World Bank President Robert Zoellick has cautioned that markets have been pushed towards a new danger zone which policymakers need to take seriously. In his speech at the Asia Society’s annual dinner in Sydney on Monday, Zoellick said, “A convergence of some events in Europe and the United States has led many market participants to lose confidence in economic leadership of some of the key countries.” His remarks followed a tumultuous week on global markets prompted by fears over the fragile US economy and European debt crisis.

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Wall Street stocks on Wednesday plunged sharply, erasing much of the gains made a day earlier, amid fears of crisis in France’s banking sector, which has major exposure to wobbly European debt. US financial stocks sparked the decline on concerns that any French bank troubles may spread to them. Large financial institutions slid sharply, including Bank of America Corp down 11.2% to $6.76. The KBW bank index fell 7%.

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NATO and Russia on Monday admitted they were still divided over Libya and missile defense during their bilateral meeting in the Russian resort city of Sochi. Moscow has long opposed the setting up of NATO missile defense system close to its borders, describing it as a threat to national security. During Monday’s talks, NATO Chief General Fogh Rasmussen said that the alliance hopes to reach an agreement with the Russians on the issue within a year.

Speaking of the differences between the two sides over the Libyan campaign, Russian Foreign Minister Sergei Lavrov said that Moscow still believes “there is no alternative for peaceful settlement.” In response, Rasmussen said that NATO understands Russia’s concerns and promised there wouldn’t be any ground operations in Libya, insisting the coalition has “successfully prevented the mass killings of the Libyan people.”

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Resentment towards Muslims is rising all over Europe and many Europeans perceive Islam as a major threat, said a report released by a high-ranking body within the European Council. The report labeled the prejudice towards Muslims as a “serious human-rights problem” claiming that such discrimination is “combined with racist attitudes” aimed at individuals originating from Arab nations, South Asia and Turkey. The report also highlighted ways to curb discrimination against Muslims, urging European nations to accept the fact that people can be “hyphenated Europeans”- for example “Turkish-Germans”- just like “African-Americans.”

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Context
Since the April revolution in Kyrgyzstan, the country’s security situation has spiraled out of control, leading to widespread violence, and pleas for international help from the interim Kyrgyz government. Washington is concerned over the fate of its crucial base in Central Asia, located in the north of Kyrgyzstan at Manas. Russia has yet to commit to sending in forces as requested by the Kyrgyz government, but the region is set to ignite if they do.

Analysis

Invading Forces, Or Peacekeepers?

Kyrgyzstan has a long history if internal unrest between the majority ethnic Kyrgyz, and the ethnic Uzbeks, who make up 15 percent of the Kyrgyzstani population. The last comparable spate of violence to the present was seen in 1990, when a couple of hundred people lost their lives. That was when Kyrgyzstan was a part of the Soviet Union, and at that time, Soviet forces from Moscow were sent in to reinstate order. Twenty years later, and a similar situation has arisen, but the outcome is by no means clear.

Many are blaming the ousted former president Kurmanbek Bakiyev for fomenting the current spate of violence between ethnic Uzbeks and Kyrgyz, with reports filtering through of mercenaries firing indiscriminately at both Uzbeks and Kyrgyz to initiate the violence-others are suggesting that perhaps Moscow is the real source of the trouble. However the violence started, it is no longer an isolated internal Kyrgyz issue, rather a burgeoning Central Asian crisis.

Russia has already sent troops into Kyrgyzstan to boost security at their base near the Kyrgyz capital Bishkek following the violence, but not in any capacity except to protect the military base. The interim Kyrgyz government has specifically called upon Russia to send troops to help stabilize the country, as it did in the 1990’s, but the situation for Russia is much more tricky, and sending in troops this time around could open up a whole new chapter of violence.

Many in the region are worried that Moscow is using the time provided by the US being more than entangled in Afghanistan, Iraq and recently distracted with the Iran nuclear issue and the Israel flotilla incident to quietly reestablish itself as preeminent in the former Soviet colonies in Central Asia. None of the countries in Central Asia have any real means of averting Russian power, militarily or otherwise, excepting perhaps Uzbekistan.

Uzbekistan has the capability of projecting power, and has already warned that Tashkent will view any Russian intervention in Kyrgyzstan as a preliminary move against Uzbekistan-not something Russia is keen to provoke. The Russian-led Central Asian ‘Collective Security Treaty Organization'(CSTO) is expected to be the only front via which Russia can send troops to Kyrgyzstan without inflaming the Uzbek nation, but Russia at present is adamant that the CSTO should not be mobilized as the organization’s charter specifies non-interference in internal affairs.

