European Institute

In Europe, Boeing Win Seen As New Sign of Pentagon "Buy-American" Bias Northrop Grumman’s withdrawal from the race to sell a new in-flight refueling tanker to the U.S. Air Force is a huge blow to the hopes of its partner in the venture, EADS, the European aircraft consortium. Its design -- based on a modified Airbus – was initially awarded the contract for the $40 billion deal. But Boeing got the Pentagon to re-run the competition with new specifications, which the U.S.-European team saw as tilted unfairly to Boeing.The collapse of the joint bid will trigger political fall-out in Europe, prompting officials and the media there to castigate “buy-American” protectionism. EADS’ manufacturing raised political debate in the U.S. about jobs: EADS would have given jobs to its U.S. sub-contractors, but Boeing has major manufacturing facilities in the U.S. Since the decision to quit came from the U.S. partner in the joint venture, there will be questions about the Pentagon’s handling of the controversial venture. But the outcry in Europe, even echoed by some U.S. voices, is unlikely to significantly worsen the already-lame state of transatlantic defense-industrial cooperation. Reactions among European arms manufacturers was characterized this way by an industry insider: “they felt that their plane was better and lost out due to unfair calls by the referee, but they felt no ‘entitlement’ to such a big contract in such hard times,” according to a European industry analyst. “They will be back for the next contract, a reconnaissance helicopter,” he said, asking not to be identified for his candid view on the sensitive subject. Finally ending a multi-year contest over the 179-plane contract, Northrop announced its decision March 8, and EADS said that it would not pursue the bid on its own. Now the contract seems set to go this team’s rival, Boeing, which emerged as a sole contender.The outcome – leaving Boeing in an unchallenged position as the dominant supplier to the Air Force -- runs counter to the Obama administration’s professed goal of promoting competition in Pentagon procurement as a way of cutting costs in the defense budget. Many analysts say that Boeing will now be able to charge a higher price because it is left as the only bidder on the contract.Northrop said it would not lodge a formal protest against the Pentagon’s handling of the process, a move that will stifle most of the potential domestic political protests about the loss of prospective jobs in southern States – jobs that will now be mainly generated around Boeing’s operations around Washington State. In Europe, however, the result is also liable to create obstacles for Pentagon hopes of seeing its new multi-role fighter-bomber, the F-35, become a standard warplane for U.S. allies.In the hours after the Northrop announcement, European governments immediately voiced anger at what they see as Pentagon bias blocking the emergence of a “two-way street” in the trans-Atlantic arms market. The EU Commission warned Washington of negative consequences for future European defense buys from the U.S. if evidence emerges that the handling of the deal favored a U.S. company. In an indirect rebuke to Northrop Grumman, the American partner of EADS, the Commission said it was “highly regrettable” that their joint bid had been withdrawn.The value of the tanker contract could ultimately amount to $100 billion as the in-flight refueling fleet – the first new one in America since the Eisenhower administration – grows in size over coming decades. As the New York Times reported the story (on an inside page), “the U.S. effort to obtain new tankers has been going on for nearly a decade, and it has come to represent much of what lawmakers say has gone wrong in military contracting. The Air Force’s first effort collapsed in 2004 amid corruption charges involving a proposed leasing deal with Boeing. Northrop Grumman and EADS then won a competition in 2008, only to have the award overturned after Boeing protested that the evaluations had been unfair.“The Air Force began its third effort last September, and Pentagon officials promised that the rules would be clear enough to steer the contest ‘straight down the middle.’ But analysts said the service’s numerical scoring system seemed to favor Boeing’s plans to offer a smaller plane, which could save billions in fuel costs over the next 40 years. What had been the strength of the previous Northrop and EADS bid — a plane that could carry more fuel and cargo than the Air Force had sought — became a liability as the competition turned into a shootout over which bidder could offer the lower price.“Northrop’s chief executive, Wesley G. Bush, said in a statement on Monday that the request for bids ‘clearly favors’ Boeing’s smaller plane, even though Northrop felt that its larger plane represented ‘the most capable tanker for the warfighter.’ ”Mr. Bush, who became the company’s chief in January, has placed more emphasis on improving Northrop’s profit margins than on increasing revenue. His decision on the tanker bid will not endear his company to potential European partners on future projects liable to provide controversial at the Pentagon.  

Once again the US Congress is mystifying the world and seriously muddying US-Turkey relations by trying to pass a resolution declaring that it was “genocide” when over a million Armenians were massacred in 1915 by Ottoman Turks. The proposed U.S. measure was passed out of the House Foreign Affairs Committee in early March.

