POL 5032 Week V

Putnam’s Two-Level Game theory can be a good point of departure to determine how Angela Merkel will deal with the debt crisis within the EU.  Set out Putnam’s argument on Two-Level Games and determine what side payments Merkel has created to pay off the protagonists within Germany.

I shall start with a few false starts.  First, I want to add that the question above has to be addressed through Mundell’s Theory of Optimum Currency Areas in order to squeeze the debate into an area governed by the Euro.

Second, with Putin acting like Peter the Great on a bad day, I wrote the following to set up a debate over the current fiasco in the Crimea:

I have been thinking about Putin's foray into the Crimea.  To my mind he acted quite rationally. Once Yanukovych was toppled, the chances of the Ukraine joining the European Union and probably NATO were quite high.  So what chance then did Putin have of hanging on to his cherished port of Sevastopol? Would a Ukraine, as part of NATO, continue to honour the lease agreements for the Russian Black Sea Fleet?

Also as Khrushchev had 'given' the Crimea to the Ukraine as part of an administrative realignment, could Putin not argue that he was 'restoring rights wrongfully denied', which would underpin his right to intervene in the Crimea through 'just cause' as a tenet of Jus ad Bellum.

There has been strong criticism about Russian 'armed thugs' influencing the Crimean referendum, but again could one not argue that these 'thugs' did not hinder the locals from endorsing the annexation with a 90 percent ratification, rather they contained or prevented the Ukrainian armed forces from influencing the vote by confining them to their barracks? (I understand there are around 25,000 Ukrainian armed forces in the area).

So Obama's histrionics in the White House are somewhat undermined.

Having written the above, I find that Putin's actions are embedded in a 19th Century mindset, instead of a 21st Century logic.  The cost to his trade with the EU (some EU400 billion) could be substantial. Why would he consider the Black Sea Fleet more important than his economic relationship with Europe? Does he understand that his actions will force Europe to diversify its energy procurements?  So in the long-term is he shooting himself in the foot?  Or has he decided that Europe's response will be flaccid and short-term?  

The key, once again, lies in the mind of Merkel.  We can now argue with a strong sense of probability that the Ukraine will join the European Union as a result of Putin’s actions.  This event will immediately create another market for Germany’s exports, and new investment opportunities for German industry.  Thus, will Merkel be happy to accept Putin’s coup? Current figures demonstrate that Germany continues to enjoy a current account surplus with its EU partners, and we also know through last week’s debate that by keeping the Euro competitive through deflationary policies in the peripheral countries of the EU, Germany continues to enjoy strong exports to the rest of the world.

So just who sits on Merkel’s domestic game board?  The media would like us to believe that the core problem for Merkel is European debt within countries like Greece, Spain, Portugal and Italy, but is this really the case?  Do German taxpayers really dominate the German domestic game board? Does Germany control the Euro, and is the European Union an Optimal Currency area?  And if not, how does the Euro act as a substitute currency?

Is Merkel really playing a different game?  Are German exports and German investments not the key drivers of the debate in Germany? What is Merkel offering as side payments to Germany’s industrial and commercial leaders?  And how is she paying off the German taxpayer to keep the status quo?

There is no question that the world is heading towards a ‘two-speed’ economy that is throwing up more and more inequality between nations and within nations.  Germany at present enjoys a booming economy, but this boom is creating a new underclass within Germany itself, and within the other nations of the EU.

How is Merkel maneuvering on the European Union game board to keep all her balls in play and how does this affect the German domestic economy?