European Smart Power

Inspiration struck while reading Joseph S. Nye's article in The World Ahead, the latest Foreign Affairs special issue. There he argues that America is not in absolute but in relative decline, and will thus have to learn to share the spotlight with other nations -- namely China --, due to their rising power there are still some worrying signs, namely the mounting government debt, primary and secondary education failure and political gridlock. However, he rightly assesses that America is still seen as 'the place to be' almost everywhere in the world: it is an enormous magnet of talent thanks to its famed multiculturality, openness and social mobility. In the words of the U.S. State Department policy czar Ann-Marie Slaughter, the U.S. can be defined as a country whose 'culture of openness and innovation will keep it central in a world where networks supplement or even replace hierarchical power.'

However, both these assessments fail to consider another huge, looming problem America has, one that has been very recently pointed out by several New York Times columnists: growing inequality and the alarming concentration of wealth in the higher echelon of U.S. society. Nicholas Kristof's latest piece -- which is, in fact, an even more pointing follow-up to his already polemic column "Our Banana Republic" -- is a very vivid account of this reality, as was Frank Rich's fittingly entitled piece, published only a few days before.

What Nye fails to acklowledge in his profuse analysis of America's ailings is that two of the most dramatic, indebtness and the inadequate schooling system, could be solved with one simple and not so unpopular move: raising income (and not corporate) taxes for the rich -- and no, letting the Bush tax cuts expire won't be enough mid-term. I won't elaborate too much on economic arguments for that: you can just read Mr. Rich's and Mr. Krystof's excellent articles to find them clearly explained in plain terms. There is also an excellent article by Roger Altman and Richard Haas in the same Foreign Affairs special issue, in which they also argue that tax increases are sorely needed. Using their own words, 'the only sound approach (to stabilize the U.S. debt-to-GDP ratio) is a mix of spending reductions and taxt increases. [...] Raising taxes is unavoidable'.

Despite the mounting evidence, the political gridlock Mr. Nye points out means America will probably stay put on that, thus deepening the potentially damaging effects to its current prowess. In any case, we can not blame political bickering as the cause for that, nor just globalization trends: as Jacob S. Hacker and Paul Pierson say in their new book, “Winner-Take-All Politics”, rising inequality is instead the result of policies championed by Washington Democrats and Republicans alike, in their a bidding war for donors in election after election.

How can we relate all that to Europe? The answer is easy: we have a window of opportunity, and we should not miss it. Europe has a chance. I call it European smart power, i.e. not based on the American version -- in Hillary Rodham Clinton's words, 'elevating diplomacy and development alongside defense' -- but on a genuinely European approach: attracting top talent lead in knowledge and innovation by promoting and reinforcing European strengths.

Let's apply a basic SWOT (strenghths, weaknesses, opportunities and threats) analysis to Europe. First, it is clear that we possess several strengths compared to other world regions: a rich cultural and historical heritage, a varied and savory gastronomy, unparalleled safety, top-notch healthcare and, of course, an undeniable economic prowess that fuels the most advanced welfare states in the world. What about the weaknesses? Using Joseph Nye's concepts, they are more 'relative' than 'absolute': Europe lacks the perceived openness, upward mobility and opportunities the U.S. has. In other words, and knowing the actual situation, it's rather a legacy and image problem than a real weakness. What are the threats we face? Well, we have a long list of items here, but we could easily sum it up: the same the U.S. faces plus an ageing population. And, finally, let's make our opportunity clear: to truly become the leading world region on the basis of an attractive lifestyle and a knowledge-rich society.

So, how can Europe achieve it? The answer should be applying a two-folded strategy. First, pumping money where it is most needed and where it gives the most returns in the context of our knowledge-based, postmodern society: education, science, technology and research. But that is not enough: Europe needs to market itself better, builing upon its unique attractiveness, to attract the people who could benefit from the aforementioned increase in resources. 

According to 2007 data, the U.S. clearly leads in terms of investment in reseach and development, at $370 billion (2.7% of its GDP), while the European Union came third as a block with just $263 billion, right behind from high-growing Asia. Europe should and could revert that. Top European researchers -- not just Indian and Chinese, as Mr. Nye argues -- also work in America. The reasons are crystal clear: funding and pay are far higher over there. How can European institutions expect to retain (or attract) top talent with salaries that barely allow to pay the rent and buy enough food for the month? Of course, thinking of buying a house, or even an appartment, is just a dream for most Europe-based researchers.

The U.S. also leads the world of higher education, dominating all the rankings of top universities, both in overall terms and specific knowledge sectors. Students from all over the world are willing to pay the high tuition costs in exchange for what is undeniably very high-level education. Can Europe compete with that, or is it just a dream if you drift too far away from Oxford and Cambridge?

The answer is yes, Europe can compete, but it must show resolve to do it. And resolve means putting money where it is needed, even in times of austerity. This seemingly contradictory goal can be attained applying a dual strategy, both at the EU and the national level.

First, the EU should take the chance offered by the upcoming negotiation of the 2014-2020 financial and budgetary framework to decidedly revamp its outdated and uncompetitive Common Agricultural Policy (CAP), which absorbs more than 40% of the Union's yearly budget. The European Commission has already proposed focusing more on environmental preservation and less on direct subsidies for farmers, specially cutting those for wealthy landowners or tying them to employment generation. However, we can clearly read between the lines that overall CAP expenditure is set to decline in the next multi-annual financial perspectives. 

To the dismay of Spain and France, nations such as Germany and the United Kingdom, which have recently pushed for budgetary restraint at the EU level, will be delighted. This should be leveraged by the European Commission and the European Parliament to extract some concessions out of these two reluctant spenders: in other words, they could be willing to accept significant EU budget increases in exchange for the reassignment of expenditures, with less money going to agricultural subsidies and more going into Europe-wide R+D projects. Of course, even if all the money currently spent on the CAP went to R+D, this would mean just 0.4% of European GDP. However, such a symbolic -- and also material -- move to shift a substantial amount of European funds to research and development would send a strong signal to everyone involved, of course including national governments.

