June 2022 – Nick Corbishley

Is Russia About to Put the Monroe Doctrine to the Test, in Nicaragua?

In a move that has already raised heckles in Washington, Nicaragua’s government has renewed a decade-long military partnership with Russia.

From July 1, forces belonging to Russia as well as seven Latin American countries, including Venezuela, Bolivia, Mexico and Cuba, will be able to participate in what Nicaragua’s Sardinista government describes as “joint training exercises” and “military operations.” The main objectives of these exercises, according to Managua, is to provide humanitarian aid or combat terrorist groups and organized crime outfits.

The measure allows for the presence of up to 230 Russian soldiers in the country from July 1 to December 31, empowering them to patrol Nicaragua’s Pacific and Caribbean coasts alongside the Nicaraguan military. At the same time, Nicaraguan President Daniel Ortega has authorized the departure to Russia of 50 Nicaraguan soldiers to participate in joint instruction and training exercises.

“A Provocation”

According to a number of Western media outlets, including Spain’s El País and The National Interest, a Washington-based bimonthly international relations magazine, it is unclear how Nicaragua stands to benefit from renewing its military partnership with Russia at such a contentious time. Despite Washington’s escalating sanctions against Nicaragua, the US is still its biggest trading partner, providing 22% of Nicaragua’s imports and buying just under 50% of its exports in 2020. By contrast, China accounted for just 9% of all imports and 3% of exports, while Russia doesn’t even feature among Nicaragua’s top ten trading partners.

One thing that is clear is that the move will piss off Washington no end. The Biden Administration has already warned Nicaraguan President Daniel Ortega not to cooperate with Russia since its recent invasion of Ukraine.

Per The National Interest:

Brian Nichols, an official at the U.S. Department of State, described Ortega’s move as a “provocation” during the Summit of the Americas.
The United States’ relationship with Ortega has long been antagonistic. The Nicaraguan leader initially ascended to power in 1979 following the successful overthrow of longtime dictator Anastasio Somoza by the Soviet-aligned Sandinista National Liberation Front, ruling the country for much of the next decade. During that time, the United States supported right-wing rebel groups opposed to Ortega’s leadership, many of which were later tied to extensive drug smuggling and war crimes.

While US power over Latin America may have diminished over the last couple of decades, Washington has not fully abandoned the Monroe Doctrine, a foreign policy position formulated in 1823 by President James Monroe that essentially holds that any intervention in the political affairs of the Americas by foreign powers is a potentially hostile act against the US. As Noam Chomsky argues, the Monroe Doctrine has been deployed by Washington as a declaration of hegemony and a right of unilateral intervention over the Americas.

Propaganda Coup

For Russia the military cooperation agreement with Nicaragua has already served as a propaganda coup. Russian state television presenter Olga Skabeeva gave extensive coverage to Ortega’s order a couple of weeks ago, stating at one point (presumably in a purely personal capacity): “If US missile systems can almost reach Moscow, it is high time that Russia deployed something powerful closer to American cities.”

The Moscow-funded Sputnik news site published a report titled: “Nicaragua: Military Cooperation with Russia Responds to National Security Principles.” The Kremlin later tried to tone down its own messaging. Foreign Ministry spokeswoman Maria Zakharova described sending the military to the tropics of Central America as merely a “routine procedure.”

Roberto Cajina, a Nicaraguan security and defense analyst, told El País that it is quite normal for foreign military personnel to enter Nicaragua to take part in training and support exercises with the Nicaraguan army. The Ortega government has at times even extended an invitation to the US to participate. But what Cajina says is striking about Managua’s latest invitation to Russian forces is that it takes place at a time when Russia has lost “international support” over its invasion of Ukraine — meaning it has lost the support of NATO members and other US-aligned countries.

Latin America, as a whole, has struck a neutral stance on the Russia-Ukraine conflict. Only four out of 33 Latin American and Caribbean countries — Cuba, El Salvador, Bolivia and Nicaragua — abstained in the vote to condemn Russia’s invasion during the emergency meeting of the United Nations General Assembly. A similarly small number of governments have publicly endorsed the West’s economic sanctions against Russia, including Ecuador, Chile and Guatemala.

Most governments in Latin America have stayed firmly on the fence over the issue of imposing sanctions against Russia, including the region’s two heavyweight economies, Brazil and Mexico. But two key dignitaries from the region, Brazil’s former, and quite possibly future, President Luiz Inácio Lula da Silva and Pope Francis, have both heavily criticized NATO’s role in stoking the conflict in Ukraine.

Curdling Relations

The renewal of Russia’s military partnership with Nicaragua comes just weeks after Washington’s announcement, at the end of May, that it would send long-range missiles to Kiev. That act of escalation prompted Kremlin spokesman Dmitry Peskov to accuse the US of “intentionally adding fuel to the fire” in Ukraine. Russia’s Foreign Minister Sergei Lavrov warned the move risked dragging a “third party” into the conflict…

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“A Digital Road to Hell”: NYU School of Law Sounds Alarm on World Bank’s Digital Identity Programs

The World Bank and its partners claim that “investing in digital ID systems is paving the road to an equitable digital future.” But instead “they may well be paving a digital road to hell.”

