Economist.com Cities Guide: Johannesburg Briefing - December 2005

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The last straw

December brought more trouble for Jacob Zuma, South Africa's former deputy president. Following several weeks of speculation, Mr Zuma—who was sacked from the deputy presidency in June and is expected to be tried on corruption charges next July—was on December 6th charged with rape. A 31-year-old, HIV-positive AIDS activist, from a family with long-standing ties to Mr Zuma, has accused him of raping her at his Johannesburg home in November.
Although Mr Zuma denies the allegations, they are likely to spell the end of his political career. His allies at the Congress of South African Trade Unions and the Communist Party, who have stood by him throughout his troubles, have started to distance themselves. He has also taken de facto leave from his position as deputy leader of the ruling African National Congress, although he retains the title. The rape trial is expected to start in Johannesburg in February.

Still devastating

December 1st—World AIDS Day—provided South Africans with an opportunity to contemplate the appalling effect the disease has had on their country, where the number of people living with HIV or AIDS is estimated at around 4.5m-6.2m. In a recent report, UNAIDS, the UN body focusing on the pandemic, underlined the speed of infection in South Africa, where about 1% of adults were infected in the early 1990s, compared with almost 25% today. The Mandela Foundation, a local organisation, published a comprehensive survey of the disease in South Africa. Unsurprisingly, it made grim reading, although it estimated the HIV-positive proportion of the population at just over 16%—lower than the UNAIDS figure.

Of the 500,000 to 900,000 HIV-positive South Africans thought to need treatment immediately, only 85,000 are receiving antiretroviral treatment through the public sector, with another 60,000 believed to be receiving private medicine. In Gauteng, South Africa's most populous province, which covers Johannesburg and Pretoria, the proportion of infected adults is the same as this national average—in Mpumalanga it is 23%; in the Western Cape 3.2%.

Back on track

There is some good news for the Gautrain, the proposed high-speed rail link between Johannesburg and Pretoria, South Africa's capital. In November, South Africa's parliamentary transport committee had recommended that the project be scrapped or delayed. However, on December 7th, the cabinet, which had greater confidence in Gautrain's benefits, duly approved the controversial 20 billion rand ($3.16 billion) enterprise. Construction should start in February and finish in time for the 2010 football World Cup, which South Africa is hosting.

The critics' major concerns involved costs and the fact that the Gautrain will benefit a minority of affluent passengers, while the rest of South Africa's awful public transport system deteriorates. The opposition Democratic Alliance is also worried about the link's incompatibility with the existing rail system. Supporters, on the other hand, have argued that the train will create jobs, boost the region’s economy and relieve the maddening traffic congestion between Johannesburg and Pretoria. The last point, in particular, was probably not lost on cabinet members.

What's in a name?

Johannesburg's airport may be getting a new name. Once known as Jan Smuts Airport, after a white former prime minister, it has been called simply Johannesburg International Airport since 1994. South Africa's transport ministry has proposed that it be renamed O.R. Tambo International Airport, after Oliver Tambo, an apartheid-era president of the African National Congress, who lived near the airport after returning from exile. South African law requires public consultation on proposed geographical name changes, and the public had until December 9th to make submissions on the suggestion. The proposal process is not quick, however, and it could be some time before the cabinet makes a final decision.

If accepted, the new name will add a finishing touch to a programme of changes at the airport, South Africa's busiest, which handles over 13m passengers a year. Since 1998, 850m rand has been spent on rebuilding the main terminals, the parking and public transport facilities, as well as the road network around the airport.

Oh, the humanity

Johannesburg is set to become a prime destination for evolution buffs. On December 7th, President Thabo Mbeki opened the Maropeng visitors' centre at the Cradle of Humankind World Heritage site, just outside Johannesburg. This is one of the most significant paleontological sites in the world and has produced about 40% of all human ancestor fossils. But as a long-term dig site, it was hardly tourist-friendly.

The new centre, built to resemble an ancient burial mound, could change that. It is part of a 347m-rand project to turn the heritage site into a tourist destination, by developing the entire area and upgrading access. Johannesburg’s Wits University, Standard Bank, Gauteng Province and the national government are among the many entities involved in the public-private partnership. The site has already earned impressive accolades, including an award from the British Guild of Travel Writers for best new tourism project worldwide. It is hoped that it will boost tourism in the Johannesburg area, with half a million visitors every year.

Catch if you can

December 2005

“Defending the Caveman”

Until February 5th 2006

This South African version of the Broadway hit should satisfy those craving some entertainment during the cultural desert of a Johannesburg summer. “Defending the Caveman” is a comedy tackling the eternal and baffling differences between men and women. Written by Rob Becker, it was the longest running one-man show in Broadway history. Tim Plewman, who has been the caveman for over 1,300 performances around South Africa, has incorporated a local flavour into the original text.

Pieter Toerien Theatre, Montecasino Shopping Mall, Montecasino Boulevard, Fourways, Johannesburg. Tel: +27 (0)11 511 1988 (box office). Bookings via Computicket. See the theatre's website.

More from the Johannesburg cultural calendar

Economist.com Cities Guide: Los Angeles Briefing - December 2005

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A vulnerable city

Does Los Angeles, one of the top three terrorist targets in the country, get the federal homeland-security money it deserves? Not according to a report by the 9-11 Commission released in early December. America's third-most vulnerable city, after New York and Washington, DC, Los Angeles got $92m in 2005. Divided among LA itself and 16 other cities in LA County, the funds represented a lower per-capita funding than for low-risk areas such as Vermont and Wyoming.

Mark Leap, head of the Los Angeles Police Department (LAPD) Counter-Terrorism and Criminal Intelligence Bureau, reckons LA needs at least twice this amount. But even if local lobbyists win more funds from Washington, city officials say they also need more flexibility in how they spend it. At present, federal funds cannot be used for staffing, which means that the LAPD must transfer officers from other units to beef up its counter-terrorism division. This is a challenge given that LA, the second-biggest city in America, has relatively few policemen.

Delayed

Los Angeles Airport—LAX to the aviation world—has more than a year left to prepare for the arrival of the A380 Airbus, the biggest airliner yet. But this may not be enough time for the world’s fifth-busiest airport to make all the necessary changes, which include special gates, taxiways and extra-long runways to cope with the massive aircraft and the 800 passengers on board. Building has been sluggish at best: LAX must deal not only with the logistical problems of construction in a busy airport, but also with protests from surrounding communities, which are opposed to any project that could create more noise and pollution.

The bickering over construction for the A380 is only part of a larger problem at LAX: after spending a decade and some $150m on a controversial plan to modernise the airport, the city has decided to review the scheme and will probably scrap much of it. In return, communities around LAX have agreed to drop the federal and state lawsuits that could have stopped work on the $300m rebuilding of the southern runway complex—the one project still on track. If LAX is not ready for the A380 in time, its loss will be San Francisco’s gain. LA’s northern rival has already made many of the needed changes, which has not gone unnoticed by several airlines flying lucrative trans-Pacific routes.

A Hollywood tragedy

Hollywood’s best actors can cry on demand, but the industry's executives may soon be shedding real tears. A new report from the Los Angeles County Economic Development Corporation predicts that 2006 will be a hard year for the entertainment industry, which employs about 249,000 people in LA County. Falling cinema attendance, a slump in DVD sales (which fell from $15.2 billion in 2004 to around $10.2 billion in 2005) and the increased threat—thanks to evolving technology—of copyright piracy are all contributing factors. As if this wasn’t bad enough, studios will begin new contract talks with unions in late 2006.

With the industry aiming to cut costs, the city itself may suffer. Los Angeles is facing increased competition from other cities in America and around the world which are wooing film and television producers with tax incentives and lower labour costs.

A killing judged not to be a crime

On December 5th, the LA County district attorney announced that it would not prosecute Steve Garcia, an LA police officer who shot and killed Devin Brown, a 13-year-old black boy, last February. The boy was shot in the early hours of the morning as he backed a stolen car towards Mr Garcia, who had stepped out of his police cruiser. Though the officer will not go to jail, his problems are not over: an internal police board will now investigate whether the shooting followed police policy, and in January the LA Police Commission will decide whether to penalise or fire Mr Garcia. In April, a jury will hear a civil-rights and wrongful death suit filed by Evelyn Davis, Brown’s mother, against the city and Mr Garcia.

In the meantime, relations between the police and LA’s blacks are as tense as ever. To soothe them, Michael Cherkasky, the federal monitor overseeing the Los Angeles Police Department, has suggested that police cars be equipped with video cameras, to document the behaviour of both the police and the public.

Busted

LA’s new Orange Line buses, 60-foot-long monsters that run from downtown through the San Fernando Valley, have become moving targets for LA drivers. The buses, which are designed to speed along a congestion-free, dedicated bus-way, have averaged a collision a week since the line was launched in late October. MTA officials have ordered the bus drivers to slow to a mere 10mph at intersections with public roads, which have been festooned with warning signs and traffic lights for other drivers. So far, the MTA is refusing to consider railway-style barriers; instead, officials hope that LA drivers can be taught not to run red-light signals at intersections with the bus line.

But this hope may be in vain: despite the $341 fine, many drivers are willing to risk running a red light, particularly since contesting the fine often leads to exoneration over a technicality (often with help from the highwayrobbery.net website). Indeed, the Superior Court of California, LA County, has grown so exasperated that in November it banned any “education or counselling” within 100 feet of a courthouse that might help a driver dispute a traffic citation.

Catch if you can

December 2005

Ecstasy: In and About Altered States

Until February 20th 2006

Baby-boomers might think psychedelia rather old hat. But those nostalgic for their hippie days may relish this exhibit in the Museum of Contemporary Art (MOCA). It features paintings, sculptures, installations and video-art created over the past 15 years by some 30 artists—most of them under the influence of some kind of hallucinogenic drug, legal or not.