However, as previously argued, the total EU budget is, at 1% of total European GDP, too small to make the difference Europe needs. Most of it (70% and rising) currently comes from member states' direct, GDP-based contributions, so it is quite understandable why most are increasingly reluctant to see the budget grow. Therefore, some kind of European tax makes sense. As much as six different ideas have been suggested by both the European Commission and the European Parliament, but only two of them would probably be substantial and feasible enough: a tax on bank transactions and an European income tax.


While the first option would be the most emotionally-fitting candidate, specially after the mounting bank bailouts European governments are suffering (last in line: the big Irish banks), it would probably make less sense than a modest -- let's say something around 2-3%, obviously modulated according to different income level ratios, so that the rich pay more than the rest -- European-wide income tax. It is quite obvious that the partition of funding between member states would not be fundamentally altered (i.e. the rich would still pay more), but the perception of fairness would be greatly increased. Moreover, with European governments set to cut expenses but not ready to accept the domestic political costs of tax raises, an EU-levied tax could be seen as a good scapegoat: member states could cut their expenses in some areas where competences are shared with the EU and blame Europe for the tax hike, while the EU could then properly fund, among others, academic and R+D projects.

In any case, the supranational level is not enough. How can national governments up the R+D ante in the midst of widespread budgetary cuts and within the context of a debt-threatened Eurozone? Military expenditure could be a big part of the answer. Europe, within the NATO umbrella and already 20 years removed from the Cold War era, is now a very safe place. Of course, a wider and deeper partnership with Russia, both in economic and military terms, would help a great deal in deepening the sense of security. The case for greater economic integration was already made just a month ago in this blog; as far as military integration is concerned, Russia is already set to become a preferential partner of the Atlantic Alliance after the NATO Heads of State and Government meeting in Lisbon. If both developments take place in the near future, Europe's hard power needs will diminish even further.

In this era of understandable fiscal austerity, European countries should further cut their military budgets. This should not necessarily curtail their citizens' security: both NATO and the EU's Common Security and Defence Policy (CSDP) are ideal supranational structures for states to profit from the economies of scale of paneuropean cooperation. A good way to start would be, for instance, using the recent Franco-British treaty as a framework for a wider structured cooperation strategy at the EU level. 

That would free up some money at the national level, that could and should be directed to funding research, development and education programs. Spending cuts in R+D such as the ones included in the Spanish government's 2011 budget are shortsighted and unacceptable. EU-level pressure should be applied: fiscal restraint is obviously needed, but the solution is not mortgaging the future like that. Military budget cuts might not be enough, either, but should be part of the fix to both deficits, fiscal and in research funding.

Despite all that, creating high-tech centers, in which publicly funded research programs would seamlessly mix with private initiatives and innovative start-ups, or properly funding universities across the continent, including generous grants for top students, both European and foreign, will not be enough if we do not market Europe as an attractive destination for bright minds. Europe must make everyone clear how appealing the European way of life can be.

The EU has the hardware it needs for showing off. First, most EU countries enjoy top-notch infrastructure, only comparable to that in Japan and, increasingly, coastal China. In contrast, U.S. infrastructure is in urgent need of a major overhaul, which is not likely to happen anytime soon. On top of that, European towns and cities also offer the most extensive and efficient public transportation networks in the world, also only paralleled in Japan and increasingly in China. U.S. public transportation systems are, with very few exceptions -- the long-suffering MTA is the most prominent example --, in no way comparable to Europe's. These two elements combine to offer an energy-efficient, confortable commuting and travelling environment, complete with high-speed rail and (extremely) low-cost flights connecting all major Western and Central European cities.

Speaking of European cities, their relatively compact dimensions also allow for livelier environments, full with parks, shops, cafés and bars, restaurants, theaters, pubs or other recreational offers, fully accessible without having to use a car to move around.  European-style downtowns, which combine remarkable architecture with lively streetlife, are almost unheard of in the sprawling American cities.

And there is still much more in the European way, starting with the unparalleled cultural and historical heritage the Old Continent boasts, undeniable an appealing asset for many people. Religious freedom is guaranteed everywhere in the European Union. Traditions and folklore, old and new, art and music: it all combines in a way that can full everyone's senses. And who could resist a meal at a tidy French restaurant, or a dinner out with some tapas and good wine? Or, why not, a Viennese coffee with an authentic apple strudel. Oh, and in case you feel indisposed, Europe also boasts top-notch healthcare, free for everyone, just like schools and many other services.

Traditions, culture, infrastructure, gastronomy, welfare state: an undeniably appealing mix of virtues that the European Union and its member states should work much harder to properly market in their fight to recruit the brightest minds. Obviously enough, these perceived advantages alone will not do the trick; however, when coupled with increasing remuneration and research funding, they can be a very powerful tool to help shape this vision of a knowledge- and lifestyle-based European smart power.

Of course, after extensively dealing with both the U.S. and the European Union, one question still looms: What about China? Are we leaving it out of this discussion?  Well, the fact is, the Chinese are not yet good enough at smart power, although they surely have their own vision, conveniently branded harmonious world. China has a rich  and fascinating historical, philosophical and cultural heritage, and it is striving to expand its values all over the world; for instance via the ever-growing number of Conficius Institutes it sponsors and runs in many corners of the globe, in what is a laudable and rather effective soft power tool. However, the real attraction China holds for most foreigners, be it Europeans, Africans, Americans or Asians, is doing business; and even here they encounter barriers, both technical and cultural, that hinder most relations. Moreover, appealing as it might be, Mandarin is also a barrier for most foreigners. In fact, one of the reasons that explains America's cultural dominance is also the relative simplicity of the English language, which combines the limited-character Latin alphabet with relatively simple grammatical rules and syntactic structures.

As far as hard power is concerned, although China's military is growing at an alarmingly rapid pace, its strength and capabilities won't be comparable to NATO's in the future to come. Moreover, China's setting in Asia is not the best to solidify its hard power structure, as it is surrounded by wary nations -- such as India or Pakistan, or even the 'rebellious province' of Taiwan -- whose militaries can and will probably also be a threat to Chinese supremacy.

