Markets already see a Putin win

o13-iconAnatole Kaletsky writes: Oscar Wilde described marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope, and realism over wishful thinking.

A grim case in point is the confrontation between Russia and the West in Ukraine. What makes this conflict so dangerous is that U.S. and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Russian President Vladimir Putin will “see sense” — or at least be deterred by the threat of sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” inevitably overcoming dictatorship and military bullying.

Investors and businesses cannot afford to be so sentimental. Though we should never forget Nathan Rothschild’s advice at the battle of Waterloo — “buy on the sound of gunfire” — the market response to this week’s events in Ukraine makes sense only if we believe that Russia has won.

The alternative to acquiescence in the Russian annexation of Crimea would be for the Ukrainian government to try to fight back, either by military means or by pressuring the Russian minority in the rest of the country. That, in turn, would almost inevitably imply a descent into Yugoslav-style civil war — with the strong possibility of sucking in Poland, the North Atlantic Treaty Organization and the United States.

The West has no intermediate option between accepting the Russian invasion and full-scale war because it seems inconceivable that Putin would voluntarily withdraw from Crimea. Having grabbed Crimea by force, to give it up now would almost certainly mean the end of Putin’s presidency. The Russian public, not to mention the military and security apparatus, believes almost unanimously that Crimea is “naturally” part of Russia, having been transferred to Ukraine, almost by accident, in 1954. In fact, many Russians think, rightly or wrongly, that the entire Ukraine “belongs” to them. (The word “u-krainy” in Russian means “at the frontier,” and definitely not “beyond the frontier.”)

Under these circumstances, the idea that Putin would respond to Western economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking. [Continue reading...]

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Why not seize Putin’s assets?

Stephen Beard writes: Few people know more about the mechanics of smart sanctions against Russians than Bill Browder, Chief Executive Officer of Hermitage Capital Management. Once the biggest foreign investor in Russia, Browder fell foul of the Kremlin after exposing corruption. His lawyer, Sergei Magnitsky, was later detained, and died in custody in murky circumstances. Browder lobbied for The Magnitsky Act, which has so far imposed asset freezes and visa bans on more than a dozen Russian officials. Browder argues that Putin could certainly be targeted too.

“He has lots of assets in the U.K., France, Germany and various places. I am sure there are plenty of intelligence agencies that have plenty of information about what Putin owns and where,” Browder says.

Putin’s true net worth has not been published. Some estimates suggest it could be as much $70 billion.

And here’s the problem: The Russian leader and his oligarchs own so much wealth that freezing it all would be a monumental task. Take Chelsea Football Club, now owned by one of Putin’s closest associates, Roman Abramovic. Are the British authorities really going to seize it? It just goes to show – admits Anne Applebaum – how dependent London has become on Russian cash. [Continue reading...]

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Russia and the West are tearing Ukraine apart. Both sides must stand down now or face the consequences

a13-iconAnatol Lieven writes: If there is one absolutely undeniable fact about Ukraine, which screams from every election and every opinion poll since its independence two decades ago, it is that the country’s population is deeply divided between pro-Russian and pro-Western sentiments. Every election victory for one side or another has been by a narrow margin, and has subsequently been reversed by an electoral victory for an opposing coalition.

What has saved the country until recently has been the existence of a certain middle ground of Ukrainians sharing elements of both positions; that the division in consequence was not clear cut; and that the West and Russia generally refrained from forcing Ukrainians to make a clear choice between these positions.

During George W. Bush’s second term as president, the U.S., Britain, and other NATO countries made a morally criminal attempt to force this choice by the offer of a NATO Membership Action Plan for Ukraine (despite the fact that repeated opinion polls had shown around two-thirds of Ukrainians opposed to NATO membership). French and German opposition delayed this ill-advised gambit, and after August 2008, it was quietly abandoned. The Georgian-Russian war in that month had made clear both the extreme dangers of further NATO expansion, and that the United States would not in fact fight to defend its allies in the former Soviet Union.

In the two decades after the collapse of the USSR, it should have become obvious that neither West nor Russia had reliable allies in Ukraine. As the demonstrations in Kiev have amply demonstrated, the “pro-Western” camp in Ukraine contains many ultra-nationalists and even neo-fascists who detest Western democracy and modern Western culture. As for Russia’s allies from the former Soviet establishment, they have extracted as much financial aid from Russia as possible, diverted most of it into their own pockets, and done as little for Russia in return as they possibly could.

