face – costs that seem to increase each year faster than overall inflation. But a sharp decline in the costs of health care, education, and other services is now possible, thanks to the ongoing information and communications technology (ICT) revolution.

The cost of services compared to the cost of goods depends on productivity. If farmers become much better at growing food while teachers become little better at teaching kids, the cost of food will tend to fall relative to the cost of education. Moreover, the proportion of the population engaged in farming will tend to fall, since fewer farmers are needed to feed the entire country.

This is the long-term pattern that we’ve seen: the share of the workforce in goods production has declined over time, while the cost of goods has fallen relative to that of services. In the United States, around 4% of the population in 1950 was employed in agriculture, 38% in industry (including mining, construction, and manufacturing), and 58% in services. By 2010, the proportions were roughly 2%, 17%, and 81%, respectively. In the meantime, health-care and tuition costs have soared, along with the costs of many other services.

But a productivity revolution in service-sector delivery is now possible. As a professor, I feel it in my own classroom. Ever since I began teaching 30 years ago, it had seemed that the technology was rather fixed. I would stand before a class and give a one-hour lecture. Sure, the blackboard gave way to an overhead projector, and then to PowerPoint; but, otherwise, the basic classroom “production system” seemed to change little.

In the past two years, everything has changed – for the better. At eight on Tuesday mornings, we turn on a computer at Columbia University and join in a “global classroom” with 20 other campuses around the world. A professor or a development expert somewhere gives a talk, and many hundreds of students listen in through videoconferencing.

Information technology is revolutionizing the classroom and driving down the costs of producing first-rate educational materials. Many universities are putting their classes online for free, so that anyone in the world can learn physics, math, or economics from world-class faculty. At Stanford University this fall, two computer-science professors put their courses online for students anywhere in the world; now they have an enrollment of 58,000.

The same breakthroughs now possible in education can occur in health care. The US health-care system is notoriously expensive, partly because many of the key costs are controlled by the American Medical Association and private-sector health-insurance companies, which act like monopolists, driving up costs. Such monopoly pricing should be ended.

Yet there are other reasons for high health-care costs. Many people suffer from chronic ailments, such as heart disease, diabetes, obesity, and depression and other mental disorders. These diseases can be expensive to address if they are poorly managed and treated. Far too many people end up in the emergency room and the hospital because they lacked the advice and help to keep their conditions under control without institutional care, or even to prevent their disorders entirely.

Now information technology is coming to the rescue. Innovative companies like CareMore in California are using ICT to keep their clientele healthy and out of the hospital. For example, when CareMore’s patients step on the scale at home each day, their weight is automatically transmitted to the health-care unit. If there is a dangerous weight swing, which could be caused by congestive heart failure, the clinic brings the patient in for a quick examination, thereby heading off a potentially devastating crisis.

These innovative companies’ approaches combine three ideas. The first is to use ICT to help individuals monitor their health conditions, and to connect individuals with expert advice. The second is to empower outreach workers (sometimes called “community health workers”) to provide home-based care in order to prevent more serious illnesses and to cut down on the high costs of doctors and hospitals.

The third idea is to recognize that many illnesses arise or become worse because of individuals’ social circumstances. Perhaps the patient is isolated, lonely, suffering from depression, out of work, or facing some other personal or family calamity. If these social conditions go unaddressed, they may give rise to an expensive, even deadly, medical condition.

Smart healthcare is therefore holistic, helping people not only as patients arriving in the emergency room, but also as individuals and family members in their own homes and communities. Holistic health care is more humane, effective, and cost-efficient. The ICT revolution provides the means to achieve holistic health care in new and powerful ways.

In economic terms, information and communications technologies are “disruptive,” meaning that they will outcompete the existing, more expensive ways of doing things. Implementing disruptive technologies is never easy. Existing high-cost producers, especially entrenched monopolists, resist. National budgets may continue to favor the old ways.

Nevertheless, the promise of great cost savings and major advances in service delivery is at hand. The world’s economies, rich and poor alike, have much to gain from accelerated innovation in the information age.

Jeffrey D. Sachs is Professor of Economics and Director of the Earth Institute at Columbia University. He is also Special Adviser to United Nations Secretary-General on the Millennium Development Goals.

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The growing tension between capitalism and democracy

Harold Meyerson,

November 25, 2011

Do capitalism and democracy conflict? Does each weaken the other?

