The Euro: A Win or Loss for Poland?

Introduction

The Euro, currently in circulation in 19 of the European Union (EU) member states, first came into physical circulation in 2002 following the electronic adoption in 1999. The introduction of the euro was originally manufactured as part of the Union’s broader plan to limit extreme nationalism following World War II and the fall of the Soviet Union. Caps on nationalism and closer economic interdependence would limit the likelihood of war breaking out again on the European continent. While originally introduced in 6 of the member states, the Euro’s rollout has extended due to the requirement, as spelt out in the Maastricht Treaty, of all member states to join. The treaty, however, does not spell out an exact timetable for accession into the Eurozone.

Accession into the Eurozone is contingent on 6 convergence criteria. The criteria as spelt out by the ECB include:

1. Low inflation: max 1.7% 2. Less than 3% budget deficit

2. Debt-to-GDP ratio less than 60%

3. ERM II Membership for minimum 2 years

4. Stable interest rates

5. Stable long-term interest rate max 6.7%

Once it has been determined a country satisfies the convergence criteria, a vote is taken in Council to permit the state to join the Eurozone. Since its conception, 8 member states have completed the accession process bringing the total membership to 19. The Euro was most recently introduced in 2015 replacing the Lithuanian lita.

In this paper I will discuss the economic basis of the euro, introduce theory behind Eurozone accession, and apply the two discussions to the current debate over Poland’s accession to the Eurozone and address some of the major concerns of citizens.

Economic Basis and the Theory of the Optimum Currency Area

Euro accession begins with the alignment of a country with the convergence criteria which cover conditions from inflation, deficit, and debt. Additionally, the national Central Bank must be independent of political control as it will be folded into the structure of the European Central Bank.

The economic benefits of switching a country’s currency to the Euro are undeniable: elimination of transaction costs of converting currencies and allowing for further integration of Eurozone economies. It contributes to the development of the single market’s free flow of goods, labor, and people which can be facilitated even easier with common currencies.

However, there are very clear economic disadvantages of joining the Eurozone. Accession to the Euro means the member state gives up its control over its monetary policy to the ECB. While that member state’s central bank will have a vote in the ECB, policies and positions contrary to that country’s interest could still be voted upon and carried out. Additionally, the ECB’s sole-mandate of price stability might play contrary to the needs of particular member states such as achieving full employment, the two of which sometimes can seem mutually exclusive.

For the majority of this paper I will be discussing the economic situation of Poland vis-à-vis accession into the Eurozone. To chart this discussion, I want to begin by discussing the economic basis of the Euro as theorized by the so called ‘Optimum Currency Area’ (OCA). The OCA theory, as developed and attributed to Robert Mundell, stresses the need to be able to control asymmetric shocks in order to build a currency union. The four main criteria he lists as needed to achieve a successful currency Union are:

i. Labor mobility across the region
ii. Open capital mobility; price and wage flexibility across the region

iii. A risk sharing system (such as a taxation redistribution)
iv. Similar business cycles across the region

If a region can meet these criteria, then Mundell stipulates it very well may be an optimal currency area. It is interesting to note that these currency areas don’t need to be multiple countries, but in fact a single country could have several optimal currency areas—but are tied under a single currency system for geopolitical reasons rather economic.

The Case of Poland

The presence of a resistance to Euro accession in Poland is clearly evident through the results of the Flash Eurobarometer 418 (FEB418). The FEB was conducted in April of 2015 in the 7 non-Euro member states with legal and treaty obligations to accede to the Eurozone. The goal was to measure public knowledge, perceptions, support, and expectations of the Euro.

In response to the question “Do you think the introduction of the Euro would have positive or negative consequences for (OUR COUNTRY)?” 54% of Poles said ‘negative’. When asked about the consequences on a personal level, 53% anticipated ‘total negative’ consequences. These results reveal that a majority of Poles see Euro introduction as a negative event (however the wording of the question does not indicate exclusivity of economic impact). This perceived negative impact, however, seems to be a native phenomenon as in the same FEB, 53% of Polish respondents indicated they believed Euro introduction has had an overall positive impact in other countries that have already introduced it versus a minority of 34% stating it was negative. The disparity in results suggests that in fact Poles do not have negative perceptions of the Euro as a whole, they just have negative perceptions about implementation of the Euro in place of the Polish Złoty.

Prior to the recent October 2015 election, Poland was under political pressure from the ECB and in particular Germany, to push towards meeting the convergence criteria, in particular officially joining the Exchange Rate Mechanism (ERM II). Political attitudes were split at the time, with justifiable economic concerns about speculation driving down the value of the złoty. However, with the outright majority victory of the right-wing, euroskeptic Law and Justice Party in the October national elections, discussions about the Euro are now a non-starter, politically speaking.

This shift in the Polish political regime has halted progress towards accession to the Eurozone. It also raises the question of whether Poland should join economically. When I posed this question to my International Economics Professor Steven Silvia at American University, he argued the most important indicator in determining the economic vitality of accession to the Eurozone (or any shared currency regime) is understanding the business cycles of the currency regime and the country in question—the fourth of Mundell’s principles. This information can be found in DG Economic and Financial Affairs’ 2014 Report in European Business Cycle Indicators. The below graphs compare growth with the Economic Sentiment Indicator (ESI).

The above graphs show the disparity of the economic conditions that struck the Euro area in the 2008 downturn versus the less dramatic recession in Poland. It is important to highlight how dramatic the disparity is: Poland’s growth rate never went negative, which cannot be said for the Eurozone. Poland’s ability to remain above the red line while the rest of Europe succumbed into recession is due to many reasons, but the main being the successful exercise of monetary policy of ‘Narodowy Bank Polski’ (National Bank of Poland).

Accession to the Eurozone, as stated earlier, means the National Bank would lose its monetary policy autonomy, and rather the country would be subject to the decisions taken at the ECB. Often portrayed as “giving up sovereignty” to Brussels, many opponents to the Euro like to leave out the fact that the National Bank will have a voting seat in the ECB. On the other hand, Poland is a single vote, and can be easily outvoted. The National Bank representative sitting on the ECB will take an oath stating that he will put the economic interests of the Eurozone as a whole before national interests. And at the end of the day, what is best for the Eurozone might not necessarily be best for Poland and vice versa.