But More Rounds Still Liable To Come From PIIGS Greece seems set to tough out the financial tempest unleashed on the country by its huge fiscal over-runs and sovereign debt. That prospect could help relieve pressures on other troubled economies in euro zone, at least temporarily. The break-through for Greece came this week when EU President, Herman Van Rompuy announced that "Euro area member states will take determined and co-ordinated action if needed to safeguard stability in the euro area as a whole.” In other words, the euro zone has not cracked in its worst-ever crisis – at least, not for now.

Sovereign Debt Liable to Overwhelm System in the EU’s Five “PIIGS” As Greece teeters on the edge of national financial default, its plight dramatically illustrates a widening economic threat to the euro (and even to the euro zone) unfolding in the wake of the global crisis. A half-dozen weaker member states in the euro zone now pose a threat to the European Union’s vaunted single currency. It is the most severe test of the European system since it was launched a decade ago. The euro zone countries in trouble have been unflatteringly dubbed by bankers as the “PIIGS”: Portugal, Ireland, Italy Greece and Spain. All give share acute fiscal crises brought on by runaway government spending and the new stresses of the global crash, and all five – starting with Greece and Spain – are potential basket cases of a sort that the euro system has never before had to deal with. For months now, Greece has been the target of calls for drastic reforms to move the country out of its dire financial straits, and it has now been joined by Spain as a cause for alarm. It is potentially a much worse problem: the Spanish economy is one of the EU’s largest – it is five times larger than Greece’s – so its failure would almost certainly trigger a systemic crisis across the euro zone and perhaps its collapse. EU political leaders and top banking officials have all vowed that the euro zone is not in danger and that a way out will be found for the Greek deficit, presumably one led by the Athens government itself. But financial markets seem to be of two minds about the outlook for Greece, even after determined public commitments made by Greek Prime Minister George Papandreou. In an encouraging sign, Greece’s central bank issued a round of government bonds into jittery international markets at the end of January: the paper was taken up, but the notes subsequently have started being discounted. Greece’s problem is compounded by the fact that similar piles of sovereign debt weigh on the outlooks of the four other euro zone PIIGS. This underlying problem – attested by the record-breaking debt accumulated by the 16 euro zone nations -- was largely masked by boom conditions and cheap credit until 2007. Now cracks in the common currency system have been wrenched open by the global financial meltdown, and experts worry about the possible domino effect of national “bankruptcies” among the PIIGS states if Greece cannot pull back from the brink, perhaps with a bail-out from other EU nations. Similar weaknesses (and perhaps some hidden vulnerabilities related to Greek credit) exist in the other PIIGS states and also in central European countries such as Slovenia and Austria, as well as in the Baltics or in nearby non-euro countries such as Iceland. In the latest development in early February, the European Commission has said it fully supports a Greek government’s deficit-cutting plan announced last month by Athens, but the commission has set in place a strict surveillance program to ensure Greece meets its targets – a big question given the recent record of governments in Athens of fudging the figures in their official economic reporting. The EU executive body issued Greece with recommendations under the bloc’s procedures for handling excessive deficits, invoking for the first time Article 121 of the Lisbon Treaty to demand badly needed structural reforms. “We are endorsing the Greek program, we are giving confidence and supporting the Greek authorities,” said outgoing EU economy commissioner Joaquin Almunia, in Brussels on 3 February, “but at the same time…we need to strengthen instruments to monitor how the program is implemented so as to avoid slippages, to avoid that the objectives are not reached.” In a televised speech dramatizing the severity of the situation, the Greek prime minister announced plans to cut civil service allowances and freeze public service hiring. His austerity package was greeted by fresh calls from unions for their members to get behind a public sector strike scheduled for February 10. Commission President Jose Manuel Barroso also warned that Greece had not escaped its fiscal problem, saying that its reform proposal was “feasible but subject to risks.” The finance ministry is due to unveil detailed measures on incomes policy and a new tax system aimed at increasing revenues by 10 per cent by mid-February. Brussels’ backing provides some relief for Athens and could ease market nervousness about the fragility of public finances in Greece and other euro zone countries – notably Portugal and Spain – that are also the intensive-care list because of their soaring deficits. These problems in the broader economies of the PIIGS states have crystallized as national debts: together, the give PIIGS account for 40 percent of the euro zone’s total debt. The sovereign debt crises of these countries means their ability to borrow money is evaporating. On present trends, the extreme outcome could be that their bonds become worthless and one or more of these countries