The 60th anniversary of the EU does not need to mean decadence

My personal contribution to commemorate the EU 60th anniversary was to publish a second edition of my 1987 book on Economic Integration and Growth, to which I added a second part dealing with enlargement and the risk of disintegration following Brexit. A link for the book is found on the left and next I reproduce its concluding chapter.

How to Rebuild a Collapsing Castle

As in relation to historical buildings, common sense dictates that the restoration of a collapsing integrated union cannot be done by demolishing first to build after. Instead, it needs some education about the value of preserving past achievements. Here lies the difficulty, but not at the technical and legal level. This is so because the required political will to preserve economic freedom is not only wavering, it risks being reversed by rising political populism in America and Europe.

This book provides plenty of theoretical and empirical evidence about the economic superiority of free trade over protectionism. However, integration is not just about economic gains and losses; it is also about institutional and political arrangements that are efficient and fair to mobilise all members regardless of their specificities. As said in chapter 10, there is no point in being a member if a country wishes to be part of other integration process or believes that an atomised world of independent states is a better road to achieve global liberalisation.

So far, it is not yet clear which of these roads Britain wishes to follow. However, this is not really important for the remaining EU members. What they need to consider is whether they should use the Brexit opportunity to change their own organisation to deal with other “unsatisfied members” and future entries and exits.

The current situation, in relation to neighbouring countries, is depicted in the diagram shown above in page 207, which needs to completed by a list of six Western Balkan countries, of which four (Albania, Macedonia, Montenegro and Serbia) are already official candidates and two (Bosnia and Kosovo) are potential candidates. The Balkan problem can be resolved swiftly through a bold enlargement. Although the Balkan countries are problematic due to rampant criminality (Albania), ties to Russia (Serbia), and Islamic population (Bosnia and Kosovo), they should not be excluded.

Indeed, their membership would make more compelling the need to transform the European Union into an official multi-tier union, based on a variable geometry as discussed in chapter 10. The institutionalisation of a variable geometry would allow member countries to opt out or to be demoted from some policies without major political upheavals. For instance, temporarily, Greece could leave the euro until she has sorted out her foreign debt. Romania could be demoted from the free movement of people while the current members could repatriate professional beggars from that country. Likewise, countries like Hungary and Poland, which are diverging from the EU pattern of democracy, could be demoted to a lower level of integration.

The long-waiting candidacy of Turkey to join the European Union should be abandoned; it seems to have replaced its strategic membership of the EU by an attempt to become the leading Islamic power in the Middle East.
Indeed, the end of the American leadership in the free world brought about by the new Trump administration is likely to generate a new drive towards the creation of rival spheres of influence. In Europe, Britain, Russia and Turkey are likely to strive to create their own spheres of influence at the expense of the European Union.

This new XXI rivalry will differ from nineteenth-century imperialism. It will use modern weapons to impact on the policies pursued by the European Union. For instance, Erdogan’s Turkey might use migration and refugees to destabilise Europe; Putin’s Russia may use energy and its spies and corrupt oligarchs to trap neighbouring countries and discredit democratic EU institutions; while Theresa May’s Britain may be tempted to use tax competition to break the social security net in the European Union.
Although individually, each of these countries is too small to threaten the EU economically, when combined, their challenge cannot be ignored in the design of new EU policies to keep and foster the integration process.

To cope with this challenge, the EU needs to simultaneously launch new common policies whilst disengaging or scaling back some of the current, more divisive policies. Moreover, the new exclusive policies should have a significant budgetary value (e.g., raising its level from less than 2 percent to a value closer to 10 percent) to have a macroeconomic role. Moreover, they should not be of a sector nature and distort international competition.

At the top of the list should be a single policy on migration and refugees, inspired by the Canadian or Australian models. In second place should be a policy of common defence and security, including a nuclear deterrent, so that the EU becomes ready to lead NATO should the United States weaken its commitment to the alliance.

Next should be the financing of the high end of two fundamental public services—education and healthcare. Given the success of the Erasmus student mobility program and the rising costs and competition of research, higher education and hospital healthcare are two obvious candidates to be funded at the European level.

Looking forwards, a regionally differentiated basic-income policy for unemployed, destitute, and old people should also be considered.

Of course, a multi-tier Europe with new single policies can only work with proximity and the trust of the people. The model based in the centralisation of the European civil servants in Brussels is no longer efficient or acceptable to guarantee accountability and democracy.