The graphs above regarding the business cycle are telling because any central bank makes its monetary policy decisions based on the business cycle. In general, (along with other policies as well): when growth is slowing down, they will buy back bonds and infuse more money into the market, and when inflation gets too high, they will sell bonds to restrict money flows. The ECB follows the same basic logic and premises. So, with that in mind, if the Polish business cycle aligns closely with that of the Eurozone, it is safe to say we will see a history of similar policy actions taken by the ECB and the Polish National Bank. And theoretically, if Poland were to accede into the Eurozone, we should continue to see the two business cycles stay similar and thus ECB policies will continue to help the Polish economy grow.

On the other hand, if the business cycles did not align, it makes a very clear case to not accede. If the ECB sells bonds at the same as the Polish business cycle is at a peak and inflation is increasing, the ECB decision would wreak havoc on the Polish economy with high inflation. The same goes for buying bonds at a low in the business cycle: the constriction of cash will mean even less growth will occur, and the economy could experience negative growth and even go into recession if the adverse policies are sustained for a prolonged period of time.

Looking at the above graphs of Poland and the EU, there is visually a generally similar trend of business cycles. There were disparities in growth from 2004-2006(ish) but then the trends seemed to converge. This is very much likely due to business cycle synchronization which can be achieved through strategic trade. 2004 marked Poland’s entry to the single market, and thus trade between the Eurozone (and the EU as a whole) has increased dramatically, allowing for convergence to be achieved through trade.

To address the issue of business cycle synchronization, the EU has a long-standing Exchange Rate Mechanism (ERM II) which is designed to help move a country’s economy towards convergence with Eurozone trends in terms of inflation, long-term interest rates, fiscal deficit, public debt, and exchange rate stability. The goal of business cycle convergence explains why membership in the ERM II for at least 2 years is one of the 6 convergence criteria a state must reach to accede to the Eurozone. Poland has not of yet joined the ERM.

The remaining three ‘criteria’ for an OCA are all semi-related. They are labor mobility, capital mobility, and a risk sharing system. These three elements are seen as necessary in forming an OCA as they are essentially for “promoting balance-of-payments equilibrium and internal stability”. BOP instability was a major concern of Mundell’s as well as concerns over balancing inflation and unemployment. He argues “the pace of inflation is set by the willingness of central authorities to allow unemployment in deficit regions”—essentially one region benefits at the expense of another in a common currency area in a monetary policy decision. In order to limit these type of situations, the three criteria are needed.

If unemployment rises in one region due to higher inflation in others, it is essential that labor has free mobility to move within the currency area. If labor can move, then the region can maintain full employment without having to enact monetary policies that might decrease unemployment in one region at the expense of another. Eventually, ideally, as the economy recovers, employment levels will balance back out across the region. The single market (all EU-28 member countries) allows for the free movement of goods and labor. Within that market, the Schengen zone allows for the free movement of peoples. Poland is part of both.

Capital mobility coupled with openness of wage and price flexibility acts part of a natural economic mechanism to redistribute supply and demand across the region. This ensures that should there be any supply or demand shocks, the impacts of such will not be isolated to one area of the currency region. If it were to be isolated as such, it would result in a disparity in BOP, which can cause undue stress and uneven economic development in the currency region. Free mobility of capital and flexible prices and wages will allow the economy to naturally adjusts to those shocks and the whole region will be affected similarly. The Eurozone (as well as the EU as a whole) has these sorts of mechanisms.

The last component: a risk sharing system. The ideal example of a risk sharing system would be an automatic fiscal transfer mechanism; think government bailouts or tax redistribution. The idea is that the governing authorities should be able to reallocate resources (money) to areas and sectors that are falling behind. The EU’s cohesion funds could have been seen as a sort of risk sharing system, as it redistributes money from wealthier regions to poorer less developed regions, but it is not an ideal example. EU law forbids state aid to business, including bailouts. However, bailouts were given out in April 2010 during the Eurozone crisis. Poland is a major recipient of cohesion funds; and has not been in need of any bailouts.

Analysis

Looking at the four factors often used in considering OCAs, Poland and the current Eurozone seem compatible on all four components. In fact, the National Bank of Poland released a report in 2004 following its EU Accession about the status of Poland’s accession to the Eurozone. The Bank indicates “there is a relatively low risk of monetary policy of the ECB being inappropriate for economic conditions prevailing in Poland after euro entry”. In reaching this conclusion, the authors of the report cite several reasons including the role that free movement of capital will have on stabilizing the exchange rate, high levels of cyclical convergence due to high trade volumes, and reductions in government debt will allow for stronger fiscal stabilizers.

Economically, the transition to the Euro makes sense in theory. The people of Poland themselves have acknowledged the benefits the Euro has. So what is the problem? In talking informally with several of my colleagues and friends in Poland, a common concern kept emerging: switchover would trigger a rise in prices, which would hurt the people. More formally, they are concerned about losing their purchasing power parity (PPP). I initially suspected this concern has emerged out of Polish people’s interactions with the Euro taking place in countries where price levels are higher compared to those in Poland (such as Germany, Belgium, and other western European countries) leading to false connotations that “euro = expensive”.

This concern, however, is not unique to Poland. Giovanni Mastrobuoni of Princeton University discusses how incomplete information led to similar “euro-biases” as they are generally referred to in other Eurozone states. In Lithuania, the most recent country to switch to the Euro, Flash Eurobarometer 412, taken in the weeks following the dual-circulation period, revealed that 58% of citizens felt the Euro has increased inflation with only 26% say it maintains stable prices. Models revealed that inflation during changeover was higher for cheaper goods, which are purchased more frequently by consumers, like food and drinks. Therefore, they make overall assumptions about the status of the economy on that limited piece of information, making it seem like there is overall greater inflation than actually present in the economy.

But, why are there different inflation rates? It turns out it is a vicious cycle. Mastrobuoni extends his model to include price uncertainty. He argues that on-the-spot conversions of the new price (in Euros) to the old currency involves a level of uncertainty “about the old-currency-equivalent of the price in euros [which] is higher the higher the price in euros is”. The graph below illustrates the vast effect of this problem as more than half of citizens in new Eurozone states still thought about prices in their own currency following switchover. Each of the results are from surveys taken in the weeks after the dual-circulation period.

