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Is Ukraine next?

With Georgia in pieces, Ukraine could be the next to fall to Russia's territorial ambition, separati

Ukraine's political summer season was cool and quiet, despite air temperatures in the high thirties (centigrade) and the war in Georgia, which the Ukrainian president, Viktor Yushchenko, tried hard to make a matter of personal significance for each Ukrainian.

The president's speeches in defence of Georgia's territorial integrity and against Russian aggression were published regularly in the papers. Television covered the Stop Russia Now! meeting of four presidents in Tbilisi, while the idea that Russia's next target would be the Crimea sparked discussion among Ukrainian politicians and political scientists. Yushchenko put on combat gear that made him look like Fidel Castro and it was announced that Ukraine would be the first to join any international "anti-Russian" alliance - although it remains unclear how such an alliance would act, and the idea now seems to have been put on the back burner.

The political battle cries over the conflict have gradually died down. Despite protests by many politicians, Ukraine's Independence Day on 24 August was celebrated in Soviet style with a military parade down Kiev's main street. Two days later, near the country's second-largest city, Kharkiv, a huge arsenal of ammunition caught fire and, for several days, bombs and mines were exploding, firework-style, over a five-kilometre radius. The minister of defence, Yuriy Yekhanurov, was forced to admit that the ammunition was to have been sold to the government of Chad. At the same time Yushchenko, in his combat suit, was bestowing the rank of general on 117 officers and government administrators.

Thus, Ukraine begins the autumn season of 2008. The start of parliament's first sitting will be dominated by a motion, tabled by the opposition, to recognise the independence of Abkhazia and South Ossetia. Parliament will not recognise them, just as Kosovan independence is not rec ognised or even discussed. But this only underlines how stable is Ukrainians' "many-sidedness" and how split the political sympathies of the country's eastern and western territories.

For many Ukrainians, the recent military conflict was yet another phase in the ongoing personal war between the Russian prime minister, Vladimir Putin, and the Georgian president, Mikhail Saak ashvili. The first phases of this war were purely economic. There was the ban on imports to Russia of Georgian wine (the wine war) and mineral water (the Borzhomi war, after a famous Georgian water). Then came the ban on imports of Georgian oranges and tangerines (the citrus war). After that began the countrywide campaign against Georgians residing - legally and illegally - in Russia, involving the deportation of illegal "guest workers" and the harassment of others, some of whom were very well known. One of Russia's best-known authors, Boris Akunin, whose real name is Grigory Chkhartishvili, suddenly found himself terrorised by the Russian tax authorities.

However, in response to the most recent Russo-Georgian conflict, Georgians living in Russia have banded togeth er against President Saakashvili. It is not a question of who did what and who is to blame. Georgian Russians simply want to get on with their lives in peace.

People in Ukraine also want a peaceful life, but Ukrainians have been more disturbed by the recent events in Georgia than western Europeans. Russia repeatedly declared that the Georgian army was using Ukrainian arms and that Ukrainian mercenaries were fighting on the side of Georgia in South Ossetia. Although neither charge has been proven, these repeated accusations serve to illustrate Russia's political antagonism towards Ukraine.

Moscow's politicians have repeatedly responded aggressively to Ukraine's demand that Russia prepare to remove her Black Sea fleet from Crimea in 2017, the year the contract under which Russia leases the Crimean naval base expires. The mayor of Moscow, Yuri Luzhkov, once called Sebastopol "a region of Moscow", and Moscow has been financing the construction of apartment buildings in the city. Luzhkov has also demanded the return of the Crimean peninsula to the Russian Federation. (Crimea was "gifted" to Ukraine by Nikita Khrushchev in 1954 to celebrate the 300th anniversary of Ukraine's voluntary integration into the Russian empire.) There are many in Russia who share Luzhkov's views, and few Ukrainians believe Putin's statement, made in an interview on CNN, that Russia has no territorial quarrel with Ukraine.

The perils of Russophobia

Ukrainians note that Russia seemed to have no territorial quarrel with Georgia until the beginning of last month. The suddenness of the Georgian crisis, and that Ukraine has approximately equal numbers of pro-Russian and pro-European politicians and regions, only underlines the complexity of the situation in which Ukraine finds itself. A referendum held in 2006 showed that a majority of South Ossetians did not wish their country to remain as part of Georgia; similarly, if a referendum were held in Crimea today, it would show that most people there do not want to live as part of Ukraine.