Charles Ray, for example, has a life-size photograph of himself under the influence of LSD, mounted in a convex frame on a convex wall. Rodney Graham has a 26-minute video illustrating a journey in the back of a van in Vancouver while under the influence of sleep-inducing Halcion. Intriguing stuff about “altered states”—definitely not for the “Just Say No” brigade.

The Geffen Contemporary at MOCA, 152 North Central Ave, Los Angeles, CA 90013. Tel: +1 (213) 626-6222. Open: Mon, Fri 11am-5pm; Thurs 11am-8pm; Sat, Sun 11am-6pm. Entry $8. See the website for details.

More from the Los Angeles cultural calendar

Economist.com Cities Guide: San Francisco Briefing - December 2005

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Cops gone wild?

In a big embarrassment for a city that prides itself on tolerance, San Francisco is reeling from a Christmas-party videotape made by city police officers which features skits ridiculing women, homosexuals, blacks, Asians and the homeless. One sketch has a white officer in a patrol car running over a black homeless woman. Gavin Newsom, the city's mayor, and Heather Fong, the police chief, suspended 24 officers for their alleged role in the video, which Ms Fong called “egregious, shameful and despicable.” Anyone with access to the internet has been able to download excerpts from it.

Daniel Horowitz, the attorney representing Andrew Cohen, the officer who produced the video, conceded that the humour in the skits was immature, but blamed city officials for thrusting it into the public domain. The video had been prepared for a Christmas party, but was leaked onto the web. Mr Cohen further explained that the jokes were not meant to disparage anyone. While some San Franciscans say the city lacks a sense of humour, others note that most private employers would fire workers over such shenanigans. Most of the suspended officers work in Bayview Hunters Point, a black neighbourhood with a high rate of violent crime, and black leaders have long accused the department of racism and sexism. But the scandal seems to be dying down. The city conducted hearings with the suspended officers and all 24 officers were back on the beat by December 15th; they could still face disciplinary action, however.

Tookie’s last stand

Stanley “Tookie” Williams, a 51-year-old co-founder of the Crips, a notorious Los Angeles street gang, who was convicted of killing four people during two robberies in 1979, was executed in the early hours of December 13th at San Quentin state prison. Governor Arnold Schwarzenegger refused to grant him clemency. The governor was unimpressed with Mr Williams's transformation into an anti-gang crusader whose writings tried to discourage poor young men from joining gangs. He was nominated for two different Nobel prizes.

This decision was a challenge for the Republican governor. Mr Williams's plea for his sentence to be commuted to life had become an international cause célèbre. Jesse Jackson, Jamie Foxx, an Oscar-winning actor, and Snoop Dogg, a rap star, said Mr Williams embodied the human capacity for redemption. But Mr Schwarzenegger, beset by low approval ratings, did not want to alienate California voters by showing leniency to a convicted murderer. Californians support the death penalty (54% of Democrats and 87% of Republicans, according to a Field poll last year), and American governors rarely commute death sentences unless presented with overwhelming evidence of a defendant’s innocence or mental incompetence.

A pile of rubbish

Ron Gonzales, the mayor of San Jose, may have hoped to ride out his term's eighth and final year without stress. But a dodgy deal with a rubbish company has spawned a scandal he can't get rid of. On December 13th, San Jose's city council censured Mr Gonzales and threatened to limit his power. The mayor of America’s tenth-largest city has ignored calls for his resignation.

The scandal has been simmering for several years, but erupted into crisis in December when an independent investigator confirmed the findings of a county grand jury. The grand jury had accused Mr Gonzales and his chief aide, Joe Guerra, of violating city (and possibly state and federal) rules in their dealings with Norcal, a local company hired by the city to haul rubbish.
Messrs Gonzales and Guerra stand accused of failing to disclose a backroom deal with Norcal in 2000 that involved a $11.3m pay increase for rubbish collectors. Mr Gonzales called for the independent investigation, after initially denying the grand jury’s allegations. The result of the investigation has tainted him further, however, and rendered him ineffective for the remainder of his term.

Black Muslims

Four men have been arrested in connection with terrorising two small markets that sell alcohol in poor neighbourhoods. Police say the four are associated with an Oakland-based black Muslim group modelled on the Nation of Islam, and were among the dozen bow-tie-wearing men caught on videotape tearing apart one of the stores on November 23rd. Their arrests bring further scrutiny to Your Black Muslim Bakery, an Oakland business founded in 1968 by the late Yusef Bey, a religious leader who espoused a black Muslim brand of self-reliance.

Mr Bey’s group has been praised for bringing business to blighted neighbourhoods and putting ex-convicts to work. But it has also been criticised by law-enforcement officials, who say it uses organised-crime tactics to build its power base. Before Mr Bey’s death in 2003, his followers had been implicated in assaults and threats against police officers. Two of Mr Bey’s sons have been murdered, and a third now stands accused in the liquor-store attacks. The proliferation of such stores in poor urban neighbourhoods has long been a source of racial tension. Most store owners are immigrants from Asia and the Middle East who, black leaders say, profit by encouraging alcoholism among local customers.

Not with our money

A conservative Christian group has closed all its accounts with Wells Fargo, in protest against the San Francisco bank's dealings with “pro-gay” groups. Focus on the Family, a non-profit, right-wing religious group with an income of $146m in 2004, ceased business with Wells Fargo after learning the bank had donated $50,000 to the Gay & Lesbian Alliance Against Defamation (GLAAD), a Los-Angeles-based NGO. Wells Fargo's website announces the bank has donated more than $14m to pro-gay organisations in the past two decades.

A vice-president at Wells Fargo has said the bank is proud to be a “diverse organisation” that supports the local gay, lesbian, bisexual and transgender community, as well as causes that Focus on the Family supports. He also said that the bank's donation to GLAAD came from profits on accounts in the San Francisco area, not from Focus on the Family’s home state of Colorado.

Catch if you can

December 2005

The Modern Art of Orchids

Until February 26th 2006

People have been fascinated by orchids throughout history: Confucius extolled their graceful leaves and delicate fragrance more than 2,000 years ago; British horticulturalists went wild for them when they were first brought to Europe in the 19th century; and in “The Big Sleep”, Raymond Chandler’s noir thriller, a character in a hothouse filled with orchids describes the flowers' “perfume” as having “the rotten sweetness of corruption.”

The Conservatory of Flowers is now inviting visitors to its own hothouse to view the diverse beauty of these flowers. The exhibit features sculptures and other art inspired by orchids, as well as a gallery full of live specimens. The show also explains the orchid’s biology. There is plenty of material here: there are up to 35,000 species of orchid, which account for 10% of all plant species.

The Conservatory of Flowers, John F. Kennedy Drive, Golden Gate Park. Tel: +1 (415) 666-7001. Visit the conservatory’s website for more details.

More from the San Francisco cultural calendar

Economist.com Cities Guide: Buenos Aires Briefing - December 2005

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Grounded

A nine-day strike by employees of Aerolineas Argentinas, Argentina’s main airline, caused trouble throughout the country in late November. Buenos Aires, at the hub of the air network, was particularly affected. With hotels already near capacity, passengers stranded in the capital had a hard time finding a place to stay. On top of this, strikers cut the highway to Ezeiza, the main international airport, forcing hundreds of passengers to walk over a kilometre to the terminal.

Aerolineas, which is Spanish-owned, reckoned that the strike, over demands for increased pay, affected 83,000 passengers and cost the company $10m. Travel-industry lobby groups, meanwhile, estimated the damage to the tourist industry at $1 billion. The strike was part of a wave of industrial action that has hit local travellers recently. Just three days after the Aerolineas strike ended, workers on the “subte”, the capital's underground network, went on strike for most of a day. And with the Aerolineas dispute merely on hold for 90 days, travellers should expect more trouble.

Feeling the heat

Things don't look good for Aníbal Ibarra, the mayor of Buenos Aires. In November, the Buenos Aires city legislature suspended him so that he can face an impeachment trial over his role in the deaths of 194 people in a nightclub fire last December. And now it seems he will be judged by a commission made up of his opponents. A new city legislature takes office in December, and a new group of deputies has been appointed to the commission, to replace those who have finished their term of office. Though this has tipped the scales in favour of the mayor's critics, it is still not certain that they will achieve the two-thirds majority needed to remove him.

Meanwhile the search continues for the concert-goer who fired a flare that ignited the club's ceiling. While one survivor claimed to have identified the culprit among photos of the victims, her friends contradicted her. The father of the boy who was fingered is one of Mr Ibarra's leading critics, and he accused the mayor of inventing the accusations to smear him. Mr Ibarra has denied the charge.

Blacklisted

Several of the congressmen elected in October to represent Buenos Aires and the surrounding province ran into problems when trying to take office in December. In a highly charged inauguration ceremony, members of Congress voted 212-8 to bar Luis Patti, a former police chief, from taking office, because he stands accused of human-rights abuses during the years of the military dictatorship (1976-83). Mr Patti claimed that he is not facing charges, but his opponents pointed out that he is under investigation for covering up abuses by two military officers. Mr Patti has been charged on repeated occasions and was even jailed in 1990, but he was later released under statute-of-limitations legislation.

Congress did not prevent two other controversial deputies from taking office. One was Eduardo Lorenzo Borocotó, who was elected for an opposition party and then switched sides to join the government before he had even been sworn in; the other was Rafael Bielsa, a former foreign minister who had resigned from Congress after being offered the post of ambassador to France, but then changed his mind.

Abuses of police power

Buenos Aires provincial police, the notorious Bonaerense, are once again under scrutiny, for their treatment of Gabriel Roser, a political activist. Critics claim that Mr Roser was singled out for mistreatment by the police because of his politics. Even though he had no criminal record, he featured in a book of police mugshots, from which he was identified by prosecution witnesses in an armed robbery case.