This phenomenon creates an artificial demand curve by consumers, which yields a higher general equilibrium. The table below, borrowed from Mastrobuoni’s paper illustrates the difference between actual and perceived inflation pre- and post- accession to the Eurozone. He also includes Denmark, Sweden, and the UK in the chart as a means of comparison to nations that were not included in the Euro switchover and consequently did not adopt the Euro.

Mastrobuoni concludes that once consumers begin to think in Euros rather converting to their old currencies, the effects of the artificial inflation will be reduced if not eliminated.

Returning to the case of Poland, the phenomenon of “euro-biases” and price hikes is founded in a widespread economic phenomenon. While citizens are rightfully worried, the EU has taken steps to try to reduce such effects. During euro switchovers, a period of “dual price display” occurs in which stores and firms are required to display prices of goods in both euros and the former currency for a designated period of time. This is an improvement from the original switchover in 2002 where dual price display was not mandated. Mastrobuoni remarks that surveys in Belgium indicated only 50% of stores participated in the dual price display, and all for varying amounts of time during the two-month switchover process. The room for error in converting currencies was much higher under those conditions. During dual price display it limits the number of conversion errors that may occur.

However, some have expressed concerns that the dual-price display may be harmful in the long-term, as displaying prices in the former local currency encourages citizens to continue to rely on that price marker rather that of the Euro. This means that once the dual display period (usually 2 weeks for new member states) ends, consumers will have to go through the same process of conversion miscalculation as discussed prior. The EU also now provides a currency calculator to citizens of new Euro member states to help them make more accurate conversions on the spot. This enables citizens to continue to gauge euro price levels in their former national currencies beyond the dual display period.

Drawing Conclusions

The case of Poland is nothing unique from an economic aspect. We saw similar concerns in other countries including Lithuania only last year in 2015. However, the political conditions of the country simply do not permit for Euro accession to happen in the next couple of years. Will we see Poland in the Eurozone? Absolutely, but it very well may be 5-10 years down the line. Poland has a legal obligation to do so under the Maastricht treaty, and no one is denying that. Concerns are about when is the best time to join.

Poland first needs to join the ERM II to bring stability to its exchange rates, and it will have to remain in the ERM II for atleast two years (unless the ECB and Council waive the requirements—which the political will to do so seems present). However, Poland will not join the ERM II under the current euroskeptic government, which will remain in power for nearly another three and a half years, and then we will have to a wait for the election results.

While citizen’s fears of price increases very well may come true: we have to remember that any shocks to the economy will be bore by the Eurozone as a whole and limit the impact on Poland. Joining the Eurozone will also only increase high levels of trade between Poland and other countries. This small economic stimulus may be essential for Poland as it struggles to keep its young population from moving to other countries and create more jobs at home to keep them.

To ultimately answer the question of whether the Euro is a potentially win or loss for Poland: I argue that it will someday be a “win”. It is hard to draw a conclusive conclusion now due to the simple fact that we don’t know what will happen were Poland to accede to the Eurozone. While the country is close to converging on the requirements for Eurozone accession, there are valid concerns about the state of the economy and how Eurozone policy will be appropriate for the economy. The government should continue to develop the economy in order to catch up with other Eurozone countries to ensure a smoother transition.

Refugees Suffer and Europe Falters

The sprawling makeshift Idomeni refugee camp now risks becoming a permanent shantytown after the recent closure of the Balkan migrant route through Europe. The Idomeni refugee camp, lying on the Macedonian-Greek border, is home to fourteen thousand refugees from war torn Syria and Libya who face squalor conditions, food shortages, disease, and little options of what to do next. Idomeni, a small town on the Macedonian-Greek border, contains roughly half of all migrants attempting to use Greece as a transition state to more affluent nations in the North of Europe. The 2,000 capacity limit refugee camp originally served as a waiting station for refugees with the hope of passing through the border into Macedonia. With the recent closure of the Balkan route, the Idomeni refugee camp is now becoming a bottleneck of refugees as it becomes severely overpopulated with little funding for proper shelter. However, rather than improving the conditions of refugees within Europe, the EU has opted to discourage those escaping war from fleeing to the West. The recent implementation of the EU-Turkey refugee deal attempts to do this by converting refugee camps, such as Idomeni, into bona fide detention facilities as newly arrived refugees face deportation back to Turkey. The EU-Turkey deal is has made it clear that Europe would rather send asylum seekers back into the fire rather than extend a helping hand. Idomeni is an unfortunate embodiment of the EU’s priorities.

The creation of Idomeni and closure of the Balkan route by Macedonia, Slovenia, Serbia, and croatia illustrates the divide within Europe over the solution to the refugee crisis. Chancellor Merkel of Germany slammed the recent closure stating “Sure, it brings us less refugees [...] but it brings Greece more, and that’s not sustainable.” The chancellor then went to underscore the importance of finding a European solution. In other words, a solution in which all countries of the European Union participate, rather attempting to slow the flow of refugees through unilateral action. Balkan countries are still standing by their decision to close their borders. They claim that the closure have slowed the flow of refugees from Greece into the rest of Europe and that a consistent stop will discourage more refugees from entering Europe through Greece. Regardless of the truth to this Greece is still left with over 36,000 refugees hoping for asylum and little resources to properly care for and process them.

Despite this it appears that many asylum seekers will be taking up residence in Greece. Why is it that Greece has been so hard hit by the refugee crisis? The answer is a combination of Greece’s geographic location, the Schengen Agreement and the Dublin Regulation. First, Greece is located across the Aegean Sea from Turkey and is one of the first European Union countries in close proximity to Turkey that provides direct land access to other EU countries such as Germany. This makes Greece an ideal entry point into the EU for refugees fleeing the Syrian civil war through Turkey. Second, the Schengen Agreement abolished internal borders within the EU, allowing for ease of travel for all once granted entrance. The Schengen agreement then created an external border of countries that lie on the edge of the EU, such as Greece. As a country that lies along this external border, Greece faces greater strain than other members in processing refugees as they are checked in Greece before entering the EU. Third, the European Union’s common law concerning asylum seekers, the Dublin Regulation, devotes the duty of asylum application processing and relocation to the refugee’s country of entry. Under the Dublin Regulation if a refugee moved on to another EU country, the government of the country can file a transfer request to the country of entry. This places the majority burden on all EU border countries in regards to the refugee crisis, but Greece most of all.

