End of the Euro?

Standard and Poor's downgraded Spain's credit rating from AA+ to AA yesterday. Less than a day earlier, the IMF grudgingly agreed to more than double the size of its aid package to Greece from $45 million to $120 million. The EU's poorer states declined to contribute to Greece's rescue package leaving the IMF and Germany to cover most of the costs. The problem is: if investors lose confidence in Spain's ability to pay its debts, then its going to collapse in the same way Greece did, but there will almost certainly be no bail out for Spain since its economy is four times the size of Greece's.


What is most disturbing about this development is that Spain was actually an ideal member of the EU, keeping its debts low (in 2007 it had a lower debt to GDP ratio than Germany) and running a budget surplus. Spain's problem was that its economy became too intertwined with the housing bubble. It was receiving huge inflows of capital from the rest of the EU to invest in its housing sector (everyone loves Spanish villas), which pushed up its gdp, but also wages and prices. When the bubble collapsed, output from the housing sector fell with it, but wages remained high (wages are generally not adjustable downward), so output from other sectors was inhibited by these higher labor costs which then resulted in higher unemployement. This then led to decreased consumption (unemployed people don't buy that much) which further reduced output, and obliged the government to enact large social insurance outlays despite the huge hit to its tax revenue.

If the European labor market was more efficient (language barriers tend to prevent workers from moving around very much), then wages would not have risen so much and prices would have remained in check. Right now, if Spain had its own currency then it could devalue it to make its exports more competitive, stimulate its economy, compensate for the lost demand, and bring its internal prices back in line with the rest of Europe. But Spain doesn't have its own currency. It is stuck with the euro, and there is no monetary levers for it to pull. Rather than a quick devaluation, it is going to have to grind through a slow deflationary process as its internal prices gradually adjust.

The larger issue is whether or not other EU member states will see Spain's crisis as a signal of the EU's viability. In good times, European integration has been beneficial to all of its member states, but as the situation in Spain has shown, the integration is neither deep enough to ameliorate the negative effects of powerful macroeconomic shocks nor relaxed enough to let the member states solve their problems by themselves. Europe is stuck in an uncomfortable middle ground between full integration and independence. The only way to prevent future problems is either further integration (which is unlikely; there will not be a United States of Europe in our lifetimes), or the slow process of dissolution. If Spain collapses and the rest of the EU isn't there to lend a hand, then the EU's days are definitely numbered.

Election Day is Here!

Polls are opening in two pretty momentous presidential elections in Chile and Ukraine today. Both of these elections have the potential of significantly affecting the course of each of those two states, so they're definitely worth paying some attention to.

In Chile, it looks like there's a decent chance that the right may come to power for the first time since the days of Pinochet, under the leadership of billionaire Sebastian Pinera. It's unclear to me why the center-left Concertacion coalition would be voted out, given the high level of success they have enjoyed under its control and the high popularity of the departing President Bachelet, other than the fact that they simply ran a lackluster candidate in former President Eduardo Frei. Hopefully, this won't be similar to the 2000 US election, where a pretty successful governing center-left party is voted out for no particular reason by a non-threatening right candidate who proceeds to steer the country straight off a cliff.

In Ukraine, the candidate accused of chicanery by the pro-Western Orange Revolution in 2004, Viktor Yanukovych, seems poised for a victory over the now-much-less-heralded former heroine of that revolution (and hottest world leader), Prime Minister Yulia Tymoshenko. Current President and Orange Revolution figurehead Viktor Yushchenko had a very lackluster showing in the first round of votes and didn't even make it into the runoff. Most of the analysis I've read on this election suggests that the predictions of a drastic pro-Russia shift in Ukrainian foreign policy following a Yanukovych victory are probably overblown. For instance, one of the first things that he is expected to do is re-negotiate energy deals with the Kremlin that are seen as unfavorable to Ukraine. At the same time, Tymoshenko has recently made overtures to Russia on some issues.

Obscure War Blogging Part IV: Irish Civil War

For this week's installment, we move from a nationalist uprising in Northwest Africa to a war that was, to a certain extent, the remnant of a nationalist uprising in Europe.
While I'm not sure how obscure this war really is, I didn't know much about it, so it was obscure to me. Also, I watched The Wind That Shakes the Barley last night and wanted to learn more about what I watched.



Who?: The forces of the Irish Free State (formed by the 1922 Anglo-Irish Treaty) versus anti-treaty Republican forces.