In early December he was released from prison, where he had spent almost 20 months despite bearing little resemblance to the initial description of the criminal and numerous inconsistencies in the witnesses' testimony. The case against him ultimately fell apart, and the prosecutors withdrew their case before the trial had ended.

Working capital

The impoverished rustbelt surrounding Buenos Aires has the highest rate of unemployment of any part of Argentina. According to government figures, 13.6% of the economically active population around the capital is unemployed, with another 16.2% under-employed (working partially, but not enough to cover their needs).

The lack of work has created a new urban underclass on the city periphery. This impoverished army is led by piqueteros—unemployed protestors who stage roadblocks to demand assistance—and cartoneros—scavengers who make a living sifting through the city's rubbish. But things are improving, albeit gradually. In the last three months, both unemployment and under-employment rates in the poor suburbs have dropped by around two percentage points. Meanwhile, unemployment in the capital itself dropped from 9.6% to 7.7%—the lowest figure in the country.

Catch if you can

December 2005

Jazz photos from the collection of Hermenegildo Sabat

Until December 30th 2006

Hermenegildo Sabat is familiar to millions of Argentines for his mordant political illustrations in Clarín, a leading local newspaper. But he is also a journalist, photographer and enthusiastic amateur clarinettist. For all these reasons, the General San Martín Cultural Centre has employed him as curator of an entertaining collection of jazz photography, as part of its 35th birthday celebrations. Some of the photos, such as one of Billie Holliday recording “Strange Fruit” in 1939, were taken by celebrated jazz photographers like Charles Peterson; others, including Louis Armstrong visiting Buenos Aires in 1957, were taken by Mr Sabat himself.

Centro Cultural General San Martín, Sarmiento 1551, Tribunales. Tel: +54 0 (11) 4374-1251/59. Open: daily, 10am-10pm. See the centre's website.

More from the Buenos Aires cultural calendar

Economist.com Cities Guide: Brussels Briefing - December 2005

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The question of rebate

On January 1st, Britain will hand over the rotating presidency of the Brussels-based European Union to Austria. The success of a country's presidency is usually judged on its record of piloting certain issues over the six-month period. But Britain's presidency will be assessed almost entirely on the outcome of the European Council, which was held in Brussels on December 15th and 16th.

During the meetings, Tony Blair, Britain's prime minister, worked hard to get an agreement on the EU's budget for 2007-2013. But the deal came at a stiff price for Britain, which will have to surrender a sizeable fraction of its rebate—the mechanism by which it is refunded EU money as compensation for paying more into the common purse than it receives. In return, Mr Blair received some small concessions on the spending cuts he has been seeking; the agreement pared the budget to €862 billion ($1.04 trillion) from the €871 billion proposed by Luxembourg, although this was still above the €847 billion proposed by Britain. But he failed to get a reduction in the EU's enormous farm subsidies, his original goal. Relations between the various countries of the EU have been rather fraught in 2005, and the summit did little to reconcile opposing parties. Austria may have to apply some soothing balm.

Veiled attack

Belgians are still shaken by the discovery that a suicide attack in Iraq was the work of a Belgian woman. Muriel Degauque, a 38-year-old from Charleroi, just south of Brussels, blew herself up just outside Baghdad on November 9th, killing five Iraqi policemen and injuring a sixth and four civilians. She is the first European female suicide bomber in Iraq. Degauque, who was raised Catholic in the industrial town of Charleroi, had converted to a radical form of Islam espoused by her half-Moroccan husband, Hissam Goris. She travelled to Iraq with her husband, who was shot by American security forces before he could detonate his bomb.

Police raided houses in Belgium and France after the attack, and five people are being held in custody in Belgium. Investigators in Brussels suspect these men are part of a group working locally to recruit suicide bombers, but the men have denied working together, despite knowing each other from school. Local mosques that harbour radical preachers have been under scrutiny.

Tongue lashing

In a controversial decision on December 2nd, Flemish authorities agreed to make the ability to speak Dutch a pre-requisite for getting social housing. The proposal, which has yet to become law, pushes non-Dutch-speakers to take a language course in order to become eligible for one of the 134,000 homes available to low-income locals in the Dutch-speaking part of Belgium. Housing associations in the region claim this will worsen relations with immigrants. The move was initiated by the Flemish liberal and centre-right parties, which are part of the region's ruling coalition. Their tough stance on immigrants can perhaps be explained as a defensive move against the right-wing Vlaams Belang, which campaigns against immigration and for an independent Flanders.

Meanwhile, political parties in French-speaking Belgium see the proposal as a threat to areas just outside Brussels, which, though technically in Flanders, are dominated by francophone residents. They have promised to challenge the legality of the proposal and its compatibility with both the Belgian constitution and European Union law.

Off course

Motor-sports are very popular in Belgium, but that does not explain why everyone is talking about Formula One (F1). The future of the Belgian Grand Prix, which has been frequently run at the Spa Francorchamps circuit since 1950, has been uncertain following the bankruptcy of the local F1 promoter last year. Owing to F1's contract with the Walloon government, the responsibility for underwriting the event fell to the government, which meant shouldering losses of about €15m ($18m) and attracting fierce criticism.

The government claims it cannot afford to continue to bail out the race's promoter, and has been in talks with Bernie Ecclestone, F1's colourful British boss, to plug this drain on local coffers. Mr Ecclestone said he was keen to create a plan to ensure the survival of the race in Belgium, and to discuss improvements to the local circuit's facilities. On December 12th, a special committee of the Walloon parliament began hearings on the issue, and the government is considering a €6m investment in the 2006 Grand Prix. The arrangement may find Mr Ecclestone promoting the event himself.

Brewing resentment

Belgium's vast array of beers expands further every December, when breweries promote special varieties for Christmas. But a bout of bickering among beer-makers has cast a pall over this year's celebrations.

InBev, the world's biggest brewer, will close several of its smaller breweries, creating more than 200 job losses. Zythos, the Belgian beer-drinkers' organisation, claimed the closures proved that InBev was run by bankers instead of brewers, and accused the company of abandoning Belgium's brewing traditions. The closures also mean that Hoegaarden, InBev's popular wheat beer, will no longer be brewed in the Flemish village it was named after. Instead, production will move to Jupille. A march in Hoegaarden on December 10th attracted 3,000 demonstrators, and more protests are planned. InBev was formed in 2004 by the $11 billion merger of Belgium's Interbrew and AmBev, Brazil's biggest brewer.

Catch if you can

December 2005

Christmas in Brussels

You would have to be a hard-hearted Grinch not to find some amusement in the centre of Brussels at this time of year. Indeed, the city’s seasonal festivities seem to grow more lavish with every year. This month, it is possible to walk the best part of a mile from Place St-Jean, north of the Grand’ Place, to the Big Wheel at the far end of the Fish Market, taking in at least 100 stalls and attractions on the way. And the annual Christmas crib in the Grand’ Place has acquired added authenticity with the presence of live sheep munching at the manger.

The Fish Market is the site of the city’s annual ice-skating rink (open until January 8th), and nearby look out for two exotic carousels featuring outlandish monsters. Near the vast Novotel hotel on Rue de la Vierge Noir is an equally statuesque ice monster, which visitors are invited to walk through.

For full details of all events, visit the City of Brussels’s “Winter Wonders” website or call +32 2 279 6413.

More from the Brussels cultural calendar

Economist.com Cities Guide: Moscow Briefing - December 2005

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No contest

The Moscow City Duma held elections for its 35-seat parliament on December 4th, in what was considered a test of parties’ popularity before the national elections in 2007. United Russia—the Kremlin-backed party locally led by Moscow’s popular mayor, Yuri Luzhkov—won with 28 of the seats, followed by the Communists with four, and a liberal coalition with three. But turnout was an apathetic 34%, and the election was overshadowed by accusations of corruption. Opposition parties claim that United Russia had unfairly used the “administrative machine” of the city to canvas, fly-post and badger voters. Moreover, critics claimed that a suspicious busload of voters cast their votes in more than one place.

United Russia’s victory was never in doubt. The election's most surprising outcome was the rise in support for the Communists, to 17%. They seem to have benefited from the last-minute ban on participation by the increasingly popular, nationalist Rodina party. Rodina was technically punished for running a campaign ad judged to have incited ethnic hatred, but pundits suggest that the ban was a calculated, Kremlin-inspired move to give United Russia a clean sweep. The struggle between these two parties is expected to be the main drama, such as it is, of the 2007 national parliamentary campaign.

Cold comfort

Anatoly Chubais, boss of Unified Energy Systems, Russia’s electricity monopoly, is not a popular man. A nationalistic ex-serviceman tried to assassinate him earlier this year, apparently because of Mr Chubais’s link with the market reforms of the 1990s. More recently, Mr Chubais riled Muscovites when he warned in late November that he might have to cut power this winter to conserve energy if a severe frost hits the city for more than three days.

Yuri Luzhkov, Moscow’s mayor who has sparred with Mr Chubais in the past, called this announcement “savagery” and complained to Vladimir Putin, Russia's president. Mr Chubais later clarified his comments, explaining that such cuts would not affect residents or social institutions, but be targeted at industrial enterprises. He warned that power outages, such as the one suffered by the city in May, remained a possibility until the ancient electricity grid and power-generating facilities are modernised, and Russia’s overdue energy reforms—which could cost as much as $50 billion—go forward.

News from Russia, with love

The Russia Today TV channel broadcast its first output from its Moscow studios on December 10th—then promptly went off-air two days later. With a mission to deliver news with a “Russian perspective” in English, the ambitious, state-funded venture is supposed to have programming round-the-clock. But on December 12th, a malfunctioning computer system, allegedly tampered with by hackers, forced Russia Today off the air.