The EU attempted a so called “European solution” for the refugee crisis as mentioned by Chancellor Merkel with a recent deal between the European Union and Turkey. This agreement attempts to ease the disproportionate strain on Greece. Largely endorsed by European leaders as well as the prime minister of Turkey, the deal attempts to “smash the business model of people-smugglers.” However, it has been condemned by the United Nations High Commissioner for Refugees (UNHCR) for arresting refugees and turning refugee processing “hotspots” into detention centers. In short, the proposed deal states that all future refugees entering Greece through the Aegean Sea after departing Turkey will be deported back to Turkey. For every refugee sent back to Turkey, another will be relocated in Europe from Turkey. Furthermore, the European Union will double the 3.3 million euros already pledged to increase the quality of Turkey’s refugee camps, renew talks concerning Turkey joining the EU, and release visa requirements of Turkish citizens. This deal has divided Europe with some hailing it as the solution to Europe’s refugee crisis and others slamming it for turning a blind eye from Turkey’s border closure to thousands of refugees escaping war torn Syria. On top of this the legality of this potential “solution” in Europe’s refugee crisis has been called into question. Critics who question the legality of the EU-Turkey refugee deal point out that Turkey not only has a large number of refugees without adequate facilities to house them, but also has not fully accepted the Geneva Convention. As such, this deal may break European and international law concerning that all asylum applications must be properly considered and cannot be sent back to any country without necessary protections for them. Due to the question of legality regarding the deal and the subsequent detention of refugees the office of the UNHCR has withdrawn much of its support for facilities in Greece that registered and assisted entering refugees, refusing to participate in the unlawful arrest of people escaping war. Despite all its flaws, this potential deal is seriously seen by the EU as a solution to the refugee problem in Greece and Europe as a whole. However, with the recent Balkan route closure and the stranded 36,000 refugees within Greece this couldn’t be farther from the truth. European leaders should be focused on improving the current humanitarian conditions of refugees within Greece, rather than condemning them to a figurative and literal limbo before deporting them back to where they risked so much to escape.

The Idomeni refugee camp is unfortunately an excellent example of the consequences of Europe placing a higher priority on denying safe haven to refugees rather than properly housing and protecting them. Jim Yardley of the New York Times visited Idomeni the day of the Macedonia border closure and describes an outrageous scene. Women and children sleep in mud, sewage flows from portable toilets, and illness spreads from person to person. Pictures from Quartz also depicts the Idomeni refugee camp as hopeless situation for an unfathomable number of men, women, and children. Seemingly endless rows of tents cover a ground littered with trash as people sit with hope that they will be allowed to move on from Idomeni into the rest of Europe. In an attempt to make Idomeni at all visible to Europe, two refugees lit themselves ablaze in a recent protest to illustrate their desperation. Europe cannot call the refugee crisis solved by the EU-Turkey deal with such cries for help emanating from Idomeni and other camps.

The International Rescue Committee (IRC) recently concluded that refugees who were recently prevented from crossing into Macedonia from Northern Greece are at an increased risk of humanitarian problems. The IRC found that refugees at the Idomeni camp faces water, sanitation, and hygiene facilities pushed past their limits, a despairingly large amount of trash with no sanity location for it, a short supply of feminine and general hygiene products, as well as limited heating. Limited heating is of a particular concern as refugees resort to lighting their own fires, often in close proximity of tents which presents a very large fire hazard. The increasingly permanent refugee camp also lacks the proper number of actors to protect women, children and the elderly from those who seek to take advantage of the most vulnerable in humanitarian crises. Women lacks safe spaces to seek solace from abuse and the camp has limited sufficient lighting which makes it even more dangerous for the vulnerable. Idomeni is nothing less than a humanitarian crisis and becoming worse. Europe must act and provide funding to care for the refugees within Greece, rather than cutting them off and shouldering them onto another country that is equally ill prepared to house them.

The EU’s focus on preventing more refugees from entering Europe combined with the recent Balkan route closure has created a situation in which Greece is becoming a hellish nightmare for asylum seekers. The EU-Turkey refugee deal is an attempt at a “European solution,” to the refugee crisis, but it prioritizes ending the flow of refugees into Europe through inhumane and illegal methods, rather than improving the conditions of asylum seekers suffering in Greece. It’s clear the EU has the resources to properly care for refugees already within Europe, as evidenced by the money given to Turkey. However, the European Union lacks the will to extend a helping hand in the name of humanity, preferring instead to give that job to somebody else. Whether the recent refugee deal does end the flow of refugees from North Africa and the Middle East into Europe will remain to be seen. Regardless, it overlooks the thousands who already risked it all to escape war and violence present in Idomeni and other camps within Greece. If the refugee crisis is to be truly solved we cannot ignore those who have found themselves at the mercy of our care.

Ukraine’s Debt to Russia: Efficient Breach Vindicated

Russia has had quite a year. The Kremlin’s militaristic gallivanting has become a staple of this year’s news cycle, with perhaps its most pugnacious acts of hostility being those involving Ukraine. While Russia’s armed harassment of Ukraine has received the lion’s share of the media’s attention, it is its financial badgering with respect to sovereign debt that may prove to be most harmful of all to the bedeviled nation.

In this article, I endeavor to explicate briefly Ukraine’s sovereign debt dispute with Russia, with an eye towards arguing how Ukraine might make use of different international legal remedies to exculpate itself from its regrettable situation. One of the most discussed of these remedies is the legal notion of “odious debt,” and many—most prominently Georgetown University Professor Anna Gelpern and Newsweek’s Anders Åslund—have argued that the “odious debt” legal remedy is Ukraine’s golden ticket out of repayment. I will argue that the legal grounds for the use of the “odious debt” solution are shaky at best, but that rather “efficient breach” is the optimal legal remedy for Ukraine in this case. On the first day of 2016, Russia formally began legal proceedings against Ukraine over the non-payment of their $3bn debt, as reported by the Financial Times. This issue will now come down to a courtroom battle, and to understand the legal implications of this dispute, we need to understand its history.  

