UKRAINE: A WESTERN DIVIDE IN THE EAST

By Marvin Andrade
Staff Writer

Many old tensions from the Cold War have resurfaced in the current Ukrainian security dilemma as the Iron Curtain is redrawn across Europe. The conflict in Ukraine has instilled deep concern in all parties involved since violence erupted during protests in 2013. The protests are the result of Ukrainian president Viktor Yanukovych’s decision to cancel preparations to sign an association agreement with the European Union (EU). This agreement would have continued an ongoing process of Ukrainian integration with the EU by opening Ukraine to more trade from the EU and setting a foundation for more freedom of movement across EU member nations. Russia, a former global hegemon, feared further encirclement as Ukraine began to tilt toward Western Europe. Unsurprisingly, Russia took actions to prevent this process and secure strategic interests, such as Crimea which housed the Russian Black Sea Fleet. The eastwards movement of western institutions is a process that Russian leaders have frequently witnessed since the end of the Cold War. During negotiations in 1999, 2004 and 2009, former Russian satellite nations and allies were incorporated into NATO. This goes against several high level discussions near the end of the Cold War. NATO claims, however, that there have “never been political or legally binding commitments” that NATO would not expand eastward.

The parliamentary ousting of president Viktor Yanukovych, which had resulted from the pressure protesters placed on lawmakers, was viewed as a “bandit coup” by Russian leaders that had favorable relations with the Ukrainian president. Leaders from the EU and the United States are concerned, however, about further Russian aggression due to the violence that has transpired during this civil and international conflict. Ukraine now stands deadlocked between two opposing sides that have divided the country. In the east, rebels supported by the Russian government find themselves in open conflict with those that want to side with the West. The Ukrainian government faces incredible hurdles in order to re-assert its sovereignty and maintain its original borders; Ukraine must negotiate with newly independent regions in East Ukraine and Russia for Crimea. The strongest supporters of restoring Ukraine’s borders, the United States and the European Union are divided over how to achieve this objective.

For much of this crisis, the United States and Europe have attempted to cooperate in order to form a strategy that unites Ukraine under democratic principles that would allow progress toward closer integration with the West. The United States has the ability to construct a coherent strategy to combat Eastern separatists in Ukraine through the use of very strong sanctions and military support. In the EU, however, there is a lack of policy coherence due to the fact that the EU is not unified in its response to the crisis. While the member nations of the EU can choose to act unilaterally, a combined response from the entire EU would produce an outcome that would signal strength and solidarity to Russia. This lack of cohesion has enabled the Russian government to strategically pull smaller European states away from action in Ukraine that would harm Russian interests. For example, in late January, the new Greek government showcased its ties with Russia in order to gain more bargaining leverage in upcoming debt talks. The Greek case is one among many others where EU member nations have opted to take less punitive measures for Russian involvement in Ukraine. The lack of unified action from the EU comes from how it makes its decisions. The EU must make decisions through a combination of supranational and intergovernmental institutions consisting of the Council of Ministers, European Commission, and the European Parliament. Since little consensus exists among EU member states, the EU is gridlocked over the security decisions it will take to confront Russian aggression.

The current situation in Ukraine begs the question as to whether or not the EU still gains economic or political advantages from pursuing intervention in this conflict. Prior to Russian intervention, Europe’s benefits of gaining Ukraine as a trading partner were minimal compared to now. Prior to Russian intervention, the EU would have needed to make marginally small investments into infrastructure that could facilitate trade and decrease corruption. However, due to recent military actions, costs have risen significantly. In times of conflict, nations have several considerations when deciding how to respond to aggression. Building defenses or training and arming individuals in Ukraine is costly and increases the risks of confrontation with Russia, a catastrophically high cost in and of itself. By arming rebels in Ukraine, Russia is implementing a strategy with a higher risk of war, but the gains that have been made since late 2013 are clear. Russia now holds Crimea and is in a good position to maintain a buffer from the West through rebel-held regions in Eastern Ukraine. On the other hand, if Europe and its allies wish to help Ukraine reclaim sovereignty, significant amounts of money would need to go into military spending. Given an expected 12% contraction of the economy this year alone, additional spending would also need to be made for reconstruction to make Ukraine viable again. Given how the EU’s cost expectations for closer association with Ukraine have increased significantly, the West is walking through a proverbial minefield as it makes future decisions. Despite sanctions, which have contributed to the devaluation of the Russian Ruble by more than half and produced a 3 percent contraction of the Russian economy in the last 12 months, many member nations are now questioning whether further sanctions would actually have any effect in curtailing Russian aggression. Putin’s approval ratings were at 85% at the start of the year. With this information, EU nations are skeptical that sanctions will have any effect in the current situation.