The new channel is as an attempt by the Kremlin to counter an alleged misrepresentation of Russia by western media. “We will mainly have Russian news, but we will also show international events and express them from our point of view here”, Margarita Simonyan, Russia Today's editor-in-chief, told the Interfax news agency. Staff have been recruited to the channel from all over the world. Many are relatively young—Ms Simonyan is only 25 years old. The content promises to be eclectic, a diet of news augmented by feature stories on life in Russia and former Soviet countries. In its first weekend, one of the channel's features relayed how some former Soviet countries are re-vamping schoolchildren's history textbooks, post-independence.

A Stalinist hotel goes upscale

The long-awaited sale of the landmark Hotel Ukraine was finally completed at the end of November. Built in 1957 as one of seven modernist “wedding-cake” tower blocks intended to dominate the Moscow skyline, the 30-storey hotel was once the world’s tallest. The value of this communist icon was—in the spirit of capitalism—almost doubled at auction, from $151m to $273m.

The Hotel Ukraine has 1,627 beds, but its new owner, a company called Biskvit (headed by the humbly named God Nisanov), will probably need to spend up to $100m on renovations. In its new incarnation, this relic of Stalinism will join the ranks of Moscow’s other exclusive hotels, which do a profitable trade in their $400-plus rooms. But the hotel will not be completely transformed. Biskvit’s contract bars the company from changing the hotel’s exterior, so the renovation will spare the hammer and sickle and decorative sheaths of wheat (symbolising the Ukraine, the “breadbasket” of the Soviet Union) that still grace the building’s façade.

Rock the house

St Basil's Cathedral, the resplendently gaudy church that stands in Red Square, has withstood much in its long life: foreign invaders, triumphal Soviet parades of men and tanks, and a threat from Stalin to destroy it (apparently thwarted only by the hunger strike of a famous architect, who camped outside the cathedral until Stalin relented). But it is now apparently threatened by nothing more than noise. According to a recently published report by the Public Council of Moscow's Central Administrative District, vibrations emanating from the concerts and events that are increasingly common in and around Red Square are harming the structure of the 16th-century building. Similar concerns were raised in 2003; then, despite the completion of a three-year restoration project on the building’s exterior, a Russian government report warned that the building was slowly sinking and its foundations should be strengthened.

Catch if you can

December 2005

The Great Moscow State Circus and the Old Circus

Through the winter

Moscow’s winter circus season is in full swing. The Great Moscow State Circus, just outside the central ring road, boasts a “Circus-whirligig” show featuring a series of trapeze artists, some accompanied by trained bears. These high jinks can attract a huge crowd: the auditorium holds up to 3,400 people. Its rival, over 100 years old and known fondly as the Old Circus, is officially named after Russia’s most famous clown, Yury Nikulin. This season’s extravaganza boasts horses, dressage dogs, acrobats and fire-eating.

Great Moscow State Circus, 7 Prospekt Vernadskogo. Visit the circus's website for further details. Tel: +7 (095) 930-0272. Nikulin Moscow Circus, 13 Tsvetnoy Boulevar. Tel: +7 (095) 200-0668. Visit the circus's website for further details.

More from the Moscow cultural calendar

Kirchner and Lula: different ways to give the Fund the kiss off

Argentina, Brazil and the IMF

Dec 20th 2005 BUENOS AIRES AND SÃO PAULO
From The Economist print edition

Doing without the IMF has underlined Brazil's financial strength and Argentina's economic uncertainty
WHATEVER the economics involved, wriggling free from the tutelage of the IMF is always good politics, in Latin America in particular. That is why Brazil's finance ministry announced on December 13th that it would repay early its entire debt of $15.5 billion falling due to the IMF over the next two years. The immediate effect was to rush Néstor Kirchner, Argentina's president, into an identical declaration just two days later. He said his government would repay $9.8 billion to the Fund, before the end of this month. In both cases, the motivations were similar. More telling was the difference in market reaction and policy implications.

Both governments claimed they would make financial gains from the move—a saving of over $900m in interest payments for Brazil and of $842m for Argentina. In both cases, the more powerful motive was political. Brazil's president, Luiz Inácio Lula da Silva, is burdened with a corruption scandal and a below-par economy as he prepares for a tough fight to win a second term in an election next October. Paying off the IMF will please his left-wing supporters without ruffling financial markets. Mr Kirchner runs the risk that by the time he seeks a second term at an election in April 2007, Argentina's economic recovery may have run out of steam. Paying off the Fund will “generate freedom for national decisions”, he said. Even La Nación, a habitually Kirchner-sceptic newspaper, hailed this as an “historic” move.

There the similarities end. Brazil's agreement with the IMF has helped steer it through financial turmoil and an inflationary spike. Its repayment exploits the robust balance of its international payments: reserves stand at some $67 billion. “Foreign investors will understand that Brazil has strong policies,” said Joaquim Levy, a senior finance official. They did: the risk premium on Brazil's dollar bonds fell to its lowest level ever last week.

Ironically, this gesture of self-confidence comes at a time of fierce debate over the policies that made it possible. The finance minister, Antonio Palocci, is defending high interest rates and a tight budget policy against increasingly shrill attacks from business, the ruling party and his fellow ministers. The odds are that government spending will rise in 2006. But the debate is over whether or not the government should continue to exceed its fiscal targets. In Brazil there is “a growing convergence around a responsible fiscal policy”, according to Lisa Schineller of Standard & Poor's, a rating agency.

Argentina's recent experience with the IMF has been far less happy. Only last month Mr Kirchner dedicated the bulk of his speech as the host of the Summit of the Americas to blaming the Fund for Argentina's woes. But the benefits to Argentina from its declaration of financial independence are hardly clear-cut. The government was paying an interest rate of 4.2% on its loans from the Fund. It will repay the central bank partly by issuing new debt, which is likely to pay a coupon rate of around 9%.

In practice, Mr Kirchner already had much freedom of manoeuvre. In August 2004, Argentina suspended its agreement with the IMF; since then, it has repaid its debts to the Fund as they fell due. Roberto Lavagna, the economy minister until he was sacked last month, wanted a new agreement with the IMF. But Mr Kirchner had made it clear that he would brook no unwelcome conditions from the Fund. Since the IMF was reluctant to contemplate a default by such a prominent debtor, the president might have got his way.

Thanks to the strength of its recovery, Argentina can just about afford to repay the Fund. Since 2002, exports have increased by around 50% and the central bank's reserves almost tripled, to $27 billion. Even so, markets reacted unfavourably, with both the peso and bond prices falling. That reaction probably had less to do with concerns about lower currency reserves than with the uncertainties Mr Kirchner has now introduced into Argentine economic policy by casting off Mr Lavagna and the IMF in short order.

In the new Argentina, the president's word is law: he chose to enact the prepayment by presidential decree, riding roughshod over the central bank's legal independence. In place of the IMF, one of Argentina's largest creditors is now Hugo Chávez, Venezuela's socialist president.

Mr Kirchner insisted that he will stick to fiscal solvency, “prudent” monetary policy and “a predictable economic environment”. His opponents argue that he is not. His economic team shows no sign of tightening monetary policy even though double-digit inflation has provoked a wave of strikes. Instead, the government has bullied food producers and supermarkets into holding down prices, under threat of higher taxes.

The IMF would have pushed for increases in the tariffs of privatised utilities, many of which have been frozen since 2002. Mr Kirchner's gamble seems to be that he can round up enough investment to overcome critical bottlenecks in energy and infrastructure, allowing growth to continue while easing inflationary pressures. If he fails, Argentina risks a return to the stagflation of its past.

Doing without the Fund is indeed an economic emancipation. But it means that governments must stand or fall purely on their own reputation for financial probity. South America's two largest economies have now put that to the test, in a controlled experiment.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Relief but little rebuilding

Asia's tsunami

Dec 20th 2005 KHAO LAK, BANDA ACEH, NEW DELHI AND BANGKOK
From The Economist print edition

One year on, man has done a surprisingly good job cleaning up after God. The harder part comes next

SOPON DECHKLA survived the tsunami that struck several countries around the Indian Ocean on 26th December 2004, by clinging to a palm tree at the Sofitel Khao Lak resort, where he worked as a driver. His wife, a cleaner at a neighbouring hotel, was one of perhaps 230,000 people who drowned in the deluge. The Sofitel, where 220 died, lies in ruins to this day, its roof tiles torn off and its windows shattered by the force of the waves. Mr Sopon has found work at the Sarojin, one of the first local resorts to reopen after the tsunami. It is fully booked over New Year despite high-season rates that start at $400 a night. But of the 6,500 hotel rooms in the area prior to the disaster, only 1,200 are back in business. Khao Lak, the part of Thailand hardest hit by the tsunami, is recovering. But progress is frustratingly slow—and, in some respects, unnecessarily so.

The same applies even more strongly to the Indonesian province of Aceh and the eastern coast of Sri Lanka, which were poor and war-torn before the tsunami struck, and suffered greater devastation when it did. Of the 1.8m people left homeless by the disaster, a minority have rebuilt their homes; others have found shelter with family or friends, or in relatively solid “transitional” homes provided by aid donors. But some 67,500 tsunami victims in Indonesia are still living in tents a year into the relief effort, while another 50,000 have crowded into temporary barracks. It will take another 18 months or so to build houses for them all. Some 500,000 Indonesians rely entirely on rations distributed by the World Food Programme. That is an improvement from 750,000 at the beginning of the year, but indicates how many still lack livelihoods.

By most accounts, the emergency-relief effort in the immediate aftermath of the tsunami was a notable success. Unlike in previous disasters of this magnitude, almost no one died from outbreaks of disease, lack of clean water or starvation in the wake of the catastrophe, even in remote islands off India and Indonesia. In some fields, the recovery has proceeded very quickly: most children in tsunami-affected areas are back in school, although not necessarily in a proper building. In Indonesia, for example, the United Nations Children's Fund has set up temporary schools for over 500,000 children.