Governments around the world are quickly but quietly designing, assembling and piloting digital identity systems, often with biometric components. They include the European Union, which itself comprises 27 member countries, the UK, Australia, Canada and dozens of countries in Africa, Asia and Latin America. The spread of these systems across the Global South is being spurred by a new development consensus that asserts that digital identification can foster inclusive and sustainable development and is a prerequisite for the realization of human rights.

As the World Bank noted in 2017, over 1.1 billion people in the world are unable to prove their identity and therefore lack access to vital services including healthcare, social protection, education and finance. Most live in Africa and Asia and more than a third of them are children. In an ostensible bid to address this problem, the World Bank launched the Identification for Development (ID4D) program in 2014 with “catalytic contributions” from the Bill & Melinda Gates Foundation as well as the governments of the UK, France, Norway and the Omidyar Network.

A Dangerous New Road

The program provides loans to help countries in the Global South “realize the transformational potential of digital identity,” and has been rolled out in dozens of countries, mainly in Africa but also in Asia and Latin America. The program is wrapped up in cosy buzz words such as “digital development” and “financial inclusion”, but it has led to the promotion of a dangerous new approach to digital identity systems. That’s the damning conclusion of a new 100-page study by the NYU School of Law’s Center for Human Rights and Global Justice (CHRGJ), titled Paving the Digital Road to Hell: A Primer on the Role of the World Bank and Global Networks in Promoting Digital ID:

Through the embrace of digital technologies, the World Bank and a broader global network of actors has been promoting a new paradigm for ID systems that prioritizes what we refer to as ‘economic identity.’ These systems focus on fueling digital transactions and transforming individuals into traceable data. They often ignore the ability of identification systems to recognize not only that an individual is unique, but that they have a legal status with associated rights.
Still, proponents have cloaked this new paradigm in the language of human rights and inclusion, arguing that such systems will help to achieve multiple Sustainable Development Goals. Like physical roads, national digital identification systems with biometric components (digital ID systems) are presented as the public infrastructure of the digital future…

The problem, notes the paper, is that this emerging infrastructure has “been linked to severe and large-scale human rights violations in a range of countries around the world, affecting social, civil, and political rights.” What’s more, the benefits remain “ill-defined and poorly documented”:

Those who stand to benefit the most may not be those “left behind,” but a small group of companies and security-minded governments. The World Bank and the network argue that investing in digital ID systems is paving the road to an equitable digital future. But, despite undoubted good intentions on the part of some, they may well be paving a digital road to hell.

Three Core Functions of Digital ID

The report identifies three core functions of digital identity: identification (“the process of establishing the identity of an individual”); authentication (“the process of asserting an identity previously established during identification”) and lastly, authorization (“the process of determining which actions may be performed or services accessed on the basis of asserted and authenticated identity”).

The report’s authors are well positioned to comment on digital identity programs having participated in global policy discussions around digital ID, including in public consultations and events with the World Bank and its ID4D Initiative as well as with other international organizations, governments, foundations, and private technology vendors. The project team members have jointly organized workshops with civil society organizations (CSOs) to discuss the impact of digital ID systems on human rights across the African continent. They have also taught on the subject in law school courses as well as partnered with national human rights organizations to research specific digital ID systems.

Digital identity programs have the potential to impact a cross-section of basic human rights including the right to food, the right to health, the right to privacy and data protection, the right to equal treatment and protection from discrimination, the right to dignity, the right to free expression and association, the right to education, the right to freedom of movement and the right to housing. Based on their research, the CHRGJ’s project team lists a litany of ways in which digital ID systems can infringe on basic human rights:

One thing is clear about digital ID systems: they can lead to serious human rights problems and are prone to implementation failure. Even those promoting the identification for development agenda acknowledge these significant risks. However, the gathering of evidence and monitoring of human rights impacts remains sorely lacking. Documenting these impacts has often fallen to activists, journalists, and researchers—including our own project.
In India, the significant impacts of Aadhaar on people living in poverty only became known through the efforts of scholars, journalists, and civil society organizations. This patchwork of evidence has shown that digital ID systems can lead to a wide range of urgent human rights issues, including but not limited to: the violation of the right to nationality; limiting access to health care, food, and social security; a multitude of concerns about privacy and data protection, surveillance, and cybersecurity; and fundamental changes to models of democracy, participation, and citizen-state relationships. The human rights consequences can be severe and irreversible. In India, for instance, exclusion from the Aadhaar system has resulted in numerous starvation deaths and countless other examples of deprivation, exclusion, and harm.
Some of these negative impacts are not necessarily linked to the digital aspects of such systems, but instead are manifestations of underlying dynamics of social exclusion, economic inequality, and marginalization. Any form of identification system has the potential to be used in beneficial and harmful ways. Digitalized identification systems may alter or augment these effects and can also reverse hard-won progress on human rights.
Still other negative impacts appear to result directly from the introduction of new digital technologies and new forms of ID system design and implementation. This includes the use of digitized biometrics, as well as the concentration or centralization of data to be used in platforms for public and private use. At the most basic level, for instance, the widespread use of biometrics creates new dependencies on Information and Communications Technology (ICT) and electrical infrastructures, which may often be lacking.
Many new or upgraded digital systems are also designed in ways that encourage function creep, as they are intended to be used for multiple purposes that are unforeseen when the system is first designed. This means that harm can quickly spread and intensify, as digital ID systems become insurmountable barriers to a wide range of services and rights.