goes “bankrupt” in the way that has happened to some developing nations in the past. Rumors are swirling that EU governments are already secretly crafting a bail-out – namely, big bridging loans – to enable Greece to get beyond its crisis. Rumors that Greece would receive a bail-out from the EU gained traction after word came from Brussels in late January that the EU may yet consider giving “emergency support” in a coordinated move by member states, the Financial Times reported January 29. In EU capitals, officials vehemently denied these claims in January. But concerns about Greece's high level of debt led the three main international credit ratings agencies to downgrade Greek government bonds in January, so when Greece issued its bonds, it had offer them at much higher interest rates (five percent higher than those offered on benchmark German bonds) in order to attract investors. And as the bonds started trading at a discount, the euro itself slid to a six-month low against the dollar amid worries that Greece might have to leave the euro or even that the euro zone might fracture. A recent rumor started in an article reported that Athens had mandated the U.S. bank Goldman Sachs to sell Greek debt to China. All such speculation has been dismissed by officials such as Jean-Claude Trichet, who heads the European Central Bank. German finance ministry spokeswoman Jeanette Schwamberger was equally categorical: “There is absolutely nothing to these rumors…they are without foundation,” she said. What cannot be denied is the scale of Greece’s problem: its deficit is projected to exceed 13 percent of the country’s gross domestic product in early 2010 – a new record for any EU country in exceeding the ceiling of a three-percent-deficit-to-GDP ratio set by the EU’s Growth and Stability Pact. And at a continental level, dismal tax receipts in 2009 have now put 20 of the 27 EU member countries with deficits above the three-percent cap. Just behind Greece, Spain is emerging as the second-worst-performing country in the euro zone. In a new policy that mirrors the austerity measures being passed in Greece, Spanish Finance Minister Elena Salgado has vowed to drastically cut the national deficit -- 11.4 percent in 2009 (a level exceeding earlier estimates to the three-percent ceiling) -- by 2013. But possible solutions to Spain’s problems are complicated by legislative stipulations that severely limit the state’s room for maneuver. For domestic political reasons, the government has also ruled out cuts to education, social security, research and development, and foreign aid. And it expects 20 percent of the “adjustment” and its pain to be assumed by Spain’s autonomous regions, which under the nation’s decentralized system account for over half of the nation’s spending. As a result, Spain has a “credibility problem” with its new stance. Voicing his skepticism, economics professor Alfredo Pastor, of Spain’s IESE business School, explained: “if you can’t cut social security (or guarantee cuts) in spending of the autonomous regions… I don’t see where you can get it from.” In the case of Greece, efforts to deal with the looming crisis since the summer have been confounded by bad data from Athens that (perhaps deliberately) hid the real dimensions of the country’s debt and its growth rate. Brussels officials have expressed rage over misleading statistics from Greek authorities: the former Athens government reported the budget hole in July as only half of the actual 12.7 percent figure. Since then Commission chiefs have called for an independent statistical service to keep Greece’s books. Such a move may serve to stem the corruption and fiscal mismanagement characteristic of the previous Athens government. Greece’s predicament stems from precisely what the euro zone was created to avoid – overspending. For Greece to stay in the European Monetary System (EMS), other EU governments are insisting that Athens must swallow bitter remedies in the form of big cuts in public spending. Before the euro, a Greek government in these circumstances would have tried to “inflate its way out” of the problem, increasing its money supply to create inflation, which in turn would have triggered a devaluation of the Greek currency (at that time the drachma) and enable Athens to pay off its debt with cheap money. These days as a member of the EMS, Greece has no national currency to “devalue” as a maneuver to get out from under crushing national debt. There is no discussion of “devaluing the euro” because the most influential EU member state on this subject is Germany, and leaders in Berlin view devaluation with horror as a step liable to spur inflation. (One country that has remained outside the euro – Britain – also has a heavy budget deficit that has started devaluing its national currency.) In many ways, the EU-Greece situation resembles the current U.S. problem with California, a virtually-bankrupt state that wants a “bail-out” from Washington – a step that would be politically poisonous for the Obama administration because of resentment among most Americans about the insistence of Californians on having lavish social services without the tax revenues to pay for them. In the euro zone, the PIIGS issue marks a reversal from the situation a few months ago when the euro was being credited with having helped protect the 16 countries in it from the global crisis’ worst effects (such as competitive devaluations of national currencies). An Austrian official told a European Institute meeting in early February that the popularity of the EU has risen significantly since the