The long haul

The transition from emergency relief to reconstruction has gone less smoothly. In both Sri Lanka and Indonesia, the authorities set up special agencies to oversee rehabilitation. That made sense, since the mammoth task would have overwhelmed existing government agencies, especially because the waves had swept away many of their staff and offices. But creating a parallel bureaucracy takes time, and is bound to provoke rivalry with the existing one. Indonesia's Rehabilitation and Reconstruction Agency (BRR) was not created until April, and was not fully operational for several months after that.

Money, in theory, should not have been a problem. The outpouring of sympathy after the tsunami resulted in pledges of over $13 billion in international aid of one sort or another. Donations from private individuals and companies alone came to more than $5 billion. Some charities, such as Médecins Sans Frontières, actually started refusing donations for tsunami victims, saying they already had as much money as they could use.

But donors have been slower to spend the money than to raise it. Of the $2 billion or so in promised aid that the government of Sri Lanka is tracking, only $1 billion has actually been handed over, and only $141m of that has been spent. These figures may exaggerate the donors' sluggishness, says Aidan Cox of the United Nations Development Programme (UNDP), who helped set up the tracking system—but they are probably not far off.

In any reconstruction effort, aid workers point out, there is always a trade-off between quality and speed. Given the amount of money they had to spend, and the amount of attention their work was receiving from the media, many agencies decided to make model projects out of their tsunami relief work.

But some delays are the result of simple ineptitude rather than complex planning. During the initial airlift, several charities flew in unsolicited, unwanted donations of winter clothing, which added to congestion at airports. More recently, aid agencies have bombarded fishermen with offers of new boats, but no one has paid to rebuild the factories that used to supply the ice to preserve their catch. No one seems to have spent much time thinking about interim measures. It was only recently that the BRR began a real push to get temporary shelters built to replace tent camps during the long wait for permanent housing.

Nor is the reconstruction effort evenly spread. In Thailand, the richer and relatively unscathed province of Phuket has received more aid than Phangnga, the province which includes Khao Lak. Groups with little political clout, such as illegal Burmese immigrants in Thailand, or Sri Lanka's Muslim minority, have got less than their fair share of assistance.

By the same token, the World Bank complains that fashionable causes, like health and education, have won more attention than equally worthy but less glamorous work, such as dredging swamped ports. Mr Cox of the UNDP says that of the $354m earmarked for road-building in Aceh, only $8m has actually been disbursed. No wonder, then, that of 3,000km (1,900 miles) of road rendered impassable, only 354km have been restored.

By far the biggest obstacle to the reconstruction effort, however, is the sheer scale of the devastation. Long swathes of coastline in Aceh rose or subsided during the earthquake that prompted the tsunami, leaving farmland submerged and coral reefs above water. Fields are strewn with boulders or sodden with salt water. Roads and ports have been washed away, making it hard to bring in heavy equipment or supplies. The temporary roads the Indonesian army has built are already eroding in the monsoon rains.

Skilled labour and building materials are also in short supply. There are simply not enough workmen, machines and supplies in Aceh to build more than 5,000 houses a month. Aid agencies, naturally, want to use timber from legal sources. But neither Sri Lanka nor Indonesia produces enough locally, so it has to be imported from Australia and New Zealand.

Even where land has been cleared and supplies are available, reconstruction often cannot begin straight away. Land disputes are legion, since the tsunami destroyed many boundary markers and deeds, if they existed in the first place. The huge number of deaths has generated plenty of inheritance disputes. Unscrupulous property developers are said to have seized valuable coastal land in Sri Lanka and Thailand to build new resorts. Suitable land will have to be found for some 30,000 families in Aceh who will have to relocate permanently, because their former property is no longer habitable.

Still, the World Bank and the BRR, in a recent report on the first year of reconstruction in Indonesia, argue that work has actually proceeded quickly compared to past disasters. It took seven years for a city as rich as Kobe in Japan to recover in terms of population, income and industrial activity after its earthquake in 1995, the report notes.

Setting up an early-warning system in the Indian Ocean to reduce the number of casualties from future tsunamis is also proving more difficult than expected. The UN agency in charge of the effort, the Intergovernmental Oceanographic Commission, is hoping to put a system of deep-sea sensors in place by 2008. It has held two conferences to discuss the scheme, but is short of money to implement it.

In the meantime, several countries are pressing ahead with interim systems of their own. India says it will spend 1.25 billion rupees ($26m) to set one up by 2007. Indonesia will soon have the first of half-a-dozen ocean-bed sensors in place off Sumatra. Thailand has built 39 of a planned 62 towers along the Indian Ocean, to house sirens and loudspeakers that will broadcast evacuation instructions in multiple languages. In mid-December, a careless technician activated the system by accident, causing a brief panic among tourists and residents alike.

Some good after evil

Politically, too, the report card is mixed. Optimists had hoped that a sense of solidarity in the wake of the tsunami would help bring an end to long-running conflicts in both Indonesia and Sri Lanka. The separatist rebels of both the Free Aceh Movement (GAM) and the Liberation Tigers of Tamil Eelam had, after all, already embarked on sporadic peace talks with the governments of Indonesia and Sri Lanka. In the end, however, the tsunami succeeded in reducing tensions in Indonesia, while raising them in Sri Lanka.

GAM, which was already on the defensive, seems to have lost weapons and fighters in the tsunami. The destruction of so many of Aceh's boats must have put the squeeze on the smuggling racket it ran to raise money. Since it did not control any territory of its own, it could not exploit the reconstruction effort for political or financial advantage. All this, coupled with some flexibility from Indonesia's new government, contributed to its decision to sign a peace agreement in August, which has proved remarkably durable so far.

The Tigers, on the other hand, do control large areas of northern and eastern Sri Lanka, and so ended up squabbling with the government over the huge amounts of aid on offer. Establishing a mechanism to administer the money meant tackling the very issues—over sovereignty and authority—that have proved the most intractable in Sri Lanka's faltering peace process.

Mahinda Rajapakse, Sri Lanka's newly elected president, has threatened to scrap a deal on how to distribute aid in areas controlled by the Tigers, while Velupillai Prabhakaran, the Tigers' leader, has threatened to return to war if the government does not offer an acceptable settlement next year. Renewed fighting would further slow the already sluggish reconstruction drive, and heap tragedy upon tragedy.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Wobbles all round

Palestine and Israel

Dec 20th 2005 NABLUS AND JERUSALEM
From The Economist print edition

A split in the Palestinians' ruling party and a threat to the health of Israel's embattled prime minister could shake up Middle East politics all over again

JUST a month after the prime minister, Ariel Sharon, overturned Israeli politics by quitting the ruling Likud to form his own party, Kadima (“Forward”), a similar upheaval has hit the Palestinian Authority (PA). And to confuse matters still more, Kadima's own chances of keeping Mr Sharon in power after the election due in March took a knock after he suffered a stroke, albeit a minor one, on December 18th; his new party, after all, depends massively on the charisma of its 77-year-old leader.

Among Palestinians the uncertainty is just as great. After lengthy feuding over whom the PA's ruling Fatah party would field in the election for Palestine's parliament on January 25th, a crowd of ambitious politicians decided that the machinations of a few old stalwarts to lead the party list had gone too far. Primaries meant to resolve things fairly had collapsed in shooting and chaos. Mahmoud Abbas (Abu Mazen), the Palestinian president, was said to be drawing up a list that would put unpopular old-timers above genuine vote-winners. So, at literally the eleventh hour on December 14th, with registration due to close at midnight, the Fatah “young guard” announced its own party list, calling it Al-Mustaqbal: “the Future”.

It is the heaviest blow to Yasser Arafat's crony-ridden legacy since he died a year ago. Palestinian voters blame the corruption and ineptitude rampant in Fatah and the PA mostly on a small group of his loyalists. Yet even though Mr Abbas had fired some of the group, such as Arafat's cousin Musa Arafat (later murdered), earlier in the year, he was reluctant to move against other hangers-on, to the bafflement even of some of his close advisers.

Instead, the young guard has done it for him, making him look indecisive and foolish. Drama turned to farce as Fatah released its official list a whisker before the deadline, only to discover that 14 of the people on it were on the al-Mustaqbal list too. For days, officials tried to negotiate a merger while debates raged over whether that was even legal. In the end there are two lists: one for the young guard, another for the rest.

Paradoxically, the split may be good for Fatah. Voters who might have rejected a unified list with the old guard on it now have an alternative, so the two lists will probably win more seats altogether. That will slightly weaken the main opposition party, the Islamists of Hamas; and it skewers a Third Path party recently set up by a bunch of reformist technocrats, including Mr Abbas's much-admired former finance minister, Salam Fayyad.

Though Mr Abbas lacked the guts to follow Mr Sharon's example himself, he can still stay on top. Al-Mustaqbal should win a good number of seats, cutting the old-timers down to size. The president could then side with al-Mustaqbal to push reforms that Palestinians want: fighting corruption, building the rule of law and investing in job creation. Since these are also Hamas's core issues, it will often have to go along. If Mr Abbas is lucky, that could sharply improve the PA's fortunes.

But the endgame is far from clear. Hamas took control of three key cities in local elections last week, including a landslide in Fatah's former stronghold, Nablus. And Hamas has been cleverer about allocating its parliamentary candidates in a complex new system whereby each voter chooses both a national list and a local representative. How much of the parliament Hamas will take—some say as little as a fifth, others as much as a half—is a guess. The result will dictate how much it subjects both its politics and its militant wing to the PA's authority, something Israel sees as a precondition for any peace talks.

Nor will things be simple afterwards. The PA's young guard has at least three competing leaders, each with his loyalists. Though Marwan Barghouti, stewing in an Israeli jail cell, is undisputedly the most popular, the fiercely ambitious Muhammad Dahlan and the slightly-less-so Jibril Rajoub, two former security-service bosses, will scheme against him and each other. Mr Abbas will need as much guile as Mr Sharon to handle this body politic—not something he has recently displayed.

