The Economist 25 June - 1 July 2011

116 Pages·2009·99.16 MB·English

by  The Economist Group

JUNE 25TH-JULY 1ST 2011

Economist.com

In praise of Britain's private schools

Egypt’s economy and the Arab spring

The danger of exchange-traded funds

What will happen if America defaults?

The marvel of medieval relics
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Contents The Economist June 25th 2011

On the cover

The opportunity for Europe’s
leaders to avoid disaster is
disappearing fast: leader,
page 13. The crisis in Greece,
pages 28-29. Is this Europe’s
Lehman moment? Page 30.
The crisis in Germany, page
32. Britain gloats, page 40.
The political choices narrow:
Charlemagne, page 38. The
surprising strength of the
euro, page 79

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Nite
Economist

Volume 399 Number 8739

First published in September 1843

to take partin "a severe contest between
intelligence, which presses forward, and
an unworthy, timid ignorance obstructing
our progress."

Editorial offices in London and also:
Atlanta, Beijing, Berlin, Brussels, Cairo,

Chicago, Hong Kong, Johannesburg, Los Angeles,

Mexico City, Moscow, New Delhi, New York, Paris,
San Francisco, Sao Paulo, Singapore, Tokyo,
Washington DC

9 The world this week

Leaders

13 The euro crisis
If Greece goes...
14 China’s future
Rising power, anxious
state
15 Afghanistan
Barack Obama’s gamble
15 The economics of the
Arab spring
Open for business?
16 Exchange-traded funds
A good idea in danger of
going bad

Letters

20 On the Carnegie
Corporation, crime rates,
Japan, Weinergate

Briefing
28 Greece and the euro
The brewing storm
30 Financial contagion
Fear of fear itself
32 Germany and the euro
Merkel’s hazardous course

Europe

35 Italian politics
Stillin league

36 Poland and the EU
Presidential ambitions

36 Nagorno-Karabakh
Caucasian questions

37 France’s government
Les quangos

37 Drugs in the Netherlands
Closed shops

38 Charlemagne
Default options

Britain
39 Bank regulation
Mervyn agonistes
40 Gloating over the euro
Told you so
40 Northern Ireland
The bogeymen return
42 Bagehot
Wanted: a schools
revolution

Middle East and Africa

43 Zimbabwe’s future
A new road map?
44 Syria’s turmoil
Wooing the middle
44 The Bedouin of Sinai
Free, but dangerous
46 Iran
Economic jihad
47 Saudi Arabia
The brrrm of dissent

Briefing
48 Egypt's economy
Light, dark and muddle

Special report: China

Rising power, anxious
state
After page 50

United States
52 Health care
Mass observation

53 Ethanol subsidies
Fiscal sobriety

53 California’s budget crisis

Kabuki without end

54 Political conferences
Rewing up the bases

55 Charter schools

Really advancing coloured

people?
55 Cutting legal costs
The paper chase

56 The decline of marriage

For richer, for smarter

57 Lexington
Mars in the descendant

The Americas
58 Central America
The governments’ rally
59 Protests in Bolivia
Car crash
59 Protests in Chile
Marching on
60 Canada
The irrelevance of
separatism

China Tensions between the
prosperous middle classes and
the poor will make it a harder
country to govern, leader:
page 14. In less than a decade
China could be the world’s
largest economy, butits
continued economic success is
under threat from a resurgence
of the state and resistance to
further reform: see our special
report after page 50. Ai Weiwei
is freed, page 63

English schools Narrowing
the gap between private and
state schools: Bagehot, page 42

Egypt’s economy Reform in
Middle Eastern economies
could prove harder thanin
eastern Europe. The West
needs to help: leader, page 15.
The shakiness of Egypt’s
economy, pages 48-50.
Surprising liberalisation in
Tran, page 46

