Christmas Day in Egypt

Nearly two years after the Arab Spring began, Egypt has a new Constitution - for now.

The National Election Commission announced this afternoon that 64% of those Egyptians who voted in a constitutional referendum, held in two stages on 15 and 22 December, said yes. There were 52 million Egyptians eligible to vote; 32% did. Of the majority of the electorate who didn't, it was not through indifference; most deliberately boycotted the election. There were no voting irregularities, according to the Commission - this, despite the refusal by most Egyptian judges to monitor the process, and allegations that fake judges were used instead.

If the Constitution holds, Egypt will be in significant ways a very different country. It certainly does not envisage a broad, inclusive and secular society, which had at least appeared to be the whole point of the Arab Spring revolution.  Articles two and four state, respectively, that "the principles of Islamic sharia" are the basis of legislation, and that the scholars of Al Azhar, an Islamic university, will interpret sharia, not parliament or the courts. Freedom of religion is said to be guaranteed, yet insulting prophets is punishable. In other ways, Egypt will, depressingly, very much resemble the eras of Mubarak, and the several dictators that preceded him. Thus, the new Constitution explicitly re-establishes an all-powerful presidency. And the special position of the military is to be maintained, to be headed by a defence minister who is an officer (not an appointed civilian), and to operate under its own budget with the right to detain, arrest and try Egyptian citizens.

Benjamin Franklin, in his masterful address (delivered by James Wilson, because Franklin was old and very weak) to the Constitutional Convention in Philadelphia in 1787, commented on the potential legitimacy of the final draft of the US Constitution. He said that "much of the strength and efficiency of any Government in procuring and securing happiness to  the people, depends on opinion, on the general opinion of the goodness of the Government, as well as of the wisdom and integrity of its Governors". As Egypt now moves to elections for the lower house of parliament, the "opinion" of Egyptians regarding its current government will likely once again become evident in Tahir Square.

A Recycling, An Axiom, and a Rigging

Over the weekend in a General Election, Japanese voters - or, rather, the 59% of eligible voters who showed up - overwhelmingly brought back Shinzo Abe, leader of the Liberal Democratic Party (LDP), as their 7th Prime Minister in 6 years. This reflected much less a new-found love of Mr. Abe (who last ruled for 12 months as Prime Minister in 2006-07), and much more a thorough disgust of Prime Minister Yoshihiko Noda and his DPJ party's chaotic rule of the past 4 years. The Japanese economy is back in recession, despite years of virtually zero interest rates and aggressively stimulative fiscal policy; Japanese exporters have struggled as the yen, until very recently, has strengthened relentlessly; and Japan has continued to provoke China and South Korea regarding the sovereignty of the tiny, uninhabited Senkaku/Diaoyu islands (claimed by both Japan and China), and the even smaller Takeshima/Dokdo islands (claimed by Japan, and both North and South Korea). Today, at his first press conference as incoming Prime Minister, Mr. Abe decided the best way to begin a Tokyo-Beijing reconciliation was to announce that "there is no room for negotiation on this (Senkaku islands) point".

Moving to America, this writer is reminded of the communication axiom that redundancy creates retention. Thus, since the Presidential election, Republicans and Democrats have engaged in seemingly endless repetition of their respective positions regarding fiscal policy - tax rates must not rise, and spending is the problem, according to Republicans; the rich must pay relatively higher taxes, and we will talk about expenditure restraint later, according to Democrats. The Republicans appeared to blink - slightly - this weekend, with Speaker Boehner saying Republicans could agree to rate increases, but only on incomes above $1 million (0.2% of US tax filers), assuming significant expenditure cuts. President Obama remains mum on this latest offer. But equity markets in America seem to think that a cliff deal is imminent, today continuing their post-November-election rise. Watch for a "fiscal-deal-lite" this week, that will simply punt the tough debt and deficit issues to next year.

Finally, in another weekend election, Egyptians began voting on their new, post-Mubarak Constitution (logistically, the referendum had to be restructured into two parts, that continues next weekend, because most judges refused to monitor the voting procedures). Secular Egyptians are outraged that the draft Constitution presented to the electorate by President Morsi and his Muslim Brotherhood party would, if adopted, shift Egypt to Islam-dominated rule. Without judicial oversight, and with many Egyptians boycotting the election (32% of those eligible voted in this first round), the referendum outcome will fall just a little short of legitimacy.

Political Ambition, Economic Neglect

Last week, Egyptian President Mohamed Morsi took one step back from his - and his Muslim Brotherhood's - power grab. He reversed his snap decision on November 22 to grant himself sweeping new powers, which included "temporary" exemption from judiciary oversight. But he is proceeding with a planned constitutional referendum, now scheduled for this weekend and next. The draft constitution, hastily passed on November 30 solely by Islamist parties in a single, late-night sitting of the constitutional assembly, would strengthen sharia (Islamic law), and pays scant attention to the rights of individuals, the press, and trade unions, and to the role of the judiciary.