The current institutions have not done enough to prove their accountability, and direct elections for the European Parliament have not contributed to create truly European parties where the electors feel represented. Moreover, the idea that the current institutions—commission, council, and parliament—may transform into a government, senate, and congress of a future federation or confederation is utopian.

The EU needs to create institutions that are adapted to its diversified country basis. One such solution would be to split the European Parliament into upper and lower houses, the first made of members elected by the national parliaments and the second by members elected directly in European lists.

To sum up, like the founding fathers had to select policies that were then crucial, any restoration of the European Union has to do the same. Back then, the challenge was to reconstruct a democratic Europe from destruction. The obvious industries were atomic, coal, steel, and farming. Now the challenge is to win the race for talent and technology and to do so with social stability and security, in a world threatened again by multi-polar power players.

Do Republicans risk becoming a neo-Nazi party?

Is Donald Trump simply a maverick inoffensive contestant from a Jerry Springer reality show?

Many moderate Republicans sincerely hope so, and refuse the similarities between Trump and Hitler.

There are certainly some differences, and Trump is no match to Hitler in terms of racism, imperialism or intelligence. However, the similarities are too many, from an anti-capitalist and protectionist stance, to an exacerbated nationalism, both being compulsive liars, demagogues, militarists and paranoid self-centered personalities.

Yet what is more frightful in relation to a possible election of Trump, is that a number of economic and political conditions are comparable to those in the 1930-1933 Germany when Hitler rose to power. I shall deal here with the political parties only.

Just like Trump, for many years until 1928, Hitler was basically seen as a wild card. Still, Hitler’s Nazi party rose to power from a 2.6% share of the vote in May 1928 to reach 37.3% in July 1932, followed by a subsequent decline to 33.1% in November 1932.

This meteoric rise was the result of a combination of the misery caused by the economic crisis of 1929, the political instability created by the fall of the so-called center-right grand-coalition brought down by the People’s Party (DVP), the 6.3% rise of the Communist Party (KPD) to 17%, at the expense of the social democrats (SPD) which declined 9.5% to become the second party, the divide in the left and right-wing liberal parties (DDP and DVP), rising anti-Semitism and, crucially, the referendum held in Germany on December 1929 to introduce a 'Law against the Enslavement of the German People' which gave prominence to the Nazis.

Throughout this period, the German Centre Party (Catholic)’s share of the vote remained stable at around 12%. But, it headed the government and, together with the German National People's Party (DNVP), was one of the main “establishment” conservative parties. The successor of this party is now the CDU (Mrs. Merkel party) and it its ideology is close to the declining moderates still in the Republican Party.

So, the main political base for Hitler’s rise came from the other conservative parties – DNVP, DVP and DDP. Let me reproduce from Wikipedia some of its characteristics, so that we may compare them to the political factions in today’s Republican Party in America.

Classical liberalism of the kind espoused now by some Tea Party and Cato Institute activists, was also split in Germany between liberals on left (DDP) and right (DVP) wing parties.

The German Democratic Party (DDP) was founded by leaders of the former Progressive People's Party, left members of the National Liberal Party, and a new group calling themselves the Democrats. The party was attacked by some for being a party of Jews and professors. Among its well-known politicians were Hugo Preuß, the main author of the Weimar constitution, and the eminent sociologist Max Weber. Hjalmar Schacht, president of the Reichsbank and one of the founders of the party, left the party in 1926 and became a supporter of Adolf Hitler. This party today would resemble some of the Bernie Sanders supporters that refuse to vote Clinton or may even vote for Trump.

The German People's Party (DVP) was a national liberal party in Weimar Germany and a successor to the National Liberal Party of the German Empire. It was the right-wing liberal or conservative-liberal party, generally thought to represent the interests of the great German industrialists. Its platform stressed Christian family values, secular education, lower tariffs, opposition to welfare spending and agrarian subsides and hostility to "Marxism" (that is, the Communists, and also the Social Democrats). Today’s equivalent names in the Trump campaign include people like Ralph Reed and Paul Ryan on the religious/political side and Aleson, Deason, Ichan and Ross on the business side. Today’s Trump financiers are mostly involved in casinos and deal making, and not so much in the traditional military industrial complex.