Therefore, Europe must take this chance without much hesitation. The Europe 2020 strategy, one of its stated targets being that 3% of the EU's GDP (public and private combined) be invested in R&D/innovation, can help a great deal. However, this new European strategy will probably not be enough under its current recommendation and cooperation-based setup: greater commitment at both the EU and the member states level is needed if we want to avoid the unfulfillment of the Lisbon strategy for the period 2000-210.

European nations should leave fuzzy goals behind and start seriously working together for the future. The window of opportunity is open right in front of our eyes: let's make the most of it before it is truly too late. We have the economic prowess to do it: we just have to learn how to harness it. The U.S. Constitution gives all Americans the right to pursue happiness. Meanwhile, the European welfare states and modern economies offer the tools to do it.

Europe should focus on a different kind of smart power: one that relies on a 'softer' form of hard power and a revamped, more appealing form of Western soft power. If we take the right steps and make use of our undeniable strengths, opportunities will become reality.

A few thoughts on the new Fed stimulus

I have just stumbled across a very interesting news item in Der Spiegel: in short, it sums up how Germany's Economics and Finance Ministers, namely Mr. Brüderle and Mr. Schäube, sharply criticize the fresh $600 billion stimulus -- or, in other words, the new quantitave easing round --  that Ben Bernanke, the Fed chairman, announced just a day after the crushing defeat the Democratic party suffered in midterm elections.

They claim -- arguably not without a reason -- that such a move by the U.S. will have 'harmful' effects on other economies, as pumping money into the economy (i.e. printing dollars and using them to buy government debt) can only devaluate the affected currency, which happens to be the default reserve currency all over the world -- sorry about that, Euro! However, it really looks like that these criticisms -- quickly backed by Chinese, Japanese and Brazilian monetary authorities -- are just a way to show frustration by other major players in the thriving currency and commercial wars we are witnessing. 

Facts are facts. First, the European Union is also "bailing out" Greece (and maybe soon Ireland) with its own rescue fund (i.e. a system to buy Government bonds nobody would otherwise have bought at reasonable interest rate). Of course, Germany is concerned that further devaluation of the dollar will only mean the strenthening of the euro, and this could obviously hurt Germany's export-oriented economy. However, the U.S. is also fighting to export its way out of the recession, and is using all the tools it has to do so, both diplomatic and economic.

China has been doing that for years, although using a very different system: buying massive quantities of U.S. debt allowed it to keep the yuan undervalued while investing its growing trade surplus in a secure way -- while letting Americans overborrow and creating the explosive conditions that led to the 2008 financial meltdown. Of course, now China is worried about its trillions of USD-denominated assets: their real value will fall due to the devaluation of the dollar, and interest rates will also go down, so yields will also fall.

But just as the image on the left shows, quantitave easing measures also mean that the Fed is rolling the dice itself: what today might be considered necessary to reduce the mounting piles of U.S. public debt and, therefore, reduce the interest rates the Government has to pay to finance it (which only add to the approx. 10% Federal budget deficit), could turn itself into excessive inflation in the mid-term and even cause another asset bubble, akin to or worse than the one we are still trying to recover from. However, given the current state of the American economy and the latest inflation -- should we start talking about deflation, indeed? -- data, this is quite a long shot.

Are Germany's concerns legitimate? Of course. Are they exaggerated? Probably. Germany's competitiveness is not based on being cheaper, but on producing highly specialized, reliable top-notch equipment. Yes, they must also be cost-competitive, but that's not the key factor here. Germany has already exported its way out of the crisis with their old, proven formula of quality manufacturing, hard work, high productivity and moderate pay raises.

Are China's concerns legitimate? Yes. Are their criticisms fair? Not so much. There will obviously be a 'spillover', as China's central bank head, Mr. Zhou Xiaochuan, affirmed. However, probably he could not deny that the huge trade surplus his country has accumulated also has negative effects on the global economy, hurting its balance and slowing growth elsewhere.

Therefore, while it might hurt others and it can indeed be harmful for U.S. foreign policy interests, we have to respect and understand Mr. Bernanke's decision. The U.S. is just using the extraordinary tools it has, leveraging its privileged position in the world economy to try to revive its economy. Who, in his right mind, would not try to mend his own problems with all the tools he has? Well, then: wish them good luck, hope for the best... and try not to be too envious!

Short update: It looks like Mr. Paul Krugman agrees with me in criticising the hypocrisy / envy of some foreign governments and also in downplaying the risks of an inflationary spiral. Read his op-ed in The New York Times.

Swimming against the tide?

Lost in the midst of headline-grabbing lines -- such as Angela Merkel's claudication on multiculturalism --, one of the most intriguing political declarations of the last few days, with potential implications for the whole EU, has been wildly overlooked by the international media.

Last week, Germany's Industry and Economy Secretary, Rainer Bruederle, echoing recent declarations by several other German politicians, said that it was time to substantially raise industrial salaries in Germany. According to Mr. Bruederle, German workers should reap the benefits the country's relatively fast drive away from recession, citing a 3.6 percent hike for the steel industry as a suitable benchmark. Thanks to its strong, export-led economy, Germany is exiting the downturn at a much higher speed than most European countries, at a 2.2 percent rate for the last quarter -- and rising. 

In the same week that the prestigious German magazine Der Spiegel ran an article on looming protectionism and trade wars, the words of Mr. Bruerdele -- a business-friendly liberal, no less -- seem to be, apparently, out of step with reality. It would hurt Germany's industries, leading to higher costs and loss of competitivity, right? Isn't that unfortunate that, in the midst of a strong, export-led recovery, a highly influential Government figure puts such pressure on German employers?

Let's stop for a moment and think about what's behind this affirmation and what these wage increases could really mean. First, German workers have largely held back on demands for pay rises over the past two years in an effort to protect jobs during the recession, even accepting reduced shifts -- in a very successful plan coordinated with the German Government. However, productivity levels have constantly been on the rise, and not only since the world financial crisis struck: German labour productivity has increased much faster than salaries for the past 10+ years, turning Germany from a country beleaguered by competitivity problems (in part due to high salaries) to an export powerhouse, known for its extremely reliable, well-crafted machinery and industrial products.