Over the past year, both Russia and the European Union tried to force Ukraine to make a clear choice between them—and the entirely predictable result has been to tear the country apart. Russia attempted to draw Ukraine into the Eurasian Customs Union by offering a massive financial bailout and heavily subsidized gas supplies. The European Union then tried to block this by offering an association agreement, though (initially) with no major financial aid attached. Neither Russia nor the EU made any serious effort to talk to each other about whether a compromise might be reached that would allow Ukraine somehow to combine the two agreements, to avoid having to choose sides. [Continue reading...]

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Ukrainians, take it from a Bosnian: the EU flag is just a rag in the wind

o13-iconAndrej Nikolaidis writes: Jorge Luis Borges once said that a true gentleman is interested in lost causes only. If you’re looking for a decent contemporary lost cause, you will surely find it in Ukraine, since if it comes to war, no matter who wins, most of the ordinary people will be losers.

We, the citizens of Bosnia, can tell you a thing or two about being losers. It was April 1992, during the start of Sarajevo’s siege. I was a long-haired teenager, dressed in blue jeans and a shirt with the famous black and white “Unknown Pleasures” print. From the window of my suburban flat, I was watching the Yugoslav People Army’s cannons, located in the Lukavica army camp, firing projectiles on Sarajevo. That army was controlled by Slobodan Milošević, the president of Serbia.

The National Radio was broadcasting Bosnian president Alija Izetbegović‘s discussion with Yugoslav army general Milutin Kukanjac. Izetbegovic asked the army to stop the bombing. Kukanjac claimed that not a single shot was fired from his army positions. I remember like it was yesterday that my glass of milk was jumping on the table to the rhythm of cannonballs “not fired” on Sarajevo.

When common people find themselves in the middle of a geopolitical storm – as the citizens of Ukraine do now, or my family back then in Bosnia – the dilemma “is this glass half empty or half full?” is irrelevant: soon, it will be broken.

The people in Bosnia were so full of optimism during the first days, even months, of war. Neighbours were saying that the west would never allow it to happen because “we are Europe”. My aunt went to Belgrade, but refused to take her money from a Sarajevo bank. It will be over in a week; we’ll be back soon, she said. President Izetbegovic, in his TV address to the people, said: “Sleep peacefully: there will be no war.”

Well, we woke up after a four-year nightmare.

Now, the events in Ukraine seem to us Bosnians like a terrifying deja vu. The parallels between Ukraine now and Bosnia in 1992 are obvious. The Russian army acted aggressively towards Ukraine, as Milošević’s army did in Bosnia. Putin had strong support in parts of Ukraine, as Milošević had in large parts of Bosnia and Herzegovina. Now Kiev has the support of the EU and the US, as Sarajevo did. We even had Bono and Pavarotti singing about Miss Sarajevo. Yet all the musical telegrams of support from the free world didn’t stop the ethnic cleansing in eastern Bosnia, close to the Serbian border. [Continue reading...]

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Internet governance too U.S.-centric, says European commission

n13-iconThe Guardian reports: The mass surveillance carried out by the US National Security Agency means that governance of the internet has to be made more international and less dominated by America, the European Union’s executive has declared.

Setting out proposals on how the world wide web should function and be regulated, the European commission called for a shift away from the California-based Internet Corporation for Assigned Names and Numbers (Icann), which is subject to US law, is contracted by the US administration and is empowered to supervise how digital traffic operates.

“Recent revelations of large-scale surveillance have called into question the stewardship of the US when it comes to internet governance,” said the commission.

“Given the US-centric model of internet governance currently in place, it is necessary to broker a smooth transition to a more global model while at the same time protecting the underlying values of open multi-stakeholder governance …

“Large-scale surveillance and intelligence activities have led to a loss of confidence in the internet and its present governance arrangements.” [Continue reading...]

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EU must open doors to avoid Syrian refugee catastrophe, says UN

The Guardian reports: The crisis posed by millions of refugees from Syria’s civil war flooding into neighbouring countries is becoming a humanitarian and political catastrophe that can only be eased if Europe opens its doors, the UN and European commission have warned.

More than 2.1 million refugees have been registered by the UN high commissioner for refugees (UNHCR) in Syria’s four neighbouring states; hundreds of thousands more are known to be living outside Syria’s borders without access to aid.

