By Dr. Vojin Joksimovich
While I was growing up in Tito’s communist Yugoslavia, as a high school and a university student, I was exposed to heavy indoctrination in Marxism, which I perceived as nothing more than a totalitarian ideology like Islamism. I almost didn’t graduate from the Faculty of Electrical Engineering of Belgrade University. I failed twice to pass my last exam in the Marxist Economy as the professor detected that I wasn’t buying into his empty teachings. Fortunately the Faculty Dean wanted me to pass my last exam as I had passed successfully 40 other exams. He ordered that my third exam attempt in Marxist Economy be before an examination committee. I detected that a couple members of that committee were not as ideological as the professor so I passed the exam and was allowed to graduate.
EUROZONE DRAMA REACHES ROME
In autumn of 2009 concerns grew in Europe over debt burdens of so called profligate countries, notably Greece. In spring 2010 austerity measures in public spending swept Europe in both north and south in response to the mountains of debt. In May 2010, after the rating agencies downgrades and riots in Athens, bailout sponsored by the EU and the IMF amounting to E110 bn was offered and agreed by Greece. In order to protect the euro the EFSF worth E750 bn was established. At the year end, Greece’s gross government debt amounted to E329 bn with a 2011 forecast of 152% debt vs.GDP ratio.
In November 2010, after pumping billions into the banks and slashing public pay and welfare, Ireland (E148bn debt, 114% debt vs. GDP) requested E85 bn from the EU/IMF.
In March of 2011, a 2013 fund able to lend E500 bn was announced. In May 2011, E78 bn bailout package was reached with Portugal (E161bn debt, 91% debt vs. GDP). At the same time talks were initiated for a second bailout to Greece. With a debt to GDP ratio of more than 150%, large annual deficits and interest rates of more than 25%, most economists say that the only question is when the default will take place. The negotiations are de facto about delaying the inevitable default in order to prevent a contagion triggering defaults by Portugal, Ireland and possibly Spain (E639 bn debt, 64% debt vs. GDP). Defaults would destroy the capital of banks and creditors in many countries Credits available to businesses throughout Europe would dry up. There could be a collapse of European banks.
Meanwhile the eurozone drama reached Rome (E1,900 bn debt, 120% debt to GDP ratio, three times the debt of Greece, Ireland and Portugal). Greece, Ireland and Portugal are all small economies whose plight can be contained with the money already pledged by the eurozone members. Spain would be a serious challenge but conceivably manageable. But Italy’s huge public debt and dysfunctional political system including used up PM was an accident waiting to happen. The French banks have E389 bn exposure to Italy, while the German ones E162 bn. A nightmare scenario became a possibility: as Italy goes (the eurozone third largest economy) so does the euro. PM Berlusconi said: “We are in the frontline of this battle.” Fortunately, Italian finance minister Giuilio Tremonti, unpopular with Berlusconi, restored relative calm in the markets by securing opposition pledges to push his three-year E45 bn austerity package through the parliament at record speed. His package intends to balance the budget by 2014. However, the bulk of the cuts do not come into play before 2013. The ball is now in Brussels and Berlin courts. The eurozone leaders are supposed to meet in Brussels on the 21st unless Merkel torpedoes the meeting like she did the week before.
In this mess of historic proportions, my hero has become the Italian finance minister, who has saved his country billions of Euros by keeping the yield on state bonds at a manageable level. Tremonti has been in danger of being fired, and actually has been fired by Berlusconi for not being a team player, but refused to resign. Berlusconi tried to undermine Tremonti amid fears that the austerity package would condemn his center-right coalition to defeat in the 2013 elections. Il Giornale, a Milan daily owned by the Berlusconi family, devoted six pages to attacking the finance minister by calling him an old-fashioned “socialist,” who has blocked the PM reforms. Like this writer, fond of Latin citations, Tremonti assured bankers of his intentions to endure by quoting the historian Livy Hic manebimus optime—I am here to stay. In addition he asserted: “If I fail, so falls Italy: if Italy fails, so does the euro.” This of course could be an over-dramatization, but it may not be. Tremonti called the Greek standoff a “crisis moving through the world like a mutant and compared the Germans to first-class passengers on the Titanic. “Today in Europe there is an appointment with destiny. Salvation does not come through finance but from politics. But politics cannot make any more mistakes. Just as on the Titanic, not even first-class passengers can save themselves.”
BLAME GAME: RATING AGENCIES BLASTED
The eurozone policy makers, most importantly German Chancellor Merkel, continue to dither. She is trying to slowdown eurozone partners into arriving at a new rescue deal for Greece, amounting to E115 bn. The second bailout is intended to ensure Greece would continue making the debt payments until mid-2014. Merkel insisted that there was no immediate urgency to finalize the deal before September. According to the German weekly Der Spiegel, Helmut Kohl viewed as the godfather of Euro said that Merkel was ruining his Europe. The big Greek parliamentary austerity vote last month solved the mid-July problem as the EU/IMF released E12 bn in bailout aid to Greece keeping its financial head above water for another three months. Netherlands, like Germany, is also adamant that private creditors must contribute to the cost. The IMF supports the German position on the Greek bondholders but is in potential conflict with the European Central Bank (ECB), which is nervous about forcing private investors to accept a reduction in the value of their assets. The expression used is “haircuts” in reference to possible debt write-downs. The term was introduced by investment bankers to make an unpleasant act sound positive although misleading. However, when you go to your barber for a haircut you have to go back again after 4-6 weeks.
The eurozone received a further blow as Moody’s, the U.S. rating agency, downgrade of Portugal and Ireland to junk status prompted angry reactions in Brussels and elsewhere. The Europeans seem to hate the rating agencies more so than anybody else. After Moody’s downgraded Portugal to junk and Standard & Poor’s pronounced the French proposal for a debt rollover would constitute a selective default, the rating agencies were accused of engaging in an anti-European conspiracy. De facto there was nothing conspiratorial in Moody’s downgrade. The reasoning was that Portugal, like Greece, will need another loan and that EU populist politics will be just as messy constituting a damn good reason for concern. Populism is as much to blame as the debt crisis itself and probably will not work.
Merkel: Loss of Leadership Skills
Angela Dorothea Merkel, the German Chancellor since November 2005, is the first female Chancellor and only the second woman to chair the G8, after Margaret Thatcher. Merkel has been the chairwoman of the Christian Democratic (CDU) since 2000, and chairwoman of the CDU-CSU (Christian Social Union-its Bavarian sister party)) parliamentary coalition from 2002-2005. From 2005-2009 she led the grand coalition with the CSU, and the Social Democratic Party of Germany (SPD). In the 2009 elections her party CDU obtained the largest share of the votes and formed a coalition with the CSU and the Free Democratic Party (FDP). In the timeframe 1994-1998 she served as the Minister for the Environment, Nature Conservation and Nuclear Safety. She is a physical chemist with a Ph.D. in quantum chemistry.
I was impressed with Merkel’s career and admired some of her statements such as the one on the failure of multiculturalism. She said that attempts to build a multicultural society in Germany had “utterly failed.” “The concept that we are now living side by side and are happy about it does not work. We feel attached to the Christian concept of mankind that is what defines us. Anyone who doesn’t accept that is in the wrong place here.” She continued to say that immigrants should integrate and adopt Germany’s culture and values.
In 2011 Merkel has failed as a crisis manager. It started in March with her overreaction to the Fukushima nuclear accident in Japan. Within five days from the accident, when it was less than abundantly clear what actually happened, she jumped the gun and ordered that seven pre-1980 built nuclear power plants, amounting to capacity of 8336 MW, be shut down immediately. As a former minister for nuclear safety, Merkel should have known that the Fukushima type of an accident scenario is of infinitesimal probability in Germany. Germany’s Nuclear Safety Commission opposed Merkel’s immediate exit from the utilization of nuclear energy stating that the German plants are still safe on the whole.
