TEC Director Amir Eshel weighs in on the strength and ability of Europe to overcome its fiscal problems in his blog article "Europe, beyond bashing."  In it, he reminds us that "the highly educated, democratic, and often quite-transparently-and-efficiently governed European Union houses 500 million citizens who earn three and a half times the average world GDP per capita. Crises come and go, but Europe’s foundation stands strong."  To read more, please visit Professor Eshel's website.

With Spain as the current hotspot in the European financial crisis, it is easy to lose sight of the broader features of the Spanish predicament, which, I submit, was political and cultural before it emerged as financial. One reason for the dramatic escalation of the risk premium on Spanish bonds is the government’s low credibility - itself the consequence of a heady mix of self-contradiction, lack of transparency, and downright lying. On November 20, 2011, after years of corrosive opposition, Mariano Rajoy rose to the presidency of the government on assurances that he understood the crisis and knew how to handle it.  He now feels trapped in a situation he cannot control, not least because much of the damage is of his own party’s making. To be sure, the socialists contributed mightily to the public debt, exacerbated it by denying the crisis when it was already in evidence, and worst of all, did not act to control the housing bubble, which left in its wake banks filled with toxic assets and a severe credit crunch. But at the root of the housing and mortgage bubble were the dangerous liaisons between the banking system and regional governments such as those in  Madrid and Valencia, that have long been steeped in the Partido Popular’s reckless politics and corrupt practices (epitomized by Bankia’s lurid ambitions and costly rescue.)

The banking crisis is dragging down the Spanish economy and bringing the country’s financial structure into uncharted territory. This is a seemingly paradoxical outcome for a country that a few years back boasted a positive balance and a higher growth rate than its neighbors. What happened to upend the triumphant rhetoric of presidents Aznar and Zapatero? To a certain extent the markets appear to have overreacted, and their knee-jerk response to rising debt caused in part by investors’ demand for higher interest on Spanish bonds threatens to bring about a self-fulfilling prophecy. Before the market developed these jitters however, Spain’s public debt was in fact lower than Germany’s, even as the latter functions as the basis against which the financial risk of other countries is measured. In the last week of June 2012, the distance between Spain's and Germany's debt risk was 504 basis points, while that between the US and Germany was only 13. In relation to GDP however, Spain’s public debt remains significantly lower than that of the U.S. At the end of 2011, Spain’s public debt was 68.5% of its GDP, while the US’s was 110.2%.  In spite of this, the US continues to have no trouble financing its debt, and the American dollar has been rising in recent months and continues to be regarded as a safe haven, while the euro is at risk.

Why all the fuss about Spain? The answer lies in a combination of causes.  In the first place, there is the big hole punched into Spanish banks by the large-scale default on loans irresponsibly pushed on overly optimistic borrowers; and then there is the unlikelihood of an economic recovery vigorous enough to guarantee the debt’s financing. Saddled with debt, subjected to salary cuts, and adrift in a dwindling job market, Spanish consumers will hardly be able to fuel a meaningful recovery for some time.  At present, the combined debt ofSaish families is nearly 100% of national GDP. Corporate debt is even larger. And it is not the private sector alone that is stuck. The loss of confidence also affects the Bank of Spain. For a long time the country’s central banking authority turned a blind eye to the bad lending practices of private institutions, and so it shares the blame for the illusion of an ever-expanding and ever-appreciating housing sector. When the fantasy receded, thousands of families, as well as the owners of small and middle-sized companies, were left stranded in a financial desert; and once the economy actually began to shrink, the government increasingly lost its ability to finance the debt.

Is Spain at risk of leaving the Eurozone? While this cannot be ruled out, it is unlikely. The possibility of going back to the peseta is precluded by the fact that foreign, mostly German and Chinese, investors, whose money helped pump up the housing bubble, now make up the bulk of Spain’s creditors. They will hardly sit by and allow Spain to devalue its way out of the mess. Although he dragged his feet, Rajoy has finally applied to Brussels for rescue funds and will submit to European oversight.  The proposed solution will undoubtedly involve further dismantling of services, salary cuts, and higher unemployment.  This is a bitter pill that will test Spain’s already shaky social cohesion. Rajoy will dispense it because he has no alternative, or rather because the alternative—letting the sick banks fail instead of nationalizing their losses—is not acceptable to the financial markets. Adding to the markets’ nervousness is the fact that Rajoy has proven to be singularly maladroit at administering the medicine.  This is where politics and culture come into the picture.

Spain’s troubles go back to the origin of its current regime in the late 1970s. They are rooted in a faulty transition that was expected to convert a country without democratic traditions into a full-fledged western democracy. But today all of Spain’s core institutions have fallen into disrepute: after years of covering its scandals, the monarchy has finally disgraced itself irreparably; the Supreme Court is affected by corruption at its core; the president of Madrid's regional government (a militant and vocal member of the extreme right wing of the Partido Popular) is calling for the dissolution of the Constitutional Court (i.e. for a return to undisguised authoritarian rule); and the tone of the debates in Congress could hardly fall to a lower level. Spanish democracy is ailing, but for anyone who has observed it with attention since its inception, the confirmation of what was once merely an inkling can hardly be cause for surprise.