The scale of the crisis is perhaps the most acute since the end of the second world war. David Miliband, president of the International Rescue Committee (IRC), described the ever-deteriorating situation in Syria as “the defining humanitarian crisis of our time”.

The UNHCR, European commission and British Refugee Council have urged EU leaders to acknowledge the exceptional crisis posed by the Syrian civil war and accept the temporary settlement of Syrian refugees inside their borders – relaxing “fortress” policies designed to keep migrants out of Europe.

The UN has issued an urgent call to resettle 30,000 of the most vulnerable Syrians worldwide – a call that remains unmet as the exodus from Syria into Turkey, Lebanon, Jordan and Iraq fast outpaces the capacity to provide for them. The UK government has refused to take part in the resettlement scheme, calling the idea tokenistic and stressing the importance of the £500m of aid it has sent to the region. [Continue reading...]

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NSA and GCHQ activities appear illegal, says EU parliamentary inquiry

The Guardian reports: Mass surveillance programmes used by the US and Britain to spy on people in Europe have been condemned in the “strongest possible terms” by the first parliamentary inquiry into the disclosures, which has demanded an end to the vast, systematic and indiscriminate collection of personal data by intelligence agencies.

The inquiry by the European parliament’s civil liberties committee says the activities of America’s National Security Agency (NSA) and its British counterpart, GCHQ, appear to be illegal and that their operations have “profoundly shaken” the trust between countries that considered themselves allies.

The 51-page draft report, obtained by the Guardian, was discussed by the committee on Thursday. Claude Moraes, the rapporteur asked to assess the impact of revelations made by the whistleblower Edward Snowden, also condemns the “chilling” way journalists working on the stories have been intimidated by state authorities.

Though Snowden is still in Russia, MEPs are expected to take evidence from him via video-link in the coming weeks, as the European parliament continues to assess the damage from the disclosures. Committee MEPs voted overwhelmingly on Thursday to have Snowden testify, defying warnings from key US congressmen that giving the “felon” a public platform would wreck the European parliament’s reputation and hamper co-operation with Washington. [Continue reading...]

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Latest Snowden revelations spark anger at European commission

The Guardian reports: The latest disclosures from the Snowden files provoked exasperation at the European commission, with officials saying they intended to press the British and American governments for answers about the targeting of one its most senior officials.

Reacting shortly after an EU summit had finished in Brussels, the commission said disclosures about the targeting of Joaquín Almunia, a vice-president with responsibility for competition policy, was “not the type of behaviour that we expect from strategic partners, let alone from our own member states”.

A spokesman added: “This piece of news follows a series of other revelations which, as we clearly stated in the past, if proven true, are unacceptable and deserve our strongest condemnation.”

In Britain, Sir Malcolm Rifkind, the chair of the parliamentary committee that provides oversight of GCHQ, said he was “disturbed by these allegations.” He added he could be “examining them in due course as part of the intelligence and security committee’s wider investigation into the interception of communications.”

A prominent German MP, Hans-Christian Ströbele, who met Edward Snowden in Moscow in October, told the Guardian it was becoming “increasingly clear that Britain has been more than the US’ stooge in this surveillance scandal”. He suggested the snooping by GCHQ on German government buildings and embassies was unacceptable.

“Great Britain is not just any country. It is a country that we are supposed to be in a union with. It’s incredible for one member of the European Union to spy on another – it’s like members of a family spying on each other. The German government will need to raise this with the British government directly and ask tough questions about the victims, and that is the right word, of this affair.”

The Liberal Democrats have been inching towards calling for an independent commission to investigate the activities of Britain’s spy agencies and the party president, Tim Farron, said that “spying on friendly governments like this is not only bad politics, it is bad foreign policy”.

“These nations are our allies and we should work together on issues from terrorism to Iran and climate change,” he said. “But we seem to be spying on them in conjunction with the NSA in what seems like an industrial basis.” [Continue reading...]

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The quest to build an NSA-proof European cloud

The Atlantic reports: If Germany’s special parliamentary session on U.S. surveillance this week was any indication, European politicians are still worked up about former NSA contractor Edward Snowden’s leaks. Chancellor Angela Merkel declared that the revelations had “tested” U.S.-German relations. Green Party politician Hans-Christian Strobele urged the German leader to thank Snowden and offer him asylum for discovering that her cell phone “was probably bugged.” Merkel even got called a “scaredy-cat” for not standing up to Washington.