When?: 1922-23

Toll: Somewhere in the low thousands total battle deaths, with the Republicans taking the worst of it. Civilian casualties numbers don't seem to be available. The suffering here, though, was actually worse than in the War of Independence with England that preceded the Civil War.

Why?: The main point of dispute between the Free Staters and Republicans was the terms of the treaty that ended the Irish War of Independence. Basically, the Republicans, including Eamon de Valera, felt that the treaty did not go far enough. The Free State was still a British Dominion and its officials had to swear an oath to the British monarch. London also maintained the ability to veto laws passed by the new Free State parliament. The treaty's opponents wanted a clean break from Britain and the establishment of an Irish republic. They were also angry that Britain retained control over Northern Ireland (via a referendum).

The Free Staters, including the famous Michael Collins, were somewhat more pragmatic about the whole thing. They saw dominion status as a path to complete independence and recognized that Britain couldn't grant complete freedom to Ireland without throwing their whole international imperial project into crisis. Mostly, supporters of the treaty wanted an end to war with Britain. Unfortunately, the civil war that would ensue would actually be more destructive.

The first Free State elections were held in 1922, with parties supporting the treaty winning the majority of seats in the new parliament. The Free State government began building an actual state apparatus, including a military to replace the IRA (this refers to the Old IRA that existed prior to the split in 1969-70).

For its part, the IRA began to disintegrate into factionalism. The majority of its members (about 2 to 1), as might be expected, rejected the treaty and the establishment of the Free State. Clashes began to break out both within the IRA itself and between anti-treaty and pro-treaty forces.

One other element that some have argued fueled the Republican campaign--addressed somewhat in the movie I referred to earlier--was class resentment. The Republicans attacked and destroyed over 100 wealthy estates controlled mainly by Loyalist and Anglo-Irish landholders during the course of the war.

Outcome: Formal hostilities broke out when anti-treaty forces occupied the Four Courts and other buildings in Dublin in April of 1922, hoping to provoke a new war with Britain and unite the quarreling factions in the IRA. This was seen as a major test for Collins and the new Free State government. London placed heavy pressure on the government to do something, and even threatened to intervene itself. Eventually, Free State forces bombarded the buildings (with British artillery no less), forcing the surrender of Republican forces.

After securing Dublin, the Free State forces, their ranks quickly swelling (given fairly widespread public support) and armed to the teeth (courtesy of His Majesty's government) quickly took control of most of the major towns in Ireland. Republican forces were quite small and poorly armed and were, for the most part, routed in open conflict. As a result, they quickly converted to guerilla tactics.

While scoring some initial successes, including the assassination of Collins, the guerilla phase of the war was not much more successful for Republican forces. There was a brief period after the killing of Collins and the death of Arthur Griffith where it looked like the Free State might collapse, but they recovered and the guerillas were mostly routed and relegated to acts of sabotage within about 8 months. Anti-treaty forces were unable to wage a proper insurgency since their support among the population was minimal (the fact that the Free State was supported by the Catholic Church was another major negative for the Republicans). This limited both their sources of supplies and their recruiting base.

The Republican campaign petered out early 1923, with many of their leaders captured or killed. A ceasefire was declared in May. Free state parties won the national elections held soon after the war.

Who Cares?: I think one of the most interesting things about this conflict is that it makes it clear that liberation movements are not just about breaking away from the metropol, but that they also have to confront what kind of state they want to create in the wake of that liberation. The hardliners in the anti-treaty movement agreed with the Free Staters that England sucked, but they fundamentally disagreed on a) what Ireland should be once England was gone and b) how to get there.

The whole thing became rather moot by the 1930s, when the anti-treatier's goal of an independent republic was realized (although, of course, the question of Northern Ireland remained unresolved). This seems to vindicate the approach taken by the Free Staters. The likely result of a Republican victory would have probably been more war with Britain and delayed independence.


As with the American Civil War, the conflict cast a pall over Irish politics for decades. Most leading Irish politicians for the next several decades were veterans of the war and politics were basically polarized along the lines drawn during the war. In fact, Ireland's two main political parties, Fianna Fail and Fine Gael, are the direct descendants of the Republican and Free State factions during the war, respectively. One particular aspect of the war that created such social strife going forward were the relatively large number of executions, both formal and summary, of Republicans by the Free State government and Free State soldiers.