In the 1970s, Spain’s bid for democratic legitimacy and admission to the European Community required the restoration of Basque and Catalan self-government, which Franco had suppressed. At the time, the provision of institutional guarantees for these nationalities was seen as a requirement of justice meant to correct decades of persecution. The Basque Country and the semi-Basque region of Navarre emerged from the transition with an important privilege. They collect their own taxes. From this revenue they transfer an amount to Madrid and use the rest as they see fit. Fiscal independence in the hands of a responsible government led to a clear improvement in the Basque standard of living and, and, not incidentally, to a certain insulation from the current crisis. Catalonia, with a larger economy, was denied that privilege. In fact the opposite occurred: its economy was made hostage to a state that, under the pretext of redistribution, severely impaired its growth and development.  Since Franco’s death, Catalonia’s leading position within Spain and its capacity to compete globally (it still accounts for 25% of all Spanish exports) have been eroded through an unfair fiscal burden and hostile decisions in matters of territorial development. Year after year, Spain’s government has defaulted on the execution of public works approved for Catalonia in the former's budget, thus retarding the latter's modernization and straining its finances to the breaking point.  Rajoy’s government will not even honor the state’s appropriations for Catalonia mandated by current fiscal law. In a display of cynical reason, the central Spanish government now blames regional governments for Spain’s public debt, obscuring the fact that the combined debt of the 17 autonomous communities is only 16% of the total, while that of the central government accounts for 76%. The remaining 8% is municipal debt. By shifting the responsibility for the crisis to the regional governments, Rajoy is patently using the current emergency as an opportunity to dismantle the structure of regional autonomy enshrined in Spain's current constitution.  The result of course would be to abrogate the limited degree of self-government that Spain only grudgingly conceded to Catalonia in the former's hour of democratic need.

As usual, propaganda is based on plausibility. It is true that Spain’s system of regional governments is costly, and a revision is long overdue. Most autonomous communities were invented ad hoc by the central government for the purpose of generalizing the autonomy principle and dissolving Catalonia’s historic claim to autonomy within a so-called “autonomous common regime” that as popularized at the time as “coffee for all.”  While history required the articulation of a state with two or three autonomous regions based on tangible cultural differences, Madrid’s politicians created 17 “autonomous communities” by administrative fiat. And since Madrid was unwilling to slim down the state’s bureaucracy, parallel administrations were created, adding to the cost of government. Since the beginning, the unwieldy system of “autonomous governments” was financed through the transfer of funds from the most productive to the least productive regions with a regularity and volume that ended up crippling the donors. These have been, with predictable monotony, the regions on the Mediterranean seaboard that possess a distinct culture and language: Catalonia, Valencia, and the Balearic Islands. So striking is the fiscal imbalance that for decades Spanish governments have refused to publicize the figures, even though this refusal constitutes the violation of a standing congressional order to make them available. But how the cookie crumbles is made evident by the president of Extremadura’s admission that a new fiscal deal for Catalonia would be catastrophic for his region. Catalonia suffers from a political paradox. As a “wealthy region” in a “poor country,” it never benefited from the European structural and cohesion funds of which Spain was the largest recipient, but instead became a net contributor on a level higher than France. Economists calculate that the Catalan fiscal deficit, that is, the percentage by which taxation exceeds allocations, rests anywhere between 8 and 10% of Catalonia’s GDP (roughly $20 billion annually for a region of 7,000,000 people.) Over time, the magnitude of such siphoning of resources impacts an economy, leading to obsolescent infrastructure, the impoverishment of the service sector, the deterioration of the educational system, and the inevitable loss of competitiveness. Catalonia’s public debt in 2011 was $52 billion, approximately 20.7% of the Catalan GDP. Two and a half years of a balanced fiscal relation with the rest of Spain would have sufficed to mop up all Catalan public debt.

Spain’s troubles were political before they became financial, but politicians will not resolve them. The country needs to be further integrated into the European structure through a common fiscal policy and a commonly regulated banking system; more importantly however, Spain needs to be politically accountable to Brussels and meet European standards of justice and democratic procedure.  This would do much to bring about economic rationality. A country on the brink of default cannot afford to build unprofitable fast-speed trains to provincial destinations, boondoggle expressways in a radial system stemming from Madrid, or airports without air traffic.  Nor should it insist on an extravagant freight train route that requires drilling through the thick of the Pyrenees instead of building a cheaper and commercially sensible coastal itinerary, a plan that, without Brussels' better judgement, the Spanish government would have rejected for the ostensible purpose of isolating Barcelona’s harbor, the busiest in Spain.  The senseless megalomania and castigation of specific territories cannot be explained along traditional ideological lines — such projects have been developed by socialists and conservatives alike — but by long-term cultural continuities. The recent bout of megalomania was buoyed by billions in structural funds, while the territorial grievances, notorious to anyone who is conversant with Spanish history, went on as before, shielded by Spain’s membership in the core Western institutions.