The German export model can not be compared to the Chinese: down in the Pearl river delta, entrepreneurs survive with extremely tight margins (sometimes, of just 2-3%), making any sudden shift in labour costs -- or even the looming strengthening of the yuan -- potentially disastrous. German export-oriented, family-run businesses and big industrial conglomerates (think Siemens or Volkswagen, among others) can withhold modest, controlled salary raises. Productivity costs would obviously rise, but that would not substantially dent profit margins. In fact, one can argue that the surplus cost could be passed on the final customers, as many German industrial products have no real rivals anywhere in the world, be it for their uniqueness and specialisation or for their extraordinary craftmanship, reliability and durability.

Therefore, generalized pay raises would not really hurt Germany's export capacity. However, they would effectively help offset trade imbalances by boosting internal consumption. Historically lacking, Germany's consumption share of the GDP has always been low by European standards, helping fuel gaping intereuropean trade imbalances. A mere 3% raise in salaries would surely mean that at least half this increase would go to internal consumption, thus helping revitalize the internal consumer market, which drives imports from the U.S., Asia and other EU countries. Therefore, although a modest move, it would not only be fair for German workers, who have been losing purchasing power for years and accepted to work for reduced hours when the crisis hit, but also towards Germany's neighbours, as the current stark trade imbalance within EU countries is hurting European economy as a whole -- by putting a brake or even halting recovery prospects in other economies which rely on the 82-million strong German internal market.

Although Bundesbank President Axel Weber -- a financial hawk who was also against a permanent European 'safety net' for troubled countries and who is currently pushing for an increase in European interest rates, although many eurozone economies are not yet out of the recession -- has warned against actively propping up domestic demand and fuelling inflationary pressures by encouraging higher wage deals, this is a move Germany could afford and should promptly do. As many in the U.S. are now realizing, perpetual trade imbalances are bad for the global economy. Germany is not China, and its trade balance won't revert overnight after some modest wage increases. However, as the saying goes, small changes can be powerful.

In the mood for love?

I recently found a very peculiar article on FP's website. It is called Bad Exes and it points out five former heads of state who, in the author's opinion, have devoted their post-spotlight time to mess around in an unhelpful manner. Although the inclusion of figures such as former Spanish Prime Minister José María Aznar is more than justified, I was shocked to see that the list is headed by Germany's former Chancellor, Gerhard Schröder.

Always an advocate of the European Union and relatively pro-Russia as a Chancellor, Schröder did not hesitate to publicly display his respect for his Russian friends and, of course, to accept their money: his dealings with Russian businessmen (read oligarchs) and authorities are well documented and have led him to the chair of the Gazprom's Nord Stream pipeline project

So, the criticism seems to be fair enough. Or isn't it? Of course, one can argue that Schröder might be into it just for the money. However, let's take a longer view: maybe the European Union should show more receptiveness towards Russia if it wants to regain its clout in global affairs.

The issue is clear: neither Russia nor the EU can keep ignoring each other in a globalized world, where power is rapidly shifting East. Russia needs to modernize and diversify its economy with Western technology and know-how, and the EU needs access to the energy sources and raw materials Russia possesses in abudance. However, the EU is obviously reluctant to having closer ties to Russia because of its undemocratic regime and constant violations of human rights: this would go against the very principles of the Union, at least in the short term... but what if we think mid- or long-term?

In the face of the global financial crisis and the return of gas and oil prices to normal, pre-bubble prices, Russia has made clear it badly needs the transfer of advanced technology to create a more modern society. Russian officials hope that this would drive the country away from its current dependence on energy exports.

If the country does indeed move forward towards the modernization path, it would obviously lead to more white collar jobs, not directly linked to the extraction and exportation of raw materials and energy resources. This would, in turn, create a bigger, more educated middle-class that would push for political opening and freedom of speech. In other words, we could see what we have seen in the past in Western societies: what Russia lacks today is an effective civil society, able to push for its civil rights and freedoms. Russian society is a highly polarized one, where almost all middle- and upper-class citizens owe their well-being to the state or a big state-sponsored or company. 

Thus, a technologically-boosted Russia could lead, in the mid term, to a growing respect of democratic values and human rights in this country -- which is precisely what Europe would like to see. And who is readier than the West to provide Russia with the technology it wants? The answer is clear: the U.S., Japan and, obviously, the EU countries. What we see here is, in short, a win-win situation: Russia modernizes and maybe ends up opening up freedom-wise, while advanced European companies get a boost to their exports with a new, big market.

Of course, as foreign investors claim, Russia suffers from rampant corruption, untrustworthy courts, stifling bureaucracy and poor protection for property rights. This should effectively and immediately be dealt with by the Russian government. However, the EU could substantially help via a very juicy incentive: the prompt establisment of a privileged partnership with Russia -- and, of course, also with the rest of the countries in Eastern Europe not yet part of the EU, including Ukraine and Belarus.

Now is also the right moment to act. Although Russia continues to develop its commercial and strategic relationship with China, it does so reluctantly. Russia is also aware of growing Chinese influence in the greater Asia, including its own underpopulated -- but extremely resource-rich -- region of Siberia and, of course, the Central Asian countries, long seen by Russia as its backyard. This explains, for instance, the recent sale of Russian armament to the Vietnamese army (underlining the continuation and intensification of a trend), which is looking to protect its interests in the face of Chinese expansionism in the East Sea. 

After a confidential report calling for a rapprochement to the West was leaked last May, it is undeniable that, under President Medvedev, Russia's foreign policy has clearly moved from ideology and invective towards pragmatism and profit. 

Therefore, the race is on: both China and the EU are worried about Russia's moves towards the other, and wish to have it by its side -- with Chinese top foreign policy experts such as Yang Jiemian openly vying for a closer relationship with Russia. China has its SOEs, which can pay hefty, above-market rates for energy resources and raw materials, but the EU has the technological edge, and what Russia really needs is to modernize its economy, not perpetuating its dependence on energy exports.