To the American ear, these questions sound bizarre. Capitalism and democracy are bound together like Siamese twins, are they not? That was our mantra during the Cold War, when it was abundantly clear that communism and democracy were incompatible. After the Cold War ended, though, things grew murkier. Recall that virtually every U.S. chief executive and every U.S. president (two Bushes and one Clinton, in particular) told us that bringing capitalism to China would democratize China.

It hasn’t quite worked out that way.

Over the past year, in fact, capitalism has fairly rolled over democracy. Nowhere is this more apparent than in Europe, where financial institutions and large investors have gone to war under the banner of austerity, and governments of nations with not-very-productive or overextended economies have found that they could not satisfy those demands and still cling to power. The elected governments of Greece and Italy have been deposed; financial technocrats are now at the helm of both nations. With interest rates on Spanish bonds rising sharply in recent weeks, Spain’s socialist government was unseated last weekend by a center-right party that has offered no solutions to that country’s growing crisis. Now the Sarkozy government in France is threatened by rising interest rates on its bonds. It’s as though the markets throughout Europe have had enough with this democratic sovereignty nonsense.

Lest you think I exaggerate, consider the interview that Alex Stubb, the minister of Europe for Finland’s right-wing government, gave to the Financial Times last weekend. The six euro-zone nations with AAA credit ratings, said Stubb, should have greater say in Europe’s economic affairs than the other 11 euro members. The political rights of Southern and Eastern Europe would be subordinated, essentially, to those of Germany and Scandinavia — or to credit rating agencies, which are threatening to downgrade France (thereby reducing the number of decision-making euro nations from six to five).

What Stubb is proposing, and what the markets are doing, is, in essence, extending to the realm of once-equally-sovereign nations the one-dollar-one-vote principle that our Supreme Court enshrined in its Citizens United decision last year. The requirement that one must own property to vote — abolished in this nation in the early 1800s by the Jacksonian Democrats — has been resurrected by powerful financial institutions and their political allies. To the nations of the European currency union, the “property” they need to secure their right to vote is a proper credit rating.

Yet this all seems very strange. The idea that there’s a conflict between our economic and political systems is hard to accept, and not just in the United States. In Europe, too, it has been assumed that democracy and capitalism (at least, European social capitalism) go together. That’s largely because both systems thrived in apparent harmony for the three decades that followed World War II. Profits rose even as wages increased and social benefits expanded. But what if that 30-year peace was the exception to the more common state of conflict between markets and the people?

That’s the argument Wolfgang Streeck, the managing director of the Max Planck Institute for the Study of Societies, makes in the September-October issue of New Left Review. Streeck contends that, since the mid-1970s, governments have had to stretch to meet the conflicting demands of each system. In the ’70s, governments pursued inflationary policies to help workers whose wages had abruptly stopped rising. In the ’80s, governments, led by Ronald Reagan and Margaret Thatcher, tipped the other way by raising interest rates and unemployment and helping to break unions. In the ’90s, a fatal compromise was struck: To compensate for stagnating incomes, private debt soared, with homeowners and consumers relying on credit extended by deregulated financial institutions. Public debt contracted (the United States had balanced budgets in the late 1990s). In the wake of the collapse of 2008, that dynamic has been reversed: Governments everywhere assumed the debt that their citizens could no longer take on by deficit-spending to counteract the Great Recession.

Now, the markets are striking back. Napoleon couldn’t conquer all of Europe, but Standard & Poor’s may yet. Conflicts between capitalism and democracy are breaking out all over. And Europeans — and even Americans — may soon have to face a question they have not contemplated in a very long time, if ever: Which side are they on?

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KUHNER: Croatia, the next Greece

Offer of EU membership is a Faustian bargain

By Jeffrey T. Kuhner

The Washington Times

Saturday, November 26, 2011

Croatia is on the verge of national surrender. This small Balkan nation is poised to follow the disastrous path of Greece - dramatically affecting European and U.S. taxpayers. On Dec. 4, Croatians will hold parliamentary elections. The ruling Croatian Democratic Union, known by its acronym HDZ, is expected to lose - and rightly so.

The HDZ has been mired in corruption scandals. Its former leader, Ivo Sanader, is in prison awaiting trial on charges of embezzling millions. Croatian Prime Minister Jadranka Kosor has sought to improve her party's badly tarnished image. She has failed.

For years, Zagreb's governing class has pillaged the Croatian economy. More than $1 billion has been siphoned off or stolen. Shady privatization deals have enriched HDZ-connected oligarchs. Bribery is rampant. The regime harasses independent journalists and media critics. Judges frequently are political hacks. The rule of law is almost nonexistent. Property rights are violated routinely. More than 1 million court cases remain backlogged - a stunning number for a country of about 4 million citizens.