We saw a perfect example of this in action a couple of weeks ago when local authorities in Central China used the country’s COVID-19 health app to prevent account holders from seeking access to funds that had been frozen by their banks. According to Asia Times, more than 400,000 depositors of six rural banks in Henan Province have been unable to withdraw their money since April. Yet when some of those depositors tried to travel to the banks’ headquarters on Monday 12 to take part in protests, they suddenly found that the health code on their app had turned red, making them ineligible for travel.

As I warn in my book, Scanned: Why Vaccine Passports and Digital Identity Will Mean the End of Privacy and Personal Freedom, once vaccine passport and digital identity systems are established, mission creep is all but guaranteed…

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A Political Earthquake Just Took Place in Latin America

Colombia’s presidential elections this past weekend were historical on a number of levels, not least because they portend a shift in relations with its long-term hegemon, the US.

Gustavo Petro made history by becoming the country’s first left-wing president since Colombia won independence in 1819. One of the few people who came close to achieving the feat, Jorge Eliécer Gaitán Ayala, was assassinated during his second presidential campaign, way back in 1948. His murder, during the conference that gave birth to the Organization of American States (OAS), sparked the beginning of La Violencia, a Colombian civil war that lasted until the mid-fifties and killed an estimated 300,000 Colombians.

Petro’s running mate, the veteran environmentalist Francia Marquez, also made history by becoming the country’s first ever ever Afro-Colombian vice president. The electoral coalition led by Petro and Marquez, the so-called “Historic Pact for Colombia,” obtained almost three million more votes than in the first round and 700,000 more than Petro’s opponent, the right-wing, business-friendly populist Rodolfo Hernández.

For the first time ever, a majority of Colombian voters have voted against the status quo.

Big Ambitions, Limited Room for Maneuver

Preto and Márques have big ambitions for Colombia. Their manifesto includes pledges to:

Demilitarize public life in Colombia, by cementing once and for all the prevalence of civil authorities over the military. Although a peace agreement was signed between Colombia’s Military Forces and the insurgent’s group, the Revolutionary Armed Forces of Colombia (People’s Army or FARC) in 2016, bringing the 50-year armed civil war to an end, violence continues in the country relentlessly. As such, peace is the number-one priority.
Phase out oil (Colombia’s #1 export) and coal while taking steps to protect Colombia’s invaluable ecosystems and rich biodiversity.
Tackle agrarian reform, one of the main goals being to reduce the extreme inequality in ownership and use of land, guaranteeing the right to land for rural families (with women as a priority).
Promote gender equality.
Provide broader public access to healthcare.
Reform the tax system, by introducing a more progressive system of income and wealth taxation.

For the Historical Pact for Colombia, the current tax system has a “clear bias in favor of excessively rich people.” To change that, Petro proposes a tax reform that, among other aspects, will focus on financial dividends: it will be mandatory to declare them and those receiving them will have to pay taxes on them.

In statements during the campaign, Petro said the lion’s share of the tax burden will be borne by the “4,000 largest fortunes in Colombia,” adding that his government will not target productive companies but rather unproductive assets, including dividends and transfers abroad. Transfers abroad make for an interesting target given the propensity for wealthy Latin American businesses and families to move their money overseas, particularly to Miami, whenever a government of even mild left-wing persuasion comes into power.

However, Petro will have limited room for maneuver, firstly because he will only have one four-year term in which to institute all of his government’s proposed structural changes. Also, like Peru’s President Pedro Castillo, he does not have a full majority in either of the two legislative chambers, meaning he will depend on the support of one of the dozen or so opposition parties in Congress.

In Peru, Castillo has failed miserably to overcome rabid right-wing opposition to his government, which appears to be in the process of crashing and burning. But there is one important difference between the two leaders: whereas Castillo was a virtual political nobody before riding to power on a wave of popular anger at establishment parties, Petro is a political animal who has been in the game most of his adult life. He is probably not as radical as some might hope; otherwise he probably wouldn’t have made it this far. He also presumably knows that if he wants to make big changes, he will have to choose his moment — and his political allies — carefully.

But he will also face severe economic obstacles and constraints along the way. As just mentioned, it won’t take much for large investors, both foreign and domestic, to begin yanking their money out of the country. That in itself can be enough to trigger a financial crisis. Like most countries in the region, Colombia’s public debt has surged during the pandemic while inflation is at a 22-year high. Business leaders and the market are eagerly awaiting announcements about Petro’s governing team, especially for key positions such as the finance ministry. Volatility is expected in the peso and bonds when they open trading on Tuesday after a holiday weekend.

The End of Uribismo?

The elections were historic for another reason: they appear to have dealt a final death blow to “Uribismo” — the political force that has dominated Colombia for the past 20 years. Since 2002 all governments in Colombia have been led, either directly or indirectly, by Álvaro Uribe Vélez, a scandal-tarnished right-wing politician who was credited with bringing some semblance of order and stability to Colombia after decades of fratricidal warfare. This he did by mobilizing the army and ruthless paramilitary organizations against leftist guerrilla groups as well as innocent civilians, all made possible by a $2.8 billion US “aid” package called “Plan Colombia.”

Uribe himself is now facing trial for alleged procedural fraud and witness tampering. The former head of state is under investigation for having bribed several former paramilitaries so as not to incriminate him in the extrajudicial executions known as “false positives” that occurred during his government (2002-2010). In order to boost statistics in the civil war with leftist rebel groups, the army murdered thousands of innocent peasants and falsely declared them combat kills.