The story behind Ukraine’s sovereign debt to Russia is convoluted. The Economist called it “the world’s wackiest bond.” Ukraine has had many issues with external debt as of late. In August of 2015, Ukraine finished negotiations with numerous creditors (primarily investment houses) over Ukraine’s international bonds, altogether valued at around $18 billion. These renegotiations included a slashing of 20% of the bonds’ principal on average, as well as postponement of repayment until 2019. Even in August, Russia’s immediate rejection of these terms adumbrated the growing conflict brewing today over the $3bn bond that Ukraine was due to pay Russia on December 20th, 2015.

The bond in question was issued in December of 2013. Listed on the Irish stock exchange, the bond was clearly backed by spurious motives. As the Economist’s Christmas double-issue summarized:

The bond was essentially a bribe to Viktor Yanukovych, Ukraine’s now-ousted president, who was dithering between European and Eurasian integration. Senior Ukrainian officials say that the government itself never saw the money; most probably it was spirited out of the country by Mr. Yanukovych’s cronies.

While some might disagree with such a malicious characterization of the Russian debt, they would be in the minority, as numerous reputable sources—from the Financial Times, to Reuters, to Bloomberg—have lamented Ukraine’s unfortunate situation. Vladimir Putin proposed a staggered plan in November in which Ukraine would pay back the debt over three years, but the stipulation that a western government or bank serve as guarantor went unfulfilled, and the deal fell through. Some have attempted to argue that the whole issue of a legal remedy to Ukraine’s debt to Russia does not merit consideration, as the debt is commercial, not sovereign. On this issue most of the international community disagrees with Kiev, including the IMF, that on December 16th confirmed the sovereign status of Ukraine’s debt to Russia.

So, where does this leave us? The December 20th deadline has come and gone, along with the 10-day grace period thereafter, and Russian President Vladimir Putin has given the green light to file a lawsuit against Ukraine. In short, the bond, as it stands, will not be repaid. Given that the solution doubtlessly lies at the tail end of arduous, drawn-out courtroom arguments, let us now delve into some potential legal remedies to which Ukraine may take recourse as it attempts to rid itself of this debt.

As Anders Åslund argues in his piece on Ukraine’s debt to Russia, published on the Atlantic Council’s site, one potential legal remedy is proposed by Professor Gelpern from Georgetown, who argues that “Ukraine should not pay this debt because it amounts to "odious debt.” I refute this argument, as the argument for the applicability of the “odious debt” remedy is tenuous at best in this scenario.

“Odious debt,” as defined recently by the Centre for International Sustainable Development Law (CISDL), is a debt that meets three criteria: “it was contracted without the consent of the population of a debtor state, without benefit to it, and the creditor had knowledge of the circumstances.” To borrow the summary of odious debt from Jeff King of CISDL, this means that “under the contemporary definition… a debt is said to be odious when there is an absence of popular consent, an absence of benefit, and creditor awareness of these two elements.” As those familiar with the field of International Law will know, the sources of International Law are treaties, customary international law, and general principles. While some may disagree with the legitimacy of certain sources of International Law, these are the principles that will govern the courtroom arguments between Ukraine and Russia. Given that Russia and Ukraine are not signatories of any binding treaty that references odious debt, and there is no “general principle” of odious debt, to prove the applicability of the odious debt remedy in this situation, it is necessary to prove that it has crystallized as customary international law in a way applicable to Ukraine’s case.  

For customary international law to be considered binding, certain thresholds must be met; namely, the “thresholds in customary international law of uniformity, consistency and generality of practice, together with the requisite opinio juris,” as explained by King. Thus, Professor Gelpern and those who advocate for the doctrine of “toxic debt,” are arguing against the customary international “rule of repayment,” arguing instead that there are cases where forgoing repayment is a legal norm of customary international law due to toxic debt.

Upon examining the legal history of “toxic debt” as a defense against repayment, one can recognize that the argument is instantaneously weakened given that for most of the history of the “toxic debt” doctrine, the defense only referred to cases of “cessation and dissolution of a state, where the legal personality of the borrowing state often remains intact.” As the Ukrainian case involved neither cessation nor dissolution, the interpretive window whereby the “toxic debt” defense might be applicable is quite small.

Next, we can look for cases in which a successful application of the “toxic debt” defense has been outlined. In the Tinoco Arbitration case, we saw that for the debt to be toxic, there must not only be a change in regime (normally revolutionary), but also a failure on the part of the bank or government in question to show that the funds were used for “legitimate governmental use.” Few doubt that Ukraine’s debt was not used for legitimate governmental purposes, but the lack of a concomitant regime change renders the application of the “toxic debt” defense unsupported by precedent.

There is only one subset of legal scholarship on “toxic debt” that may support the applicability of the defense in Ukraine’s case: O’Connell’s “hostile debts” doctrine. Also referred to by scholars such as Mohammed Bedjaoui as “subjugation debts,” this subset of “toxic debt” is defined as “debts that are contracted by a state representative without the population’s consent and against its interests, with both these issues to the creditor’s knowledge.” While this may sound perfectly fitting in Ukraine’s case, Bedjaoui—the intellectual father of “subjugation debts”—suggests a “very high threshold for the standard,” specifically: “debts contracted by a State with a view to attempting to repress an insurrectionary movement or war of liberation in a territory that it dominates or seeks to dominate, or to strengthen its economic colonization of that territory.” While most of the evidence suggests that Mr. Yanukovych did not use the funds for the benefit of his country, it would be challenging for anyone to make the argument that Yanukovych used the $3 billion to quell insurrection.

In summary, given the lack of precedent in utilizing the “toxic debt” defense in cases where no revolutionary regime-change took place, the “toxic debt” defense is weak in Ukraine’s case. There is a small possibility that Ukraine could argue its bond debt to Russia is a “subjugation debt,” but here there is no precedent of such an argument being made when it has not been proven that the state leader who incurred this debt utilized the funds to quell an insurrection. Moreover, all of these considerations necessitate the assumption that the “odious debt” doctrine can be considered customary international law, which, on its own, is questionable. While, in theory, legal scholars might wish that such a norm had crystallized in the system, there appears to be no case in recent history where a tribunal has accepted the “toxic debt” defense. Moreover, there is a dearth of opinio juris et necessitatis, meaning that for the “toxic debt” defense to crystalize as customary international law in the future, we must not only see more states decline to pay “toxic debt,” but we must see more states officially argue that the reason for their forgoing repayment is their belief that they are absolved of the responsibility because of the “toxic debt” defense.

