The View From Istanbul
World leaders seem to spend much of their time these days jetting from one conference to another. Russia’s Vladimir Putin and Iran’s Mahmoud Ahmadinejad just arrived here for a summit with Turkey’s increasing influential prime minister, Recep Tayyip Erdogan.
Turkey is rapidly emerging as an important regional political and economic power. Ankara no longer automatically follows Washington’s direction, as it did in the past, and no longer has to accept US financial aid. PM Erdogan’s opposition to Israel’s bombing and blockade of Gaza, and his refusal to isolate neighboring Iran, has made him a hero across the Muslim world.
Turkey’s long self-isolation from the rest of the Muslim world, and antipathy towards the Arabs, was the result of veiled rule by the powerful, hard-right military. The generals were guardians of Turkey’s virtual state religion, the cult of 1930’s strongman, Mustafa Kemal Ataturk, who tried to uproot Islam and Turkey’s ancient traditions and turn the nation into a secular western state.
The military has been forced back to its barracks with a helping hand from the European Union. Now that Turkey is no longer isolated from its neighbors, Istanbul is returning to its former role as the Paris of the Muslim world.
This boisterous, fascinating, magical metropolis pulsates with intellectual energy, exciting films and music, and superb food. Western ways are in constant clash with traditional Islamic culture. I spent an afternoon at the military museum, studying the epic of the greater Turkish nation, whose peoples extend from the Great Wall of China to Europe. Iu2018ve long studied Pan-Turkism, which arose in the 19th century at the same time as Russian-led Pan-Slavism. This belief in a great Turkic nation spanning Central Asia continues to have deep roots in among fiercely nationalistic Turks.
But the most important issue facing Turkey and the rest of Europe today is not the Mideast or dreams of empire but the financial storm raging around the continent. Turkey is so far weathering the tempest fairly well, in part because it was not integrated into the global financial system. After decades of near-death experiences, Turkey’s finances have finally been stabilized. But many other European nations are in real trouble.
Hungary, Latvia, Romania, and Bulgaria are in financial turmoil. Greece is racked by riots, protests and strikes by angry civil servants. There is no way Greece will be able to reduce its unsustainable debt load from 13.3% of GDP to 3%, as Athens promises.
Greece will likely default on its bonds over coming years, just like debt-strapped Argentina. It’s hellishly difficult for democratic governments to massively slash public spending, raise taxes, and purge bloated bureaucracies.
The only way out for Greece is to default, withdraw from the euro zone, and bring back its wobbly drachma.
There is some good news from Europe. Germany’s economy is picking up speed, aided by the weak euro. Britain’s new government is about to attack the monstrous debt left by Labour, equal to 12.9% of GDP. Spain, Europe’s fourth largest economy, is slashing spending. A euro and pound sterling at parity with the US dollar would power up the EU’s stagnating economies.
Members of the European Union have realized they must shrink their debts and construct a central financial authority with enforcement powers. They face war with their powerful public sector unions, particularly in France.
I just attended a conference put on by the Dutch firm DSM in Interlaken, Switzerland that featured noted economist Nouriel Roubini, who predicted the American crash of 2008. Nicknamed "Dr. Death” by the media, he warns of grim economic times ahead: deflation; rising unemployment; increased taxes; over capacity; and negative growth. I have long agreed with his outlook.
According to Roubini, for the US, the second half of 2010 will be worse than the first. US industrial capacity has fallen from 70 to 65%. Restocking depleted inventories is complete.
The United States, 25% of the global economy, can’t rein in its spending or cut debt. President George Bush inherited a surplus and went on to create the biggest deficit in US history (excepting WWII). Now, President Barack Obama is making matters worse by piling on more unsustainable debt.
Government stimulus efforts were a "waste of money" says Roubini. The only way to escape this debt trap is to make economies more productive and shrink governments. But slashing government spending will depress debt-addicted economies in the short-medium term, making matters worse. Dangerous inflation lies ahead in the long term.
Most alarmingly for resource exporters like Canada and Australia, Roubini warns China has massively overspent on infrastructure, exporting its excess capacity. Beijing has "front-loaded 15 years of capital spending," says Roubini.
As this column keeps reporting, China has massive over-capacity in industry, producing a huge, dangerous bubble. China’s property market is another giant bubble. When they pop, the globe will tremble. China has got to boost domestic consumption, says Roubini, which is now only 36% of GDP versus America’s 70%.
Canada, rarely in the news, is being hailed across Europe as a model of debt reduction for slashing public spending from 1994—1999. Former prime ministers Jean Chretien and Paul Martin are lauded for their wise economic management. Canada ran budget surpluses until 2007. As a result, when the financial tsunami struck in 2008, Canada’s healthy economy and well-managed banks weathered the storm.