The criticism comes as politicians in the region — from Estonia to Germany — are calling for the European Union to create a cloud-computing infrastructure of its own to compete with American providers like Amazon, Google, and Verizon.

The idea is that if the EU has its own cloud — and what form it would take, who would build it, and where it would be based remain unclear — then member states could compel providers to abide by the EU’s (comparatively) stricter data-protection rules. It’s part of a backlash against the long arm of the U.S. intelligence community that has echoes everywhere from Brazil to the United Nations. [Continue reading...]

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NSA disclosures put U.S. on defense

Politico reports: The NSA spying controversy is quickly transforming from a domestic headache for the Obama administration into a global public relations fiasco for the United States government.

After months of public and congressional debate over the National Security Agency’s collection of details on U.S. telephone calls, a series of reports about alleged spying on foreign countries and their leaders has unleashed an angry global reaction that appears likely to swamp the debate about gathering of metadata within American borders.

While prospects for a legislative or judicial curtailment of the U.S. call-tracking program are doubtful, damage from public revelations about NSA’s global surveillance is already evident and seems to be growing.

Citing the snooping disclosed by former NSA contractor Edward Snowden, Brazil’s president canceled a state visit to the U.S. set for this week. Leaders in France and Italy and Germany have lodged heated protests with Washington, with the Germans announcing plans to dispatch a delegation to Washington to discuss the issue. Boeing airplane sales are in jeopardy. And the European Union is threatening to slap restrictions on U.S. technology firms that profit from tens of millions of users on the Continent.

“Europe is talking about this. Some people in Europe are upset and may take steps to block us,” former Rep. Jane Harman (D-Calif.) said in a telephone interview from Rome on Friday. “The reaction of retail politicians is to mirror the upset of the people who elected them.”

“Confidence between countries and confidence between governments are important and sometime decisive and there’s almost no confidence between the United States of America and Europe” now, former German intelligence chief Hansjörg Geiger said. “I’m quite convinced there will be an impact…. It will be a real impact and not only the [intelligence] services will have some turbulence.”

Some analysts see immediate trouble for U.S.-European arrangements to share information about airline passengers, financial transactions and more.

“The bigger problems are not in Berlin or Paris, but in the future out of Brussels,” said Michael Leiter, former head of the National Counterterrorism Center. “At the EU, I expect them to be very, very resistant to any increase — and to have problems even with maintenance — of some of the information sharing we have now…..All of this complicates those discussions exponentially.”

For the average person, American or from elsewhere, the knowledge that their own communications are subject to NSA surveillance is likely to be a matter of relatively little concern. Even if they vehimently object to such collection as a matter of principle, they also are likely to feel reasonably confident that for all intents and purposes, this data gets lost almost as rapidly as it gets collected. It instantly becomes buried in vast databases where it will almost certainly never receive further scrutiny. Not only is the collection process unjustifiably intrusive, but it also seems grossly wasteful.

In response to this week’s revelations, Glenn Greenwald wrote:

[N]ote how leaders such as Chancellor Angela Merkel reacted with basic indifference when it was revealed months ago that the NSA was bulk-spying on all German citizens, but suddenly found her indignation only when it turned out that she personally was also targeted. That reaction gives potent insight into the true mindset of many western leaders.

No doubt our political leaders are guilty of all kinds of hypocrisy, but in this case, surveillance of heads of state can hardly be put on a par with surveillance of ordinary citizens.

When the NSA was monitoring Merkel’s communications, it’s reasonable to assume that the monitoring went far beyond recording. They were not getting tossed into a database where they might reside until the day there was some justification to examine them. Much more likely, they were subject to daily analysis.

The NSA might be listening to everyone, but it focuses its attention on far fewer, including as we now know, some of America’s closest allies.

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The NSA is undermining the fight against terrorism

The Guardian reports: Germany and France are to spearhead a drive to try to force the Americans to agree new transatlantic rules on intelligence and security service behaviour in the wake of the Snowden revelations and allegations of mass US spying in France and tapping of the German chancellor Angela Merkel’s mobile phone.

At an EU summit in Brussels that was hijacked by the furore over the activities of the National Security Agency in the US and Britain’s GCHQ, the French president, François Hollande, also called for a new code of conduct agreed between national intelligence services in the EU, raising the question of whether Britain would opt to join in.

