Peter L. Berger's Blog, page 565

China Cuts Rates—Again

The People’s Bank of China has unexpectedly cut interest rates again, for the fifth time this year, in yet another effort by policymakers to goose a faltering economy. The rate cut of .25 percent, which brought its one-year benchmark down to 4.35 percent, was accompanied by a loosening of reserve requirements for banks by 50 basis points. Commodities, the Australian dollar, and European equities were up on the news, with S&P futures up almost 1 percent ahead of markets opening.

Some analysts have been saying the Chinese economy is starting to do better, but that’s both right and wrong. In order to maintain high rates of growth, China needs to transition away from heavy industry and toward services. Our reading of Monday’s growth figures suggests that may be starting to happen, which is good news.But transforming the economy will take time, and will likely occur during a period of slower growth. PBoC wouldn’t cut rates if it were satisfied with the country’s growth numbers. That’s not to mention that China’s official numbers are notoriously unreliable, and it may be better to base one’s analysis on the actions of its government than on the official figures.As we noted on Monday, the short-term and long-term losers here are commodities-rich emerging markets. A less energetic China means less demand for raw materials from Brazil, South Africa, and others. But if the long-term trends bring a services-based Chinese economy rather than a manufacturing one, that won’t be good for commodities suppliers either.

The $117-a-Barrel Alliance

Russia and Iran have been teaming up to give the U.S. fits in the Middle East, but can this alliance last? A good piece in the WSJ examines the question:

For Moscow, the Syrian war fits into its global strategy of creating a “multipolar” world in which Russia would re-emerge as one of the key powers alongside a declining America. The Kremlin is focused on preventing “color revolutions” and regime changes such as those in Ukraine or Egypt.

Following this logic, Moscow views propping up Mr. Assad as establishing a precedent that further regime changes would no longer be tolerated—a message intended as much for the West as for opponents of President Vladimir Putin at home. Second come Moscow’s other considerations, such as the need to secure its naval facility on the Syrian coast, Russia’s only outlet in the Mediterranean Sea.Iran, by contrast, remains a revolutionary nation seeking to transform the region and to bolster the sway of fellow Shiites all the way to Lebanon and Yemen. Iranian officials openly call for regime change in Saudi Arabia and other Sunni Gulf monarchies, let alone the elimination of the state of Israel.Iran’s way of operating in Iraq, Lebanon—and now in Syria—is to weaken these states by building up proxy Shiite militias.

This is sound analysis, and points at divisions among America’s adversaries that don’t often get enough attention. But there is something else that the article doesn’t mention that is likely to tie Russia and Iran together: Both countries desperately want oil prices to go up.

They may not see an obvious path to that right at the moment—Syrian oil production is not significant and the violence in Syria isn’t affecting world oil prices. But both countries will be looking for ways to get the Saudis to agree to the kind of production cuts that could jack up oil prices. Who knows: perhaps they could cut a deal in Yemen (where the Saudis are struggling, but feel they must win) in return for price hikes? Or use power in Syria as a bargaining chip?(It’s worth noting that China, which needs oil prices to stay low, will want no part of this. In that light, Colum Lynch’s recent piece in Foreign Policy on growing cracks between Beijing and Moscow makes interesting reading.)Finally, Iran and Russia both agree that reducing American power and prestige is vital if either is to reach its objectives. As long as they can find ways to undercut the U.S. and come closer to the kind of oil price rise that would rescue their economies, Russia and Iran will have good reasons to look beyond their differences and find ways to work together.

The Immorality of a $15 Minimum

Robert Reich, a sometime contributor to this magazine and one of the smartest thinkers on the economic left, has an interesting piece on his blog entitled “The Morality of a $15 Minimum Wage.” While most defenses of a national $15 minimum wage assert that such a radical policy change would have essentially no downsides—that the federal government could suspend the laws of economics and double the cost of labor without reducing employment—Reich makes the concession that the policy would likely destroy jobs, but argues that it should be implemented anyway. “Maybe some jobs are worth risking if a strong moral case can be made for a $15 minimum”, Reich writes. He continues:

People who work full time are fulfilling their most basic social responsibility. As such, they should earn enough to live on.