The question of deploying EU ground personnel in Ukraine is an entirely different matter altogether. Many have asked the European Commission to strengthen the Organization for Security and Co-operation in Europe’s (OSCE) mandate in Ukraine. With some hesitation, the OSCE’s mission in Ukraine was extended for an additional 6 months in March. The mission calls for monitoring of the situation as well as facilitating talks between parties in Ukraine. The OSCE mission is to go in tandem with the second Minsk Agreement that was signed in February that called for a ceasefire in Ukraine. Few nations are willing to strengthen the mandate to go beyond monitoring and observation.

Since the start of hostilities in Ukraine, NATO was quick to respond with missions spearheaded by the United States. Given the United State’s military contributions to NATO, it played a large part in strategy design. Because of the efforts of NATO and the United States, member states around Ukraine have been armed and continue to train for the possibility of future Russian aggression. Additionally, very expensive war games are ongoing in the Black Sea. While the war-games do little to de-escalate violence in Ukraine, they serve to signal to Russia the consequences of further aggression in other Eastern European states. The United States has pressed forward with some reluctance from its EU counterparts, but given the massive military contributions provided by the United States, few states can form a cohesive bloc that can disagree and prevent action. German commanders are not pleased with the large divide between its commanders and those of NATO which are taking more aggressive military stances. Other Western European members such as France also believe the US is behaving in a manner which is too hawkish. A response from members of the European community has formed. The president of the European Commission, Jean-Claude Juncker, announced on March 12 the need for an exclusive EU military force. There are several reasons why an exclusive EU military is necessary and unnecessary. The suggestion by the Commission President and Germany’s backing points toward the rift in the strategic partnership between the United States and the EU. The United States pushed forward initiatives through NATO that would arm rebels in Ukraine. While the United States has pushed for increased armament, the European community, led by Germany and France, wants to prevent further escalation of conflict and spillover into neighboring regions. This is clearly observable in the diplomatic route that was taken February in the signing of the second Minsk agreement negotiated by Russia, Ukraine, France, and Germany. Through the suggestion of an EU military, observers can see the strain that the Ukraine crisis has had on the US-EU relationship. The creation of this force would give the EU more control over forces in the region and could allow the institution to move further away from US influence through NATO. The mere suggestion of an exclusive EU military force by high level officials outlines an apparent fault line between the EU and US. The EU and the US have generally worked together in a unified manner to resolve security concerns, but this recent turn of events in Eastern Europe highlights the divergence of preferences between all sides that has been becoming more apparent in the last decade since the 2003 invasion of Iraq. To the benefit of the United States, the creation of an EU military force is politically unfeasible in the EU due to the fact that few members would be willing to agree to pay for these forces and set the EU on a course that could lead to further detachment of the US from Europe. Although these conditions are always subject to change, this is not a foreseeable option for the duration of this conflict. While the strengthening of the OSCE mission is difficult to pass through EU legislation, it is nowhere near as politically unfeasible as an exclusive EU force.