Spain would gain much from trading sovereignty for rationality, and from being forced to invest for economic rather than merely symbolic payoff. A dishonored monarchy, a politicized justice, and a corrupt party system are as much toxic assets as those the banks hold, and if intervention is inevitable, the discipline mandated from outside ought to touch the country to the quick. If and when Brussels decides to put the Iberian house in order, it ought to recognize which administrations have practiced fiscal restraint and are capable, under good governance, of meeting European standards. Spain could well be the last ditch of the European monetary union and of the political union itself. But timely political reform in Spain could be the last opportunity not only to keep the country within the EU but also to hold it together as a meaningful political project.

He’s been a presidential adviser, academic administrator, scholar and mentor.
But listening to those who best know Coit Blacker talk about his professional achievements is to hear people describe a close friend nearly everyone calls “Chip.”

“One of the reasons Chip has been so successful as a leader is that he is simply a good guy,” said Condoleezza Rice, who first met Blacker at Stanford in the early 1980s – long before she would become the university’s provost and later serve as President George W. Bush’s secretary of state.

“Great leaders are first and foremost good people,” Rice said.

After a decade leading Stanford’s Freeman Spogli Institute for International Studies, Blacker is stepping down from the position on Aug. 31. He will be succeeded by President Emeritus Gerhard Casper.

Following a yearlong sabbatical, Blacker plans to return to campus and continue teaching about foreign policy – a topic he mastered through academic research and as President Bill Clinton’s special assistant for national security affairs and senior director of Russian, Ukrainian and Eurasian affairs at the National Security Council.

Reading letters written by Clinton, former national security adviser Sandy Berger and Michael McFaul – the U.S. ambassador to Russia and FSI senior fellow who studied closely with Blacker – Rice capped a lineup of colleagues, students and donors who honored the departing director during a farewell reception held June 14 at the Cantor Arts Center.

“Under your directorship, the institute has enhanced its status as one of the globe’s most prominent and influential centers for the study of international relations,” Clinton wrote. “The institute’s research is helping us move toward a more stable, sustainable and equitable world in this age of interdependence. In addition to your devotion to Stanford, I will always be grateful for your outstanding work at the National Security Council during my presidency.”

Nearly 20 years before joining the Clinton administration in 1995, Blacker arrived at Stanford as a postdoctoral fellow in the university's Arms Control and Disarmament Program. He lectured and taught through the 1980s, becoming a popular professor known for working closely with his students.

“I saw in him a mentor who not only excelled in his field, but did so with intellectual fortitude, integrity, and a deep-seeded sense of service to which I only hoped I could aspire,” said Theo Milonopoulos, a former student of Blacker’s who is now a Fulbright Scholar at King’s College London.

In 1991, Blacker became a senior fellow at the Institute for International Studies – the precursor to FSI. He was appointed as the institute’s deputy director in 1998, and took over as director five years later.

Under Blacker’s tenure, FSI expanded its number of research centers from four to seven, and grew its faculty from 21 to 32 professors. The institute’s endowment is nearly $200 million, up from $122 million in 2002.

“FSI has really become the jewel in the crown of Stanford’s interdisciplinary institutes under Chip’s leadership,” said Ann Arvin, Stanford’s dean of research. “I hesitate to say how many times I have advised others to just ask Chip how they do it at FSI – whatever `it’ may be.”

Continuing to move between the academic and political worlds, Blacker advised Vice President Al Gore on foreign policy issues during the 2000 presidential race.

Back at Stanford a year later, he was awarded the Laurence and Naomi Carpenter Hoagland Prize for undergraduate teaching, and was named the Olivier Nomellini Family University Fellow in Undergraduate Education in 2002.

Even surrounded by faculty at Stanford, Blacker was never far from policymakers in Washington and working abroad. In a letter read by Rice, McFaul wrote directly to his old teacher.

“You have been and remain one of my most important mentors,” McFaul wrote. “I have not made a single decision in my professional career without first seeking your advice.”

“Chip has had a distinguished career – not just as a scholar, not just as a teacher – but of course as a policymaker,” Rice said. “It is that wonderful sensibility for what policymakers need and listen to that helps him to translate Stanford and its great research for the policy world.”

In 2005, Blacker was instrumental in securing a $50 million naming gift from Brad Freeman and Ronald Spogli, partners in a private equity investment firm.

“We believed very much in the guiding principal of interdisciplinary research which is at the core of FSI today,” said Spogli, a former U.S. ambassador to Italy and San Marino. “But the most important reason that we made our gift is Chip Blacker. We believed in Chip as the leader who would be able to take FSI to a new and greater level.”

Much of Blacker’s success has revolved around his development and support of FSI’s faculty. Stephen Krasner, FSI’s deputy director who has worked with Blacker for about 20 years, praised his friend and colleague for fostering an environment where researchers are eager to collaborate and share ideas.

“From the outside – when Chip does these things – they all look flawless, effortless, perfectly organized, well structured,” Krasner said. “From the inside, you can see how astute, wise and generous Chip has been in developing FSI and its faculty and activities.”