A full-time worker with two kids needs at least $30,135 this year to be safely out of poverty. That’s $15 an hour for a forty-hour workweek.Any amount below this usually requires government make up the shortfall — using tax payments from the rest of us to finance food stamps, Medicaid, housing assistance, and other kinds of help.What about the risk of job loss? Historically, such a risk hasn’t deterred us from setting minimum work standards based on public morality.The original child labor laws that went into effect in many states at turn of last century were opposed by business groups that argued such standards would raise the costs of business and force employers to lay off large numbers of young workers.

By admitting that a $15 minimum would likely cause American workers to lose their jobs, Reich shows far better economic judgment than his fellow minimum wage boosters, who generally substitute ideological bluster for economic reasoning when faced with this dilemma. But he’s wrong on the morality. Even if one agrees with Reich—as we do—that society owes a basic standard of living to all citizens who work full time, there is no reason such support must take the form of a minimum wage hike that would sever other workers’ connection to the job market. In fact, there is a strong moral case against such a policy.

It’s true that a $15 minimum would make it possible for some arbitrary number of workers to be “safely out of poverty” without relying at all on social programs. But it would only achieve this by shutting other vulnerable people out of the labor force, forcing them to rely entirely on social programs. It’s unclear how it serves the interests of public morality to have some people (the people whose jobs are lost as a result of the minimum wage hike) permanently and entirely supported by welfare programs so that others (the few beneficiaries of the hike) can shed their partial dependence on such programs.In our view, the right to work—to enjoy the fruits of one’s own labor—is a core part of human dignity. A “moral” public policy would be aimed at ensuring that as many people as possible are able to find jobs. Even if those jobs pay poorly, they provide skills and experience that allow people to command higher wages in the future. And of course, there is room for programs like the Earned Income Tax Credit to enhance the income of low-wage workers and ensure that working people have some level of material security.Reich has a different vision: that government should mandate that all employers offer higher wages, and that people who can’t find jobs at those wages should be denied the chance to work. But creating a permanent underclass of people who can never get the skills for a meaningful career is not moral; it is cruel.In other words, public morality does not and has never required us artificially to exclude millions of low-skilled adults from the job market for the benefit of (some) of their higher-skilled counterparts. Nor does it require us to destroy small-town local economies and hobble America’s fragile manufacturing sector with a big minimum wage hike when we have good reasons to think that there are more effective poverty-alleviation strategies available.Reich’s piece is welcome because it avoids the economic sleight-of-hand typically associated with left-wing minimum wage arguments and gets to the heart of the issue: Do we want to shut some people out of the workforce so that we can lift other peoples’ paychecks? And he’s right that, at some level, economic debates are moral ones. A just society must find ways to reduce poverty and expand opportunity for its vulnerable citizens. But a one-size-fits-all $15 hike is emphatically not the answer.

Orbanism Ascendant?

In a blistering speech at European People’s Party conference in Madrid, Hungarian Prime Minister Viktor Orban drew applause at the expense of Angela Merkel as he called for a new approach to the migrant crisis in Europe—one not buttressed by unrealistic idealism and politically correct bromides.

“We are in deep trouble”, Orban intoned. “This is an uncontrolled and unregulated process. We did not get authorisation from [our citizens] for millions to walk into our continent.” He accused left-leaning parties of “importing future leftist voters to Europe” while trying to “hide it behind humanism.” “The German, Hungarian or Austrian way of life is not a basic right of all people on earth,” he continued. “It is only a right for those people who have contributed to it.”Orban is a genuinely unsavory character, who has taken advantage of the migrant crisis to give his government quasi-fascist police powers in Hungary. But he is also speaking eminently good sense when he points out that immigration and refugee rights cannot be as unlimited as the EU has promised by law. Orban’s good sense on that point has been making a lot of the bien pensants in the corridors of Brussels and Berlin uncomfortable—as well it should. What does it say about your policies when it takes a figure like Orban to finally acknowledge that the Emperor is naked?European Commission President Donald Tusk, whose job is to be conciliatory, has always found Orban’s line, if not his tone, persuasive, and he tried to smooth the rough edges in his own speech. After offering a ritual intonation that, “we cannot give into populism and xenophobia”, he went on to declare that “We cannot pretend any longer that the great tide of migrants is something that we want and that we are conducting a well-thought out policy.[..] We have lost our ability to control our borders.”But Angela Merkel was speaking as well (must have been one awkward green room), and she declared that, “For a rich European Union this is the right thing to do. We cannot simply leave these people to our neighbors.” The question now becomes, will Angela be able to continue to have her way on this, as she has on so much else in Europe recently? Or is Orbanism, in this respect, ascendant?

Japan Pulls Ahead of China in Bid for Indian Rail Deal

India is looking to build its first high-speed rail line, inviting competition from Japan and China. Reuters has the story:

Japan has offered to finance India’s first bullet train, estimated to cost $15 billion, at an interest rate of less than 1 percent, officials said, stealing a march on China, which is bidding for other projects on the world’s fourth-largest network.

Tokyo was picked to assess the feasibility of building the 505-kilometre corridor linking Mumbai with Ahmedabad, the commercial capital of Prime Minister Narendra Modi’s home state, and concluded it would be technically and financially viable.The project to build and supply the route will be put out to tender, but offering finance makes Japan the clear frontrunner.Last month China won the contract to assess the feasibility of a high-speed train between Delhi and Mumbai, a 1,200-km route estimated to cost twice as much. No loan has yet been offered.

Japan has been looking for opportunities to challenge China’s position as a leading international developer, and the country suffered a recent loss in that competition: Just earlier this month, China beat out Japan on a rail contract in Indonesia, as it looked like China was simply more willing to take on risk than Japan. So the India contract would be a big economic and political victory for Japan.

Although we don’t expect Japan and China to offer deals unless they expect to profit from them, the geopolitical competition between the two is definitely good for countries seeking infrastructure development. Access to cheap Japanese and Chinese credit will be a big help for emerging markets, including smaller economies that are struggling far more than India.

Keeping the Open Seas Open

Reports are percolating that the Obama Administration has finally given the Navy a green light to conduct some sort of freedom of navigation exercise, somewhere near the archipelago of instant islands Beijing is constructing in the South China Sea, sometime in the near future. As in the case of the very public debates it had with itself over surging troops to Afghanistan, supporting autocracy or democracy in Egypt, enforcing the President’s red-line warning in Syria, and responding to the Islamic State’s dismembering of Iraq, President Obama’s hesitant response to China may be too little too late.

Regardless of when or where he allows the Navy to act, what the President doesn’t seem to understand is that there’s nothing new, let alone provocative, about the U.S. Navy challenging the sort of mischief that Beijing has been engaged in. America has been keeping the open seas, well, open for 215 years.UnsinkableBefore digging into some of that history, we need to understand what China is doing today.China is laying claim to 90 percent of the South China Sea based on a map drawn by Chinese cartographers in 1947, ignoring international borders, flouting international norms, and turning tiny atolls hundreds of miles from its territorial waters into military outposts. Beijing’s goal: to control the resource-rich South China Sea and muscle the United States out of the Western Pacific.Beijing’s new military strategy offers some of the details of how China aims to achieve this goal. The document vows to “accelerate the modernization of national defense and armed forces [and] resolutely safeguard China’s sovereignty, security, and development interests.”China is certainly succeeding at the former: Its military spending mushroomed 170 percent between 2004 and 2013. Beijing increased military spending by 10 percent in 2015 and 12.2 percent in 2014.As to the latter, Beijing’s notion of sovereignty differs radically from that of its neighbors. By international convention, a country’s territorial waters extend 12 miles from its coastline. Beyond that, nations observe an exclusive economic zone (EEZ), which extends 200 miles off a country’s coastline and allows for privileged exploration rights. Not only does Beijing expect others to observe its EEZ and the airspace above as sovereign Chinese territory, not only does Beijing refuse to respect the EEZs of its neighbors, but Beijing claims waters and islands 500 miles from the Chinese mainland.Bolstered by its instant islands, China is asserting these claims in fait accompli fashion. Satellite images detail Beijing’s brazen island-construction operations. These instant islands have obvious military applications. According to the U.S.-China Economic and Security Review Commission, “China appears to be expanding and upgrading military and civilian infrastructure—including radars, satellite communication equipment, antiaircraft and naval guns, helipads and docks—on some of the man-made islands.” One of the islands has a 10,000-foot airstrip—big enough for bombers and fighter-interceptors. Recall that MacArthur described Taiwan as America’s “unsinkable aircraft carrier.” These islands could become China’s unsinkable aircraft carriers.True, Beijing is not trying to lop off part of Venezuela (like Kaiser Wilhelm II in 1902), annexing the Sudeten in the heart of Europe (like Adolf Hitler in 1938), or declaring a sovereign Kuwait “Province 19” (like Saddam Hussein in 1990). But the principle is the same. As they bully weaker neighbors and dot international seaspace with man-made islands, China’s leaders are trying to take what’s not theirs. Munich reminds us it’s better to confront such aggression than to appease it.American PolicyThat brings us to America’s enduring role in defending freedom of the seas.At the time of George Washington’s inauguration, Americans were being held hostage by Barbary pirates. The U.S. paid huge sums to win release of those being held—and to appease further piracy. Thomas Jefferson opposed this policy, and he overturned it once he became President. He initially proposed an anti-piracy coalition with Europe “to compel the piratical states to perpetual peace.” But as Gerard Gawalt of the Library of Congress explains, “Jefferson’s plan for an international coalition foundered on the shoals of indifference.” So, Jefferson launched a war on piracy, famously concluding, “It will be more easy to raise ships and men to fight these pirates into reason, than money to bribe them.” Naval battles and invasions followed, until the Barbary States finally ended decades of attacks against U.S. shipping.But piracy wasn’t confined to the Barbary Coast. The Congressional Research Service (CRS) reports there were 3,000 pirate attacks in the Caribbean between 1815 and 1823. The U.S. Navy responded in Puerto Rico, Cuba, Spanish Florida, and Mexico. All told, between 1801 and 1870, as CRS details, U.S. forces waged a far-flung war against piracy—and for freedom of the seas—in Tripoli, Algiers, Greece, Ivory Coast, Hong Kong, Sumatra, the Caribbean, and the Gulf of Mexico.Of the hundreds of instances of U.S. military intervention tallied by CRS, dozens are related to piracy, freedom of the seas, freedom of transit, and maritime poaching. So, it should come as no surprise that President Wilson’s Fourteen Points called for “absolute freedom of navigation upon the seas.” FDR and Churchill’s Atlantic Charter envisioned a postwar peace allowing “all men to traverse the high seas and oceans without hindrance.” FDR bluntly called “freedom of the seas” an “American policy.”Since 1979, U.S. forces have challenged excessive airspace and coastal claims around the world under the Freedom of Navigation program. The program began under President Carter to “demonstrate a non-acquiescence to excessive maritime claims asserted by coastal states.”When Libya’s Muammar Qaddafi declared the Gulf of Sidra as his own, the Carter Administration ordered U.S. forces into the area from time to time, although it suspended the exercises during the Iranian hostage crisis “because of a desire not to cause unnecessary agitation in the region,” the New York Times reported at the time.President Reagan revived the program and ordered the U.S. Sixth Fleet to resume exercises throughout the Mediterranean. When the exercises recommenced in 1981, Qaddafi sent warplanes into international airspace to challenge the Americans. Authorized, in Reagan’s words, to pursue attacking Libyan warplanes “all the way into the