Morsi has clearly miscalculated. His decree and planned referendum have provoked secular Egyptians into further - at times violent - demonstrations in Cairo on a scale equivalent to those of the Arab Spring revolution against the Mubarak regime. Yesterday, the political crisis deepened, as judges announced their refusal to oversee the referendum, and the defence minister, Abdel-Fatah el-Sissi, felt compelled to call for a "national dialogue meeting" between the Muslim Brotherhood and other, secular political parties.

And as political upheaval rolls on, Egypt's economy continues to deteriorate. Its current account and budget deficits are huge (the latter estimated at 11% of GDP), the official unemployment rate is 12.5%, price inflation is running at 8%, and growth is in free-fall, as tourism and exports drop.  It was announced yesterday that an urgently-needed $4.8 billion IMF loan, scheduled for final Board approval this week in Washington, has been postponed. President Morsi, clearly attempting to mitigate the severity of the Cairo protests, this week cancelled planned tax increases on a broad range of goods and services which formed an integral part of the IMF loan agreement.

In commenting on the loan delay, Finance Minister Mumtaz al-Said noted that "of course the delay will have some impact, ..but I am optimistic everything will be well, God willing". Now that's optimism.

On to The Next Crisis

Just as Europe seemed to be pulling back from imminent crisis - easing pressure on Greece (with a new deal to release a further portion of a bail-out loan to the Greek government), and on Spain (granting further bail-out funds for its major banks) - another, possibly much greater, threat emerged over the weekend.

Former Italian Prime Minister Silvio Berlusconi announced on Saturday that he was withdrawing his party's support from the coalition run for the past year by Mario Monti, an economist, appointed by  Italian President Napolitano to head a non-elected government charged with the task of pulling Italy back from near-financial collapse. A technocrat who has implemented a broad range of austerity measures (the retirement age for pension eligibility has been raised, sales taxes hiked, and a property tax on primary residences has been reinstated), Mr. Monti has garnered respect (if not popularity) for so far avoiding the sovereign debt crises plaguing Portugal, Ireland, Greece and Spain. Decades of political instability in Italy seemed to have, for once, transitioned to steady, competent leadership.

But Monti cannot continue governing without the support in Parliament of Mr. Berlusconi's Freedom People party. As for Mr. Berlusconi, his withdrawal of support is designed to hasten an election call - originally scheduled for next Spring - in which he has announced he will run for his fourth term as Prime Minister. Berlusconi was convicted of tax fraud in October (he is appealing), is on trial in Milan for allegedly paying an underage prostitute for sex (he and the woman deny they had sex), and has been the subject of numerous other judicial probes in the past several years. Only two countries -Zimbabwe and Haiti - grew more slowly than Italy under Berlusconi in the decade to 2010. He was finally forced to resign as Prime Minister over a year ago as markets became intolerant of his government corruption and ineptitude (Italian bond yields soared above 7%). Last year, The Economist magazine, in assessing his record, described him as "the man who screwed an entire country". Berlusconi insisted this weekend that he is running "out of a sense of responsibility", and "out of desperation" for lack of an alternative.

New political instability in Italy - Europe's fourth-largest economy - could roil markets - and not just in Europe - as they open tomorrow morning. Watch for spreads between German and Italian bond yields to widen dramatically, and for pressure on the euro to re-emerge.

(Lack of) Progress Report

Negotiations between Republicans and Democrats to avert the fiscal cliff apparently went nowhere this week. Public utterances by the major players in Washington indicated that their well-known political orthodoxies are as entrenched as before the Presidential election. Thus, for example:

- Treasury Secretary Geithner, when asked in a television interview whether the Administration was willing to let the economy slip over the fiscal cliff if the Republicans did not agree to income tax rate increases for the wealthy, responded, "oh, absolutely". “There is no prospect (for) an agreement that doesn’t involve rates going up on the top 2 percent of the wealthiest Americans,” he told CNBC.

- House Speaker Boehner briefed the Press, very briefly, this morning. He began by noting, tersely, that he was not providing a progress report, because "there is no progress to report".  He characterized this past week as "wasted", as the President's negotiating position was nothing more than a reiteration of his campaign promises - "his way or the highway", as the Speaker described it. His phone discussion with the President earlier this week was "pleasant", but essentially just more of the same. Though widely anticipated, there was no face-to-face follow-up meeting with the President.

- Not to be outdone, House Democratic Minority Leader Nancy Pelosi spoke to the press right after Speaker Boehner, and immediately after meeting one-on-one with the President. Her message, much the same as Secretary Geithner's,  was that the only thing standing in the way of "middle-income tax relief" was the Republican's refusal to allow rates to rise on the wealthy. Her stated objective was to ensure that everyone "pays their fair share".

So, with 24 days left before the hesitant economic recovery in America slips over the cliff, it appears that expectations  this week for progress towards fiscal resolution were unwarranted. Curiously, perhaps, US equity and bond markets seemed mostly unfazed (the Dow and S&P 500 were up on the week) by the evidence of persistent stalemate. Maybe they simply had no expectation to begin with, or have moved beyond cliff concerns, recognizing that the gravity of fiscal imbalance is such that, if Washington can't fix it, markets will, forcing resolution upon squabbling politicians sometime soon.