Shadow Government

A smooth transition for a change

The world's focus, which increasingly suffers from attention deficit disorder, has shifted to Egypt, where the Muslim Brotherhood's Mohamed Morsi has been named winner of that country's first-ever truly democratic presidential election. Already consigned to yesterday's forgotten news is the passing of Saudi Arabia's Prince Nayef, and the succession of his younger brothers Prince Salman and Prince Ahmed respectively, to the positions of Crown Prince and Interior Minister. The changes in Riyadh should not be so quickly forgotten, however, for they portend more of the same in Saudi Arabia, with potentially significant implications both for the balance of power in the Arabian Gulf and relations with the United States.

The passing of Prince Nayef, just nine months after the death of his older brother and predecessor as Crown Prince, Prince Sultan, is even more rapid than the turnover in the Soviet leadership during the period 1982-1985. At that time, Leonid Brezhnev was succeeded first by Yuri Andropov, and then when Andropov suddenly passed away just two years later, by Konstantin Chernenko, who died thirteen months after taking office. Prince Sultan also held the post of Defense Minister -- Prince Salman succeeded him in that role, and remains Defense Minister. Prince Salman, who is 76, and has already suffered a stroke, may nevertheless remain active for a decade or more; King Abdullah is 88, after all. Still one wonders how long the current generation of Saudi princes will remain at the helm of the country that was united and founded 80 years ago by their father, King Abdul Aziz.

Unlike Prince Nayef, whose cooperation with the United States against al Qaeda and related terrorists never got in the way of his conservative, indeed fundamentalist, unease regarding all things Western, Prince Salman has the reputation of being a more open-minded and forward-looking (though cautious) individual, evidently cut from the same cloth as King Abdullah. In addition, during his tenure at the Defense Ministry, he has presided over the largest-yet arms purchase from the United States, totaling $90 billion, up from an announced $60 billion at the end of 2011. These purchases include both aircrafts and ships, the latter to modernize the Eastern Fleet, headquartered at Jubail, in the heart of the Saudi oil rich Shia populated Eastern Province. 

Both the air and naval deals had been contemplated for years, but nothing was finalized until Prince Salman took the helm of the Defense Ministry after Prince Sultan's passing. The decision to undertake both deals is crucial for the preservation of an American industrial base that is already reeling in the wake of U.S. Department of Defense budget cuts. It reflects the newly named Crown Prince's readiness to maintain the close military ties that characterize U.S.-Saudi relations. The French had tried every possible means, including visits by President Sarkozy, to win the navy contract. 

Equally important, the fact that Prince Salman decided upon both contracts so quickly after assuming office points to a degree of decisiveness not seen in the Saudi defense ministry for some time. (The decision to send troops to Bahrain was made at a much higher level). This too bodes well for the United States. 

Standing behind Prince Salman in the line of succession are Prince Ahmed, promoted to Interior Minister in succession to Prince Nayef, and who is in his early seventies and behind him, informed Saudis believe, Prince Mukhtar, who is in his sixties. The latter probably represents the transition to the next generation of Saudi leaders. With so much turmoil in the region, the smooth Saudi transition is to be welcomed. Hopefully when the time for another such transition takes place, it will be equally smooth.


Shadow Government

Diving into summitry

So far as I know, there is no summit taking place at the moment to address Europe's problems (the Euro2012 quarterfinal between Greece and Germany doesn't count). Given the frequency of meetings between leaders --- the G20 earlier this week, a major European summit next week -- it would seem easier just to report when the leaders have retreated to their own capitals to regroup.

One can hardly begrudge the European leaders their meetings; there is no global economic issue more pressing than the looming euro crisis. But it is worth keeping the frequency in mind when we try to determine whether big, expensive global conclaves accomplished anything. So how should one grade a summit?

In the spirit of next month's London Olympics, I think it would be appropriate to adopt the diving approach of adjusting scores for the degree of difficulty. If Olympic divers perform only elementary dives, with nary a flourish, they will not end up on the podium.

Summitry has its equivalents. The Obama administration emerged from the G20 summit in Los Cabos, Mexico claiming progress; they had impressed upon their European colleagues the urgency of resolving the crisis.

Judges say: Reasonably executed, but negligible degree of difficulty. The Europeans were aware they had a crisis. It's been in all the newspapers. They understand how serious it is; they live there. Yes, there will be negative repercussions for the rest of the world when the euro splits apart, but the potential for repercussions had already fully grabbed their attention.

What else? Per Reuters:

"Euro area countries pledged to "take all necessary policy measures" to safeguard monetary union. Europe also intends "to consider concrete steps towards a more integrated financial architecture", including common banking supervision, bank recapitalization, winding down of failed banks and guarantees for bank depositors..."

Judges say: Yawn. There was a time when this maneuver would have drawn delight from the crowd. Markets would have rallied for days on promises to ‘do what was necessary,' to ‘consider concrete steps' (ever so much better than considering feeble steps). But now one must do more to impress.

The European crisis certainly features a loss of confidence among investors and the public, but it is not exclusively about a loss of confidence. President Obama seemed not to grasp this, when he enthused about summit pledges "breaking the fever" gripping Europe. There are real and pressing problems that require substantial resources and dramatic shifts in sovereign powers. Far too many previous summits ended in "plans to have a plan" or statements of resolve and good intentions. Market critiques have become increasingly discerning.

When earlier this month European governments announced an actual plan to direct real money toward salvaging Spanish banks, the market soured on it in a matter of hours, as details became available. The problem was not the plan's evanescence, it was that the resources for the bailout were being added to the tab of the Spanish government, which was already overburdened. Further, it looked likely that these new loans would take precedence over old loans and thus worsen the already gloomy outlook for holders of regular Spanish government debt.

So what could our avid summiteers do to impress? The problem is sufficiently complex that it probably cannot be solved over a weekend of bilateral chats. But it is worth keeping in mind the three dimensions of the crisis:

  • Banking: The proximate cause of Spain's problems is its teetering banks, who continue to suffer from plunging real estate prices. Other European banks are stuffed with dubious sovereign debt. They are all trying to raise capital as their stock prices sink.
  • Sovereign debt: Greece, Ireland, and Portugal have already required bailouts. Italy and Spain are seeing steadily increasing costs when they try to borrow from markets. As the third and fourth largest euro zone economies, respectively, a full bailout does not look feasible.
  • Growth and employment: When economies shrink, tax receipts fall, deficits grow, and people suffer. Unemployment in Spain and Greece exceeds 20 percent.

Back to our exacting judging. To get a high score, you have to nail all three of these. The problem with the recent Spanish bank bailout was that it addressed the first while worsening the second. The problem with grand austerity plans is that they address the second while neglecting the third. The problem with ambitious plans for a growth agenda is that they address the third while worsening the second.

In the midst of such an intricate challenge for our euro zone performers, having outsiders lecture them on the seriousness of the problem might even come across as annoying. By these standards, the G20 summit did nothing to pull the euro zone out of its dive. Since leaders managed to paper over their differences and preserve the appearance of comity, we can score it as a straight, simple entry into the water, rather than a belly flop. But no need to stick around for the award ceremony.  

Phil Levy