Geopolitics

Beirut Blast: Mayhem In A Nation Already On Its Knees

Tuesday's deadly explosion couldn't have come at a worse time for Lebanon, which is also struggling with high inflation, the collapse of its currency and a new wave of coronavirus infections.

Street in Beirut after the deadly Aug. 4 explosion that killed at least 100
Benjamin Barthe

BEIRUT — Lebanon had already been teetering on the edge of an abyss. It's now fallen in. That, at least, is the overwhelming sense here in Beirut following the gigantic detonation that devastated the city on Tuesday, Aug. 4.

The explosion, which killed at least 78 people and was felt kilometers away in all directions, comes in the midst of an unprecedented crisis. The national currency is in free fall, the middle class is disintegrating and state institutions are adrift. And the enormous mushroom cloud of black smoke that appeared at about 6 p.m. yesterday, above the city's port, is the sad symbol of that systematic implosion. It signals the collapse of a model that was supposed to allow Lebanon to rebuild after its 15-year civil war (1975-1990) but instead took it in the opposite direction.

Power cuts and the pandemic

Several hours before the explosion, dozens of demonstrators tried to force their way into the Ministry of Energy headquarters to protest against the electricity outages that have become a daily occurrence in Lebanon. Three, five, 10 hours per day — there are blackouts constantly. How long they last depends on where a person lives and the effectiveness of the "motor," as the generators that serve a particular building or neighborhood are known.

Barely touched by the COVID-19 epidemic this past spring, Lebanon is now facing a second, more violent wave.

The generators were supposed to alleviate the power rationing measures imposed by the national electricity company, a money pit and temple of patronage that is a prime example of the spreading decay in the country's state institutions as a whole. All of the governments that have succeeded each other over the past 30 years promised to reform the electricity sector, which is alone responsible for some 40% of the country's debt. None of them managed to do so.

Also on Tuesday, at about 5:30 p.m. — only a few minutes, in other words, before the chaos — the Ministry of the Interior announced details about a new coronavirus lockdown phase, to take place between Aug. 6 and 10.

Barely touched by the COVID-19 epidemic this past spring, Lebanon is now facing a second, more violent wave. At the rate things are going now, with approximately 200 new coronavirus cases detected every day, the country's health care system will soon be overwhelmed.

In the Rafik-Hariri public hospital, of the 23 beds that are specially equipped for COVID-19 patients, 19 are already occupied. And in reality, there are no other establishments in Lebanon really engaged in the fight against the pandemic. Budget cuts have left the country's other public hospitals without the means, equipment or personnel to cope with the crisis. Private health care facilities are more numerous and offer better services. But most are reluctant to treat COVID-19 patients for fear that they'll scare off other paying clients.

Currency woes and class demotion

The confessionalist political model that governs Lebanon has failed to remedy these glaring dysfunctions. Established to ensure fair representation of all the country's religious communities, the system has instead been perverted by the heads of the different groups, who are often former militia leaders and are unwavering in their positions.

The Taif Agreement that, in 1989, put an end to the war, envisioned a transition toward a civil state. Instead, a kind of "vetocracy" — a dysfunctional government where no one has enough power to really take charge — gradually emerged. The country's oligarchs keep pushing against each other for fear of losing their share of the power. In the end, the only thing the members of this cartel can agree on is preserving their own interests.

Site of the blast in Beirut on Aug. 4 — Photo: Marwan Naamani/DPA/ZUMA

This attitude is also at the root of the economic catastrophe that befell Lebanon this spring. The public financing system is based on deposits in the central bank and on inflated treasury bonds. But because the political class profits from it — most notably through its shareholding in the banks — the government refused to reform the system.

Now, the country's banking and financial reputation is in tatters.

Eventually the Ponzi-scheme pyramid collapsed, triggering a cash shortage that caused the national currency — the Lebanese pound — to lose 80% of its value in the span of just a few months. The price of basic consumer goods skyrocketed as a result, with an inflation rate that, as of June, was up 90% on the previous year. The de facto capital controls instituted by the banks ended up destroying the purchasing power of the Lebanese. The poverty rate, estimated at 35% of the population in the fall, is now close to the 50% mark.

The crisis has hit the Lebanese middle class — long considered the Middle East's wealthiest and best educated — especially hard. A 30-something university professor who earned the equivalent of $4,000 per month last year is now bringing in perhaps $800 a month. Professionals in this income bracket were used to traveling several times a year and driving SUVs. Now they're having to pull their children out of private schools and enroll them instead in public schools — the ultimate sign of class demotion in Lebanon.

The country earned a reputation abroad for offering a certain carefree, expensive and enjoyable lifestyle. But that way of life is now on hold. Because of the plunging pound and the measures taken to combat the spread of the coronavirus, hundreds of bars, nightclubs and restaurants have been forced to close. Tourism, a pillar of the local economy, is in dire straits, as is the banking sector, which had long been another point of pride. Now, the country's banking and financial reputation is in tatters.

But along with the deep political and economic problems, what's also in crisis — and in need of rebuilding — is Lebanon's raison d"être: its regional role as a service hub linking Europe and the Arab world. And that's why the cataclysm of Aug. 4 will be so painful, because it rocked an already tottering edifice. It's a gut punch to a people already burnt out from exhaustion, a knock-out blow to country that simply can't take another calamity.

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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Angela Merkel at a campaign event of CDU party, Stralsund, Sep 2021

Tobias Kaiser, Virginia Kirst, Martina Meister


-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.

France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

Europe's north-south divide lives on

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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