In an attempt to transform the south and east of the country, Yushchenko has tried to "Ukrainianise" secondary and tertiary education in the Russian-speaking regions. This has drawn protests from the local popu lation and politicians, and the policy has only increased pro-Russian sentiment in these regions. Yush chenko, called a "Russophobe" in the Russian press, has never been so unpopular. Ukrainian polls give him only 5 to 6 per cent support, the same as the Ukrainian Communists. His chances of winning a second term in office in the 2009 presidential elections are practically nil.

The presidential race is expected to be between Yulia Tymoshen ko and Viktor Yanukov ych. Both would be acceptable to Moscow. Both would be prepared to negotiate an extension of lease for the Crimean naval base and to postpone the question of Ukraine's Nato membership - unless Nato acts swiftly to make Ukraine a member while Yushchenko is still in power.

With regard to the European Union, most Ukrainians understand that they won't get in for at least another 20 years, leaving Ukraine economically dependent on Russia for the foreseeable future. Each anti-Russian move by the Ukrainian president has resulted in the sort of economic sanctions employed by Russia against Georgia, except that now it's Ukrainian meat and dairy products that Russia has banned. Thus, American chicken and Ukrainian dried milk have been the first victims of the current stand-off between the west and Russia.

Ukraine, an industrially developed country, could be seriously harmed by Russian sanctions. Most thinking Ukrainians appreciate that the country requires super-competent politicians if it is to maintain its political independence while being economically dependent on Russia - about which Ukraine has no choice. Unfortunately, the present level of political corruption puts Ukraine a long way from seeing the necessary calibre of politician in its corridors of power. Sadly, Yush chenko has not fulfilled his central election promise to overcome corruption.

But Saakashvili, his good friend and the godfather of one of his children, seems fully to intend to carry out his own election promises. Having been re-elected in January this year, Saakashvili sought to strengthen his position by reinforcing the territorial integrity of Georgia, a task made urgent by the obligation on all countries aspiring to join Nato not to have any unsettled territorial disputes. It is my belief that, in rekindling the South Ossetian conflict, Saakashvili planned to speed up the process of his country's entry into Nato. Perhaps he hoped Nato would join in the conflict on Georgia's side. Surely he could not have imagined that Russia would not respond to artillery fire over a town where a battalion of Russian peacekeepers was stationed, or that the Georgian army could win the ensuing battle on its own. Nato remained outside this conflict, as I believe it would in the case of any military confrontation with Russia, because doing otherwise could take the world to the brink of disaster.

A Pandora's box

The Ukrainian president, like the Georgian leader, wants Ukraine to join Nato as soon as possible, and though Ukrainians themselves are less enthusiastic, right-wing politicians maintain that if Georgia had been a member of Nato, Russia would not have dared to protect South Ossetia or march into Georgian cities and ports.

However, most Ukrainians doubt that the west will put any significant pressure on Russia, and expect that any protests will be confined to hard-hitting rhetoric, along the lines of David Miliband's recent speech in Kiev. On returning to London, he admitted that Europe needs Russian gas and also noted that Gazprom needs European clients and investors.

Meanwhile, untouched by western opinion, Russia has boosted its image as a country prepared for brutal confrontation with neighbours. As Putin put it on 29 August, the west started the business of redrawing the map of Europe when it recognised the independence of Kosovo, thus "opening a Pandora's box". South Ossetia and Abkhazia are only the second and third "evils" to have flown out of that box since Kosovo. Might there be others?

For 17 years, the "independent" state of Transdnestria has existed on the boarder of Ukraine and Moldova. It is populated by Russians, Ukrainians and now well-rooted settlers from the 14th army of the USSR, which was stationed there when the Soviet Union broke up. There are other unrecognised "independent" territories, the leaders of which are now looking hopefully towards Moscow, which is ready to expand its political territory under the banner of the CIS (Confederation of Independent States), a friendly enough sounding union.

All that will be required, from Moscow's point of view, will be the recognition of these states by each other and by Russia - and, in the end, eastern Europe, the Caucasus and central Asia will be firmly within the Russian sphere of influence. The western border of this sphere could very well be drawn through the middle of Ukraine, slicing the country in two.

Andrey Kurkov is the author of "The President's Last Love" (Harvill Secker, £12.99)

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

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The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt