Ah, ze French

Determined to avoid yet another G20 yawn-fest, the French are now threatening a walkout. Their finance minister has indicated that she will not sign the final communiqué should their demands for "deliverables" not be met (re: a global financial regulator, conceived and implemented by the end of the week).

Spicy stuff. I'm not familiar enough with international diplomacy to answer this with confidence, but is France operating on such a different plane that it can threaten not to sign the G20 document, sign the document four days later, and suffer no significant reprecussions? Because if not, it's not clear to me what this publicity stunt will achieve. If the leaders summit was going to agree to set up a global regulator, the G20 finance deputies and their sherpas would have already have laid the groundwork for one. The leaked draft communiqué shows no signs of any truly "global" regulator, only a more integrated collection of national ones.

So if the French aren't likely to get what they want by Friday, what do they stand to gain?

Bad News From The CEE Region...

I first reported on the grim news from Central and Eastern Europe in January, then again last week on the troubling similarities between what's happening now and the conditions that led to the Asian crisis in 1997-8. Since then, the bad news has been piling up fast and thick.

S&P, a credit ratings agency, has just downgraded the Ukraine by two levels to CCC+ (a category it shares with Pakistan). The country owes some $64 billion in debt this year, and as you might have guessed, the credit markets aren't going to be particularly forgiving. This is not just a problem for those working in a Ukrainian (or Polish, or Latvian, or Hungarian, or Bulgarian...) economy that's about to get hit by a twin banking and currency crisis: as Ken Rogoff points out in this NYT article, there is the problem of contagion:

“International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”

Actually, it's less the New York municipal bonds and more the Austrian banking system, which has a collective exposure to the region equivalent to some 70% of GDP. Belgian and Swedish banks are also heavily exposed to the danger of a spike in the number of nonperforming loans.

Furthermore, the expected economic turmoil has been accompanied by political unrest that was already building due to a spate of political corruption scandals. The resignation of the Latvian government last Friday is just the most obvious example of these colliding factors, making Latvia the second government to collapse as a result of the crisis, after Iceland (or is it the third?).

It's important not to overgeneralize - there are plenty of countries in the CEE and not all of them are facing the same challenges. Moreover, those countries within the EU have access to a different support system than those on the outside. As one Austrian banker pointed out in this FT article:

“What’s been lost in this crisis very often has been the ability of people to differentiate.”

But that's exactly the problem with financial contagion - people generalize, leap to conclusions, and make rash decisions. For example, one consequence of this phenomenon is that, rightly or wrongly, the citizens of Central and Eastern Europe appear to be growing increasingly skeptical of the value of the EU free market integration project. It would be too rash to predict a complete halt to the process, or even a splitting of the EU, but the crisis certainly isn't helping.

Nor, for that matter, is the political leadership of Western Europe. The Czechs have rightly taken Sarkozy to task for his suggestion that French car manufacturers pack up their things and return home. Meanwhile, in the UK - home to the ridiculous obsession about Polish plumbers stealing babies or whatever - we've seen renewed political pressure on Gordon Brown to follow through on his promise of British jobs for British workers.

So it doesn't look like Euromageddon just yet, but Europhiles are going to have work a lot harder over the next short while if they're going to keep the project going. If only there were some encouraging news to hang on to....

(Unless otherwise stated, stats used in this post originate from RGE Monitor)

Vladimir Putin wanted to hang Saakashvili by the b*lls

The Times of London has published the leaked details of a conversation between French President Nicolas Sarkozy and Russian Prime Minister Vladimir Putin in Moscow on August 12th. Sarkozy had flown to Moscow to broker a ceasefire between Russia and Georgia, and Putin made his ultimate goal clear. The following is an excerpt from the Times article:

Mr Sarkozy was aware from intelligence reports that the Russian army was aiming to overthrow Mr Saakashvili and install a puppet government. He told Mr Putin that the world would not accept this, according to Mr Levitte, Mr Sarkozy's foreign policy chief, who was in the Kremlin for the talks.

"I am going to hang Saakashvili by the balls," Mr Putin replied.

Mr Sarkozy responded: "Hang him?"

"Why not? The Americans hanged Saddam Hussein," said Mr Putin.

Mr Sarkozy replied, using the familiar "tu": "Yes but do you want to end up like (President) Bush?" Mr Putin was briefly lost for words, then replied: "Ah, you have scored a point there."

Wow. It is rare that the private conversations of heads of state are leaked to the public, and really suprising that the French would do so just days before Sarkozy chairs an EU-Russian summit in Nice (ironically, the scene of one of France's biggest diplomatic blunders of the past decade- see EC Nice Summit of 2000). There is little utility in angering/embarassing the Russians ahead of a vital strategic meeting, and the leak can probably be chalked up to Sarko's super ego.

Back in August, I argued that Saakashvili would not survive the conflict. I thought that Russia's intentions were clear, and was both wrong and surprised when the Georgian President survived. The credit for this may very well go to Sarko. But if this conversation highlights anything, it is that the situation in Georgia is fragile. I seriously doubt that Putin's feelings have changed, and given the evidence that Georgia may have been more of an agressor in the conflict than it claimed, it will take very little for the Russian Prime Minister to finish the job.