Then Merkel proceeded with the nuclear phase-out of remaining 17 plants by 2022. This represented Merkel’s populist U-turn and blatant political opportunism after the September 2010 reversal of 34-year life of nuclear plants imposed by the red/green coalition in 2001. The replacement cost for the nuclear plants, supplying 23% of the nation’s electricity, is estimated up to $400 bn. Wind farms are supposedly going to provide ~35% nation’s electricity by 2020. In addition Germany plans to rely on the Russian natural gas and domestic coal. Germany needs doubling new fossil power plants for existing nuclear: needs to add 20 GW by 2022. Germany already depends on Russia for 40% of its gas supplies. Tie-up between Gazprom, the Russian state energy monopoly and RWE, one of Germany’s leading power companies, is in the cards. Also Germany will probably have to import nuclear electricity from France, Russia and the Czech Republic. In addition, Merkel has imposed a uranium tax ($203 on every gram of uranium or plutonium) as a cash cow for developments of renewables. The utility EnBW is about to sue the government for this “nine-digit” nuclear tax. Refueling the single reactor in operation has cost EnBW over $140 million extra. RWE has filed a law suit with the Constitutional Court. As it stands Germany has the second highest prices for electricity within the EU at 36.2 cents per kWh. Only Denmark, getting 20% of its electricity from wind farms, has more expensive power. The German rate payers will be paying through their noses for electricity as a result of Merkel’s populist anti-nuclear policies.
Obama: Time to Get Serious!
The U.S. Treasury says that the U.S. will breach its $14.3 trillion borrowing limit on August 2. The first U.S. debt ceiling was created in 1917, which helped finance the WWI. That ceiling was $11.5 bn. The current aggregate ceiling was set up in 1939 and has been lifted almost 100 times since but without the present rancor on display in the Congress. The Congress must approve lifting the ceiling limit.
On July 16, President Obama has urged the congressional leaders to “avert Armageddon” with Congress bitterly divided. He pointed out that without a deal the interest rates will rise and thus increase the taxes “on all Americans.” Rating agencies have warned of a debt downgrade with Standard & Poor’s suggesting the country faces more than 30% chance of losing its triple A status even before the resolution of impasse. Obama demonstrated some flexibility by saying that he still wanted a $4 trillion deficit reduction over 10 years but would consider compromises to avoid default. Incidentally, $4 trillion is an estimated cost of imperial wars in Iraq and Afghanistan. China is the biggest foreign creditor.
John Boehner, the Republican House Speaker, has been insisting that any new borrowings must be more than matched by spending cuts, while ruling out any tax increases. Nancy Pelosi, previous Democratic House Speaker, drew a line saying: “We are not cutting taxes for the wealthy on the backs of Medicare and welfare recipients.” In addition to the three names mentioned the other dramatis personae battling on borrowed time and often not behaving like adults are: the Senate Democratic leader Harry Reid, the Senate Republican leader Mitch McConnell, the House majority leader Eric Cantor, and the Republican Presidential Candidate Michele Bachmann, who is the Tea Party standard bearer and who opposes lifting the debt ceiling no matter of what. So it is up to these seven leaders to reach a last minute deal and thus avoid an American Armageddon. Is this how American democracy is supposed to work? Some analysts have compared American political dysfunction with that of Italy. However, the comparison is unfair to Italy and in particular to the leadership provided by the finance minister Tremonti.
On July 19 Gang of Six (three Republican and three Democratic senators) put forward potential escape from stalemate amounting to $3.7 trillion deficit reduction over the coming decade. The plan tracks the recommendations of a bipartisan fiscal commission that reported last year proposing cuts of $3.9 trillion by 2020 through a mix of tax reform and cuts to popular government programs such as Medicare and Social Security. President Obama didn’t like that plan when proposed but now in the last minute he embraced it.
Japan: Leadership Crisis
Japan’s short-lived PMs, five in five years, compare with pre-Berlusconi Italy. Existing PM Naoto Kan has survived a Diet no-confidence vote at the price of a vague promise to resign. It is irresponsible that even after the largest disaster after the WWII, the Japanese political elite is more interested in squabbling over how long Kan should stay in the office as opposed to addressing the burning issues of reconstruction. The Diet has failed to approve new bond issues needed to fund government spending beyond a few months. Ryu Matsumoto, Kan’s long-awaited choice for the cabinet post leading to tsunami reconstruction resigned nine days into the job. With millions of tones of debris yet to be cleared and tens of thousands of residents still confined to the evacuation centers, the north-east coast residents deserve better treatment by their government. There is vast disconnect between the magnitude of the problems facing the third largest world economy and the political response.