What if the bulldozer is blocked?

As for Mr Sharon's stroke, however minor, it is a reminder that his time may be short. His new party draws its main strength from him. Should anything else befall him before Israel votes in March, there would be turmoil as his heirs fight it out with a rejuvenated Labour Party on the left and Likud regrouping on the right. This week Binyamin Netanyahu, aged 56, a hawkish former prime minister, was elected as Likud's leader. Expect a tense few months.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Sweet spot

Buttonwood

Dec 20th 2005 TOKYO
From The Economist Global Agenda

It’ll have its scares, but Japan is still the best story in town

AN ACQUAINTANCE of Buttonwood’s, an economist at a great investment house, is just back from a round-the-world road show to charm clients about Japan. Everywhere he went, he played to packed houses: there is no doubt that Japan is now the big investment story. Yet interest in Japan among fund managers is not always matched by familiarity. Even this travelling economist found himself briefly lost for words when one manager in, let us say, Milwaukee raised his hand to say that, as a young card, he had once greatly enjoyed driving a thing called a Datsun about town, a delightful little car if rather prone to rust. What, the manager asked, did the economist think now about a punt on the company?

Now, the currencies in which Buttonwood deals are scepticism, a contrarian streak and a sense of dark foreboding about the consequences of human folly. So when it has escaped a potential guardian of your retirement pot and mine that the Datsun badge last adorned a vehicle in 1980; that Nissan, the parent company, subsequently slid into alarming decline until it was rescued by Renault; and that what happened next is one of the great turnarounds in business history: then you might think it is time to bring the curtain down on the sizzling story that is Japan’s stockmarket this year (chart 1). After all, while this gentle man dreams of his old Datsun, the annual bonuses at the big investment banks’ Tokyo branches have already been calculated, and the new Testarossas already ordered—and rare indeed is it that equity markets can sizzle two years in a row as Japan’s has done in 2005, when it rose by two-fifths.

Signs of froth in the Japan market are there for all to see. Heavens, even the Tokyo Stock Exchange, after a decade of torpor, is overwhelmed by the volumes now being sent through its systems. But can it not happen that sometimes, just sometimes, the contrarians are wrong and the consensus right? At any rate, do not take as an excess of seasonal spirit the prediction by this Asian incarnation of Buttonwood that for the next year or four Japan will be the happiest place to prosper in as far as the asset markets of the world are concerned—and that even whatever goes on in China will prove, from an investor’s point of view, to be a mere distraction.

This columnist’s premises are the following. First, the world’s second-biggest economy has started—but only started—on the path out of the morass formed by a decade of deflation. As the recovery builds speed, it is likely to be sustained by a virtuous circle of forces.

Paul Sheard, chief Asian economist at Lehman Brothers, talks about the economy’s transmission mechanisms, broken for so long, starting to engage again. In the real economy, he says, company restructuring, more focused management and deregulation have boosted a corporate sector that at last is hiring more and paying more. Incomes are rising for the first time since the late 1990s. That bodes well for a recovery in consumption.

On the monetary side, signs are growing that the Bank of Japan (BoJ) may one day no longer be pushing on a string. Lending by private-sector banks is growing (just) after years of shrinkage, even if total bank lending is still in negative territory. Jesper Koll, chief economist at Merrill Lynch in Tokyo, even sees hints of a return of rational pricing in credit markets. Since the beginning of October, he notes, when the BoJ started to suggest in earnest that it would not provide the banking system with free money forever, spreads between the best and worst of corporate credits have widened sharply.

The second premise is that the recovery will continue to be accompanied by supply-side reforms amounting to a revolution in the way capital is allocated. The government also promises fiscal discipline. On December 20th it unveiled its budget for the fiscal year that begins next April: it proposes to cut public spending by 3% and to cut bond issuance for the first time in nine years.

Third, and crucially, the central bank will continue to provide free money for the foreseeable future. For despite today’s tensions between the BoJ and the government over the course of monetary policy, the central bank has little room for manoeuvre. That is because it has committed itself not to tighten monetary policy until “core” inflation has turned positive for “a considerable time”. For the moment, core inflation has not turned positive at all—though figures for November or December may mark that momentous change. Count on free money for a good year more, and probably longer. With inflation on the rise, real interest rates would even turn negative.

All well and good, but none of this would establish the bull case if asset markets were already overvalued. But they are not. To take just one stockmarket measure, the earnings yield on the Topix index is still a highish 5% or so, making shares a far richer buy than bonds (chart 2). As for property, fizz has indeed returned to central Tokyo and that is now spreading outwards. But, on average, residential prices are back to levels last seen in the early 1980s, while commercial property prices are where they were before the mid-1970s, when this writer was in short trousers.

As for the risks to this happy scenario, some think there are none; Buttonwood does not carry the consensus so far. One risk is premature tightening by the BoJ. Another is a rise in bond yields that imposes crippling costs on the service of the government’s gargantuan debt. And there is always the lurking thought that a repeat of the great earthquake of 1923 is overdue.

Apart from those, the risks, as strategists quaintly put it, are pretty much all on the upside. Mr Koll, one of the most upbeat forecasters, thinks that Japan’s annual productivity growth over the coming decade will average 2.8%, versus 1.5% over the past decade. Whether or not you buy that much bullishness, reflation means that surprises in corporate profit growth over the next few years are more likely to be pleasant than nasty.

A final statistic, courtesy of Lehman’s Mr Sheard. Since the beginning of 1999, Japanese households have greatly increased the very safest and most liquid of assets—cash and money held in demand deposits at the bank: these have risen as a proportion of nominal GDP from 21% to 39%. They have been heavy net sellers of shares, to the tune of ¥25 trillion ($215 billion) since the market bottomed, while foreigners have dived in. Ordinary Japanese, in other words, are still hunkered down against deflation.

If the economy does now reflate, that mountain of cash is bound to move with expectations, with heady consequences for property and share markets. Could it be, in other words, that the domestic view of Japan’s prospects, overly jaundiced by the awful experience of the past, is in fact the dominant consensus? And could it therefore be that Buttonwood remains a contrarian, honour intact?

Send comments on this article to Buttonwood (Please state whether you are happy for your comments to be published)

Read more Buttonwood columns at www.economist.com/buttonwood

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Look who’s listening

Dec 22nd 2005
From The Economist print edition

In the “war on terror”, George Bush can point to a number of advances in Iraq. But he has suffered setbacks at home over the wiretapping and torture of suspects

“DEFEATISM may have its partisan uses, but it is not justified by the facts.” That was George Bush’s pre-Christmas message, televised on Sunday December 18th. “Not only can we win the war in Iraq, we are winning the war in Iraq.” It was a deft performance, in which the president offered what the Washington Post called “an olive twig” to his critics—“I also want to speak to those of you who did not support my decision to send troops to Iraq”—even as he smilingly heaped scorn on them.

Mr Bush conceded mistakes and admitted that the occupation has proved “difficult”, but remained confident that his three-pronged strategy was working. First, American forces are training Iraqis to defend the new order. Second, a democracy is being built: witness the 10m Iraqis who went to the polls on December 15th. Third, the Iraqi economy is improving.

Progress in Iraq may be less sure than Mr Bush implied. But, after five speeches in 19 days, he is rousing his base. His approval ratings have crept back up from the mid-30s to the mid-40s—though Charlie Cook, a political analyst, thinks this is because his supporters have stopped smarting over his abortive bid to put his former personal lawyer on the Supreme Court. Meanwhile, the Democrats are struggling to present a united front.

A faction conservatives have dubbed the “Defeaticrats”, including the party’s chairman Howard Dean and many activists, thinks victory in Iraq is impossible. They want to pull out, either straight away or over the next two years. Members of another group, typified by Hillary Clinton, are trying artfully to avoid committing themselves to anything that might turn out to be unpopular. Senator Clinton has rejected both a “rigid timetable” for withdrawal and an “open” one. A final faction, consisting of Senator Joe Lieberman, offers Mr Bush qualified support.

Despite the Democrats’ incoherence, Mr Bush appears to have lost two battles on the home front this month. First, he has failed to get the Patriot Act, key provisions of which expire at the end of the year, renewed indefinitely. Second, he has been forced to drop his threat to veto an anti-torture amendment sponsored by John McCain, a Republican senator from Arizona.

Mr Bush argues that the Patriot Act, which was passed nearly unanimously after the attacks of September 11th 2001, is a vital tool in the war on terror. Senator Russ Feingold, a Democrat from Wisconsin, says it allows the government too much scope to spy on American citizens by, for example, allowing roving wiretaps and scrutiny of library records.

Worryingly for Mr Bush, some of his own side agree. When Mr Feingold led a filibuster against the act on December 16th, he was backed by four Republican senators, as well as virtually the entire Democratic contingent. Fretting that “we cannot afford to be without this law for a single moment,” Mr Bush challenged the Patriot Act’s opponents to explain why nearly all of them voted for it in 2001. After much further squabbling, the two sides finally agreed on a compromise on December 21st, with the Senate voting for an extension of the act, but one lasting a mere six months.

One reason for congressional distrust of the executive may be the revelation in the New York Times last week that the National Security Agency has been carrying out “hundreds, perhaps thousands” of wiretaps within the United States without court orders. The American Civil Liberties Union calls this “shocking” and “unconstitutional”—the NSA has broad authority to spy overseas, but not in America.

Mr Bush retorts that it was both legal and necessary. The wiretaps were used only against those with known links to terrorist groups and only international calls were bugged, not calls “from Houston to LA”. His authority to order such surveillance derived from the constitution and the act of Congress authorising the use of military force against al-Qaeda. (His critics dispute this.)