hangar,” U.S. Naval airpower responded with deadly force and made it clear to Qaddafi that there would be no payoff for disregarding international norms—only costs.But Reagan wasn’t finished defending freedom of the seas. When Iran began attacking commercial ships in the Persian Gulf during the Iran-Iraq War, Reagan ordered Kuwaiti ships reflagged with the Stars and Stripes and had U.S. warships escort Kuwaiti vessels. After an Iranian mine ripped through a U.S. ship in international waters, Reagan launched a series of punishing military strikes against Iran. While most Americans forget this war on the Gulf, Tehran doesn’t. On a single day in 1988, the U.S. crippled Iran’s outlaw navy. “By the end of the operation, U.S. air and surface units had sunk or severely damaged half of Iran’s operational fleet,” a Navy report recalls.Today, 90 percent of global trade, equaling more than $14 trillion, travels by sea. It doesn’t happen by accident or by magic. The burden of keeping the sea lanes open—discouraging encroachment, deterring bad actors, fighting piracy, clearing vital waterways and chokepoints—falls on the U.S. Navy, which is why the Freedom of Navigation Program continues. In fact, the U.S. military directly challenged dubious maritime claims of 19 countries last year. Related, the Obama Administration sent a flight of B-52s into China’s unilaterally declared “air-defense identification zone” in late 2013 to enforce freedom of the skies. So it’s difficult to understand why Obama has been so slow to enforce freedom of the seas in this instance.In reaction to Beijing’s behavior, Defense Secretary Ashton Carter began declaring in May that “the United States will fly, sail, and operate wherever international law allows.” Yet the Navy has avoided sailing or flying near the disputed territories claimed by China since 2012—no doubt under orders from the White House. This summer, the White House reportedly blocked PACOM Commander Admiral Harry Harris from sending ships into the area.ShrinkingThe administration needs to answer a threshold question: Is maintaining an international system that has kept the Pacific peaceful, prosperous, and open in the national interest? If so—and it’s difficult to argue otherwise—then Washington should move on four fronts.First, Obama should order the Navy to defend freedom of the seas by routinely steaming ships through the international waters China is trying to poach. Equally important, these exercises should not be pre-announced. Just as I need not notify my neighbors about where, when, or why I will be traveling the city streets, Washington is under no obligation to forewarn Beijing about plans to deploy U.S. assets in international seaspace or airspace. In fact, doing so implies that China is owed such a forewarning, which in turn implies that China has a special prerogative over the areas it claims.Second, the administration needs to internationalize the problem. In what Jane’s Defense called “unusually forceful language,” the Association of Southeast Asian Nations has issued a declaration endorsing “freedom of navigation in, and over-flight above, the South China Sea.” Washington should put muscle behind those words by organizing a standing multinational maritime taskforce to turn back China’s claims.Washington also should call on international organizations to deal with China’s provocations. Manila has offered a roadmap by taking its behemoth neighbor to court, appealing to a UN tribunal to keep China out of Philippine waters. That’s a lot to ask of the often-feckless UN, but Manila’s decision exposes Beijing to the glare of international attention. Other nations whose maritime rights have been infringed by China should follow suit. Washington can help by offering technical assistance, diplomatic support, and satellite and reconnaissance evidence.Third, Washington should play the asymmetric card. Beijing fancies itself a master of asymmetry, but asymmetric warfare cuts both ways.Consider the anti-access/area-denial strategy (A2AD) Beijing is employing. Researchers at RAND propose “using ground-based anti-ship missiles (ASM) as part of a U.S. A2AD strategy” by linking several strategically located partner nations in a regional ASM coalition. As former Defense Secretary Chuck Hagel suggested last year, the Army could begin “leveraging its current suite of long-range precision-guided missiles, rockets, artillery, and air-defense systems” with an eye toward “helping ensure the free flow of commerce.”Fourth, Washington should end the bipartisan gamble known as sequestration. The defense budget has fallen from 4.7 percent of GDP in 2009 to 3.2 percent today—headed for just 2.8 percent by 2018. The last time America invested less than 3 percent of GDP in defense was 1940. As China builds up and builds out, this is the best way to invite the worst of possibilities: what Churchill called “temptations to a trial of strength.”Given the reservoir of U.S. military capacity, the White House seems to argue, the balance of power will still favor the United States, even after sequestration takes its toll. That may appear to be true—but only until one considers that America’s military assets and security priorities are spread around the globe, while China’s are concentrated in its neighborhood.At the height of Reagan’s buildup, the Navy boasted 594 ships. Even the post-Cold War Navy of the 1990s totaled 375 ships. Today’s fleet numbers just 284 ships. “For us to meet what combatant commanders request,” according to former CNO Admiral Jonathan Greenert, “we need a Navy of 450 ships.”It’s a matter of simple arithmetic: The U.S military cannot carry out an ever-growing number of missions—deterring China in the Pacific and Russia in the Baltics, fighting ISIS and al-Qaeda, protecting North America, NATO, South Korea, and Japan, defending freedom of the seas—with an ever-shrinking number of resources.