The German National People's Party (DNVP) was a national conservative party in Germany during the time of the Weimar Republic. Before the rise of the Nazi Party (NSDAP) it was the major conservative and nationalist party in Weimar Germany. It was an alliance of nationalists, reactionary monarchists, völkisch, and anti-Semitic elements, and supported by the Pan-German League. After 1929 the DNVP co-operated with the Nazis, joining forces in the Harzburg Front of 1931, forming coalition governments in some states and finally supporting Hitler's appointment as Chancellor in January 1933. Initially, the DNVP had a number of ministers in Hitler's government but quickly lost influence and eventually dissolved itself in June 1933, giving way to the Nazis' single-party dictatorship. The current day Republican equivalent is found among the more conservative Republicans and some Tea Party activists.

These three parties had their role in paving Hitler’s rise to power, the same way that several Republican factions paved the way to Trump’s nomination as Republican candidate for President in 2016.

Should Trump be elected, can we expect the Republican factions to merge into a neo-Nazi party?

The risk is very real.

So, what can Bush and other moderate Republicans do to stop this nightmare scenario?

They have basically two defense lines. First, recommending a vote for Clinton to stop it happening. Second, should this fail, to stop the Congress and Senate from approving an “enabling act” of the type that gave Hitler the power to obliterate the other parties and become a dictator. Not even if Trump portrays himself simply as a Putin-like dictator, and not a radical like Hitler, should the moderate Republicans conciliate.

In conclusion, Republicans have an enormous moral and historical responsibility in stopping the devil before it rises again. The Great American Nation and World Peace depend on their wisdom and courage!

A fine balance between the breakup of Britain or the EU

After the British vote to leave the EU, what should the EU offer the new UK (or England)?

The first thing that the EU must offer is time. Time to let the Brits reflect on what they wish to do about their new position in Europe and whether they wish to do it together in the UK or separately.

This should not stop the EU from setting the maximum it can offer. There is an obvious answer to this, which is the signing of a European Economic Area agreement. This is the obvious offer whether the new Britain decides to rejoin EFTA or not.

This would allow the English to participate in the EU internal market which is what they value most.

However, this creates a major problem because it forces the signatories to accept the EU rules on free movement of people, goods and services without much substantive discussion. Yet, not being ruled by Brussels was precisely the main motive for the leave vote.

Without signing an EEA agreement Britain may be in a position similar to Switzerland, which also did not sign with fear of labor mobility and loss of independence. However the Swiss Cantons are not as pro-European as Scotland and Northern Ireland are.

So, what are the options?

Basically, the EU can design a new type of EEA agreement to meet the Swiss and British fears and hope that it would be enough to prevent the choice of independence in Scotland and Northern Ireland.

Alternatively, it might advise the UK to rejoin EFTA with a promise to let Scotland and Ireland sign separate EEA agreements, by using a reverse of the formula found for the Norwegian Svalbard archipelago in the Arctic Ocean. I doubt that this would be enough to stop the breakup of Britain, but it is worth consideration.

What the EU should not do, is to give Britain better terms than the current EEA members have or encourage a breakup of Britain. The first would encourage more EU exits and the second would weaken NATO’s role and the prospect for lasting security and peace in Europe.

So, let us hope that the European Council meeting this Tuesday to discuss what to do about Brexit is a calm one, which decides to preserve the unity of Britain and of the remaining EU above all else.

Wild west and “crony” capitalism

Capitalism without rules and capitalism with rigged rules are the two sides of the same coin. In fact, despite claiming to be capitalist, such economic systems violate its basic foundations, namely free markets and the rule of law.

The absence of any form of regulation, whether on working conditions or environment, is often associated with the early days of capitalism in XIX century England. However, Anderson and Hill in their “An American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West”, re-interpreted the wild west history as an experimental libertarian society. They claim that “Private agencies provided the necessary basis for an orderly society in which property was protected and conflicts were resolved. These agencies often did not qualify as governments because they did not have a legal monopoly on "keeping order."”

This is a mistaken reinterpretation of facts. Indeed, all historical experiments quickly have shown that someone (the government) stepped in with a monopoly over law and its enforcement before the country collapsed from civil war or banditry. This has happened in all revolutionary processes as well as in the development of private law experiments (e.g. securities law in XVII century Amsterdam or the merchant courts in medieval Europe).

Presently we may find examples of wild west capitalism in failed states (e.g. Somalia or Libya) or in special territories enjoying reduced or non-existent regulation (e.g. the special enterprise zones in China).