Mr Bush claims that in some cases his spies needed to act quickly rather than waiting for a warrant. A two-minute phone call between an al-Qaeda operative in America and one of his contacts overseas could lead to thousands of American deaths. Given that wiretap warrants can be granted retroactively, his critics wonder whether this argument adds up. Mr Bush has refused to give many details of how exactly the wiretaps were carried out, citing the need to protect operational secrecy.

Conservatives have tried to shift the eavesdropping debate on to the conduct of the New York Times, which sat on the story for a year. But the revelation fits all too easily with the idea of an administration that has paid scant attention to civil liberties.

With regard to a more controversial means of gathering information, Mr Bush has provided more clarity, albeit reluctantly. On December 15th, he agreed not to veto Mr McCain’s amendment outlawing the “cruel, inhuman and degrading” treatment of enemy captives anywhere in the world. This was after Dick Cheney, the vice-president, had held out for an exception to be made for the CIA.

Although the administration insists that it does not “torture” anyone, it has defined “torture” so narrowly as to exclude, for example, “water-boarding”, where a captive is made to believe he is drowning. A debate on the ethics of such techniques has raged in recent weeks. Advocates, such as the conservative columnist Charles Krauthammer, say that since a few terrorists undoubtedly have information that could save many lives, it would be immoral not to force them to disclose it.

That sounded plausible to those who have seen Kiefer Sutherland brutally extract crucial clues from bad guys to ward off Armageddon on the television series “24”, but Mr McCain, who was tortured by the Vietcong, has pointed out that in the real world, information extracted under torture is unreliable. And other columnists have argued that even if torture does sometimes yield useful intelligence, that must be set against the probably larger volume of intelligence forgone because Iraqis and Afghans are outraged at what Americans do to their captives.

“We’ve sent a message to the world that the United States is not like the terrorists,” said Mr McCain. His amendment, attached to a defence bill, is expected to pass this month.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Fazio shamed out of office at last

Dec 19th 2005
From The Economist Global Agenda

The governor of Italy’s central bank, Antonio Fazio, has resigned following the arrest of his friend, the former BPI chief Gianpiero Fiorani, and the revelation that Mr Fazio himself was being investigated for suspected insider trading. His departure brings to an end a period of months in which he embarrassed Italy's government by refusing to quit over a bank-takeover scandal

FIVE months ago, the rise of Gianpiero Fiorani looked unstoppable: the ambitious, well-connected provincial banker seemed to have pulled off a stunning coup, the hostile takeover by Banca Popolare Italiana (BPI), of which he was chief executive, of the much larger Banca Antoniana Popolare Veneta (Antonveneta). But Mr Fiorani's fall since then has been steep, culminating in his arrest earlier this month. On Monday December 19th the controversy surrounding the takeover brought down a much grander figure: his friend and steadfast supporter in that bid, Antonio Fazio, governor of the Bank of Italy, the country's central bank.

Mr Fazio's handling of that takeover has had politicians on all sides calling for his resignation for months. But the law, drawn up to preserve the central bank's independence, makes the governor all but unsackable and Mr Fazio had simply resisted his critics. The government was preparing a rapid change in the law, in an effort to unseat him, when he resigned. Mr Fazio's successor must now restore both confidence in Italian banking and the reputation of what was once Italy's most respected public body.

Mr Fiorani's arrest and the news that Mr Fazio himself was being investigated for misusing privileged information about Antonveneta appear to have been the final straws. The warrant issued against Mr Fiorani by a Milanese judge claimed he had organised a criminal gang that had in effect enriched itself at the expense of BPI's depositors. The warrant refers scathingly to the central bank, which is responsible for banking supervision. By defending BPI it had, wrote the judge, betrayed savers.

When it bid for Antonveneta, BPI was challenging ABN Amro, a Dutch bank (and the eventual winner). Telephone taps in investigations of suspected market abuse and insider trading revealed that BPI had political support to keep its target in Italian hands. But, noted the judge, keeping the banking system Italian was in effect a pretext for protecting the flow of large and illicit profits.

The new governor's first test could be to pass judgment on another controversial takeover fight, for Banca Nazionale del Lavoro (BNL). This also involves a foreign bidder. Spain's BBVA, which owns almost 15% of BNL and has been an important shareholder since BNL was privatised in 1998, made an unsuccessful bid in March. A group of property speculators who had bought large stakes in BNL sold to allow Unipol, an Italian insurer, to acquire a controlling interest. BBVA's offer lapsed in July.

However, the battle for BNL is not over. Unipol's bid is subject to approval by three regulators. The insurance industry's watchdog has given its opinion, but only to the Bank of Italy. Neither the central bank nor the stockmarket regulator has yet given a nod. Attention is focused on the central bank, which was due to reply to Unipol's request for approval by late December, but this deadline has now slipped.

With magistrates probing BPI's operations and with some actors in the BPI-Antonveneta saga also tied up in the Unipol-BNL affair, the banking supervisors will have extra need for caution. One reason for prudence is that Giovanni Consorte, Unipol's chairman, is reportedly under investigation—although the company says that neither it nor he has been notified of this; another is that he is on trial for insider trading in Unipol bonds (which he denies).

In addition, the arrest warrant for Mr Fiorani states that BPI granted Mr Consorte and Unipol's chief executive unsecured loans of €4m each. These loans, made in December 2004, when BPI was secretly preparing its move on Antonveneta, were used to fund equity trades, perhaps involving derivatives. According to the judge, the Unipol executives each netted €1.7m from these deals, and withdrew their profits by means of banker's drafts.

Had Mr Fazio still been in office, the central bank would have been in an impossible position: whether he had approved Unipol's bid or denied it, his judgment could have been questioned. Bankers and investors elsewhere in Europe will hope that Italy will now be more welcoming to foreign takeovers. At least, under a new governor Italy's banking industry can make a fresh start.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Miraculous recovery or last gasp?

Dec 21st 2005
From The Economist Global Agenda

After soaring for years, housing markets throughout the rich world have been looking wobbly for some time. But surprisingly strong data on mortgages and house-building released this week in America and Britain seem to signal at least a temporary reprieve. How long can this go on? And what will happen to the economy when it finally stops?

IN RECENT years, housing has been a peach of an investment in many rich countries. The Economist’s latest house-price index shows that since 1997 prices have soared by more than 85% in America, 100% in France, 112% in Australia, 150% in Spain, 166% in Britain and a whopping 208% in Ireland. And hot urban markets, such as London and New York, have far outstripped their national averages.

But recently anxious homeowners—and anxious central bankers—have begun to wonder if the market isn’t running out of steam. A decline that started in Sydney has spread to other Australian cities, as a result of which house prices rose by a measly 1% nationwide in the year to the third quarter of 2005. Britain’s market has also begun to look sickly: the Nationwide building society’s price index has risen by only 2.4% in the year to November. Could Australia and Britain be the canaries in the coal mine? Is America next?

Well, not yet. On Tuesday December 20th, new data released by America’s Commerce Department showed that after a decline of 6.6% in October compared with the month before, housing starts increased by 5.3% in November, a much stronger showing than expected. The number of new housing permits, which had been expected to fall, also increased, by 2.5%. John Snow, the treasury secretary, touted this as proof of the American economy’s strength.

Even the British canary seems to be waking from its coma. This week, the Royal Institution of Chartered Surveyors reported that house prices had risen in the three months to November, the first time this has happened in 15 months. Mortgage activity is also on the mend, according to the British Bankers’ Association, which announced on Tuesday that November had brought the biggest increase in mortgage lending since July 2004.

But this may be less miraculous recovery than last gasp. A recent report by the Organisation for Economic Co-operation and Development (OECD) indicates that house prices in Britain remain overvalued by more than 30% compared with rents. Britain’s economy, which has grown steadily for over a decade, has been flirting with recession in recent months. In response, the central bank cut interest rates, which may have sparked a temporary recovery in the housing market. But without faster growth, consumers cannot pay ever-higher prices for their homes.

Though the relationship between house prices and rents is less outlandish in America, consumers there are seriously overstretched. According to the Federal Reserve, the ratio of debt-service payments to disposable income was 13.75% in the third quarter, an historical high. Since 2000, the level of outstanding mortgage debt has almost doubled. While lower interest rates have helped consumers to meet these obligations without much additional pain, those rates are now creeping back up.

Not only is the Fed not done tightening, but the flood of cheap capital flowing into America from abroad could reverse itself at any time. This is bound to hurt consumers, especially since soaring house prices have forced many of them into adjustable-rate loans to keep their payments low.
Indeed, a lot of desperate homebuyers have turned to interest-only loans, or even negative amortisation loans (where the payments don’t even cover the accrued interest). As interest rates rise, many of these marginal buyers will be forced out of their homes, and the supply of new buyers will fall, which may result in a sharp decline in house prices. The Federal Deposit Insurance Corporation, which regulates America’s banks, indicated on Tuesday that it was considering stiffer guidance for banks that grant these sorts of loans.

If the housing market does turn sour, it would be bad news for the American economy, as it has been for the economy in Britain, where the recent slowdown has been partially attributed to a weak housing market. In both countries, consumers have become dangerously dependent on strong house prices to keep them feeling wealthy enough to spend. Housing markets may be the canaries that signal the fate of the broader economy. And, as any miner will tell you, canaries don’t live all that long.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Josef’s uncomfortable Christmas

Dec 22nd 2005
From The Economist Global Agenda

Germany’s federal court has ordered a retrial of Josef Ackermann, the boss of Deutsche Bank, for his role in awarding bonuses after Vodafone’s takeover of Mannesmann. The ruling is likely to hasten his departure from the bank, just as he succeeds in turning it into a force to be reckoned with in investment banking

DESPITE its economic might, Germany is often criticised for the way business is conducted there. Over-mighty unions hold sway over firms’ decision-making; the country’s model of corporate governance is clunky, to put it mildly. Optimists point to a series of recent reforms that have begun to unpick “Deutschland AG”, the cosy arrangement of cross-shareholdings and board appointments that deterred international involvement in German business and made firms largely unanswerable to investors outside the system. But a decision by the Federal Court of Justice in Karlsruhe on Wednesday December 21st will be seen by many as exemplifying Germany’s resistance to change, and as a victory for those fighting a rearguard action against the advance of Anglo-American capitalism.

