Can It Last?

Italy's public sector debt, which at 130% of its GDP is the second-highest among the euro-area's countries, received another downgrade this week. Standard & Poor's lowered the rating to triple-B (two levels above junk) from triple-B-plus and, as significantly, left its outlook at "negative".

The issue is not so much with Italy's annual government budget deficits - a succession of tax increases and spending cuts in recent years has managed to at least hold these at just over 3% of GDP, roughly in line with the average in the Euro area as a whole. Costs of financing these deficits have dropped from the crisis levels two years ago, when a spike in the yield on 10-year Italian government bonds to above 7% contributed to the downfall of the Berlusconi government. And even with this week's latest credit-rating downgrade, these yields are holding, for now, at about 4.5%.

The issue is the overall structure of the Italian economy. Or, as S&P put it this week explaining their downgrade, "our action reflects our view of a further worsening of Italy's economic prospects coming on top of a decade of real growth averaging minus 0.04 per cent. The low growth stems in large part from rigidities in Italy's labor and product markets". S&P went on to point out that Italian economic output in the first quarter of 2013 was 8 per cent lower than in the last quarter of 2007, and that it was continuing to fall, with a drop of nearly 2% expected for 2013 as a whole.

None of this is news - economic commentators have been focusing on rigid labor and product markets in Italy (and the rest of Europe) for years. The Germans did something about their structural issues, beginning a decade ago, and are enjoying the benefits today (Germany's so-called Agenda 2010). Italian governments, on the other hand, have squandered their opportunities over the past decades, especially under Silvio Berlusconi. Mario Monti, Italy's technocrat prime minister between 2011 and 2013 , began introducing such reforms, but his government, though highly respected in Brussels, was, like so many before it in Italy, not sufficiently strong politically. It fell late in 2012, and his party garnered barely 10% in the national elections earlier this year.

Italy's current prime minister, Enrico Letta, certainly knows what needs to be done. Just after the S&P downgrade, he said in an Italian television interview that "the situation remains complicated, and internationally those who think that everything has been resolved are very wrong". Letta has some powerful and competent cabinet members on whom he can rely: Fabrizio Saccomanni, head of the Economy Ministry, will be particularly useful. Letta also knows that structural reform is politically difficult, and especially unpopular in a country weary of austerity and record unemployment. The question now is whether his left-center-right coalition government (an awkward combination even under the best of economic circumstances) has the will to proceed, and if it does, whether the coalition will survive. All of Europe is watching.

Better, in Mali

This is a remarkable story. In early February of this year, French President Hollande, strolling through the streets of Timbuktu with Mali's President, was celebrating his quick "victory". (He needed such a victory, given the state of the French economy, and his deteriorating political standing at home.) Some 4,000 French troops had, in barely a month, and with only little help from a disintegrated Malian army, managed to force out an inevitably temporary alliance of Islamist extremists and local Tuareg separatists (a quick primer: Tuaregs are a nomadic people who have been fighting for independence in northern Mali since the colonial French left in 1960) from establishing their own state in the north of the country. To completely secure the area, and to ensure that Mali remained whole, Hollande recognized, speaking in Timbuktu in February, that perhaps "a few more weeks" of French troop involvement would be needed.

A few weeks turned into a few months, but positively for the French. The Tuaregs broke with the militant Islamists, whom they had come to hate, and backed efforts to oust them. Then, in late June, they signed a peace accord with the Malian government in Bamako (the capital city, far to the south-west of the country), accepting a peace deal based on winning a degree of autonomy for their desert region. This was sufficient to allow Mali to lift, just last week, a country-wide state of emergency. The Northern Malian campaign persists, now with a 12,600-strong UN peace-keeping force (the third-largest in Africa) of French and West African troops, focusing especially along the mountainous border with Algeria, and that with Niger to the east. (More on Niger in a subsequent blog.)

The Islamist extremists have not gone away in Mali, and may emerge again in force if Mali does not, first, get a legitimate, national government in elections, tentatively scheduled for the end of July. And a real government in Bamako may produce an effective army. Even if all this happens, the jihadists in the north will simply shift elsewhere in the Sahel, into Niger, or northern Nigeria, perhaps back into Algeria to the north, into Chad to the east, or into the Darfur region of western Sudan. These are among the world's least defended borders. Even Ghana, the region's one successful state, is watching: its President, John Mahama, is worried about Islamist militancy, saying, "If we allow that foothold to consolidate, then it could affect the stability of the entire region".

.....as if Northern Africa, and Middle East, unrest and violence weren't enough. 

Out with the Brotherhood, back with the Army

Egyptian President Muhammad Morsi is now ex-President Morsi - under house arrest with his family - as the military, under chief of army staff, General Abdel Fattah al-Sisi, has stepped forward to install a new President and interim technocrat government, and is arresting some 300 leading members of the Egyptian Muslim Brotherhood. Egypt's experiment with a freely-elected, Sunni-dominated government, begun just about a year ago, is over.

This writer has argued in several past blogs that Morsi needed to spend far less time consolidating Brotherhood power in virtually every government institution, in a society, a large segment of which is comprised of not only educated, secular-minded Egyptians, but some Christians (about 10% of the populace) and a small Shia population (about 1%). But it was not just religious differences that led an estimated 14 million protesters into the streets on June 30 and subsequent days and nights, demanding that Morsi be ousted. It was as importantly Morsi's, and his government's, combination of arrogance and incompetence, on a grand scale.