In addition to the general reconstruction, the response to the Fukushima nuclear accident is yet another example of the government’s incompetence. The Modern Tokyo Times has published three of my articles dealing with the accident. Incidentally, the 750 page government report presented at the IAEA ministerial meeting in Vienna admitted that Japan was unprepared for severe accidents like tsunami induced, which was one of the key points I made. Herein, I want to comment only on PM’s call for a nuclear phase-out and inability to restart some nuclear plants.
In mid-July Kan stated: “Our nation should aim to become a society that can manage fine without nuclear power.” A leading contender to replace Kan, Seiji Maehara one of the most popular figures in the ruling Democratic Party, said that Japan should phase out nuclear power over the next two decades and that construction should “basically be stopped.” This policy would have far reaching implications for the energy sector providing one third of the nation’s electricity. Nuclear technology companies: Toshiba, Hitachi and Mitsubishi Heavy Industries would be severely hurt while the existing prospects for international orders would all but disappear. Like Chancellor Merkel in Germany, PM Kan sees adoption of anti-nuclear policy as a way to rebuild his image as well as that of his party. It is understandable that triple reactor meltdowns after the reactor cooling systems were wiped out by tsunami had shaken the Japanese faith in nuclear safety. The Japanese nuclear establishment has overlooked the need to provide a need for adequate tsunami protection. San Onofre nuclear power plant in my neighborhood is protected by a 30 foot high tsunami wall. The Tohoku earthquake originated in a subduction zone. The tsunamis generated in a subduction zone are much larger than those resulting from earthquakes in a strike slip geologic fault systems such as faults near San Onofre.
Nuclear power plays an important role in the world’s energy mix. It is clean, as the world seeks to reduce carbon emissions. It is steadier than renewables, such as solar and wind, which require a more expensive and sophisticated power grid. In addition, the solar and wind energy storage facilities still need to be developed. The nuclear power, like coal, provides inexpensive source of base power, while solar and wind are useful as supplementary energy sources. The third largest world economy cannot afford to abandon nuclear power. Japan in future could focus on building inherently safe high-temperature gas cooled reactors.
Supply-demand balance of electricity in Japan this summer is very tight in the east coast served by TEPCO, Tohoku Electric (50 Hz) and Chubu Electric (60 Hz). Only 17, out of 50 remaining nuclear plants, are in operation or 35% of the total nuclear generating capacity of 44 GW. While the utilities on the west coast will help out, it is essential that some of those reactors currently down for periodic inspections be allowed to restart. It should be noted that Japanese periodic inspections are mandated much more frequently and longer than in other countries. Needless to say that public safety comes first in these considerations. On June 18, the Industry Minister Kaeida declared that safety enhancements were in place and asked local communities to allow utilities to restart these reactors. Mayor of Genkai Hideo Kashimoto officially agreed to have two reactors to be restarted. However, on July 6 Kaeida announced a plan to conduct stress tests on all reactors on the instruction of the PM. This about face angered baffled local communities and especially Kashimoto who withdrew his concurrence. The PM then told the cabinet meeting that he was late in giving the instructions on the stress tests and feels responsible. One more time PM Kan displayed his incompetence and lack of leadership. He didn’t offer a plausible explanation other than saying that the EU is conducting the stress tests and that the International Atomic Energy Agency (IAEA) has recommended them. However, the EU plants continue to generate electricity while stress tests are under way. In addition, it is less than abundantly clear what kind of insights the stress tests might generate. The insights are likely to be plant specific rather than some generic insights already known. A great deal has already been learned from the Fukushima accidents.
An analogy with the April 2010 Macondo oil spill in the Gulf of Mexico might be helpful. It is the biggest offshore oil spill in history which has killed 11 people. There were no fatalities from the Fukushima accidents. By October 2010, the moratorium has been lifted. In June 2010, 46 drilling permits were issued. Exxon/Mobil, BHP Billiton, Royal Dutch Shell and Chevron have discovered new oil wells.
Dr. Vojin Joksimovich: PhD in nuclear engineering and is a retired nuclear safety specialist. Also, an author of several highly acclaimed books and a specialist in many fields.
The above article is from Modern Tokyo Times.
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