Russia Closer to Passing “Sadists’ Law”

The Russian parliament (Duma) has granted preliminary approval to a controversial bill—dubbed the “sadists’ law” by human rights activists and opposed lawmakers—that would allow prison staff to use truncheons, electric shock devices, and guard dogs against those who were perceived to have violated prison discipline. The law would allow guards to “use physical force, including combat methods of fighting, if non-forceful means cannot ensure that duties are fulfilled”, according to the text published on the Duma’s website. “If this bill becomes law in its current form, it means that prison staff will be able to beat a prisoner for the most minor of violations. A failure to make their beds properly or an undone button, for example”, the head of the Moscow-Helsinki Group of human rights campaigners, said. The bill comes on the heels of another proposal earlier this week to ban NGO’s designated as “foreign agents” from monitoring human rights in prisons.

Earlier in the week Putin announced that he was boosting the domestic War on Terror, a key part of his strategy to keep Russians fearful and himself in the role of benevolent and heavily armed ruler. Spillover of Islamic terror from the Caucasus remains a threat to Russia and to Putin’s rule, but we wouldn’t be surprised if Russia’s Sadist-in-Chief used those and other laws as much to stifle political opposition.

It’s Not Just Oil: Russia Has Gazproblems, Too

Russia is battening down the hatches as it prepares for a dismal winter sales season in Europe. Its struggles with cheap oil, a resource on which it relies for much of its budgetary revenue, have been apparent as state-run oil companies have slashed expenditures while the Kremlin has run deep into the red. But oil isn’t the only hydrocarbon Russia sells en masse, and it’s not even the only one whose price has been affected by the more than 50 percent plunge in the global oil market since June of last year.

Gazprom has long tied the price of its long-term take-or-pay natural gas contracts in Europe to the price of oil. When prices were high, the Russian company was raking it in and its customers were agitating for a decoupling. But oh, what a difference 15 months can make, because now those same contracts are linked to sub-$50 per barrel crude, as compared to $100+ of last summer. As Bloomberg reports, that has Gazprom—and by extension the Russian government, whose budget depends heavily on oil and gas sales—expecting a fairly dismal winter:

The state-run exporter is drafting its budget for 2016 with preliminary estimates for gas prices outside the former Soviet Union of about $200 per 1,000 cubic meters ($5.45 a million British thermal units), said two people with direct knowledge of the matter who asked not to be identified because the information is private. That compares with the company’s estimate of an average price for the region, which covers Turkey and Europe outside the Baltic States, in 2015 of about $238 per 1,000 cubic meters and $349 last year.

Between Western sanctions, a bearish crude market, and now an inability to fetch a robust price for its natural gas heading into a seasonal spike in demand, Russia’s economy is being besieged on all sides. Europe won’t mind: Putin’s loss is the continent’s gain.

It’s Pay Up or Shut Up for the Climate Deal

The world’s poor countries won’t sign on to a Global Climate Treaty in Paris this December if it doesn’t include assurances of cold, hard cash. That’s the message being put forth by Nozipho Joyce Mxakato-Diseko, a South African climate delegate who speaks for the G77+China, who described climate change as an “existential” threat for the developing world and a “matter of life and death.” Reuters reports:

[South African delegate Nozipho Mxakato-Diseko’s] Group of 77 and China, which has expanded to 134 members from 77 at its founding, wants guarantees that aid will be “scaled up from a floor of $100 billion from 2020″…The United States and other rich nations favor vaguer wording that stops short of promising a rise from 2020. […]

“Whether Paris succeeds or not will be dependent on what we have as part of the core agreement on finance,” she told a news conference in Bonn during the Oct. 19-23 U.N. talks among almost 200 nations, the final preparatory session before Paris.

This isn’t the first time Mxakoto-Diseko has made headlines this week. On Monday she likened the current state of climate treaty negotiations to apartheid, saying those in the developing world are finding themselves “in a position where in essence we are disenfranchised.”

