Recession sets in, outlook for Europe is not positive

"The notion of the euro is very much more a political concept rather than a concept based on sound economics," said Desmond Lachman, resident fellow of the American Enterprise Institute during a discussion on "Assessing the Impacts of the Financial Crisis on Europe's Political Architecture" hosted by the Heritage Foundation. According to Lachman there is no positive outlook for the European markets and the euro. "There is no question now that Europe is in a recession...," Lachman said.

J.D. Foster, a Norman Ture senior fellow in the economics of fiscal policy at the Heritage Foundation, stated that Europe has always put more efforts into economic security than economic growth, underlining the reason why the economic crisis has had such an impact on the European markets. "Europeans put more emphasis on security and Americans traditionally put more emphasis on economic growth," Foster said.

Richard Rahn, director general of the Center for Global Economic Growth, mentioned several countries who will suffer tremendously from the economic crisis, for example Spain, Ireland and Italy. According to Rahn, countries like Estonia and Lithuania will not suffer as much from the crisis due to minor investments internationally. Rahn also mentioned that countries like Austria and the Netherlands are not in danger of going into in recession due to a majority of their investments being made in eastern Europe.

In conclusion, Rahn highlighted Norway, which due to its major oil resources, will be affected by the declining oil prices, but otherwise stay totally unaffected by the recession. "Norway shows what happens when you have a very small population and lots of oil, so the Norwegians have become very rich," said Rahn.

Two options for developing economies

According to Czech National Bank Governor Zdenek Tuma, developing economies are faced with two monetary policy options, either fixing their exchange rate to a set currency or adopting an inflation targeting policy, in which a central bank aims to control inflation by adjusting interest rates, an action referred to as "floating."

"Today we can observe much stronger emphasis on floating in most economies...it's accepted that inflation targeting is superior to other regimes."

However, inflation targeting has raised questions, such as whether smaller countries with weaker economies will be able to afford the practice and if it is possible to judge its success when inflation has been low for the past two decades, but Tuma is confident the practice can exceed these concerns.

Tuma discussed the effects of both policies in the Czech Republic. From 1990-1997 the Czech Republic had a fixed exchange rate, and faced skyrocketing inflation rates.

"At that time our predecessors were hesitating between monetary targeting and inflation targeting, and in the end it was inflation targeting and I believe it was the right choice...after ten years we can say that we have managed to introduce very strong credibility of this monetary policy regime and that inflation expectations are pretty well anchored."

Tuma said an additional benefit of inflation targeting was that it can help mitigate the impact of inflationary shock, something that a fixed exchange rate can not do without making abrupt and often times unsuccessful changes.

Still, Tuma said that choosing the right monetary policy is not the sole factor for success in emerging economies and explained that it is not a substitute for sounds governmental policies.

Pentagon brief: Iran has long-range missiles

We must take the missile threat from Iran seriously.

Such was the statement of Missile Defense Agency Director Lt. General Henry A. “Trey” Obering III at a Missile Defense Status briefing at the Pentagon. Iran, he says, is working on an extended-range variant of the Shahab-3 missile and a new 2,000 km medium-range ballistic missile known as the “Ashura.” Iran is acquiring “advanced ballistic missile capabilities,” and they’re doing it with foreign assistance and an “aggressive development and test program.”

So what was Iran testing last week? Intelligence provides that info, Obering said, but the Iranians themselves are the ones providing the information. Although this may call into question the accuracy of the information due to bias, Obering said that based on what he has seen, they [Iran] have the capability to have long range missiles. And by having Iran talk about the possibility of a space launch brings to mind something else: the ability to have an umbrella of cover under which they could make booster missiles capable of traveling intercontinental distances.

The thought of a nuclear missile capable of reaching the United States from Iran strikes fear into the heart of every American, and Obering stressed that this is the very reason the missile defense system in Europe is needed. Based on azimuth trajectories (the arc a missile would have to travel in order for it to intercept another target), we need radar detection in the Czech Republic, and our actual interceptors located in Poland. Any closer, and they could not travel the proper trajectory to destroy an enemy missile in time to avoid significant damage.

But what if the attack isn’t nuclear, and is, in fact, an EMP? EMP’s are missiles that deploy an electromagnetic pulse, capable of disabling electronics across a large area. The amount of disabling caused is proportional to how close it is to the target when it goes off, hence the desire to intercept those types of missiles as far above the ground as possible. The House Armed Services Committee discussed that threat and said the potential damage would be significant.

The United States has eighteen nations around the globe that we can do missile defense interaction with. “It’s not the United States only” that is concerned, and there are a growing number of nations that want defense. Placing our interceptors in Poland is where it makes the most sense. Although Russia says that we’re exaggerating a missile threat from Iran, and has also come to a misconception that we are pointing missiles at Russia themselves, there are three fundamental problems with that theory. One, the angle of the missiles would actually fire them 256 kilometers into space if they went all the way to their apex, two, interceptors don’t carry the same payload such as an actual destructive missiles does- they’re only designed to hit things that do have that payload, and make them explode on themselves, and three, a European interceptor site (up to 10 interceptors) “would be easily overwhelmed by Russia’s strategic missiles force,” should we fire at them.

Russia, apparently, has been invited to “come have a look,” and we’ve made a proposal: we will set the defense system up but we won’t bring it completely operational unless the Iranian threat emerges. Obering said that an Iranian threat has emerged when there is proof they have the capability to fire off a missile that can travel 2,000 - 2,500 kilometers, and, if we wait till they actual fire off those missiles, it’s too late to get our own defenses up to defend against it. There is the need to be ready now, not later. Yes, Obering said, they [Iran] have long-range missiles.

Tests have been conducted utilizing missiles fired at the proper trajectories from Alaska and California, to emulate an actual airstrike. Obering said they’re concerned that Iran and North Korea will develop the ability to counteract our defense, and shoot our interceptors down before they can do what they are meant to do: protect. That is why by the end of this year we hope to have two tracking satellites that can track launched missiles more precisely than we do with our current ground radar, such as the one located in Japan. Since we have fielded an initial capability to defend the United States against ballistic missile attacks, we must take into account future uncertainties. Right now, we’re hitting our targets within centimeters from where we’re aiming.