It's about time that both Russia and the EU do something to regain their lost relevance. They should just seriously consider acting together.

Radically inverted logic

Two Spanish aid workers who had been kidnapped in Mali by Al-Qaeda of the Islamic Maghreb members were freed earlier this week after more than 9 months in capture.

Immediately after some details about the negotiation with the kidnappers were released, French President Nicolas Sarkozy criticized the Spanish negotiators, as they seemingly paid a ransom and released an imprisoned terrorist, maybe the mastermind behind many more kidnappings, in exchange for the lives of those two people. Although the French Foreign Minister pressed personally for the liberation of four terrorists in 2009 to save the life of a French national, allegedly a spy, France chose a different path when confronted with a similar dilemma in 2010: Paris, probably pushed to do so by the Algerian secret services, sent elite army units to Mauritania to try to liberate a kidnapped French engineer, Michel Germaneau, who was ultimately killed by the islamists in retaliation for the six dead left after the combined Franco-Mauritanian raid.

Is Sarkozy right to criticize the Spanish negotiators? Have they been too soft? Will this have consequences, i.e. further kidnappings? Our Western mind tends to think so: nobody wants seeing people die, but we might be tempted to assume that accepting some of the conditions imposed by the kidnappers, including the release of a dangerous terrorist, might be counterproductive and make things even more dangerous for Westerners working or helping people in those countries. It could fuel further kidnappings, further unrest. We can also tend to think that those same Al-Qaeda men will have second thoughts about kidnapping or assaulting a French national, as they already saw how Paris answers to that. Of course, in the light of recent events, they might now be tempted to kidnap Spanish nationals and wait for a hefty ransom to come.

However, this is just how our Western logic operates: we should learn to see more than that. Sarkozy should go just one step further to see how things can turn against him quickly and easily. We are not talking about men in a conventional negotiation setting, where rational logic rules: we are talking about religious fanatics, brainwashed people who have next to nothing to lose. People ready and willing to die for their cause, their hate, expecting a better life on the other side. And this changes everything.

France's violent response may well mean that these islamists now hate, more than ever before, French nationals and everything smelling of French laicism (including the recent law banning Islamic face veils from public areas). Maybe they won't kidnap any Frenchmen because they know they will not get much of a ransom, but rather plan bombings to kill people or hurt French interests, a beloved Al-Qaeda tactic which coud be much more deadly. 

Maybe they will try to kidnap Spanish citizens again, who knows. However, their 'spiritual' leaders will not have the same leverage again, they will not be able to justify their actions against Spaniards with hate, this hate that fuels Al-Qaeda terrorism. Spain came up as more tolerant country, willing to negotiate and surrender a dangerous prisoner, caring about the lives of the two kidnapped human beings at all times, even knowing the political and diplomatic consequences such moves could have.

We could even link this episode with the more recent events in Afghanistan, where two Spanish soldiers and their interpreter were killed by an Afghan driver. Shouldn't it be interpreted in the light of what Sarkozy said? Doesn't that attest that Spain is seen as a weaker country among Islamic radicals? Not necessarily: this attack is just an extreme demonstration of dissent in a war-like context, of hate against someone seen as an invader in your home country. The fact that the victims were Spanish is secondary: what matters is that they were Westerners in Afghanistan, and this alone creates resent among a portion of the Afghan population. The same resent French retaliation can cause among Maghrebi islamists. And we see the consequences resent can have.

Western leaders should learn that dealing with Al-Qaeda is not like dealing with a traditional hostile foe. Rational logic is not what fuels its members: hate and fanaticism do. And even though there are lots of examples of evil states and leaders, all those people have much to lose: many privileges, many riches, many valued lives (even if just the ones of those on top) that Western nations use as leverage in negotiations or retaliations. Not with Al-Qaeda. Just think about their iconic leader, Osama Bin Laden: if his actions were purely rational in a Western classical way, wouldn't he rather be living in a big mansion, filled with concubines, in Saudi Arabia?

Rational logic does not match well with fanaticism, and Western leaders and diplomats are just starting to grasp it, even if some seem to be readier than others.

The KPA: An army in disarray?

One more incident involving the North Korean military has added extra confusion to the already obscure developments in the socialist country. China’s official news agency reported on Wednesday that a fighter jet, probably coming from North Korea, had crashed in the northeast of the country. Pictures of the wrecked plane seem to confirm its procedence, and speculation abounds that the pilot was a defector trying to reach Russia, as China has a deal in place with Pyongyang to repatriate all Korean defectors.

At first sight, such incident looks like the result of the individual actions of a disgruntled air force pilot who risked and lost his life to abandon his crumbling nation. However, such a blunt act, coupled with the recent violent actions carried out by the Korean People's Army (KPA), can raise several questions about what might be happening inside the world’s fourth largest army.

One such doubts would be if the sinking of the Cheonan, a South Korean navy corvette, last March, was orchestrated from above or not. In spite of several conspiracy theories and the vociferous claims of innocence from Pyongyang, it seems clear that a North Korean torpedo shattered the boat, killing 46 sailors. However, it is still unclear who decided the attack should be perpetrated. Assuming that the top brass of the North Korean regime ordered the sinking of the Cheonan, perhaps to bolster their image among the populace, one has to wonder why they haven't been crowing about it in public instead of issuing denials. In fact, the only (unproved) hint at claiming veiled responsibility for the sinking can be found in an (allegedly) recently published propaganda poster depicting a small navy ship being smashed by a North Korean fist (see image and related link).
 

There is a widespread assumption that the mastermind behind the attack was the younger Kim, the mysterious youngster soon to be named successor to the Dear Leader. Such defiant and violent acts are not unheard of in the North Korean hereditary regime: while preparing to succeed his own father, Kim Jong-il orchestrated two bloody attacks against South Korean interests. The first notorious incident was the 1983 Burma Bombing, in which 4 South Korean ministers and 13 top officials were killed when a bomb, aimed at then-South Korean President Chun Doo-hwan, exploded in Rangoo. And later came the 1987 bombing of the Korean Air Flight 858, which killed all 115 on board.

