Caught up in Gridlocks

Majorities and minorities in legislatures are not all there is to it when it comes to determining a country’s progress

Voters in Mauritius are caught up these days deciding whether there will be Constitutional amendment or not. As many have already pointed out, the forthcoming elections are critical for the country as they could mark an important departure from our existing electoral system. In a few days’ time, before this paper’s next edition, we’ll be settled about this thorny issue. Seen in a larger perspective, majorities and minorities in legislatures are not all there is to it when it comes to determining a country’s progress.

Events the world over have shown that overwhelming majorities in Parliaments are not necessarily positively correlated with economic and social breakthroughs or the removal of a state of economic stalemate. A country makes economic progress when its resources are constantly sharpened up, adapted and geared to the markets; and, there are decision-makers within the country who are seriously tuned up with unfolding international events so as to drive up the agenda before it is too late. We’ve done such things in the past.

Why policies adopted in the Euro area matter to us

As we well know, much depends for a country like Mauritius on the state of health of its external markets and external economic conditions generally. We are closely associated with some of them. Europe is one example. We very much depend on it for a good part of our exports. We also draw the larger part of our tourists from Europe. So, for the immediate, what goes on or doesn’t in Europe will determine how well we will perform.

Unfortunately, the Euro area has been slowing down considerably, casting doubts on how we will pull along in the coming period. Third quarter forecasts show that the Euro area is expected to grow by no more than 0.8% this year. Within this overall rate, there are divergent rates of growth for individual European countries: for example, France is forecast to show economic growth of 0.4% this year; Italy: – 0.3%; Greece: +0.4%; Netherlands: +0.6%; Spain: +1.2%; Germany: +1.2%. So, the question to ask is: how good are the prospects of a turnaround for the better in what is currently our principal economic market?

Unfortunately again, the Euro area is in dire straits. Its overall current rate of growth of industrial output is + 0.7% {-0.2% Germany, -0.3% France, -2.9% Italy, -2.2% Austria, +3.7% Spain, +3.4% Belgium} compared with +4.0% for the US, +7.7% for China, +3.2% for Canada, +10.9% for Indonesia, +9% for Taiwan, +3.1% for Switzerland, among others.

This low industrial performance in the Euro area has been blamed variously on the loose economic policies previously pursued by the periphery countries to the south of the Euro area. True, for what happened in the past when politicians chose to pander to misguided voters and put a premium on failed economic doctrines. A puritanical doctrine of fiscal restraint, sponsored by Germany, is now sought to be imposed on all who don’t keep within rigid “prescribed” limits set out in an old treaty that was born at a time when the Euro area was not facing such dire conditions.

At present, however, the Euro area is confronted with another more serious problem: falling prices with a threat for deflation (a situation of successively falling consumer prices and wage reductions having the effect of shrinking economic production in successive stages) to take on the Euro area economies. Of all the countries of the Euro area, Germany is one the one with the lowest consumer price and wage rate inflations at 1% and 0.5%, respectively, confirming, if it were necessary, that the countdown to deflation is now a serious threat to the whole of Europe, including its principal engine, Germany. Yet, Germany is the country of the Euro area that has been stiffly opposing the adoption of anti-deflationary policies in the Euro area.

The remedy against deflation is aggressive monetary easing before the deflationary rounds settle in firmly, throwing up into serious jeopardy the chance of economic pickup. As a big player in Europe, it was Germany’s responsibility to avoid the Euro area getting into the deflationary spiral. It has taken the view however that fiscal restraint is the answer. Much of the European elite have bought into this misguided narrative.

Not surprisingly, the Euro area is caught up in a policy gridlock the consequences of which could be devastating for others like us who depend on the Euro area’s prosperity to do business. Only time will tell whether good sense will ultimately prevail.

Falling oil Prices

Since the middle of this year fuel oil prices have fallen by more than 25%. From the $115-$120 a barrel at that time, the price of Brent crude has come down to around $78 at present. This is due to oversupply of oil on the global market, principally as new sources of production such as shale oil in North America went into higher gear.

For a country like Mauritius which spends a quarter or more of its total import bill paying up for oil imports, this looked like a sense of deep relief. We should not however make short shrift of the strategies of the OPEC oil price cartel in this context.

Members of the cartel met in Vienna last week to decide whether they would cut down oil production in a bid to perk up its price. They decided not to do so. It means the situation of oversupply would continue. Is this what they want, really? No.

Their strategy is to let the international oil price go on falling. Their hope is that falling oil prices would reach a point when it would become uneconomic for alternative extractors of oil, such as shale oil producers (who account for the recent global oversupply), to continue producing. The latter are, in fact producing at a cost between $70 and $100 a barrel. If the price comes down to this level, they will close down production units for having become uneconomic.  This is expected to drive them out of business, giving back the OPEC cartel its levers to fix the international oil price to its advantage, letting it go to the $150-$200 a barrel level, a situation which caused Air Mauritius to engage in its disastrous hedging contract.

It remains to be seen whether countries like America which have since long been betting on their fuel independence, will allow the OPEC cartel to get to its objective, thereby nullifying America’s home-based production of shale oil. The geopolitics of oil is a more complex equation than its economics. In any event, this underlying tussle will redefine the global map of energy supply and demand.

Negotiating with Iran

It will be recalled that tensions rose to a high pitch last year between Israel and Iran when it was becoming clearer that Iran was getting nearer to its home-made nuclear bomb. To reduce those tensions and taking advantage of the election of Hassan Rouhani as the more moderate newly elected President of Iran in 2013, negotiations were opened up with Iran (against the background of Western sanctions) by the five Permanent Security Council members plus Germany, commonly referred to as P5+1. The aim was to prevent Iran from undertaking Uranium enrichment to the 20% level that could potentially help it make its nuclear bomb, putting in danger the security of its neighbours such as Saudi Arabia and Israel in particular. The aim also was to prevent a proliferation of nuclear bombs in the region.

These negotiations aiming to cut back on the sanctions against Iran if the latter agreed to exposing its nuclear projects to international scrutiny and not to go beyond an acceptable tipping point in its enrichment of Uranium, were expected to be concluded on Monday last. There would have been a plausible roadmap on containing the threat posed by Iran’s nuclear ambitions to the region.

American Secretary of State, John Kerry, came out last Monday to explain that the expected deal could not be reached between the parties in the given deadline. The deadline would therefore be extended to June next year. This is diplomatic language to state that there is stalemate and that progress will depend on a number of gives and takes that were unacceptable to the two sides for now. Things will hang in suspense and impending dangers to international peace and stability will persist.

We all know that the Middle East tension with Israel as the epicentre (posing as the indirect buffer against the effective threat intended against the West by various Middle Eastern religious factions) is very important for geopolitical stability. This has implications, among others, for the price of oil but even more so for global peace. Now that the deal has come to a deadlock, the nuclear threat remains in abeyance. In six months’ time, we’ll know whether and to what extent this gridlock will unwind or whether it will become an enduring tension threatening global peace.

 

* Published in print edition on 5 December 2014

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