The results have been disastrous. The unemployment rate hovers at 20 percent. Youth unemployment is near 40 percent. Growth is anemic. Yet the HDZ's most destructive legacy has been its reckless borrowing and spending. The national debt has skyrocketed. Croatia's per-capita debt-to-gross-domestic-product ratio is one of the highest in Europe. In response, Ms. Kosor's government has refused to do what is required: slash public spending and overhaul the country's lavish entitlement programs. Instead, Zagreb has raised taxes - especially on foreign corporations. The HDZ's high-tax, statist polices have fostered economic sclerosis, chased away investment capital and stifled job creation.

Moreover, the country is so saddled with debt that Croatia's Central Bank is warning of possible national bankruptcy and financial collapse. Croatia's future is bleak. That is why its largest export has been people - the vast brain drain of the most educated and skilled young Croatians.

The HDZ has staked everything on joining the European Union. Brussels has agreed to accept Croatia as its newest member. According to Zagreb, EU accession is the magic solution to the country's woes. It isn't.

The current EU agreement is a dagger aimed at the heart of Croatia's national sovereignty and economic independence. It literally sells the country down the river - Croatia's fishing and agricultural sectors will be decimated; its economic zone in the Adriatic Sea, estimated to possess vast potential reservoirs of oil and natural gas, has been abandoned to Brussels; its wine exports will be crippled; and its fiscal policy will be subordinated to EU bureaucrats. In short, Croatia will be transformed into a political vassal.

The deal is also bad for Europe and America. Brussels will be assuming another Greece - a debt-laden Balkan nation that will require constant expensive bailouts to stay afloat. So far, EU and American taxpayers have provided more than $1 billion in foreign aid to Croatia. The money has not gone to advance anti-corruption reform measures. Instead, it largely has been misappropriated, misused or simply embezzled. Zagreb's political class has been pushing to join the EU for one reason: to get its dirty hands on the 4 billion euros Brussels is promising as part of Croatia's entry. It is a Faustian bargain that threatens to cost Croatians - and Europeans - dearly.

The surging opposition leftist coalition is expected to win at the ballot box. Composed of former communists and social democrats, it promises to offer the same broad policies of the HDZ - EU membership, high taxes, stifling regulations and big government spending - minus the corruption. Even this will not happen. Left-wing parties control numerous local cities and towns. Yet graft, cronyism and bribery remain pervasive. Nothing will change except party labels and different oligarchs. The Croatian people, however, will continue to bleed.

This is why voters need to overturn the political status quo. It is time to confront Croatia's entrenched corruption and incompetent governing class. There are some promising new parties offering viable options to reverse the country's decline.

One of them is Croatia 21st Century. Its leader, Natasha Srdoc, champions a tax-cutting, pro-growth agenda. She advocates reducing government spending, balancing the budget and unleashing the private economy. She is also one of the few politicians truly serious about tackling Zagreb's culture of corruption. Ms. Srdoc is demanding that any Croatian government official who has amassed unexplained illicit wealth while in office be prosecuted and have his or her assets seized. This alone would smash Croatia's mafia state.

She also is a Euro-skeptic who vows to scuttle Zagreb's deal with Brussels. Her party has close ties to European conservatives. In contrast to the HDZ, Ms. Srdoc is a genuine traditionalist. She is pro-family, pro-life and seeks eventually to end the mass murder of unborn Croatian children by making abortion illegal - but only through a referendum. In short, she poses a mortal threat to Croatia's venal kleptocracy.

Hence, the HDZ has branded her "an enemy of the state." Nearly two dozen of her party's members and supporters have been harassed and intimidated by HDZ and leftist officials. Recently, Aleksandar Radovic, a candidate for Croatia 21st Century and a well-known anti-corruption author, was arrested by government authorities. His crime: He had extensively documented the vast illicit wealth and corruption of Interior Minister Tomislav Karamarko - a thug who uses the police as his personal henchmen. Mr. Radovic is rotting in jail, a political prisoner in a supposedly democratic country.

Having won its war for national independence from Serb-dominated Yugoslavia, Croatia is about to fritter away its hard-won sovereignty. Joining the EU is a fatal mistake. Just ask the Greeks.

Jeffrey T. Kuhner is a columnist at The Washington Times and president of the Edmund Burke Institute.

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