economic meltdown, apparently because many euro-phobic Austrians now feel gratitude to the EU as a guardrail sparing their country – as part of the euro bloc -- against the worst effects of the global economic meltdown. Policymakers in Athens insist that they can manage the situation they inherited from the previous government. Greek officials have announced that they can get the debt crisis under control by the end of 2012 – a deadline that seems unrealistic in light of recent developments. New legislation on pension reform is also being pushed for April – two months ahead of the previous deadline. So far these efforts, which would have been impressive a year ago, seem to have had little effect in restoring confidence about Greece’s finances. But leaders from the PIIGS states have been vocal in a chorus of public statements about the euro zone’s capabilities to right itself. “We are a serious country and we will fulfill our promises,” according to Spain’s prime minister.. Papandreou promised to “draw blood” in austerity measures for Greece. In what signals a potential change in tone from the absolutely-no-help vows from EU finance authorities such as the Commission and the European Central Bank (ECB), French finance minister Christine Lagarde insisted that “there is no bail-out system” for failing states, but nuanced that “any single member state, France, Germany, Greece, is not alone. We’re jointly accountable to one another.” The fact that Lagarde cited France and Germany, the lynchpin economies in the euro zone, will inspire hope in Greece and other PIIGS countries, where intra-euro zone support is very much in doubt. Prior to the Lagarde statement, a German member of the ECB executive board, Jürgen Stark warned that “the markets are deluding themselves when they think... the other member states will put their hands in their wallets to save Greece.” While the Greek government’s revised emergency economic-stability has gained the full support of the European Commission, some EU officials remain skeptical about Greek predictions of recovery. Non-Greek sources predict a growth rate of 1.5 percent – a turnaround from the 0.3 percent shrinkage of the economy in 2009, but not enough to meet the government’s promises. The draconian measures planned by Papandreou’s Socialist government include a new tax on property transfers, hikes in excise taxes on alcohol and tobacco and reforms of the heavily indebted pension system. The politically prickliest features of the whole package are likely to be the planned cutbacks in public sector pay and benefits, including salary freezes, actual pay cuts and pension reforms – which trade unions claim could amount to as much as five percent for government employees. In pushing through a parliamentary bill to cut spending, Papandreou warned in December that the country was at risk of "sinking under its debts" and outlined a number of measures to reduce deficit levels, including a 10 percent cut in social security spending. He also announced a 90 percent tax on the bonuses of senior bank workers. Other proposals included a cut in defense spending and the closure of a third of Greece's overseas tourism offices. These tough measures may trigger social unrest if and when the government seeks to implement the cuts required for what it calls a “new social compact.” So far, Greece’s deficit has been partially offset by the ECB’s currently low interest rates and generous liquidity allowances. These enable Greek banks (like those in other PIIGS countries) to buy their governments’ bonds and thus allow the continuation of a pattern of rolling over more and more national debt. But this option risks being overtaken by events and running out of time. The responses from other euro zone countries about help for Greece might be best summed up as “constructive ambiguity” – a purposefully vague tone aimed at goading Athens to do some heavy lifting without any solidarity bail-out, beyond perhaps some promises of temporary help by way of incentives from Germany and other EU countries. Up to this point, Germany has resisted calls for it to lead in seeking an EU-wide solution. “German [funds] are the determinant of the euro zone’s solvency,” according to Constantin Gurdgiev, a finance professor at Trinity College in Dublin. The domestic deadlock in Athens and similar standstill in the EU means that Greece may soon have no choice but to seek help from abroad. The outcome would be a serious setback for the reputation of the euro zone as a growing pole in the global economy underpinned by a common currency and the EU’s growth-and-stability pact. An intervention from the International Monetary Fund (IMF) would be embarrassing to European leaders. Axel Weber, president of the German central bank, the Bundesbank, declared in December that in the German view, “we don’t need the IMF” to handle euro zone problems. A radical alternative, some are whispering, would be for Greece to leave the euro zone – just when the system is being hailed by many as a factor in sparing the EU from the deepest shock of the global crisis. Markets and European governments are still anxious about this worst-case scenario, but the tones in Brussels remains, for now, resolute. As France’s Lagarde has said: the “[the euro zone] is a monetary unit which holds us together. There is no way out.” But so far the jury is still out on the prospect for a breakthrough in the Greek stalemate. Experts of every stripe have proposed new policy directions, such as Wolfgang Münchau’s six-part survival plan put forth January 31 in the Financial Times. By Will Fleeson