The current matter in the Ukraine stands as a frontline for many world superpowers. Since the end of the Cold War, president Clinton and Bush have taken steps to expand NATO beyond the comfort levels of Russian leaders. Unsurprisingly, Russia did not stand by idly while Ukraine, one of the most important states within the USSR, began to tilt westwards. President Putin has already shown his willingness and commitment to maintain a buffer from the west. Given the violent turn of events as the EU and US attempted to incorporate Ukraine into their framework, both powers must consider the ramifications of further expansion. It is clear, however, that the US and EU have divergent preferences. The United States is much more willing to risk war than Europe. This comes from the fact that the United States was willing to give the EU a blanket of defense while it formed so that the EU could focus on other domestic policies. While respectful of the United State’s contributions to the creation of the EU, many EU states have not been as willing in the last decade to support the United State’s military actions. This rift has become much more apparent in the last few months as the US has taken hazardous steps to ensure its preferences are achieved within the Ukrainian security crisis. Russia has been fast to respond to this and has successfully prevented more severe action against itself by dividing Europe through bilateral negotiations. While Europe battles itself and the United States, Russia’s strategy has successfully ensured that Ukraine will not side with the west for a considerable length of time. At the end of the Cold War, the line between East and West was temporarily blurred, however, as Russia regains economic capacity and military strength, the world will find out to what extent Russia will permit the line to move.

Photo by Sasha Maksymenko

INCONCEIVABLE! HOW NEGATIVE INTEREST RATES IN EUROPE HAVE STUMPED ECONOMISTS

ECB

By Evan Carlo
Staff Writer

What was once thought inconceivable is now a reality for many countries in Europe. The nominal interest rates of many European government bonds and deposits are now negative and may stay that way for some time. Now instead of the government paying bond holders interest for lending money, the bond holders are paying the government interest for borrowing their money. This backwards world we are living in is stumping many economists who believed negative nominal interest rates were impossible. Why pay the government to spend your money when you can just hold cash? Is it logical for zero nominal interest rates to exist?

Standard monetary economics teaches that central banks can only reduce the interest rates of bonds to what is called the zero bound. This is the conventional method that central banks use to regulate the economy. When economic output or inflation is lower than the central bank’s target, they lower the interest rate of government bonds in order to reduce the cost of borrowing to businesses and consumers. This policy stimulates aggregate demand and lifts the economy back up to its target rate. But once nominal interest rates are zero, known as “the zero bound,” there is nothing the central bank can do to further stimulate the economy through conventional means. It can use unconventional policies such as quantitative easing in which the government tries to lower the interest rates of other types of bonds. But again, once the zero bound is reached on these rates, the central bank cannot lower them further. One economists even boldly claimed, “the zero lower bound isn’t a theory, it’s a fact, and it’s a fact that we’ve been facing for five years now.”

However, the reality of negative nominal interest rates challenges this traditional view. Several European government bond interest rates are trading negative, although only slightly. Switzerland, Germany, Finland, the Netherlands, Denmark, Austria, Belgium, France and Sweden have all experienced negative interest rates on bonds this year. In the most extreme case, Switzerland even has negative interest rates in place for bonds with a maturity of up to 10 years. What factors are driving these nominal interest rates negative?

Pessimism about the economic prospects of European countries is partially responsible for driving interest rates negative. During times of economic turmoil, investors look for safe assets to invest in even if they accept lower rates of return on investment. In this case, they may be willing to accept negative interest rates on government bonds that are considered a safe investment. Since the likelihood of government default is essentially zero, buying a government bond is a riskless asset. Considering the anemic economic growth Europe has experienced the past few years, many investors are looking for a safe asset even if they offer negative interest rates.

Fear of deflation also plays a role in driving down interest rates. The inflation rate of the Eurozone area fell below zero in December 2014 and has remained low ever since. Deflation drives interest rates down since investors need less of an inflation risk premium. This could cause rates to fall below zero if the rate of deflation is lower than the nominal interest rate.

Deflation also can mean trouble for the economy by driving pessimism. Lower prices reduce the amount businesses receive in sales, leading them to lay off workers and spend less in investment. The workers therefore have less money to spend which further reduces aggregate demand in a deflationary spiral. Right now this is a big problem in Europe which is suffering from low aggregate demand. Further deflation can cause more pessimism among investors who will continue to hold safe assets even at negative rates.