However, the most common is to find situations where, although private property is protected from extortion by law, the law itself and its enforcement may be twisted in favor of the rulers and their acolytes. Like in “wild west” societies, business is carried out under the law of the jungle but this time the strongest is protected by the state. This type of “crony capitalism” is common in dictatorships but exists also in democratic societies.

The “cronies” typically use their control of the state to raid other people’s property, to get rid of competitors, to get favorable tax treatment, privileged access to financing and to secure government procurement contracts and concessions. Often, these advantages are also secured through protection against corruption charges.

Crony capitalism exists to some extent in most capitalist economies but only when favoritism is rampant can we talk of a “crony capitalistic” system.

Unfortunately, there are too many past and present examples of crony capitalism. Among the most extreme historical examples we may mention the Suharto and Mobutu families in Indonesia and Zaire, respectively. Presently, Putin’s Russia or Chaves’ Venezuela are also two of the most extreme examples, although the later would be better described as crony socialism. Obviously, the more regulated a sector is the greater the scope for crony capitalism. For instance, in sectors like banking, real estate, utilities, telecoms, natural resources and casinos. So, not surprisingly, in 2014 the Economist ranked Hong Kong, Russia, Malaysia, Ukraine and Singapore as the top five countries in terms of crony-sector wealth.

The antidotes to crony capitalism are the rule of law and free markets. Indeed, as long as these are upheld, as they should in societies with representative democracy and constitutional liberalism, market capitalism will never degenerate into “crony capitalism” as is frequently anticipated by Marxists and other anti-capitalist movements.

It is important to remember that in their initial stages countries under crony capitalism economies often experience substantial economic growth driven by public or speculative investment. However, when such levels of unsustainable investment comes to a halt due to losses and lack of financing the economic miracle always collapses with huge amounts of debt, abandoned investments and unemployment.

That is, even when apparently successful, one should not be fooled because in the end crony capitalism will always bring misery and a huge misallocation of resources.

Likewise, the frequent examples of crony capitalism under systems of state and managerial capitalism should not be used to confuse these systems with crony capitalism, because such systems have a deliberate policy to change the workings of capitalism.

The economics of disintegration and why the Scottish should vote no

The world and Scotland fear what may happen if next week the Scottish people votes for Independence. Economic theory has a solid knowledge about economic integration and there are a few empirical studies measuring its costs and benefits (including my own here). Independence is the reversal of integration, so we may apply most of the theory to disintegration.

Apart from the immediate impact caused by changing existing relations and institutions, which may be enormous if independence is not a peaceful process, the long term advantages of separation must be proved in terms on how it will impact on the four basic freedoms – free movement of labour, capital, goods and services. To these one may add the pros and cons of financial transfers through a centralized budget and the use of a common currency.

Let me speculate on each one of them. For this I shall assume, optimistically, that the process will be peaceful and Scotland will remain in the European Union, which itself will not disintegrate if the independence movement extends to countries like Spain, Belgium, etc.

In terms of labour market Scotland is now fully integrated with the UK and workers move freely between Scotland and the rest of the UK. So nothing can be won by independence, but losses are foreseeable in terms of job opportunities.

Likewise, in relation to the free movement of goods and services, as long as Scotland remains within the EU, these will remain relatively free. Again, nothing can be gained through separation but the risk of non-tariff barriers will rise.

When it comes to the free movement of capital the answer is not straightforward, because it depends on what the separatists would decide in terms of their future currency. They promise to retain the British Pound but this may prove untenable. Using a foreign currency only works until the rulers of that currency (in this case the Bank of England) pursue a monetary policy that is good for the local economy, but this is uncertain. What is sure is that there will be a significant change in Scotland’s current account because of the North Sea revenues.

Indeed, the case for independence rests on little else than retaining such revenues in Scotland. However, there is no certainty on how long those reserves will last. And, more importantly, they would only reduce the current government deficit from 14 to 8%, or probably much less if one accounts for loss of revenue in the financial sector and increased sovereignty costs, let alone the local politicians’ eagerness for more spending.

This bet on becoming an oil-producing country is a very dangerous mirage. Not only because of the likely effects of the so-called “Dutch disease”, but also due to the rise of populism and anarchy in the fight for such revenues (Venezuela comes to mind when one thinks about it).