If, as publications both in Colombia and overseas are now suggesting, Uribismo is indeed on its last legs, it is probably not the best of news for Washington…

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Mexico to Take Legal Action Against US Construction Materials Giant, Vulcan, for Environmental Damage

The Mexican government’s moves against Vulcan has drawn accusations of “anti-business attitude[s] and rhetoric” from both sides of the US Senate.

Mexico’s President Andrés Manuel López Obrador (otherwise known as AMLO) is causing yet more hand-wringing and consternation in the US business and lobbying community. On Tuesday he announced plans to file an international lawsuit against Alabama-based Vulcan Materials and its subsidiary in Mexico, Sac-Tun (formerly known as Calica), for the grave environmental damage its extraction of limestone has caused to the water quality and subsoil conditions.

Aerial photos give some idea of the scale of the damage. Vulcan and Sac-Tun have created a vast wasteland in the middle of verdant rainforest less than a kilometer from the Caribbean coastline. Even the business-friendly Mexican daily El Economista called it a “sinkhole of industrial proportions.”

Government of Mexico confirms closure of Sac-Tun excavation site outside Playa del Carmen - Riviera Maya News

“Imagine: they took away material to build highways in the United States, creating an ecological catastrophe and we are going to present an international complaint,” stated AMLO in his press conference from the National Palace, adding that the environmental damage has already affected the region’s famous cenotes and underground rivers. AMLO said he will take the case to national and international courts.

Vulcan is the largest construction materials producer in the United States. It has operations overseas, including underwater quarrying operations at its Sac-Tun site in Quintana Roo. Once excavated, the limestone is shipped to the US from a purpose-built port. Headquartered in Birmingham, Alabama, Vulcan Materials has been operating on Mexico’s Mayan Riviera since 1986, when it bought more than 4,000 hectares of coastal rainforest just 10 kilometers south of Playa del Carmen.

The company received mining licenses from a succession of Mexican governments. But things began to change in 2018, when Mexican authorities refused to allow quarrying at some of the sites due to the environmental damage being caused. In response, the company filed for an arbitration panel under the old North American Free Trade Agreement (NAFTA), in which it is seeking damages of around $1.5 billion from the Mexican government.

“No More Impunity”

AMLO has emphasized his government will not issue permits that harm the Mexican population and its resources. Therefore, if Vulcan refuses to withdraw its lawsuit, the government will seek the support of influential multilateral institutions such as the United Nations. “Caring for the environment comes before financial gains,” AMLO said in February:

“If they say no and want to continue exploiting [resources] without authorization or continue suing the country for taking care of its environment, we are going to take our case to the UN. This is not an idle threat or a warning, we are simply stating that impunity is no longer allowed.”

As I reported in February, this is part of a broader trend of growing resource nationalism in Latin America that has global mining companies and their investors extremely concerned, especially as interest in the region’s unparalleled lithium deposits rises. Governments of lithium-rich countries in the region, including Mexico, want to make sure they (and hopefully by extension their voters) benefit from the lithium rush.

To that end, the AMLO government passed a new mining bill in April whose main goal is to ensure that lithium exploration, exploitation and use will be exclusively reserved for the Mexican state under a federal authority.

“We are going to protect Mexico’s lithium, the lithium of our generation and future generations, our children and grandchildren,” AMLO said at the time.

As many of AMLO’s opponents were desperate to point out, all of Mexico’s lithium stores already belong to the Mexican State — at least in theory. Article 27 of Mexico’s constitution holds that “the direct ownership of all natural resources of the continental shelf and the submarine shelf of the islands” is vested in the nation. But in practice, just about every government since NAFTA has awarded exceptionally generous concessions to foreign mining companies that have left behind them a vast trail of environmental devastation, human rights violations (including union busting) and corrupt practices.

Mexico’s new mining law has sparked fears that other countries in the region may do something similar. As the UK-based global risk and strategic consulting firm Verisk Maplecroft noted in August 2021, more and more countries are taking greater control of the revenues generated by the minerals and hydrocarbons produced within their borders:

Mexico stands out as seeing the largest increase in risk out of the 198 countries assessed by the RNI, driven by AMLO’s nationalist agenda that wields community and environmental arguments as justification for greater state involvement in the extractive sector. Worryingly for miners and energy firms, its performance is indicative of a wider regional trend. South America’s three largest economies, Brazil, Argentina and Colombia are also experiencing substantial negative shifts in the index.

Since coming to power in late 2018 AMLO’s government has rejected a permit for Odyssey Marine Exploration’s Don Diego phosphates seabed mining project in Baja California Sur due to concerns about the local wildlife, which has also led to an arbitration claim. It has said it will block Invecture Group’s Los Cardones open-pit gold project due to its inherent environmental risks. In fact, the AMLO Government has imposed a de facto ban on open-pit mining.

Mexican Shakedown

In February this year, the AMLO government unveiled plans to negotiate a resolution to its standoff with Vulcan. In exchange for Vulcan’s withdrawing of the lawsuit, the company would receive material resources and help from the government to convert the limestone quarry into a natural park or tourism attraction. It was a deal that Vulcan could hardly accept, given it has zero expertise or interest in tourism. But the alternative was to lose all rights over the land.