That’s a feeling widely felt in the developing world, which rightfully takes issue with the idea of a climate deal that restricts the industrialization of poorer nations, when it was the developed world’s own growth that put them in the position of having to regulate greenhouse gas emissions. That complaint is exactly what the climate fund set up in the failed 2009 Copenhagen summit was meant to address, but that program has so far been underfunded.It’s no surprise, then, that the G77 is making a big deal about financing as we gear up for Paris. Rich countries—the United States chief among them—will push back on this, wary of being indefinitely on the hook for hundreds of billions of dollars, but it’s hard to imagine the impending summit producing any sort of agreement that doesn’t involve financial guarantees.

Let Data Flow

Contrary to what the Snowdenistas of the world might tell you, the recent ruling by the European Court of Justice (ECJ), which has scrapped the so-called safe harbor agreement existing between the European Union and the United States, is not good news. Instead, it will inflict unnecessary harm on Europe’s digital businesses and further erode the continent’s competitiveness.

The safe harbor agreement enabled companies like Google or Facebook to move personal data across the Atlantic. The legal challenge against Facebook, brought by Austrian graduate student Max Schrems, relied on Edward Snowden’s revelation of the access that American intelligence agencies had to personal data originating in Europe, thus infringing on Europeans’ rights to privacy.Whatever one thinks of the substantive merits of the case, the judgment creates significant legal uncertainty, as it leaves its interpretation up to regulators in the EU’s member states. Under the strictest interpretation, the decision obliges companies to set up separate data storage facilities in Europe. That may not be a problem for the likes of Google, but it is likely to be a huge barrier for smaller businesses. And if regulators in different European countries decide to interpret the judgment differently, Europe’s digital markets will become even more fragmented.The judgment comes at a time when the EU’s digital economy has clearly fallen behind America’s—mostly on account of bad policy. That is a pity, considering Europe’s earlier contributions to the industry. As Žiga Turk, a Slovenian economist and the country’s former Minister for Growth and Minister of Education, noted, “[t]he World Wide Web was invented in Europe’s CERN. A Finn developed Linux, disrupting the operating system market and bringing the open source paradigm to a whole new level. A Swede and a Dane invented Skype, shaking up telephony. Nokia, Ericsson and Siemens dominated the early days of the mobile telephony business. Fraunhofer Institute invented the MP3 codec that changed the music industry.”Most of these European innovations only became big commercial successes in North America, not in Europe. One reason is that barriers separate digital markets in European countries from one another. A start-up in the United States has immediate access to 300 million customers, but on top of the obvious linguistic and cultural divides, a European business has to deal with 28 different sets of laws, including telecom regulations, postal service rules, value-added tax, and copyright. As a result, reports The Economist, “[o]nly 4 percent of internet traffic from EU countries goes to online services in another European country, whereas 54 percent of it goes to services in America.”While committed, at least rhetorically, to the creation of a single digital market in Europe, the EU’s institutions often spend their energy fighting yesterday’s battles, such as regulating roaming charges or entertaining fantasies about breaking up supposed digital “monopolies,” such as Google, without realizing that the digital companies of today have little in common with the entrenched public utilities of yesteryear. And, as this week’s decision demonstrates, the ECJ might willingly sacrifice the future of Europe’s digital economy for short-term political posturing.Instead, the EU’s institutions should be busy helping to create the EU’s common spectrum policy, which would render the idea of “roaming” obsolete on the continent, and working to dismantle the numerous regulatory barriers that prevent technology businesses from reaching customers throughout the EU. Through its decisions in cases such as Dassonville or Cassis de Dijon, the ECJ historically played an important role in dismantling regulatory barriers dividing European markets in commodities and services, to a degree far beyond what the EU could have accomplished by legislative fiat.Instead of weighing in on issues that can be addressed through contractual means by companies and their clients, European institutions, including the ECJ, should focus on the unglamorous but vitally important job of removing regulatory barriers to the growth of the digital economy in Europe. Unfortunately, unless a new safe harbor agreement is negotiated swiftly, the ECJ’s ruling will erect new barriers to online commerce and will encourage even more Europeans to try their luck in Silicon Valley, instead of the Old World.