Traditionally, the Scottish are viewed as tight-fisted and prudent people. Let’s trust that these characteristics will lead them to prefer the certain to the uncertain and to avoid embarking on an independence adventure with so many risks for them and the rest of Europe.

Multiculturalism and Democracy

We define here multiculturalism in a narrow sense to include only major differences based on ethnicity or religion, leaving aside other rivalries created by geography or ideology.

Theoretically, one may expect multiculturalism and democracy to conflict or even to be irreconcilable, because people tend to rally around single issue parties along ethnic or religious lines.

In reality we find democracy in large multicultural countries like India, a country where 20% of the population follows a religion different from Hinduism, where cohabit more than 700 tribes, with 18 official languages and 450 linguistic groups.

In contrast we currently have many smaller multicultural countries like Syria and Iraq being ravaged by civil war. At the same time we have totalitarian multicultural countries like China, also a big country, where less than 50% of the population follow Shenism-Taoism and Buddhism among the Han Chinese and the other 55 official ethnic groups speaking 292 languages. Despite Mandarin being the only national official language in China, other languages like the Cantonese are also official languages at the regional level.

The question then is: why is multiculturalism consistent with democracy, tolerance and diversity in some places but not elsewhere?

One explanation is that democracy was possible where there was an over-riding cultural inheritance; often originating from the leadership of independence movements. India, where Gandhi’s party – the National Congress Party – dominated the political life in the first 25 years of independence, is such an example.

What makes the Indian experience interesting is how such party dominance could be ended in a peaceful way. Indeed, democracy survived despite the emergence of a plethora of small regional and ethnic parties and, at times, being governed by a 14-party coalition.

Many factors might have contributed for such outcome, but among the most important we must certainly include the choice of a federal system of government, the adoption of a unified and independent judicial system and the acceptance of coalition governments instead of a more traditional two-party rotation system.

All those currently pushing to jump towards political union in the European Union must think about these factors.

Democracy and the Euro-Greek Tragicomedy

It appears that Aristotle defined tragicomedy as a serious action with a happy ending. So can we write the recent tragedy of the Greek bailout and the ongoing comic infighting of the Greek politicians as a prelude to a plot with a happy ending?

Last night’s refusal to agree on a Greek government of national salvation might lead to either new elections or a referendum on the bailout program. This should be the democratic way to solve the current deadlock. The people should be given the last word; even if the results leave the nation divided in two almost identical camps the winning camp has the mandate to carry out his policies. That is the foundation of democracy and it is preferable to forcing the Greeks to accept the undemocratic tutelage of the shameful duo Merkel-Sarkozy.

Now, let’s imagine that the camp opposing the current bailout wins and decides to declare a unilateral default on the Icelandic-style, but decides to keep the Euro. This is the scenario feared by the “very serious people in pin stripes” and some economists who fear the contagion of a disorderly bail-out.

What can Mr. Juncker, Draghi and Barroso do about it? According to Mr. Barroso the Lisbon Treaty does not have any legal mechanism to expel a Euro-zone member. Mr. Draghi’s interpretation of the European Central Bank remit is that it does not include any responsibility as lender of last resort for any member country. Mr. Junker’s Eurogroup meeting of the Finance Ministers of the Eurozone countries was institutionalized by the Lisbon treaty without any power over its members. So, let us image also that they decide to do nothing.

Would this mean the end of the Eurozone? In principle no! For instance, in the Dollarzone (USA) when a local government defaults on its Muni-bonds the Federal Bonds barely move. Yes, I know, the USA has a Federal budget. However, its interstate transfers are not enough to justify the decoupling between the Munis and the Treasuries. What is different is that the FED (the US central bank) has an implicit remit to bailout the major banks whose failure would represent a systemic risk as it has shown in the crisis of 2008.

This is a key weakness of the current ECB thinking. Should the markets attack the other highly leveraged countries to an extent that would bankrupt some of their major banks in those countries the ECB might feel restrained in continuing to lend to such countries.

Indeed, as illustrated by its continuing purchase of low quality securities, the ECB does not need to have an explicit lender of last resort mandate enshrined in the European Union treaty. Nor does it need to take massive losses on its ABS holdings, as has been propagated by the German Press. For instance, it can simply print money to finance an off-balance sheet vehicle to park such securities and ask the EFSF and the Governments rescued to share on its capitalization.