While Kim Jong-un's destructive role makes historical sense, and given the lack of information and knowledge about the real internal situation in the Hermit Kingdom, we can not rule out that the army might be in disarray, uncontrolled and unhappy about its role or the political future of the country. Although prestigious analysts such as A. Lankov sustain that 'he will be an obedient puppet in the hands of the people who lobbied for him', the recent disastrous currency reform, the reported reappearance of widespread hunger and the recent political moves to pave the way for the succession might have rattled some in the military.

China is not amused at this last incident. For an up-and-coming power that craves stability both home and abroad, increased turmoil in its own backyard is not welcome at all. Beijing will probably take this issue very seriously, demanding assurances that the army of the nuclear-armed regime is under control. However, it is also possible that Kim Jong-il, always an extremely shrewd negotiator, takes this opportunity to plead for even more Chinese aid. Paradigmatic experts in negotiating on the edge, the North Koreans might even have orchestrated this chaotic defection attempt --aiming at combining it with another, lesser known bargaining chip they keep up their sleeve--, in order to obtain further concessions in exchange for stability pledges.

Among all this mess of disinformation and theories, we at least know one thing for sure: North Korean minds are so complicated that no theory can be dismissed.

Pakistan’s image problem

Day after day, we are hit by ever more somber news on Pakistan. If just a month ago it was a bunch of leaked documents on the Afghan war, which clearly demonstrated the role of Pakistan’s army and secret services in protecting and helping Al-Qaeda and Taliban fighters, now it is a major natural disaster.

After the devastating floods that have already caused more than a thousand deaths and uncountable human suffering, now the UN is warning about a wave of epidemic diseases that could skyrocket the number of casualties, blaming the international community of being too slow and not committed enough to helping the devastated nation. UN Secretary General Ban Ki-moon just visited Pakistan, where local authorities claim 20 million have made been homeless by the floods, 6 million of them being at risk of starving or exposed to contaminated water. UN experts have also warned that 3,5 million children are among the affected. At the same time, the American press is warning that the floods can be an opportunity for the Taliban to solidify their grip on the region, thus hindering US efforts in Afghanistan and further destabilizing the troublesome AfPak conundrum.

While the claims made by the UN and are hard to rebate, we should stop for a minute to think why things are going this way. Of course, a key reason is the lack of total media spotlight that former humanitarian crises have enjoyed. Although information about floods and deaths in Pakistan has been constant –and the stakes are being raised right now, with the sickening numbers of affected people–, it has shared the spotlight with similar natural disasters in India and China (and even Central Europe), and also with the raging wildfires in Russia.  Moreover, international public opinion is only truly shaken when casualties are in the high thousands: floods or fires where “only” hundreds die are seen as second-rate tragedies, obviously not taking into account that the ensuing destruction is far worse than the most immediate and impactful effects.

However, there’s a second reason that explains the lack of international interest in helping out: the perceived futility of and distrust towards the Pakistani army and government. Indeed, Pakistan has a deep problem of bad reputation and a startling lack of true allies in the international theater, starting with its more immediate neighbors and top regional powers, India and China. While it is obvious that India won’t rush to help its archrival –specially since they are also facing serious floods in the disputed Kashmir area–, China is also uninterested in helping a country that it perceives as unreliable and unstable –something that really worries the Chinese, who crave stability and preservation of the status quo, both home and abroad–, one that poses a threat to the Chinese grand view of a pan-Asian sphere of prosperity under Beijing's tutelage. Enter China’s own floods, affecting the central provinces of Henan and Sichuan, and you get the full picture.

What about the US, the strongest ally of the Pakistani government, which offers aid to the tune of $1.5 billion a year –not including military cooperation– to the troubled nation? Here’s what: although the US’ has been the largest humanitarian response from any single country, it has only meant an extra $10 million and a bunch of rescue personnel and Chinook helicopters to boot. As a recent Examiner header said, what’s $10 million more between friends? Well, the answer is clear: maybe the US is not such a good friend of Pakistan, at least not for all that matters.

Once again, it is clear that the US is handing massive amounts of aid to the Pakistani authorities in order to ensure the nuclear-armed regime will not descend into chaos and will cooperate in the struggle against Al-Qaeda and the Taliban. Although progress in both respects can be labeled of moderate at best, the US has strong interests in preserving stability in Pakistan, although it sees the Pakistani ruling and military elite with suspicion and even despair. Of course, now the US is rushing to mollify its image: in a classic public diplomacy move, the US has pledged further aid in order to avoid fueling even further disapproval among Pakistanis. However, although the US image problem in Pakistan is deeply troubling, it looks like Pakistan’s own image problems might be far worse.

A further example is provided by the next in line of helping hands: the EU, a confederation of states whose statutes, the Lisbon Treaty, clearly specify that it will actively engage in humanitarian causes whenever needed. So where’s the European help? Nowhere to be seen. Too busy with internal economic problems, and too unwilling to get further muddled in the AfPak swamp, the EU has clearly ceded all initiative in the area to the regional powers and the US. In other words, don't count on Europe, either.

Finally, we can’t help but thinking about fellow Muslim states, which could be seen as natural allies for Pakistan. Unfortunately, they are not helping, either. The powerful and resource-rich Gulf States see Pakistan, a fellow Sunny country, as a threat to regional stability and a sponsor of radical, violent islamism, which they strongly condemn (of course, also to please its American and Chinese allies/customers). What about Iran, Egypt or Turkey? Same answer: these states, chiefly Iran and Turkey, sponsor themselves as leaders of the Muslim world, as trustful power poles that should pave the way towards greater regional development and cooperation. In this context, Pakistan is once again seen as a nuclear-armed focus of instability, a deeply unreliable regional power that sponsors disruptive forces in Afghanistan, preventing this greater pan-Muslim goal.