Shaken by this week’s revelations of NSA operations in France and Germany, EU leaders and Merkel in particular warned that the international fight against terrorism was being jeopardised by the perception that mass US surveillance was out of control.

The leaders “stressed that intelligence-gathering is a vital element in the fight against terrorism”, a summit statement said. “A lack of trust could prejudice the necessary co-operation in the field of intelligence-gathering.”

Merkel drove the point home: “We need trust among allies and partners. Such trust now has to be built anew … The United States of America and Europe face common challenges. We are allies. But such an alliance can only be built on trust.” [Continue reading...]

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Europe’s anger grows over alleged U.S. spying

The Los Angeles Times reports: European leaders united in outrage Thursday over reported U.S. spying, with German Chancellor Angela Merkel declaring that trust between her government and the Obama administration would need to be rebuilt after reports that U.S. intelligence agencies might have tapped her cellphone.

Amid signs of anger from close allies over mass electronic surveillance, Germany’s Foreign Ministry also summoned U.S. Ambassador John B. Emerson to make clear its displeasure. Foreign Minister Guido Westerwelle said afterward that he had demanded that “these activities that have been reported will be comprehensively investigated. We need the truth now.”

Arriving at a meeting of European Union leaders in Brussels, Merkel said she had “repeatedly made clear to the American president [that] spying among friends is absolutely not OK. I said that to him in June when he was in Berlin, also in July, and yesterday in a telephone call.

“We need trust among allies and partners,” she said. “Such trust must now be built anew.”

Her anger was matched by that of other European leaders at the 28-nation meeting. “We want the truth,” Italian Prime Minister Enrico Letta was quoted as telling reporters. “It is not in the least bit conceivable that activity of this type could be acceptable.”

Reuters adds: A delegation of lawmakers from the European Union will travel to Washington on Monday to seek a response to allegations of widespread spying by the United States against EU citizens and governments, including German Chancellor Angela Merkel.

The three-day visit by members of the European Parliament’s civil liberties committee follows reports this week that the U.S. National Security Agency accessed tens of thousands of French phone records and monitored Merkel’s mobile phone.

The revelations have drawn condemnation from EU leaders meeting in Brussels, with Merkel demanding that the United States sign up to a “no-spying” agreement with Germany and France by the end of the year, in line with similar deals with Britain and others.

The nine-member delegation will meet senior U.S. government and intelligence officials and explore “possible legal remedies for EU citizens” resulting from the alleged surveillance, although it is not clear what such remedies might entail.

The European Parliament has already opened an inquiry into the impact on Europe from leaks by former NSA contractor Edward Snowden, and has led a push for tougher data protection rules and the suspension of a major transatlantic data-sharing deal.

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American myopia: spying on allies

An editorial in the Washington Post says: In response to the serial revelations of National Security Agency (NSA) spying against allied countries, the Obama administration offers two standard explanations. One is pragmatic: sweeping up phone records and other data in places such as France and Germany is an important counterterrorism operation that protects citizens of those nations as well as Americans. The other is tinged with cynicism: Many governments spy on one another, including on their friends, so no one should be shocked to learn that the United States does it as well.

These are reasonable answers, to a point. Germany and other European countries have been home to dangerous Islamist militants, including several perpetrators of the Sept. 11, 2001, attacks. At least some of the spying on such targets is done in cooperation with European intelligence services. And France — which summoned the U.S. ambassador on Monday to express “shock” at the latest revelation of NSA data mining — is known to conduct similar operations, as well as industrial espionage sometimes aimed at U.S. targets.

There are, however, a couple of problems with the administration’s response. Some of the spying, revealed in leaks originating with NSA defector Edward Snowden, has targeted top political leaders and diplomats, including the last two presidents of Mexico, Brazilian President Dilma Rousseff and embassies and offices of the European Union. The NSA apparently scooped up e-mails and text messages of Ms. Rousseff and her top aides, as well as Mexican President Enrique Peña Nieto — something that cannot be explained away as counterterrorism.

The breezy U.S. response also overlooks the damage that revelations of spying are doing to important relationships. A furious Ms. Rousseff canceled a state visit to Washington last month and her government is now busy concocting ways to lessen U.S. leverage on the Internet, including a new encrypted e-mail service. French protests may be hypocritical, but they could also lead to demands that anti-surveillance measures be included in a proposed transatlantic trade treaty. Already the European Parliament is considering legislation that would require technology firms such as Google to consult E.U. governments before complying with U.S. warrants seeking data.