As I have argued, there is little chance that a “toxic debt” defense will exculpate Ukraine from paying Russia; so, the question remaining is, what might? In general, my perspective on international law derives from an economic perspective of international law similar to that advocated by Dunoff & Trachtman. Put colloquially, this is a legal perspective based on optimal welfare outcomes, not one based on any a priori assumptions of the morality and bindingness of international law. For this reason, the case of Ukraine offers an interesting case where Posner & Sykes’ argument of “efficient breach of international law” may pertain. The logic behind Posner’s “efficient breach” theory is that if the costs of compliance outweigh the costs of non-compliance, then a breach of international law—such as the customary law of repayments in Ukraine’s case—is efficient, and thus, can be an optimal remedy.

In the case of Ukraine’s sovereign debt, simple non-compliance with the law of repayments may be optimal. Differently stated, one of the best present legal strategies for Ukraine might simply be not to pay back Russia until they concede more in negotiations. The reasoning behind this ploy is simple: few entities aside from Russia are against Ukraine in the case of its bond debt. Most of its private international bondholders have already settled a restructuring package with Ukraine. Moody’s—the international rating agency—has made it clear that it expects Russia eventually to restructure Ukraine’s debt. Perhaps most importantly, however, is the surreptitious way in which the IMF has gone about altering its rules for aid provision, so as indirectly to show its support for Ukraine. On the 15th of December, the FT reported that the IMF decided “to change its strict policy prohibiting the fund from lending “to countries that are not making a good-faith effort to eliminate their arrears with creditors.” The decision was criticized by Moscow, as it will allow the IMF to continue doing business as usual with Kiev even if it fails to pay its sovereign debt to Russia.”

Most of the western world—i.e. most of the power players in international finance—are in Ukraine’s camp. Ukraine is trapped by a predatory bond deal orchestrated by a lecherous former leader with no desire to use the funds to strengthen Ukraine. While Ukraine has been left with a repugnant debt to pay, it is not one that meets the legal thresholds necessary to deem it “toxic debt.” That said, if one is willing to accept an economic perspective of international law in place of a moralistic one, then “efficient breach” seems to be both the current choice Ukraine has selected in proceeding to deal with its debt, as well as the legal course of action that may be most beneficial for Ukraine, as even the IMF—one of the most important entities with a role in determining Ukraine’s economic wellbeing—appears to be supporting Ukraine in its abstention from repayment by the accommodations it is making in its policies. With Russia’s foreign reserves tanking, and its economic outlook growing dimmer each day due to the plunging price of oil, it is likely that Russia will eventually take whatever they can get from Ukraine, and, like Moody’s predicted, will agree to restructure Ukraine’s debt after a period of suffering efficient breach.

France’s State of Emergency

After threats, or attacks upon a country’s security such as the recent terrorist attacks in Paris, a state will most likely strive to undertake measures to reestablish security and prevent future attacks from occurring. However, the steps a state undertake to do this must be in line with the rights and freedoms their citizens are entitled to under the United Nations Universal Declaration of Human Rights, which every UN member is expected to promote and protect. After 9/11 the United States attempted to prevent future terrorist attacks by a number of measures. However, not all of them, such as the CIA torture program and NSA mass surveillance program, respected human rights. Fortunately, due to a collected public outcry, the CIA’s use of torture is no more, and many aspects of NSA’s mass surveillance that infringe on a person’s right to privacy are currently under heavy scrutiny. However, the same environment of fear that lead to those programs still lives today.

Following the recent Paris attacks in November by a group of individuals linked to ISIL, France’s President Hollande enacted a state of emergency. This state of emergency gives regional authorities a number of powers such as setting curfews, forbidding public gatherings, etc. However, what makes this state of emergency significant is that it gives authorities the ability to conduct raids and enforce house arrests without a warrant. Without judicial oversight, French authorities have been allowed to conduct anti-terrorism operations with no consequence. This has led to an extensive police presence, overuse of raids, and abuse of house arrests by the French government. However, rather than actually being effective against terrorism, France’s state of emergency has only created an environment in which its Muslim citizens experience trampled civil liberties and are targeted as potential terrorists with little to no evidence. As a member of the UN, France is expected to uphold the UN Universal Declaration of Human Rights and extend the rights defined within it to all of its citizens. However, France’s extensive use of raids and detention under grounds of state of emergency violates the declaration.

Grey Anderson writes an extensive background of the state of emergency law within the Jacobin magazine, which is best summarized to explain the important role its history plays in the violations of civil liberties in France today. The state of emergency law was first composed in 1955 during the Algerian war of independence. France had a peculiar relationship with Algeria in that rather than viewing Algeria simply as a foreign colony, many French citizens regarded Algeria as part of France. France’s identity became entwined with Algeria’s. In 1955, when Algerian nationalists took up arms against the French government in a bid for independence, France sought to put down the nationalist movement in a way that didn’t recognize the conflict as a foreign war. Doing so would legitimize the Algerian nationalists and go against the French discourse of France and Algeria as one and the same. Instead of using military action, France thus crafted a law that imposed a state of emergency in which emergency powers were given to French authorities within Algeria as a tool of repression during a time of war. These roots give France’s state of emergency today its repressive nature. Rather than effective anti-terrorism measures that respect civil liberties, the French government has recalled this 1955 piece of legislation that was intended to prevent a free Algeria.

While the law that defines France’s state of emergency is over 60 years old, it was recently updated and enhanced in November when the French parliament extended it for three months. A recent LawFare article written by Daniel Severson, a graduate student at Harvard University, explains the recent updates to France’s state of emergency legislation. The new, 2015 law has significantly broader language than the previous, which has played a significant part in France’s civil rights abuses. The old 1955 law stated that a person could be placed under house arrest if they were involved in activities that “prove to be dangerous to security and the public order.” However, the updated law now states anyone may be subjected to house arrest if there is “serious reason to think that the person’s conduct threatens security or the public order.” The new 2015 law also allows for raids without a warrant upon a place a person frequents if there are “serious reasons to think the place is frequented by a person whose conduct threatens security or the public order.” This broad language makes it far easier for the French government to define terrorist threats and react, but it also makes it far easier for the French government to abuse the civil rights of those who are not affiliated with terrorist groups.