While there is no doubt that increased media focus and public diplomacy goals will translate into a higher level of international commitment to help Pakistan, the horrible image its government and military leaders enjoy throughout the world has turned against its own citizens, who have been literally and unfairly abandoned to their fate in the midst of a serious natural disaster. As the saying goes, humans are the only animals able to trip over the same stone twice: Pakistan's leaders should be more clever than that, learning from their public diplomacy mistakes in order to avoid this isolation to happen again.

A fourth way forward for North Korea

How should the U.S. respond to a renewed North Korean leadership under pressure by China not to open up

North Korea is up for a change in leadership, which explains the current wait-and-see approach by the Obama administration. Although the dangerous scenario of a sudden collapse can’t be ruled out, U.S. officials are working on two other possibilities: a regime as hermetic and reluctant to change as Kim Jong-Il’s or a new leadership which is open to progressive change. However, a fourth scenario, with heavy Chinese involvement, should not be ruled out.

Despite the security threat it poses to our East Asian allies and the recent recommendations by the CFR Independent Task Force on U.S. policy on Korea, the Obama administration has wisely taken a wait-and-see approach towards the North Korean Regime, as Secretary of State Hillary Clinton made clear during a recent official visit to South Korea: according to the South Korean’s President spokesman, “the key word” was her strategy of “strategic patience.” 

Assuming that Kim Jong Il’s poor health will lead to a leadership change sooner than later, and obviously not forgetting the sudden and dramatic collapse of the regime, the U.S. is working on two probable future scenarios: one in which the new Korean leaders decide not to open up despite international pressure and a second one in which they show receptiveness to a progressive political and/or economic aperture.

However, Secretary of Defense Robert Gates and his senior advisors, including Richard Bush III, are discarding a fourth possible scenario, which is indeed a combination of the two above-mentioned possibilities: a new North Korean leadership that hints at opening up the country but encounter a cold, menacing response by China, the current lifeline of the North Korean dictatorship, forcing it to maintain the status quo.

China could certainly be interested in such an outcome. Although several experts argue that China’s engagement and defense of the North Korean regime is thinking in Cold War terms and that its stance could be somewhat counterproductive for its economic interests – namely its trade with South Korea –, several strategic factors should be taken into account. 

First of all, there is the geopolitical factor of having a debilitated friendly nation fencing the Chinese border from U.S. influenced South Korea. Secondly, there would be what we could call a “neocolonial factor”: China has growing access to North Korea’s natural resources (mostly minerals) and infrastructure, as evidenced by the recent agreement between Kim Jong-il and Hu Jintao that will allow the Chinese to use and develop the Rajin port, thus giving Chinese merchants vital access to the Sea of Japan.

These two factors could also lead to a third development: as labor costs rise, China will certainly seek to externalize the production of low value-added products, and North Korea could be a major and submissive player, which would be amenable to developing joint industrial or special economic zones under Chinese tutelage.

Therefore, for the purpose of this scenario, the U.S. should assume that any policies adopted will, at the very least, be viewed by suspicion from China. Cooperation outside the field of regional security – the eventual continuation of the Six Party Talks shall be borne in mind – should be ruled out. of It is thus imperative that the U.S. reacts with caution, applying a savvy combination of the current hard power measures – i.e. strong military cooperation with South Korea and Japan with a new soft power approach vis-à-vis the authoritarian Korean regime, which should revolve around three policy pillars.

The first engagement policy should be based on a grants program for top North Korean college students, who would be invited to attend participating world-class U.S. universities for at least one full academic year.

This public diplomacy program would aim to improve U.S. relations with North Korea and reinforce the image of the U.S. as a leading nation in higher education. If North Korea accepts the offer, then it receives much-needed expertise and know-how. If Pyongyang rejects it, publicity about the rejection might harm the regime's image, both internally and externally. The United States has a long-term goal of gaining wider approval by establishing lasting personal relationships in the education field with talented and influental young students, while also improving their access to international knowledge and special learning experiences. 

Needless to say, U.S. authorities should reassure the Korean authorities that the students would be back in North Korea after their year abroad and not be allowed to stay in the country under any circumstances, a key element to secure Pyongyang’s agreement with such proposal.

This policy, implemented with federal funds, could prove cheap and effective: for the cost of deploying just ten U.S. soldiers in Afghanistan (an estimated $10 million a year), the U.S. could pay the tuition, lodging and other expenses of up to 100 North Korean students. Moreover, given that only a limited number of scholarships would be provided, it could be readily approved by Congress: we shall remember that, every year, U.S. lawmakers pass a hefty budget for the 28.500 U.S. troops stationed in South Korea.

The rewards would probably be modest short-term, but such an American-educated elite could also pave the way towards a future democratic regime, as the case of colonial India proves: it was the young elite with British education who pushed for democracy for the new Indian state some 60 years ago.

This program could also be complemented with various cultural and/or recreational exchanges, which would foster mutual knowledge and would allow the U.S. to leverage the overall and undeniable appeal its mass culture and entertainment, as this video shows.

A second policy element would imply increasing the information flow reaching North Korean citizens. Total isolation from the outside world has allowed the dictatorial Korean socialist regime to survive until now; however, in recent years, Chinese-smuggled cultural and informational products – mostly films in DVD format – have reached the isolated North Korean population, creating some cracks in the monolithic Stalinist society, especially among affluent, educated youth.

Therefore, the U.S. should use cover agents and intermediaries to step up these smuggling activities, ideally expanding them to encompass South Korean printed and audiovisual media. A variety of methods could be used: from camouflaged newspapers in food aid cargo, both entering by land or sea, to direct bribes for border patrols, which is the method used by Chinese media smugglers.

This activity, which should be sponsored using reserved funds and obviously never made public, would have the clear goal of reinforcing the knowledge of the outside world among North Koreans. Latent demand for Western or South Korean media products is already high among educated North Koreans, and the rest of the population could also dramatically raise its awareness of the economic reality away from the hermit kingdom’s borders if even only minimum access to non-state controlled media is provided.

The third policy element the U.S. should study would be the implementation of development, infrastructure and commercial projects, in a multilateral effort with Russia and South Korea, to undermine growing Chinese influence in the country.