There may be justification for some of this spying. Brazil, for example, has been a problematic partner in recent years, working at cross-purposes to U.S. policy on Iran and several Latin American countries. But the potential benefits of collecting intelligence on nominally friendly leaders has to be weighed against the potential blowback if the operations are exposed — which in the Internet era has become increasingly likely. It seems unlikely that anything gleaned from Ms. Rousseff’s e-mail is worth the trouble it has caused.

Without quite conceding this point, President Obama has been suggesting that U.S. surveillance practices may need adjustment. He promised Mr. Peña Nieto an investigation into the spying and told French President François Hollande in a phone call Monday that there were “legitimate questions for our friends and allies about how these capabilities are employed.” The review that’s underway surely will not lead to an end to foreign surveillance activity, nor should it. But better political controls are needed, along with an injection of common sense.

The core issue here is not about surveillance practices per se but rather the mentality that has facilitated those practices. America continues to strut around the globe with a sense of impunity — with the attitude that its unchallenged power insulates it from any lasting harm that might be caused by offending others. In other words, the American mindset has long been and continues to be: we can get away with anything.

The U.S. can launch preemptive preventive wars, conduct extrajudicial killings, engage in kidnapping, operate secret prisons, use torture, disregard basic human rights, and spy on the rest of the world, all without constraint. Were any other country to conduct itself in the same way, it would be branded by the U.S. government as a rogue state and face all kinds of threats and sanctions. But America defines itself as exceptional.

To the extent that this grandiosity once had an objective basis, this is now rapidly evaporating. The assumption that our allies need us more than we need them will eventually no longer hold. Indeed, in many ways it does not hold now.

New regulations that could soon be approved by the European Union will force companies such as Google to seek the authorization of European data protection authorities before complying with NSA data requests on European citizens. Any company failing to comply with these regulations could face fines of 5% of global revenue. That means, based on its current revenues, Google could get fined $2-3 billion for an infraction.

The U.S. government and U.S. companies will no doubt continue to fight against the imposition of these regulations, but as much as Americans may be in the habit of scoffing at European power, the fact is America is only two-thirds the size of the EU. The megalomania of NSA chief Keith Alexander notwithstanding, the interests of 500 million people can no longer be trampled on so easily in the name of America’s national security interests.

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Thanks to Snowden, EU moves ahead with tough new data protection rules

Slate reports: Lawmakers in the European Parliament have moved to combat clandestine mass surveillance programs by voting in favor of introducing tougher new data protection rules.

On Monday, the Parliament’s civil liberties committee approved the proposed reform, laying the groundwork for a significant overhaul of Europe’s current data protection framework. The changes have been in the works for 18 months, but the former NSA contractor Edward Snowden’s disclosures about U.S. and U.K. spy programs gave new urgency to the overhaul. The newly proposed rules, which still have to be agreed upon by EU member states, would restrict how companies such as Google and Microsoft could pass data on a European citizen to a third country. Companies would have to inform people whose data were requested and get any transfer of data signed off by the data protection authority. Any company caught breaching the regulations could face large fines of up to 5 percent of their revenue, which could in some cases amount to billions of dollars.

German member of the European Parliament Jan Albrecht described the vote as “a breakthrough for data protection rules in Europe, ensuring that they are up to the task of the challenges in the digital age.” Albrecht, a vocal critic of NSA and GCHQ surveillance on the civil liberties committee, added in a statement issued Monday that the legislation would introduce “overarching EU rules on data protection, replacing the current patchwork of national laws.” [Continue reading...]

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How austerity is killing Europe

Jeff Madrick writes: On the last day of 2011, a headline in The Wall Street Journal read: “Spain Misses Deficit Target, Sets Cuts.” The cruel forces of poor economic logic were at work to welcome in the new year. The European Union has become a vicious circle of burgeoning debt leading to radical austerity measures, which in turn further weaken economic conditions and result in calls for still more damaging cuts in government spending and higher taxes. The European debt crisis began with Greece, and that nation remains the European Union’s most stricken economy. But it has spread inexorably to Ireland, Portugal, Italy, and Spain, and even threatens France and possibly the U.K. It need not have done so. Rarely do we get so stark an example of bad—arguably even perverse—economic thinking in action.