The court has ordered a retrial of Josef Ackermann, the boss of Deutsche Bank, Germany’s largest financial institution, for his role in awarding €57m ($55m) in bonuses to executives at Mannesmann after the German telecoms company yielded to a €180 billion hostile takeover bid by Britain’s Vodafone in 2000. Mr Ackermann was a prominent member of Mannesmann’s supervisory board at the time. After the takeover, the Deutsche boss, three other former members of Mannesmann’s supervisory board and two top executives, including Klaus Esser, Mannesmann’s then chief executive, were accused of failing in their fiduciary duty to the company, and stood trial. They were acquitted in 2004, but an appeal was lodged, culminating in this week’s ruling. All of the accused will have to go back to court.

The ordering of a retrial is certain to increase pressure on Mr Ackermann to step down from Deutsche Bank, just as efforts to turn it into a respected global player are coming to fruition. Mr Ackermann is the architect of Deutsche’s change of emphasis from domestic retail banking to investment banking on the world stage. This shift has boosted the bottom line: in October, the bank announced net profits in the third quarter of €1 billion, 25% better than expected and nearly half as much again as the same period last year. The bank can now boast a return on equity of more than 25%, a long-held ambition of Mr Ackermann, who joined Deutsche in 1996 to run its investment-banking businesses and took over as boss in May 2002.

While the announcement of bumper third-quarter profits was a vindication of Mr Ackermann’s strategy, trouble had begun to brew. Disquiet over job cuts announced earlier this year was compounded by news of trouble at a multi-billion-euro property fund run by Deutsche. But more significantly for Mr Ackermann, an appeal court sat in October to reconsider his acquittal over the Mannesmann bonuses. Despite the original verdict, doubts persisted about payouts of many millions that were of no apparent benefit to the company.

Although Mr Ackermann has always insisted that his legal difficulties have not detracted from his role running Deutsche, he may now conclude that he cannot continue as boss of a very large, increasingly complex institution while another long court case grinds on. He may yet be able to cut proceedings short by striking a deal with prosecutors, but any such agreement would probably involve some admission of guilt that would undermine his authority within his bank. If found guilty second time round, he and the other defendants would face up to ten years in jail or hefty fines, or both. Most legal experts following the case say custodial sentences are unlikely.

Already, there is much speculation about who might replace Mr Ackermann. One possible successor is Rainer Neske, head of Deutsche’s retail-banking operations. Even Rolf Breuer, the chairman of Deutsche’s supervisory board, is talking about the post-Ackermann era. He was quoted by the Financial Times on Wednesday as saying he would prefer to see an internal candidate take over, when the time comes. Deutsche's shares fell slightly on the news of the retrial, but rallied after Mr Ackermann issued a statement saying he intended to continue as chief executive. His present contract ends in October 2006.

At the time, Vodafone’s takeover of Mannesmann caused widespread indignation that foreign business cultures should impinge upon the German way of doing things. Trying Mr Ackermann and the others again for handing out and receiving bonuses that would have been uncontroversial in Britain or America suggests that Germany’s efforts at reform are stalling. The payouts were not concealed but were made publicly, at the behest of one of Mannesmann’s biggest shareholders, as an “appreciation award” for the services of the firm’s top executives. Although executive remuneration is a fitting topic for debate, it is rarely the subject of career-blighting court cases. Clearly, many sections of Germany’s elite are still chary of embracing the brand of capitalism that is commonplace in Britain or America. Mr Ackermann is set to pay a heavy price for looking beyond Germany’s borders.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Another splendid compromise forged in Brussels

Dec 17th 2005
From The Economist Global Agenda

Heads of state finally struck a deal on the European Union budget in the early hours of Saturday. Britain has agreed to give up a bit more of its contentious rebate; in return, the EU will review its spending, including the common agricultural policy. The final compromise owed much to proposals made by Germany's new chancellor

IT WAS hardly Europe at its finest. The European Union’s budget wrangle—which finally ended in the early hours of Saturday December 17th—came down to a haggle between Britain, Poland and France about a relatively small amount of money. The sum at issue was around €12 billion in 2007-2013 (the EU budget is set in seven-year cycles). This is the difference in the total size of the budget between what Britain first proposed and Poland, France and others wanted. In other words, 25 heads of government slogged through a marathon 18-hour negotiating session over a sum which, divided between their countries and spent over six years, would be small change in America (where federal government spending is around $2 trillion a year).

Yet the drama surrounding the deal was worthy of greater substance. Repeatedly during the long hours before the budget compromise was finally announced, the talks seemed destined to fall apart.

Before the summit, Britain had demanded the EU budget be kept to below €850 billion. Both Poland and France rejected that sum as too penny-pinching to allow for needed increases in regional spending, notably in the EU’s new member states. On Friday afternoon, Poland demanded overall spending be raised to around €865 billion. In the finest traditions of EU negotiations, the chances of a deal seemed to be vanishing in arguments about accounting definitions, contradictory numbers, and even the census figures for Budapest.

In the event, the final British compromise moved most of the way towards the demands for a bigger budget. Under the deal, the pie would grow to around €862 billion, €12 billion more than Britain had first wanted. Of that extra sum, Britain would cover €1.2 billion and Germany €2 billion, the largest share. But in total, Britain’s contribution to the EU would rise much more. Its prime minister, Tony Blair, had already offered to forgo €8 billion of his country’s contentious rebate, awarded to Margaret Thatcher’s government in the 1980s. At the summit, he offered to give up an extra €2.5 billion, meaning the rebate would fall by about €10.5 billion. This is most, but not quite all, of the estimated €14 billion cost of the EU’s eastward expansion. The extra “concessions” Britain offered at the summit came to €4 billion, or a third of the increase in the EU’s budget.

Before the negotiations, Britain’s foreign secretary, Jack Straw, gave a warning that a bad budget deal would be worse than no deal at all. Presenting his compromise, Mr Blair hailed it as fair and reasonable. The president of the European Commission, José Manuel Barroso, called it “a good thing…Europe is on the move.” But Mr Straw’s warning may be prescient.

The deal avoids an immediate bad outcome—yet another European embarrassment in a year full of them. After the popular rejection of the proposed EU constitution in France and the Netherlands, the acrimonious break-up of budget talks in June, and multiple setbacks to economic reform (symbolised by the German election result), most European leaders were anxious for any budget settlement.

Yet in the long term, the deal may not be so good. It concedes that there will be no real reform of the common agricultural policy (CAP) in the medium term, something Mr Blair had earlier said was a condition for offering up some of Britain’s rebate. The deal says that the European Commission will review all aspects of EU spending, including the CAP and Britain’s rebate. And the EU may, as the proposal puts it, “take decisions” on the review. But the agreement is ambiguous about when exactly any reforms may come into force. Under the deal, spending on agriculture—an industry that accounts for 3% of Europe’s economy but 40% of the EU budget—rises slightly as a share of the total.

It is the product of pure power politics. Mr Blair had offered to reform the rebate in exchange for a fundamental reform of the CAP. But, unable to persuade others of the case for an overhaul of farming (there had been a deal to reform the sector in 2002 and others refused to accept another one), he ended up cutting aid to poor member states in order not to reduce Britain’s rebate even more.

As a result, the budget agreement may have damaged some of the most important relationships within the EU. For the past decade, close ties between Britain and the new members in central and eastern Europe have been founded on Britain’s campaign for their membership. Yet Poland—even more than France—led the criticism of Britain’s pre-summit budget proposals. The new prime minister, Kazimierz Marcinkiewicz, threatened to veto them and dubbed them “fake”. They were also criticised by Mr Barroso, who attacked Mr Blair in unusually harsh terms, comparing him to Robin Hood’s adversary, the Sheriff of Nottingham.

Yet the concessions Mr Blair did make—which mean Britain’s contributions to the EU will be about €61 billion in 2007-2013, compared with about €50 billion if there had been no budget deal—provoke the ire of critics in Britain who complained that he had given much more, and got much less, than he had promised. Mr Blair is presumably calculating that his success in brokering a deal in tricky circumstances will help him to face down the outburst of criticism at home. The budget deal will also help Britain to portray its six-month presidency of the EU (which also oversaw the beginning of accession talks with Turkey) as a modest success.

But perhaps the most intriguing implications of the budget deal concern the role of Germany. The summit was the first attended by Angela Merkel, the new German chancellor, and showed the impact she may yet have in Europe. At previous summits, her predecessor, Gerhard Schröder, and Jacques Chirac, the French president, agreed on a joint position beforehand, and presented it to the rest. In 2002, for instance, they stitched up a common position on the CAP that everyone else accepted. This time, both countries rejected the original British proposals for budget reform. But, as German diplomats said, Ms Merkel was not following in Mr Schröder’s footsteps. The result was that the dynamics of the summit proved very different.

There was no Franco-German démarche. Instead, Ms Merkel held meetings with everyone in sight, in parallel with the official talks chaired by the British (an indication of how hard it has become for any one country to control the conduct of negotiations in an EU of 25). As one diplomat put it, not only did she play a constructive role herself but she got others to be more constructive, too. She cajoled the easterners into accepting a total budget slightly less than the €865 billion-870 billion they wanted. Like her Christian Democrat predecessor as chancellor, Helmut Kohl, she agreed that Germany would finance the lion’s share of the increase in the size of the EU budget. And in the end, the final compromise owed more to her proposals than to Britain’s original one.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.