The European Central Bank’s (ECB) asset buying program is yet another contributor to negative interest rates. On March 9, the ECB announced a planned injection of 1.1 trillion euros into the European economy through the purchase of government bonds. Policymakers designed the program to inject much needed liquidity into the European economy to increase aggregate demand and fight off deflation.

The ECB’s asset buying program also lowers the interest rate on bonds by restricting the supply of bonds. With less bonds in the market, the price of bonds rise as investors are willing to pay more to get their hands on the scarcer safe assets. As the price of bonds increase, investors are willing to accept a lower interest rate since the high price of the bond makes it less necessary to have a high interest rate to make a profit. The price of bonds can become so high that investors are willing to accept negative interest rates that will still allow them to make a profit.

Even bank deposits are earning negative interest as the European Central Bank (ECB) pushed the nominal interest rate on ECB deposits negative in June of last year. This means that if banks want to hold excess cash at the ECB they will lose money. This is the first time an economy the size of the European Union has tried to use negative interest rates. The ECB hopes that negative deposits will force banks with excess reserves to loan them out to business and consumers. Europe’s economic malaise forced the ECB to take these unconventional methods to stimulate the economy.

This combination of unusual circumstances is driving nominal interest rates negative. Fears of slow growth, European government policies, and investor demand for safe assets have made negative rates possible. Negative nominal rates are a sign of both economic trouble for Europe and a policy failure on the side of European central banks. The ECB kept rates too high for too long and is responding too late to the economic crisis (http://www.economist.com/news/finance-and-economics/21640371-policy-will-help-less-so-other-big-economies-better-late). As of now, negative interest rates are necessary to boost aggregate demand. However, if rates stay low for too long it can hurt banks, investors and pension holders who depend on savings for income.

Fortunately, the European economy appears to be recovering. The European Commission revised its forecast from 1.3 to 1.5 percent, higher than last year’s measly 0.9 percent. The inflation rate now stands at zero percent, ending four months of deflation. All of this points to the ECB’s asset program and negative interest rates helping raise aggregate demand. While it is too early to say the European economy is out of trouble, if the economy continues to recover, negative interest rates will only be a temporary phenomenon.

Image by VasenkaPhotography

SPAIN: FROM CITY TO WILDERNESS

By Hart Pitcher
Contributing Writer

This is the fourth article in our 2015 Week of Photo Journals: Changing Perspectives. Check back each day this week to see more beautiful photography and travel accounts from UC San Diego students. Click on the images in the article to view the photos up close.

Spain 1

I was exploring the city and came across this view at just the right time. You can get a sense of how much energy exists in the city just from how colorful, compact and elaborate each structure is. I think the architecture makes a nice contrast as it fades towards the mountains in the background. Spain has some amazingly beautiful landscapes, and this was my favorite sunset from my trip there.

Spain 2

After exploring the city of Barcelona during the day, we went and had dinner out on the harbor for sunset. It was amazingly beautiful, there was a lot going on – including a large pirate ship parked on the dock.

Spain 3

La Sagrada Familia is quite a breathtaking site from the outside. I had never seen anything like this kind of architecture. Then I found out it was a cathedral, and I was even more amazed.

Spain 4

We hiked for hours for this one. Spain has such an active city life that a lot of people forget how much beauty exists in its wilderness. It is vast in nature, and twists and turns around canyons and rivers.

Spain 5

Another perspective of Spain’s natural beauty.

Spain 6

Spain 7

This view is of Park Güell in Spain. There was a lot going on here, hundreds of people going about their days and enjoying the same beauty as me. It was a beautiful, hot, blue-sky day, and we hiked up a long trail around the back of the park to reach this view – totally worth it.

Spain 8

On the coast, I struggled to find a vantage point to look out at the city, but it was worth the search.

Spain 9

I love this perspective of the Spanish landscape. It was a beautiful time of the year, when we could still see a faint brush of fall.

Spain 10

Buildings on the mountain-tops hardly seem feasible, but people used to live in this tiny formation carved out of the mountain that used to be a city!