According to the Guardian, there have been 3,099 house raids with more than 260 people detained for questioning, and more than 380 people have been placed under house arrest, including 24 climate activists preceding the November Paris climate summit since the establishment of France’s state of emergency. However, the majority of those who have been affected are French Muslims. In addition, The Guardian also claims that of the 3,099 raids, only 4 have resulted in “judicial proceedings linked to terrorism.” It is obvious that most of the raids and detentions are conducted on little to no evidentiary grounds if out of more than 3,000 raids only 4 have resulted in actual court cases. Lack of judicial oversight has led to the French government acting in a dangerous and lawless manner with many innocent citizens being put in harm’s way. For example, in a video a Muslim man describes and shows the results of a French police raid upon his home. His daughter was hit in the neck by shotgun pellets when they shot the door open and his home was upturned. In an interview with Democracy Now, Yasser Louati, a spokesperson for the Collective Against Islamophobia in France, elaborates on this video and states that the French police had the wrong house, apologized, and then left. Louati goes on to say that carelessness and targeting such as that seen in the described video has created a sense of “outrage and deep humiliation and complete abandonment by the government” within the French Muslim community. With little to no accountability for their actions, the French government is alienating the Muslim community within France.

The UN Declaration of Human Rights establishes a groundwork of civil liberties for every human being regardless of race, religious affiliation, etc. When a state becomes a UN member they must pledge to uphold this declaration and apply it to each of its own citizens. France, however, has violated Article 3, Article 7, Article 9, as well as Article 13 which deal with security of person, representation before the law, arbitrary detention, and freedom of movement, respectively, with its current state of emergency. If France’s raids and detentions actually resulted in prosecutions after extensive evidence of terrorist connection was found before a raid, then yes, the raids would be warranted. However, when 3,000 raids are conducted and only 4 result in prosecutions on grounds of terrorist connections, something is horribly wrong with the anti-terrorism process. Substantial evidence to justify a raid should be found before one occurs, not sought for during. Lack of judicial oversight has allowed for raids to be ordered with little to no justification, which explains the large disparity in France’s number of raids and number of prosecutions. However, this disparity illuminates the heavy handedness of the French government on the Muslim French community as French police detain people and raid home with no terrorist connections.

Currently, the French government is seeking to extend the state of emergency another three months. The Prime Minister of France, Manuel Valls, recently stated that emergency powers may have to be kept until ISIL is defeated. Frankly, an indefinite extension of these laws is frightening and signal that civil liberties have lost out to supposed security in France. If the French government truly values liberté, égalité, fraternité and its role as a UN Security Council member, it should immediately revise its state of emergency law and add judicial oversight while specifying the law’s language to prevent civil rights abuses. It is well within the French government’s right to do what it feels is best for the safety of its people, however as a member of the United Nations and the Security Council, France’s current actions are unacceptable.

The Euro Mistake: The Good, The Bad, and Potential Solutions

Introduction and Background

The Economic and Monetary Union (EMU) consists of a single currency, the Euro, and the Eurosystem, made up by the ECB and national central banks of Euro member states. The Euro, introduced in 1999 in 12 states that “abandoned their national currencies in favour of a European alternative” had been in development since 1992 . It now covers 19 EU member states, and for the first time since the Roman Empire, much of Europe has one currency. Member states control their national budgets and structural policies while staying within deficit and debt limits the EMU imposes.

The European Central Bank (ECB), the central bank for the Euro controls monetary policy.  Its primary goal is price stability but is also responsible for defining and implementing euro area monetary policy, foreign exchange operations portfolio management, and smooth payment systems in addition to other tasks . Despite the many benefits of the Euro, the European Monetary Union (EMU) was a mistake because the negatives, such as asymmetric shocks, outweigh its positive effects, like greater economic integration. However, dismantling the Euro would create substantial economic setbacks and is not a viable option, meaning the Euro will remain regardless of its problems.

Benefits of a Single Currency

The Euro, despite its controversy, has played an important role in the development of the EU’s economic integration. Its introduction lowered barriers to trade, which increased competitiveness of and trade between Eurozone businesses. Business contracts are no longer subject to exchange rate uncertainty, increasing certainty and investment while lowering business’ capital costs . The Euro has not only stimulated trade, but also the free movement of capital, goods, and people.

The Euro has also strengthened the EU’s single market. The introduction of the Euro increased transparency and allowed simpler comparison of cross-border prices. With transparent prices, it is easier to see whether the EU single market has achieved price convergence, indicating the level of market integration. Eurozone states will cooperate more closely with one another to create a stable currency and economy, thus making the Euro a “tangible sign of a European identity.” Additionally, countries around the world are using the Euro for reserves, and some are even pegging their currencies to the Euro, demonstrating the importance of the Euro and the EU as a global economic power. Since the introduction of the Euro, there has been a “stronger presence for the EU in the global economy”, and the Euro is “considered a viable alternative global reserve currency and competitor to the US dollar” (564).

The Euro was a major political accomplishment of EU member states, and politicians and citizens believed that the Euro “would lead to peace and prosperity”. The recent economic crisis proved that the Euro, in fact, heightens asymmetric shocks due to the lack of cyclical correlation. Overall, “the euro is an integral part of the economic, social and political structures of today’s European Union”, but was ultimately a result of political desire for more European integration rather than an economic motivation.

Negative Effects of a Single Currency

The Euro created a loss of economic sovereignty and individual monetary policy, making it difficult to respond to national economic problems. The ECB sets monetary policy even if it helps some countries while hurting others in order to act based on “what is good for the whole Euro zone, rather than any individual economy”. Individual exchange rates can no longer respond to national economic booms and busts, but rather, the Euro exchange rate responds to the Eurozone as a whole. Eurozone countries can neither devalue their currencies nor use interest rate policy in order to achieve their national objectives. Additionally, the Euro weakened “the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive”. Although countries willingly gave up their right to control monetary policy, the Euro has had an overall negative effect on the economy of many, if not most, Eurozone countries.