There is a stalemate on external forces entering Kyrgyzstan to help: Uzbekistan is the closest military power, and despite supporting the interim Kyrgyz government, any move by the Uzbek’s to enter Kyrgyzstan will be viewed as hostile, no matter what the pretext. Russia is not without interests in Kyrgyzstan, but at present is reluctant to make the military move. China, while evacuating its citizens from the country, is completely hands off as far as aiding the country militarily, and neighbors Kazakhstan and Tajikistan simply don’t have the resources to help. The US has vital interests in Kyrgyzstan in the form of its one remaining Central Asian military base, but engaging in a third theatre of operation is highly unlikely, and would be very unpalatable to the US, government and public alike. India must also be worried over the fate of its big power dreams in Central Asia. The country has maintained a military base in Ayni, Tajikistan, much to the dismay of Russia, China and Pakistan. (In an upcoming piece, PoliTact will be examining Indian role in Central Asia.)

Despite Russian proclamations to the contrary, if the present situation continues to deteriorate, a peacekeeping force within the framework of the CSTO is very likely, as no one in the region wants the country to collapse altogether.

Great Power Tussles and Vital Interests

Kyrgyzstan is also the setting of a latent tussle between Russia and the US over the presence of military bases. As previously discussed by PoliTact, Moscow views the US military base at Manas as a fly in the ointment of its backyard, with a Russian senior official stating “In Kyrgyzstan there should only be one base-Russian” in 2008. The Manas base is a long-standing issue between Russia and the US, with Kyrgyzstan sandwiched in the middle. Continuous pressure on the interim government from Moscow to disallow the US presence, and in the wake of the recent violence, Moscow has renewed its push for the US base to be evicted.

The status of the base may very well become the bargaining chip Russia wants to ‘motivate’ it to intervene in the current Kyrgyz crisis, and it must be noted that if this eventuates, the fate of the Manas base is indeed in peril. This would spell disaster for the US’s war on terror, as the Manas base is the first stop for troops and supplies for the war in Afghanistan. Without the Kyrgyz base, the US would have to rely fully on supply routes through Pakistan, something which would likely cripple the US operations. Given the worsening situation in the AfPak region, the US has been trying to wean itself from the supply chain through Pakistan, and focus more on the northern routes.

If the US base is closed, and the Russians do intervene in the current crisis, Kyrgyzstan may well become a de-facto Russian state, as without a strong government, nor even a cohesive national population, the only thing holding it together would be the Russian presence-in fact a Russian presence may be the only thing to stop Kyrgyzstan from disintegrating into total chaos, and becoming a failed state.

This links in with a recent PoliTact projection of the region as a possible sink-hole for the nation state. The Kyrgyz state is not alone in the region in being subject to the pressure of greater powers, the clamoring of a population ill-content and inhomogeneous, and the weakness of its own internal structures and institutions. Pakistan is another case in point.

The AfPak theater is hanging tenaciously to the nation-state structure, but at the same time tearing itself from the inside-Afghanistan through the ongoing war with the Taliban, and Pakistan through the operations in North Waziristan and possible operations in Southern Punjab-not to mention the presence of extremism that is tearing at the national fabric of the states. Interestingly however, the reports of mercenaries starting the violence in Kyrgyzstan are echoed in Pakistan as well. A senior Pakistan Peoples Party (PPP) member recently divulged that the number of terrorist attacks with no known links to a political or religious groups, but carried out by paid mercenaries was on the rise in Pakistan-the government is scrambling to find a source for these attacks, but finding only instead, that terrorism has become an industry, a ‘mafia’ if you will, which makes the whole scenario that much more complicated.

The current crisis in Kyrgyzstan is another backwards step for the region at large, and one which may prove the eventual undoing of the nation-state system in Central Asia-a failed state close by is a haven for extremists from all over Central Asia, whether they be from Afghanistan, Russia, Pakistan or even China. Thus the crisis in Kyrgyzstan could be the tipping point of the descent of the region into a new, vamped up cycle of violence.

If for a moment we take a look back at history, we can see that it took over 400 fraught and bloody years for the nation-state system to settle into its current borders in Europe, and even still there are tensions within some borders, such as the Basque separatists in Spain where the homogenizing process is still not properly complete. This tells us two things: we should expect there to be more bloodshed before the region is settled, and that it may take many, many years before any semblance of stability is attained.

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Context

Governments across the world greeted the second decade of the 21st century, wishing that the economic crisis of the last decade will become a tale of the past and the economic recovery could finally become a reality. Greece is the latest problem child for Europe. The current financial crisis in Greece can be attributed to immense spending in the past and the country’s social programs. The country’s total debt accounts for 115.1% of the GDP. What it precisely means is that Greece will never be able to fully pay off its debt unless some adjustment is made to the amount owed.

In addition to this, the country has an annual budget deficit of 13.6%, which surpasses the Eurozone maximum of 3% by a long way. This shows that not only did Greece spend a great deal in the past but the massive interest payments also prevented her from making progress.

Analysis

A government would normally try to borrow money by putting up its bonds for sale, in order to be able to finance its current debts whilst cutting on spending. However, it’s rather unfortunate for Greece that nobody wants to purchase the bonds due to the high risks involved. In other words, investors are looking for a very high rate of return if they are to invest in Greece bonds.

Both the Eurozone countries of the EU and the IMF have been attempting to help bail out Greece. The problem would’ve been easy to tackle had Greece been the only country in need of a bail out. There is a widespread fear of the Eurozone facing a domino effect, especially countries like Italy, Portugal, Ireland and Spain. The biggest cause of concern is Spain with an economy that is five times that of Greece. If Spain defaults, the whole of EU and eventually the entire world will be influenced.

In view of this situation, bail out appeared inevitable. Recommendations presented by the EU and the IMF entailed a three-year debt bail out plan valued at around 45bn euros in the first year, with a concessionary rate of interest of about 5%. The Eurozone would contribute around 30bn euros, with 8.4bn euros coming from Germany this year and up to 16.8bn euros by 2012.

This package was put forward prior to the summit on the Greece debt crisis. The public in Germany, the country which was supposed to be the largest contributor to the package, strongly opposed this proposal. Fingers were immediately pointed at the immensity of this amount, which is around 2bn euros more than the German family ministry’s annual budget.

As a result, the German government put forward a proposal at the summit that focused on preventing a bail out for the Greek economy. The German delegation provided assurance to the Greece government on precondition that it pays out punitive interest rates for the settlement of its debt, whilst clarifying that any aid would only be provided as a last option. In other words, what Germany meant was that Europe would not proffer Greece any more sympathetic conditions than those presently offered on the global financial markets.

What Germany was trying to achieve through these unsympathetic terms was to pressurize the Greece government to pursue its policy of massive spending cuts so as to convince the banks to provide credit to Greece at more favorable terms. In addition, Germany also wanted to make it clear to other heavily indebted countries of Europe not to expect easy payment from Brussels.

The crisis developing in the financial system of Greece is being seen as a continent-wide emergency as members recognize that there is no chance of the European Central Bank or the EU itself to lend a hand. The crisis is threatening to spread beyond Europe and into the countries of South Asia. The dependence of South Asian countries on trade is likely to make them vulnerable to the sharp decline in demand from the European economies. The Greek debt crisis is expected to further undermine the already declining investment flows into the developing economies of South Asia, intensifying the problems of some of the most fragile countries of the region.

Pakistan and the EU have traditionally enjoyed strong and cooperative trade ties, with the EU being Pakistan’s most significant trade partner. Pakistan has been pushing for preferred market access to Europe as the country’s integration into the global economy is vital for the its economic well being as well as for tackling extremist in the long run.

Pakistan has enjoyed very close relations with Germany over the decades. The bilateral trade between the two countries is growing steadily and both regularly share their thoughts on all the global matters of concern and support each other at the international level. Germany has always supported Pakistan by all possible means in her attempts to acquire access to the European markets.

Pakistan’s economy and trade have already been hit hard because of its leading role in the war against terror. Now this latest crisis in the EU could further worsen the situation for Pakistan. If people fear that Greece could go bankrupt, they will fear that Portugal and other countries will also go bankrupt. Once people get scared, they get scared about everything. This fear and lack of confidence will naturally lead to a fall in consumer demand. The EU is a vital export market for Pakistan and producers are relying on sending more goods to Europe.

This latest crisis can also influence the EU’s commitment to the war on terror. It might become extremely difficult to pay inducements to allies and tribesmen. The EU’s involvement in Iraq and Afghanistan will be viewed from the economic viewpoint, and more European taxpayers will support withdrawal. Hence, coalition partners are likely to opt for an early troop pull out in order to steer their home economies out of crisis.

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