So here is a script for a happy ending to the Greek tragicomedy:
1) Greece reasserts its firm commitment to remain in the Euro;
2) Greece defaults on its debts and goes to the London and Paris clubs for a restructuring deal with better terms than those currently on offer;
3) To support the debt restructuring program Greece applies to the IMF for a new extended facility;
4) Meanwhile the ECB extends an unlimited liquidity line to one or two of the best Greek banks to keep the financial system afloat, subject to Greece agreeing to points 1-3;
5) The ECB announces that it will provide such lines to any other member who needs them;
6) To kill any doubts about its own strength the ECB will begin selling its low quality assets to special purpose vehicles;
7) Faced with such determination the markets will begin pricing the sovereign debt spreads of the various Eurozone members in accordance with their respective risk profile; and
8) After the successful implementation of programs 2 and 3, Greece regains market access within three years.

Here is the lesson from such tragicomedy. One should never give up on the ability of democracy to find a solution. It may be convoluted; it may take some time, but it will be better than a dictatorial solution under a veil of technocracy or to a shameful begging for help from a mixed bag of world leaders gathering in the G20 group.

We can’t all deleverage at the same time

We can’t all deleverage at the same time. That would be equivalent to everyone moving to the same spot in a sinking ship. It would capsize immediately. To see why, imagine this nightmare scenario: everywhere and everybody – banks, firms, governments and families – think that they are overleveraged (i.e. is excessively in debt) and decide to reduce debt (deleverage) simultaneously. Regardless of whether they are right or wrong about their excessive level of debt (in a previous post we explain why this is difficult to define); the simultaneous deleveraging could start the following fatal spiral.

Banks reduced excessive leverage by not renewing their lending facilities to firms; these add misery to injury and reduce further their leverage by firing workers and trying to sell assets. Braced with lower tax revenues and higher calls for unemployment insurance, governments answer by reducing public debt through higher taxes and massive cuts in spending; which reduce the revenue streams of banks, firms and families. Families, affected by higher unemployment, loss of revenues and fearing the future, decide also to deleverage by saving more or defaulting on their loans and by massive cuts in spending. This would reduce further the revenues of banks, firms and governments. Thus, to pursue their debt reducing objectives all would initiate a new round of cuts. This would cause a downward spiral of spending cuts that would stop only after the economy was brought to a complete halt and widespread defaults.

Wait, there must exist some break point on this spiral. After all, debts are owed to someone and those receiving the debt repayments must use their surplus money. Yes, but what if, fearing that same spiral, they decide to hoard it by holding cash, exchanging it for some remote currency (e.g. the Swiss Franc) or buying some relic from the past (e.g. gold). The first, if not offset by the Central Bank, would cause a major liquidity crisis accelerating the depression. The other two may lead to absurd bubbles whose anticipated bust would hang on the heads of enterprising people. So, not much hope here.

What if there is somewhere an unleveraged entity willing to finance an orderly sequence of deleveraging through saving and inflation? To a large extent that was the situation at the end of World War II, when the US played that role. Can’t China and other emerging nations play that role now? Probably not, because they do not have the economic size needed to face a much bigger problem. Moreover, by accepting a rescue from a dictatorship, the Western democratic nations would risk losing their freedom.

Indeed, despite some double counting, the following table shows that the net international investment position of the Western countries is less than 3% of their GDP, largely because of the high level of savings in Japan. Yet, Japan has the largest government debt as a percentage of GDP (226%).

Unfortunately, a deleveraging spiral may start without all countries being overleveraged. A debt crisis in one sector (e.g. the Government) may easily infect the remaining or be started off by a generalized downgrade by the rating agencies. In fact, some fear that the leading Western nations (US, European Union and Japan) may be in the brink of getting into such a depression spiral started by deleveraging in the sovereign debt sector. So they desperately need to find an alternative solution.

First, they must plug once and for all the holes emerging in the weaker economies of the Euro Area. Second, they must mobilize the spending power of the few remaining sectors with borrowing capacity. Finally, and most importantly, they must acknowledge that at least one entity must be allowed to continue to increase its leverage while the others deleverage.

Here the obvious choice must be the Government (except in Japan), due to its policy powers, but mostly because it is the only one that can borrow with very long maturities.

Thus, although we live in a peacetime period, sovereign debt limits in the US and Europe can be increased to levels close to those observed at the end of wars. That is, countries with national debts around 60% of GDP could borrow close to a 100%, while those already above the 100% should be allowed to borrow up to 180% of GDP.