For instance, Greece is suffering at the expense of the Euro. Although Greece began failing before the financial crisis, European authorities failed to intervene at the first sign of trouble. The introduction of the Euro lowered interest rates in Greece, who previously had high interest rates, which increased borrowing, leading to more problems. A “Grexit” might end up improving the Euro credibility because it would remove a member who “should never have been allowed to join in the first place”. The ECB was not supposed to bailout countries, so Greece had to choose either to leave the euro or achieve an unsanctioned bailout. Without borrowing from other Eurozone countries, Greece would have failed to pay its national debt or other payment obligations such as salaries or pensions.

The EU and EMU economic governance has been unsuccessful. Despite the fact that the Euro helped capital movement within the EMU, it led to the funding of bubbles like the property bubble in Ireland and many Eurozone countries still have other barriers such as intense administrative regulations, immovable labor markets, and high business expenses. If individual states have negative economic indicators, they can cause an overall euro depreciation. Finally, the Euro was supposed to increase price transparency and bring about a single price, which it has not yet done.

Optimum Currency Area

An optimum currency area is “a phrase used in economic theory to define the geographical area in which the conditions are most favourable for sharing a single currency.” A single currency implies imposing a single monetary policy, meaning countries must be similar in order for all to benefit.  One monetary policy is only appropriate if countries have similar economies and similar economic cultures. In order to have similar economic cycles, member states must have similar shocks, institutions, and policies in addition to economic integration. If a currency union does not have synchronized business cycles, “the common monetary policy does not satisfy the needs of all and may even contribute to cyclical divergence,” which the Eurozone has been experiencing.

The convergence criteria in the Maastricht Treaty of 1992 addressed exchange rate, inflation, and interest rate stability as well as debt and deficit limits in the attempt to create an optimum currency area; however these convergence criteria should have also considered economic structures, cycles, and political culture. This condition of similarity in the optimum currency area theory implies that “countries suffering from asymmetric shocks should not yet join the eurozone,” which the convergence criteria did not address, thus leading to problems.

There are two main groups in the Eurozone with opposite business cycles: the north, or core, and the south, or periphery. The core wants the periphery to take on economic reforms and has allowed the ECB to provide relief to struggling countries in the periphery. Although reforms in the periphery could help the Euro, the main challenge is whether those countries will do what is necessary and whether a compromise between the core and periphery is possible. Despite convergence criteria, some periphery countries joined the Euro with high debt and deficits.  The main problem with the Euro that signals that it might not work is that “European economies are too different” and “going in two opposite directions”.

For example, in 2001, the Eurozone’s main economies, France and Germany, slowed with increased unemployment while Ireland and Spain experienced a boom. These groups needed opposite solutions; however, the ECB lowered interest rates to help France and Germany prosper, which made Ireland and Spain suffer, contributing to a crisis in the periphery. Similarly, after the economic crisis, France and Germany are booming but Ireland, Greece, and Spain are in a recession, so the “core needs higher interest rates whereas the periphery needs lower interest rates”. Thus, the ECB has a choice to make between inflation in the core or unemployment in the periphery, but since the core has more power within the EU and the Eurozone, generally, monetary policy benefits the core and hurts the periphery.

Adjustment mechanisms such as labor movement, price and wage flexibility, and “interregional fiscal transfer payments” that work in the United States when only certain areas are under duress are less likely in the Eurozone due to linguistic and cultural barriers, limited labor market reform, and the political impossibility of core countries paying to support periphery countries. Without these mechanisms available to the Eurozone as they are to the United States, the euro-area will struggle with asymmetric shocks and divergent cycles among many other difficulties. The Euro will not work while the core and periphery have opposite economic conditions with no possible adjustment mechanisms and will further fiscal problems in the periphery because the Euro is “a one-size-fits-all policy for fundamentally different economies”. Despite economic changes, “the fundamental problems of forcing disparate countries to live with a single monetary policy and a single rate” persist.

Analysis and Conclusion

As a whole, the Euro has been an unsuccessful monetary union for many reasons, most importantly because of the lack of an optimum currency area and the divide between core and periphery economies. Despite the trade and job creation and greater European integration, the euro was mainly a politically motivated rather than an economic decision. However, despite the mistake of this monetary union, the euro is irreversible and will survive because of Germany’s economic influence, risk-averse voters, and potential further ECB powers.

One potential solution to the divergent economic problem is for the outliers to leave. Leaving the Euro could be disastrous for both the Euro and those countries that leave and thus is not a viable option. If the struggling countries formed a new currency union separate from the core countries’ currency union, there would be greater economic harmonization and more similar business cycles since the periphery and core separately would be closer to creating optimum currency areas. This solution would mean that the separate central banks would be able to help all countries in its optimum currency area by setting one monetary policy. Since the core and periphery states are on opposite boom-and-bust cycles, the ECB is unable to set monetary policy without hurting one set of countries. However, the periphery countries will not want to leave the euro because they desire to be part of a strong currency. If the periphery countries had their own currency, it would be weak even though the monetary policy would be better suited to those states’ economic situations. Additionally, the unplanned change of currency could lead to a market panic or loss of investor confidence, which could spark bank runs leading into another financial crisis. Thus, the breakup of the Euro is not a viable future option.

The EU must do something to improve the Euro situation, though. The EU plans to “improve the economic governance framework” of the EMU by improving and reinforcing the EMU. By the end of June 2017, the EU will complete the financial union, enhance democratic accountability, and increase competitiveness and convergence of structures. By 2025, the EU plans to increase convergence through legal means and to have established a treasury for the EMU. There is no correct solution to the Euro problem, and it is clear that the monetary union was a mistake. The Euro will not break up because it would create instability and potential crises. The EU’s plan going forward will not solve all of the Euro’s problems nor will it make up for the economic mistake it made by introducing the Euro, but it might bring the Euro closer to what politicians tried to start. The mistake of introducing the Euro is now an important part of the global economy and cannot easily be broken up without economic backlash, so it is important that EU institutions attempt to fix what they can to increase harmony in the EMU.