Friday, 28 February 2014

Where goes?

Where goes Ukraine?

That's the question on everybody's mind.

With the ousting of Yunokovich, who in the face of clear evidence of rampant corruption was abandoned even by his own party in parliament, will Ukraine resume its road for gradual integration within the EU, starting with an Association Agreement,   or will it have to balance its internal dissent of the pro-Russian Eastern part of the country by maintaining the status quo?

It is highly optimistic to assume that Putin's Russia will permit to have an important strategic border with a country that professes an EU integration vocation.  Russia can easily create a pretext for occupation of Crimea and Eastern Ukraine to defend the interest of ethnic Russian majority in the region.  Putin is unlikely to allow a Russia without buffer zones between it and western countries.

So I am afraid that for the short term Ukraine's future seems tumultuous and its territorial integrity could be prejudiced.   For the longer term I view this development more positively.  Even Germany after WWII did not remain divided for ever.   So even a divided Ukraine could be a transit situation to a more stable post Putin Russia where economic realism will force its leaders to admit that Russia can no longer pretend to a be a stand alone superpower.

Russia's economy remains unsustainably dependent on energy.   Internal corruption and repression will force change upon Russia  who in the end will be forced to seek active participation within a more flexible EU to permit different levels of political and economic membership underpinned by a free trade area.

As China grows into the second element of a bi-polar world Russia can only remain relevant if it joins the movement for European integration to ensure that Europe remains geo-politically relevant and not merely a sandwich filling between the US and China.

How long is long term?   That's anybody's guess but these things take time.   Germany's division lasted 45 years but then it happened overnight.  Pressure builds up very slowly but when the tipping point is reached the change will be sudden and total.

Where goes Ukraine? Unavoidably it has reached the point of no return where it has to go west even if it risks losing control over parts of its eastern territory for some time.   Where goes Russia?   For some time Russia will continue to play let's pretend we are still a superpower macho game.  Unavoidably for the longer term Russia goes where Ukraine goes; west.

My thoughts and prayers are with Ukraine with the hope that the transition will be short, not too painful and bloodless.

Where goes the Euro?

At a time when periphery Euro Area needs a lower Euro against the USD and the Yen ( to enhance their export competitiveness) , it is quite perplexing that the Euro continues to stay strong.   What underpins the Euro is the fact that as a whole the Euro area runs a balance of payments surplus, so on average it is competitive and can live with current level of Euro forex (f/x) value.   But averages are as deceptive as having an average correct body temperature with the head in the oven and feet in deep freeze.

The balance of payments reason cannot explain it all.   F/X values are not just influenced by balance of payments issues but mostly by capital flows.   Capital flows are influenced by interest rate movements.   So at a time when interest rates in US are expected to follow an upward trajectory whereas in the Euro area the ECB is considering entering uncharted territory through negative interest rates, the strength of the Euro is hard to explain.

My guess is that the Euro is suffering competitive beggar thy neighbour devaluations of competitor currencies who are more organised to manage the level of their currency with a single Treasury, whereas the Euro has 18 Treasuries.

The Euro is suffering the consequences of its conservative wisdom whilst many around it are going mad with competitive devaluations which are causing great problems to emerging markets ( Brazil, Turkey, India, Thailand and China)  who are also forced to join the currency warfare.

In the end wisdom will be rewarded but as Keynes once said, in the long term we are all dead.

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