AMLO dispatched Mexico’s Ambassador to the US, Esteban Moctezuma, to Birmingham, Alabama, to try to twist the company’s arm. The message was simple: the mine’s activities must be terminated as they are damaging the region’s ecosystem. At the same time the AMLO government insisted the concession was not being revoked; it just had to be used for other, less environmentally harmful purposes.

Granted, mass tourism is hardly good for the environment but it is better than excavating for limestone meters under the water table. Also, as luck would have it, a new tourism development on the site would fit perfectly with AMLO’s signature infrastructure project, the Mayan Train, a 948-mile intercity railway that will traverse the Yucatán Peninsula, which itself has come under criticism for the environmental destruction it is causing…

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After Decades of God-like Omnipotence, Central Bankers Are Finally Falling Back Down to Earth

For the first time in a very long time, central bankers are coming under friendly fire as they lose control over some of the economic forces they themselves have helped to generate.

The UK economy, even by today’s general standards, is in a world of pain. This is due to a slew of reasons, from the fallout of unfinished Brexit to the ongoing impact of pandemic-induced lockdowns to the war in Ukraine and the West’s backfiring sanctions against Russia. The latest data suggest that UK growth will turn negative this quarter while inflation, already at a 40-year high of 9%, is expected to break into double figures some time soon. The high street is dying a long, slow death while manufacturing is still 2.2% smaller than it was pre-pandemic.

Bank of England “Wrong Again”

The Bank of England has warned of a looming high-inflation recession, otherwise known as “stagflation,” which threatens to push millions of families deeper into poverty and tip many cash-starved businesses into bankruptcy. The bank’s Governor Andrew Bailey recently warned of a “very real income shock” due to soaring energy prices and “apocalyptic” food prices. As the desperation grows, people are understandably looking for someone to blame. Some are pointing their finger at the Bank of England itself. In an article on Monday, the Daily Telegraph wondered how the BoE could have got it “wrong, again”, on Britain’s slide towards recession:

The bank had thought the economy would still be growing, albeit weakly. In its downgraded forecasts last month, officials predicted the UK would eke out growth of 0.1% this quarter, with a contraction only taking hold at the end of this year after October’s expected 40% rise in the household energy price cap.
Instead, analysts now think GDP will fall this quarter by between 0.5% and 0.7%. It marks a significant shift in expectations over a very short space of time.

This is not the first time the Telegraph has shone a light of the BoE’s recent failings. On May 28, Tim Wallace lambasted Andrew Bailey and the BoE for failing to heed warnings over runaway inflation. Some of those warnings had been raised internally within the bank but went unheeded:

By February 2021, the Bank’s forecasts showed the tiniest bit of inflation and predicted it would stand at 2% today.
Andy Haldane. then the Bank’s chief economist, flagged that risk prices might not behave, calling inflation “a tiger… stirred by the extraordinary events and policy actions of the past 12 months.”…
In May 2021, Haldane voted to end QE early. Looking back, he says risks to inflation were “balanced fairly and squarely to the upside,” with demand unleashed into a world of limited supply. “The laws of economic gravity had not been suspended.”
But Haldane was outvoted. “It would have been nice if I could have convinced [the] eight others around the table.”

Haldane’s was a lone voice that was drowned out by the prevailing consensus that inflation was only transitory. Once Haldane left the BoE to become chief executive of the Royal Society of Arts in June 2021, only two other BoE members ever voted to curtail QE, notes The Telegraph. A month later, the House of Lords’ Economic Affairs Committee, whose members include former BoE governor Lord Melvin King, was calling QE “a dangerous addiction” and asking the Bank to explain “why it believes higher inflation will be a short-term phenomenon.”

The Bank of England is not the only central bank being brought to task for losing control over the economy. In an article published last week in Project Syndicate, the economists Willem H Buiter and Anne C. Sibert warn that major central banks “have lost the plot when it comes to fulfilling their price-stability mandates.” Both the Federal Reserve and the Bank of England have done too little, too late to bring inflation under control, the authors argue.

“Be Happy” for Inflation

It’s worth bearing in mind that central banks have been trying their damnedest since the Global Financial Crisis to create enough inflation in order to gradually inflate away the debt, but perhaps not on the scale we are seeing today. A perfect reminder of this now somewhat inconvenient fact is an article by Reuters’ chief correspondent Balazs Koranyi from October 2021, which insisted that the return of inflation is a victory, not a defeat, for central banks.

Yes, inflation is back, and you should probably be relieved if not outright happy.
That is the verdict of the world’s top central banks, who hope they have hit the sweetspot where healthy economies see prices gently rising – but not spiralling out of control.
Backed by vast government spending, central bankers unleashed unprecedented monetary firepower in recent years to get this result. Indeed, anything less would suggest the biggest experiment in central banking in the modern era had failed.
Only Japan, which has been trying and failing to heat up prices since the 1990s, remains in the inflation doldrums.
For the other advanced economies, a rise in price pressures puts the elusive goal of unwinding ultra-easy policy within sight and at last raises the prospect that central banks – thrust into prominence during the global financial crisis – could finally step back.
The current inflation rise is not without risk, of course, but comparisons with 1970s style stagflation – a period of high inflation and unemployment combined with little to no growth – appear unfounded.