As previously noted, Morsi failed to even begin to mitigate economic pressures, and the economy is now in free-fall.  Power outages, in a heat-ravaged Cairo and elsewhere, are frequent, petrol lines grow ever longer, bread and other staples are rationed, as wheat supplies dwindle, or are often not available at all. Youth unemployment exceeds 40%, serious crime is surging, inflation is rapid and accelerating, the central government deficit is some 11% of GDP, foreign-exchange reserves are nearly gone, and so are international investors and tourists. The International Monetary Fund has stood ready to disperse a $4.8 billion stand-by loan, but Morsi's government resisted at every turn the implementation of austerity measures, an essential loan condition. 

It is within this context that the Army felt compelled to intervene, and suspend a constitution that was so hastily written and implemented by Morsi's government. (And in this context, America and other countries have closed their embassies in the country and withdrawn their personnel.) The new interim leader, Adly Mahmud Mansour, the top judge of Egypt's constitutional court, is promising new elections and a new, broadly-inclusive constitution. The Army has said it will guarantee the right to peaceful demonstrations. If Mansour, and the Army, hold to their promises over the next few months, the considerable damage done to the cause of democracy, by forcefully removing a freely-elected government, will be much less than that of leaving in power a government whose actions increasingly exacerbated an already polarized society, and whose gross incompetence has pushed the economy to the brink of collapse. There is a chance that this military "coup", unlike so many before it, will be used  to encourage a functioning democracy in Egypt. If so, the coup will have been worth it.  

A Coup?

Late last week, this writer wondered whether the weekend would bring an anniversary celebration of Egypt's freely-elected President Morsi's first year in office, or a collapse of his government. With army helicopters flying over Cairo's Tahir Square, and  hundreds of thousands of protestors throughout Egypt demanding Morsi's resignation, collapse is the likely scenario in the days ahead.  

Egypt's army, historically a key player in the complex Egyptian political mix (it ousted Hosni Mubarak in 2011, but has stayed firmly in the background during the Morsi presidency), issued a clear ultimatum yesterday, read over state television  - President Morsi, you have 48 hours to resolve the unrest, or we will set a new "roadmap, enforced under the military’s supervision”. At the same time, six of President Morsi's cabinet ministers, including the Foreign Minister, resigned between Sunday and today. Egypt's highest appellate court also upheld the removal of the country's prosecutor general, Talaat  Abdallah, whom Morsi appointed. 

Morsi is digging in, demanding the army withdraw its ultimatum. But the army is again ready to rule, at least for a temporary period - it would install an interim council, composed mainly of civilians from different political groups and experienced technocrats, to run the country until an amended constitution was drafted within months, and new elections were called. Its over-riding interest is to prevent a full-scale civil war, such as that in Syria, now spreading to much of the rest of the Middle East. 

Celebration or Collapse?

At the beginning of this month, in assessing Egypt's drawn-out negotiations with the IMF for a sorely-needed $4.8 billion bail-out loan, this writer noted that "the country is likely to struggle on for the rest of the year without the loan, or at least until the parliamentary elections in the fall, somehow coping with a summer of worsening fuel and food shortages, power cuts, a dearth of foreign investment and tourism - and domestic unrest". 

About a month later, the IMF loan, under discussion for nearly two years, is still, at best, "pending" (according to a government spokesman), and economic disruption is indeed worsening. The summer has barely begun, yet already more of the perma-protest-process in Cairo, and other Egyptian cities, is virtually certain this Sunday. President Muhammad Morsi, the first Egyptian President to be freely elected, had hoped the day could be a celebration of his one-year anniversary. Instead, the army is already deployed at key sites throughout the country, and the unrest is expected to be on a scale equivalent to that which toppled Hosni Mubarak in 2011 , and at least as violent. Secular Egyptians object to the increasing influence of the Muslim Brotherhood in Morsi's government. But all Egyptians are frustrated by an economy on the brink of collapse, and a failure of government at virtually every level - fuel shortages are now acute, power outages frequent, food staples (even bread) rationed, if available at all, general price inflation is accelerating, and the marked ineptitude of the Morsi government in attempting to improve everyday conditions is made worse by corruption as insidious and prevalent as it was under Mubarak.

International investors have disappeared. So have tourists. The Egyptian pound and foreign exchange reserves continue to drop precipitously. Importers have been forced almost exclusively into a black market for currency exchange. This weekend's demonstrations, especially if they are violent and prolonged, will only ramp up pressure on the pound, with the threat of a disorderly fall that becomes beyond control of the monetary authorities. U.S. Secretary of State John Kerry, on his fifth recent visit to the Middle East, is set to meet with Israeli and Palestinian officials this coming week in efforts to  renew peace talks. No doubt, while Mr. Kerry negotiates in Amman and Jerusalem, he will also be carefully watching events in Cairo. Descent into chaos in Egypt would only worsen the sectarian upheavals spreading from Syria into Lebanon, Jordan, Turkey and Iraq, and drawing in Iran and Israel.