Over the past two years, the severe 2009 recession, which started in the U.S. but spread across Europe, have imperiled the finances of one European country after another. As a result, Portugal, Ireland, Spain and Italy are coming under pressure from the EU to cut government spending and raise taxes to reduce their deficits if they wanted to qualify for a bailout. All have done so. Ireland and Portugal sharply cut spending and still had to take tens of billions of euros to help meet financial obligations as of course did Greece. The European Central Bank bought the bonds of Italy and Spain. Britain’s Conservative government led the way in ruthless government cutbacks in 2010. France has adopted its own austerity package, and even Germany, the supposed economic leader of Europe, has planned to cut its deficit by a record 80 billion euros in 2014.

Proponents of austerity claim that as nations take control of their finances businesses become more convinced that interest rates will not rise and that growth will resume. Their reasoning has been abetted by the financial markets, which drove up rates on Greek debt and soon enough on the debt of nations like Portugal, Spain and Italy. Should these nations not be able to pay their debts, bond buyers wanted a high enough interest rate to compensate for the risk.

But this is pre-Great Depression economics. How could the EU so misread history and treat with contempt the teachings of John Maynard Keynes, who argued that during recessions governments must expand economies through spending and tax cuts, not the opposite? In practice, making large-scale budget cuts or raising taxes, as Keynes showed, will reduce demand for goods and services just when an increase is needed. Faltering sales will undermine the confidence of businesses far more than fiscal consolidation will embolden them. By ignoring this, European policy makers will deepen, not solve, the financial crisis and millions of people will suffer needlessly.

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Iranians fear war, deprived of life-saving medicines — Washington satisfied

The Obama administration’s definition of diplomacy with Iran is that it does not talk about “regime change.” Instead it talks about “tightening the noose.”

As the rial collapses and Iranians die because they can’t afford life-saving medicines, no doubt they feel deeply grateful for America’s kind attention.

The Washington Post reports: At a time when U.S. officials are increasingly confident that economic and political pressure alone may succeed in curbing Iran’s nuclear ambitions, the mood here has turned bleak and belligerent as Iranians prepare grimly for a period of prolonged hardship and, they fear, war.

This stark contrast has been evident in the Iranian capital this week as a top military commander declared a “critical point” in the country’s long feud with the West and ordinary Iranians stocked up on essential supplies. Merchants watched helplessly as the Iranian currency, the rial, shed more than a third of its value, triggering huge increases in the prices of imported goods.

“I will tell you what this is leading to: war,” said a merchant in Tehran’s popular Paytakht bazaar who gave his name only as Milad. “My family, friends and I — we are all desperate.”

The sense of impending confrontation is not shared in Washington and other Western capitals, where government officials and analysts expressed cautious satisfaction that their policies are working.

Former and current U.S. government officials did not dismiss the possibility of a military confrontation but said they saw recent threats by Iranian leaders — including warning a U.S. aircraft carrier this week not to return to the crucial Strait of Hormuz — mainly as signs of rising frustration. U.S. officials say this amounts to vindication of a years-long policy of increasing pressure, including through clandestine operations, on Iran’s clerical rulers without provoking war.

“The reasons you’re seeing the bluster now is because they’re feeling it,” said Dennis Ross, who was one of the White House’s chief advisers on Iran before stepping down late last year. With even tougher sanctions poised to take effect in weeks, the White House had succeeded in dramatically raising the costs of Iran’s nuclear program, he said.

“The measure, in the end, is, ‘Do they change their behavior?’ ” Ross said.

The Obama administration is readying new punitive measures targeting the Central Bank of Iran, while leaders of the European Union took a step this week toward approving strict curbs on imports of Iranian petroleum in hopes of pressuring the nation to abandon what they say is a drive to develop nuclear weapons. Iran says its nuclear program is for peaceful energy production.

State Department spokes­woman Victoria Nuland deemed as “very good news” the E.U.’s commitment to shutting off the flow of Iranian oil to Europe.

“This is consistent with tightening the noose on Iran economically,” Nuland told reporters Wednesday. “We think that the place to get Iran’s attention is with regard to its oil sector.”

In Tehran, that tightening is being felt by millions of people. Economists and independent analysts say the sanctions have aggravated the country’s chronic economic problems and fueled a currency crisis that is limiting the availability of a broad array of goods, including illegally imported iPhones and life-saving medicines.

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