Of course, back then inflation was “just” 4.2% in the UK, 6.2% in the US and 4.1% in the EU (compared to 9%, 8.5% and 8.1% respectively in May). Now, fears are rising that central banks will not be able to tame the inflationary forces they have partly unleashed, at least not without causing huge economic pain, dislocation and destruction in the process…

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Spain Faces Energy Blowback, As Its Largest Natural Gas Provider, Algeria, Breaks Commercial Ties

“Seldom in the history of Spanish diplomacy… has a foreign policy initiative had such disastrous results,” as Spain loses its grip on diplomatic relations with Algeria at the worst possible moment.

The quote above, from the Spanish financial daily El Confidencial, pertains to Spanish premier Pedro Sanchez’s unilateral decision, in late March, to endorse Morocco’s plan for “limited” sovereignty over Western Sahara, in the process putting an end to 47 years of Spanish neutrality on the issue while also poisoning relations with Spain’s biggest provider of natural gas, Algeria. On Wednesday, after Sánchez ratified the new policy in congress, Algeria announced it was severing its commercial ties with Spain.

It’s a decision that will hurt both economies. In 2020, the last year with full data available, when business activity was sledgehammered by the pandemic-induced lockdowns and travel restrictions, Algeria exported just over €2.5 billion of goods and services to Spain. Spain, for its part, exported just under €2 billion to Algeria.

More importantly, the two countries’ bilateral trade includes a very large amount of natural gas, a commodity that right now is extremely scarce due to the fallout from the ongoing war in Ukraine and the US and EU’s ratcheting sanctions on Russia, the world’s second largest producer of natural gas. Last year, Algeria provided 41% of all the natural gas consumed in Spain.

Big Blowback

When, in March, Pedro Sánchez’s government called an abrupt end to Spain’s 47-year position of neutrality over the disputed territory of its former colony, Western Sahara, by publicly recognizing Rabat’s “autonomy” plan for the region, diplomatic and commercial blowback was all but inevitable. Morocco and Algeria are direct rivals in the rule of Western Sahara, 80% of which is controlled by Morocco. Algeria is the main supporter of the Polisario Front independence movement, which controls the remaining territory.

As I warned at the time, Madrid’s diplomatic u-turn risked torpedoing Spain’s commercial relations with its biggest energy provider, just as Europe faces its biggest energy crisis in at least half a century. Since then Algeria has gradually intensified its retaliation. First, it recalled its ambassador to Spain. Then it announced it would refuse the return of African migrants intercepted at sea on their way to the Spanish coast. It has said it will increase natural gas prices for Spain while maintaining prices for everyone else. It has also struck new energy deals with Italy and China.

But this week, the blowback went ballistic. On Wednesday (June 7), Algiers announced it was pulling back from a 2002 cooperation treaty with Spain that established the legal framework for bilateral relations between the two countries. The treaty is also meant to control immigration and human trafficking between the two nations. The reason cited for Algiers’ drastic move was Madrid’s “unjustifiable” reversal of its long-standing policy of neutrality on the Western Sahara conflict.

“The current Spanish government has given its full support to the illegal and illegitimate form of internal autonomy advocated by the occupying power, and has worked to promote a colonial fait accompli using spurious arguments,” the Algerian president’s office said, as quoted by Spanish news agency EFE.

At the stroke of midnight on Wednesday Algeria’s banking association (ABEF) announced it will block all bank direct debits for foreign trade operations to and from Spain, a move that will affect all economic sectors. As Reuters reports, Spanish exports to Algeria include iron and steel, machinery, paper products, fuel and plastics, while service exports include construction, banking and insurance. Algiers already banned imports of live Spanish cattle in April, a trade that was worth €55 million alone in 2021.

Sánchez has already set up a “crisis cabinet” to oversee Algerian relations and has even put Josep Borrell, a former Spanish socialist politician who is currently serving as the EU’s foreign minister, on standby, just in case the EU’s assistance is needed. Spain’s foreign minister José Manuel Albares said Thursday that the Sánchez government is analyzing the potential implications and impact, at both the national and European level, of Algeria’s severance of banking ties.

The EU Foreign Affairs Spokeswoman man Nabila Massrali said Thursday that the suspension of the friendship treaty with Spain is “extremely worrying” and called on Algeria to “reconsider” its decision. She also described Algeria as an “important partner of the European Union” in the Mediterranean and “key to stability in the region”.

As the Spanish journalist Ignacio Cembrero said in an interview on Thursday, “These measures that Algeria took yesterday (…) in my view contravene the association agreement that is still in force between the EU and Algeria.”

The biggest concern, of course, is that Algiers ends up cutting off natural gas supplies to Spain…

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Recent Payment Outage in Germany Underscores One of the Dangers of a Cashless Economy: System Fragility

As recent payment outages in Germany (and elsewhere) have shown, even strong proponents of a cashless economy have an interest in safeguarding the future of cash, if only for the sake of financial stability.

A few days ago, many shops in Germany had “CASH ONLY” signs displayed on their windows or at the entrance to their premises. Some establishments allowed people without cash to pay by card, but only if they provided a signature. It was as if parts of Germany’s payment system had just travelled through a wormhole back to the 1990’s, albeit with euros rather than the Deutsche Mark as the legal currency.

According to initial reports, the cause of the problems was a software glitch affecting all H5000 payment card terminals, which are widely used by German retailers including some of the largest supermarket chains. Starting on May 24 normal card payments became all but impossible for those retailers. The problems lasted for a week or so, prompting some larger retailers to replace all of their card terminals. It’s an investment that many smaller, struggling retailers can ill afford to make right now.