The process, relying on multilateral facilities, should be sequential with an agreed calendar and coordinated at the level of the G3 group of countries (not the G20, which should only have a consultative role).

Is the Portuguese experience relevant for Egypt and Tunisia?

On 25th April 1974 a military coup by young officers in Portugal followed by a popular uprising brought to an end the authoritarian regime of Salazar established in 1928. The so-called “carnation revolution” was largely peaceful and two years later ended-up establishing a democracy in Portugal. It is often seen as the forerunner experience of other forthcoming peaceful regime changes brought by popular uprisings, namely in Eastern Europe. To understand whether it can be also a reference for peaceful democratic revolutions in the Arab world one needs to consider the similarities and differences with Portugal.

Portugal was a secular but deeply religious (Catholic) country where the church was a strong supporter of the old regime. The country was also caught by surprise, without political parties (with the exception of the clandestine communist party that had been the only serious opposition to the old regime). The country was a member of NATO but for two years lived in danger of a communist takeover. Western powers helped the creation of new democratic political parties and pressured the Soviet Union not to try doing in Portugal what it had done in Eastern Europe. At the time the danger for Portugal was that it risked replacing a pro-western authoritarian regime with an anti-western communist dictatorship.

Similarly the fear in relation to the Arab uprisings is that they also risk replacing pro-western authoritarian regimes with anti-western theocratic dictatorships. Should then Western countries support a Portuguese-like change in the Arab world?

The risks are certainly higher, if one remembers the precedents of Pakistan and Iran. But if one compares with Portugal the fear of failure is even higher. Consider first the role of the military. Although the military in most Arab countries are also Western trained, but they are neither bound by membership to a democratic military alliance like NATO nor are they free from corruption charges as were the military under Salazar. If we look at the role of religion a major difference can also be found. After centuries of wars the catholic religion had already lost its grip on political power. That is not the case with Islam. Also, Islam does not have a Soviet-type leadership that the West can stop from interfering in the democratic process. More importantly, Portugal was culturally and socially part of a democratic Europe. Unfortunately, there is no such environment among Arab and Muslim countries. Among the more than 50 countries with Muslim majorities, less than one third is secular, and only two are democracies (Malaysia and Turkey) but none of them is Arab.

Therefore the chances of achieving a peaceful democratic regime change are very slim. The most likely result is a theocratic anti-western dictatorship and the West must have a plan B to deal with such eventuality, especially if it becomes a military threat. By definition democracy cannot be imposed by force. It is up to the Arab people to decide if and when they will choose democracy. Possibly, they will not be able to do so before severing the grip of religion on politics. However, that does not mean that the West should treat all dictatorships as equal. The three types of dictatorial regimes – theocratic, monarchic and military – are very different in their respect for peace and human rights.

This is a situation where one wishes that our pessimism is proved wrong.

Why only six pillars?

No doubt, the happiness of humanity cannot depend only on six pillars. However, at the dawn of a new millennium, we selected only those that strike us as the most important means to promote human happiness. By focusing on the means rather than the ends, we left out some important values like peace, friendship, family bonds and a healthy body and soul, as these are simultaneously means and ends in the pursuit of joy by humankind.

The most controversial pillar that we have left out is religion. Because of its crucial role to secure compliance with moral values and to help us face death, it should have a prominent role. Yet, since religion is at variance with the scientific method and it is often used to fuel hate and extremism we cannot consider religion as an unequivocal pillar of human betterment.

We see the six pillars as sustaining an equal number of columns in the gate of human progress. We looked for such beautiful gates with an historical significance but all we could find to illustrate our approach were the stone archway at Yuling, in China, and Hadrian’s Gate in the Ancient City of Ephesus in Turkey. Neither is particularly well suited to show the many sides supported by each pillar (so, if you are keen on art and may help us find a more beautiful gate we will be obliged). We are looking to add to each column the many ratings appropriate to monitor the multi-faced nature of the columns supported by each pillar.

Each pillar will be the subject of future posts. For now we close this post with a simply note on their role. The first two – representative democracy and constitutional liberalism are essential to understand how to manage power for the benefit of all. The next pair – market capitalism and productive work – is the key to a prosperous economy. The last two – scientific method and enlightened virtues provide the foundation for a gratifying life that goes beyond the satisfaction of our material needs.