Two concrete projects have already been planned but not yet executed. On the one side, Russia and South Korea are pushing for the construction of an electrified cargo railroad across North Korea that would bring South Korean goods to Russia and Europe by land, thus creating a cheap and direct transportation corridor between the two nations. The U.S. should cooperate with these two nations in convincing the North Korean government that this project could only produce revenue and jobs for the local populations, as well as development opportunities; in that sense, the U.S. could offer technical and financial support for the construction of a power plant that would provide electricity for the railroad and any surrounding towns or villages.

The second project which has already been laid out relates to bringing Russian natural gas to South Korea via a pipeline that would cross North Korea. The U.S. should get involved in that project, by providing both advanced technical expertise and financial support: that would help its regional strategic allies convince the North Korean government about the feasibility of the project, which would also provide hefty revenues for the state – an estimated $100 million a year only in transit fees – and, at the same time, show the U.S. approach towards development and its involvement in the region – as opposed to China’s foreseeable neocolonial approach –, thus improving the perception of the U.S. both among the local populations and at the government level.

The obvious conclusion is that these policies, while limited in scope and probably not self-sufficient to ignite major changes in North Korea, could be a positive first step towards an integral “smart power” approach in the Korean peninsula, under which the U.S. would distance themselves of possible Chinese power projection goals by focusing on an array of soft power initiatives – aimed at benefiting the local population while also facilitating international economic transactions and clearly improving U.S. perceptions in the area – that would complement the hard power and diplomatic measures – including a hypothetical resumption of the Six Party Talks – needed to keep the militarist regime in Pyongyang in check. 

Therefore, while their aim would clearly be undermining a hypothetical growing Chinese clout in North Korea, the specificities of these policies would make any Chinese criticism illegitimate in the eyes of the international community, and should not prevent the U.S. from further cooperating with China for the common goal of guaranteeing peace and stability in the region.

Diplomacy with Chinese characteristics

Apart from fending off inflationary fears and helping drive the economy towards internal consumption, letting the yuan revalue might well become the boldest diplomatic move by the Chinese government in the last few years.

Although much has already been written about recent U.S. congressmen rumblings on China's currency, the Americans won't be the only ones positively affected by such measure. Oviously, a more expensive yuan (and a cheaper dollar) would boost American plans to reorient its economy towards exports and investment (see related article in The Washington Post) and partially away from consumption and debt, which is also good for the whole world, as economic imbalances in the U.S. were the main factor behind the financial crisis we are just (and barely) leaving behind. In any case, such a move would probably boost American exports to China, as its products would become more affordable to increasingly affluent Chinese consumers, while not needingly rising the cost of the items America imports from Asia.

In fact, a stronger yuan would have a specially positive effect on other developing economies, such as India, Brazil and, most notably, the rest of ASEAN countries, whose exports and competitiveness have also been hit by the artificially low exchange rate of the yuan. It is quite obvious that any manufacturing jobs lost in Chinese export-oriented businesses will mean more jobs in similar industries located in lower-wage, nearby countries, such as Vietnam, Laos, Cambodia or even Indonesia -- and not in America, whose productive system is no longer ready to manufacture  items such as clothing, shoes and tech products. In fact, the upcoming yuan revaluation could accelerate a delocalization process that was already underway, thus further transforming the Chinese ecomonic model from a low-cost, export-based one to a more higher-value, service-oriented one.

Moreover, such a move would also please the global diplomatic community (and, more specifically, the rich economies') after the Copenhagen fiasco, where Chinese reluctancy to cooperate, topped with sending a junior minister to a meeting which included Barack Obama (although Wen Jiabao has recently denied such claims), allegedly led the negotiations towards a quasi-ridicule and a last minute non-binding, almost empty agreement.

Also adding to the grudges were Chinese economic activities in Africa, which raise suspicions among developed nations that accuse China of funding crony, bloody dictators (arguably, what some Western powers have already done in the past, specially during the Cold War era), and its reluctance to agree to tightening sanctions on Iran -- a stance that is probably also going to change, in great part thanks to the recent conciliatory tone and decisions by the U.S. Government.

In that sense, we have to acknowledge the role played by the Obama administration and, more precisely, by Vice President Joe Biden by not giving in to mounting pressure among US lawmakers, who had repeatedly asked to label China a "currency manipulator", giving way to the imposition of tariffs on Chinese goods (on the basis of the dumping this artificially low currency exchange implies) and, quite probably, to a trade war between the world's to biggest powers and economies.

Biden's and Obama's decision to postponing the publication of a U.S. Treasury report (see article in the Financial Times) until after the Nuclear Security Summit (see information on the US Department of State website), with Chinese President Hu Jintao among the high-ranking invitees, was held was a deft diplomatic move that obviously had a positive effect on the Chinese leadership. As we have clearly seen in the last few years, as Chinese global clout grows bigger, its leaders have felt uneasy about acknowledging and responding to foreign pressures and expectations, giving leeway to nationalistic voices and feelings, both from inside the government and the (government-controlled) media.

This attitude of entrenchment should come as no surprise: Chinese leaders are extremely reluctant to surrendering to foreign pressures, even if it could sometimes do them good (for instance, in the environmental field), for both historical and pragmatic reasons. After its de facto dependency of Western powers during the 19th century and the beginning of the 20th century, which led to the ultimate decadency of the once mighty Chinese Empire and to a bloody Japanese occupation until 1945, Chinese leaders, heirs of the Communist liberators, are understandably wary of Western pressures on what they consider issues of their sole jurisdiction (which is in fact leading the way towards a growing trend of unilateralism in world politics). Linked to that, the Communist party grip on power depends on both continued economic growth and assertion of Chinese independency and soft power, a task they have "inherited" from the Mao era.

Therefore, the wait-and-see, appeasing approach adopted by the U.S. administration, coupled with relentless and coordinated -- but not aggressive -- pressure by other world powers is probably the best way to deal with China and to affect its government's decisions. (as also suggested by this New York Times editorial) As China struggles to assert its newly found global clout, patience and understanding will bear the best fruits for everyone involved.