There are (or at least were) around 100,000 H5000 units in Germany, according to some estimates. The devices were manufactured by the US financial services provider Verifone specifically for the German market, but they are operated by eleven network operators, including Payone GmbH and Concardis GmbH.

On May 27, one of those companies, Payone, reported it was facing issues with the H5000 card terminal and that the issues were occurring throughout the country: “Like other network operators, we are currently experiencing considerable restrictions in the processing of transactions with card payment terminals of the type H5000 from the manufacturer Verifone throughout Germany.”

According to Handelsblatt, financial supervisors from Bafin and Bundesbank are already on the case. The German banking industry, which represents the interests of banks and savings banks, also announced that it would “analyze and process the disruption in depth in collaboration with the various parties involved and the supervisory authorities”. However, it also conceded that it will still take “a while” before the last H5000 terminal is replaced or updated.

The problem first came to light on May 24 when the Konsum retail chain in Dresden published the following message on its Facebook page: “Attention, an important notice for you! Due to a Germany-wide malfunction, card payments are currently not possible in our stores.”

Similar problems began to be reported by other retail chains such as Netto, Edeka, Aldi Nord, Rossman and DM as well as smaller, independent retailers and petrol stations. Initial reports suggested that H5000 card machines across Germany were experiencing a software malfunction that stopped them processing payments.

“As things stand, it will be necessary to install new software updates on all H5000 terminals, which the manufacturer will provide as soon as possible,” Payone said.

But some IT experts have pointed to a different potential cause: an expiring product certificate. The problem, it seems, is that the Verifone H5000 is a rather old albeit robust model whose so-called “End of Life” was officially announced by Verifone in 2019. The company ended its production of the terminal a year later. Although it offered limited product support until 2023, one of the embedded certificates seem to have expired unnoticed on Tuesday May 24 causing the terminals to stop working. That is the hypothesis of Jan Wildeboer, a self-described “EMEA Evengelist” at IBM-owned Red Hat who began informing the English-speaking public about the issue in a rapidly expanding Twitter thread.

Wuildeboer is a Linux expert and the H5000 was the first card terminal in Germany to run on open source software. On May 30, the Bavarian newspaper Süddeutsche Zeitung reported that a “curious detail” within the network operators’ support instructions seemed to support Wildeboer’s hypothesis:

Usually, any tech support will immediately ask the caller, “Have you tried rebooting?” In this case, the network operators advise retailers against rebooting the terminals themselves. That fits with Wildeboer’s certification thesis. Because when you reboot, the devices check their integrity, i.e. whether they may have been manipulated by hackers. If they then lack a necessary certificate, they switch to a kind of safe mode from which only an on-the-spot technician can release them.

Who’s to Blame?

Trying to apportion blame for the payment terminal outages is not going to be easy. As the article in Süddeutsche Zeitung notes, Verifone released a software update in Verifone despite having previously stated there would be no more updates after April 2021. This suggests the developers may have realized there was a potential problem with the expiring certificate. But the update seems to have reached only a few retailers, who apparently experienced no problems with their terminals. For everyone else, the devices suddenly became unusable on May 24…

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Blame Game Begins As Chaos Reigns At Airports in UK (and Other Parts of Europe)

Neither airports nor airlines in the UK have restored enough capacity into their operations to handle the predictable surge in passenger numbers as the skies reopen.

Flight TOM2106, operated by the UK’s largest tour operator, TUI UK, was scheduled to leave Manchester airport for the Spanish island of Tenerife in the early evening of May 30. The passengers boarded the plane but the plane never left the ground. Due to staff shortages, the ground crew were unable to load the luggage, resulting in the flight being axed.

Footage filmed by one of the passengers shows the pilot telling exasperated customers, three hours after they had boarded the flight: “Swissport (the outsourcing firm that runs cargo handling services for TUI) have abandoned us.” According to passengers, there was not even any staff to let them off the plane and the pilot ended up having to call the police to help them disembark.

TUI is a subsidiary of Europe’s largest tour operator, TUI, which has received multiple bailouts from the German government as well as €4.7 billion of loans to help weather the virus crisis. This week it cancelled hundreds of flights to or from UK airports, scuppering the travel or holiday plans of tens of thousands of Brits.

Who Needs Bags for Holidays Anyway?

This is the busiest weekend of the year so far for UK airports and the chaos is expected to worsen in the coming days. Things have gotten so bad that passengers are now being urged to take just one carry-on bag to help airlines cut down the time spent checking people in.

“It is one less thing to worry about,” said Andy Prendergast, national secretary of GMB union. “If people can check in online and do not take bags, that limits the disruption. It’s not a magic bullet but it does reduce the chance of there being problems.”

Following the UK government’s removal of all travel restrictions in March many Brits are looking to venture abroad for the first time since the COVID-19 pandemic began. And most are choosing to fly. The UK’s largest airport, Heathrow, has estimated that demand for flights over the summer holidays could reach as high as 85% of pre-pandemic levels. Spain, one of the UK’s most popular destinations, received 6.1 million foreign tourists in April, 10 times more than the same month of 2021 and just a million fewer than in April 2019.

In other words, mass tourism is back with a vengeance, though it is not clear for how long. The problem is that neither airports nor airlines have built enough capacity into their operations to handle the wholly predictable surge in passenger numbers. The result has been chaos at UK airports, with hundreds of flights cancelled and long delays for those lucky enough to fly. The chaos is expected to get worse over this long Jubilee weekend, with as many as two million people expected to (or at least hoping to) fly.

German-based TUI apologized for the disruption, blaming the cancellation of what it described as a “small number” of flights — nearly 200 — from Manchester Airport between now and June 30 on “ongoing challenges.” Those challenges include an acute lack of personnel. Like easyjet and British Airways, which have also cancelled hundreds of flights in recent days, TUI is massively understaffed.

The workers’ union Unite estimated in March 2021 that around 45,000 jobs in the UK’s aviation industry were shed during the first year of Covid-19 restrictions. To compound matters, the UK government began phasing out its furlough support before the travel recovery took hold, leaving airlines and airport groups with the stark choice of resuming paying the full salaries of the employees or just laying them off. Many of them opted for the latter.

Since the skies have reopened airlines have struggled to recruit enough new workers to fill the gaps. Drawn out employee security checks, which can take as long as three months, are not helping matters. Both the airlines and airports have turned to outsourcing firms to tackle the shortages, with predictably dire results.

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Europe Braces for Stagflation After EU Bans, At Least Officially, Two-Thirds of Russian Oil

The EU’s latest hare-brained gambit is likely to put further downward pressure on economic activity while exerting further upward pressure on inflation, making stagflation all but inevitable.

Official inflation reached new record highs in the Euro Area in the month of May, clocking in at 8.1%, well above the consensus estimate of 7.7%. In six of the 19 Euro Area countries the “harmonized” (calculated the same way for all countries) inflation rate was in double digits: Estonia (20.1%), Lithuania (18.5%), Latvia (16.4%), Slovakia (11.8%), Greece (10.7%) and Netherlands (10.2%). The three Baltic States, Estonia, Latvia and Lithuania, were the first EU Member States to stop all imports of Russian oil and gas, which they did in early April.

These record-high rates of inflation were all registered before the EU decided (in Yves’ words) “to shoot itself in the foot” by banning shipments of oil from Russia, its biggest oil provider. As such, inflation is likely to rise even higher in the coming months, especially given the central role energy prices have played in driving inflation in Europe. In the last month alone energy prices in the currency bloc have risen by 39%.

At the same time, the European economy is de facto stagnating, according to European Central Bank executive board member Fabio Panetta told Italian daily La Stampa at the beginning of May:

Growth in the first quarter was 0.2%, and would have essentially been zero without what may have partly been one-off spikes in growth in certain countries. The major economies are suffering – GDP growth has slowed in Spain, halted in France and contracted in Italy. In Germany growth momentum is low and has been weakening since the end of February, which is the point when everything changed.

Making Matters Worse

Now, Europe’s political leaders have decided to make matters even worse by further exacerbating its largely self-inflicted energy crisis. As part of its sixth sanctions package against Russia, the EU’s 27 Member States have agreed to ban all seaborne Russian oil, with a temporary exemption for pipeline oil. As a result, roughly two thirds of the oil EU Member States buy from Russia will no longer be available — at least not officially. The Council of the EU said that by the end of the year 90% of Russian oil will be banned.

As Yves said in her piece yesterday, “if you believe the EU really, truly, will have cut its imports of Russian oil by 90% in a few months,” she has a bridge she’d like to sell you. She also pointed out that an “EU ban on oil shipped by tanker still allows for Russian oil to come to Europe via out and out laundering through cut-outs and mixing with non-Russian source product, albeit at a higher cost.” In other words, there is whole lot a lot of puff, bluff and bluster to the EU’s latest escalation.

But that is not to say it won’t cause yet more economic hurt and hardship to the citizens of EU member states that depend heavily on Russian oil to meet their basic energy needs. Before Monday night Russia supplied around a quarter of the EU’s oil. Given tight — and thanks to the EU’s latest hare-brained gambit, tightening — global supplies of oil, Europe will probably struggle to replenish their supplies without resorting to laundering Russian oil through cut outs.

Even then, prices are likely to rise much higher in the coming months. And that is going to put further downward pressure on economic activity while exerting further upward pressure on inflation, which is already at or around decades-highs in many jurisdictions, including the EU.

The impact on Germany, which depends on Russia to meet around 12% of its oil needs, is likely to be pronounced. Yet its government is one of the most vocal supporters of the partial oil embargo. Judging by recent comments from members of the Scholz government, it is perfectly aware of the economic harm the embargo is likely to exact on consumers not only in German but across Europe. But as the FT reported last week, it believes it is a price worth paying:

Europe was prepared to bear the strain of cutting its use of Russian crude, said Robert Habeck, Germany’s economy minister and deputy chancellor. But he said the move should be properly prepared and should consider the high dependency of some EU countries on Russian supplies.
“We will be harming ourselves, that much is clear,” he said ahead of an emergency meeting of EU energy ministers that is debating an embargo on Russian oil.
“It’s inconceivable that sanctions won’t have consequences for our own economy and for prices in our countries,” he said. “We as Europeans are prepared to bear [the economic strain] in order to help Ukraine. But there’s no way this won’t come at a cost to us.”

The Worst of All Worlds

That cost is likely to be stagflation, which is bad news for all EU citizens, particularly those on the lower rungs of the economic ladder…

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