>> Contents continues overleaf
6 Rene The Economist June 25th 2011

64 Banyan : : ;
Exchange-traded funds Afghanistan’s future 83 Neutrinos Medieval relics A history of
The reckless expansion of Delta force Christianity in 100 reliquaries,
“synthetic” funds requires a - 84 Mental well-bein page 86
few new rules, leader: page 16. International A NewYork state be enived
The risks created by 65 Anew row about the IPCC 84 Sol f
complicating a simple idea, A climate of conflict & SOlar power trom space Principal commercial offices:
pages 75-76 66 Illegal drugs Beam it down, Scotty 25 St James’s Street, London SW1A 1HG
. 85 LSD Tel: [phone]
Home-grown highs Acid tests Boulevard des Tranchées 16
66 Domestic workers 1206 Geneva, Switzerland
Free the maids Tel: [phone]
Books and arts 750 3rd Avenue, 5th Floor, New York, NY 10017
. Tel: [phone]
F 86 Holy jewels
siaitiae The pull of religious relics Gey Etenteat lez .

67 America’s Supreme Court 87 T lating Arth eibal: sales aia Hong Kong

Business’s learned friends 7 einbaud ur ia
Other commercial offices:

68 European boardrooms Realms of the ideal Chicago, Dubai, Frankfurt, Los Angeles,
ean ng the Augean 87 Samuel Palmer’s Paris, San Francisco and Singapore
tables

landscapes
69 The Bayreuth Wagner Fields i
If America defaults The festival 88 Israeli counterterrorism Subscription service

markets would be convulsed.
Nothing else is certain, page 77

City minds Urban brains
behave differently from rural
ones, and notin a good way,
page 84

Asi 80 American retail banking
sia .
. . The road to agnosticism

61 Thailand’s election 81 Accounting

Lucey Hang . Tweedie departs
62 Religion in Indonesia 81M ina inflati

Growing intolerance easuring innation
63 J , _ Price ina trice

apan’s energy crisis ‘
A matter of trust $2 Economics focus
Democratisation

63 Repression in China
A tax-evader goes free

Gotterddmmerung
69 Foreign law firms in

Science and technology

Tactics over strategy

For our latest subscription offers, visit
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or call the telephone number provided below:

Brazil 88 In defence of flogging Telephone: [phone]
K t Sing Sing or the lash
eep ou 89 Elias Khoury’stietion When you subscribe, a tree
70 Entrepreneurs in Japan ry een
Battling the old guard Wet dreams ,
. . . Subscription for 1 year (51 issues)
72 The o1 l-services industry - Euro-zone countries €185
Profits gush Obituary Czech Republic CZK 5,365
z Denmar' Dkr 1,600
72 Energy in Poland 90 Yelena Bonner Hungary HUF 58,850
Fracking heaven The necessity of anger Honey ie es
‘olan 75
74 Schumpeter Sweden SKr 1,780
Thebott fth id ; Fi Switzerland SFr 298
e bottom of the pyrami 97 Economic and financial Other Europe (ex UK) €185
indicators Middle East - GCC US$349
rae South Africa Rand 2,040
Statistics on 42 Middle East + Africa US$285

Briefing
75 Exchange-traded funds
Too much of a good thing

Finance and economics

77 America’s debt ceiling
The mother of all tail risks

78 Buttonwood

The return of rationing
79 The euro’s resilience

In sickness and wealth
79 Hedge-fund celebrities

Kapow!

economies, plus closer
looks at refugees and
short-selling

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The world this week

Politics

It was a turbulent week for
Greece and the euro zone. As
angry demonstrators filled the
squares of Athens, George
Papandreou, the prime min-
ister, narrowly won a vote of
confidence in parliament. A
bigger test will come when
Greek politicians vote on
contentious legislation to
enact yet more austerity mea-
sures and structural reforms.
Euro-zone finance ministers
meeting in Luxembourg gave
warning that the next tranche
of bail-out funding for Greece,
which is needed to avoid a
debt default in mid-July, would
be released only if the legisla-
tion is passed.

The rmF said that contagion
from the Greek crisis posed
considerable risks to the Span-
ish economy and that efforts
on reform must not slow.
Earlier, up to 200,000 people
rallied on the streets of Span-
ish cities, protesting against
austerity and political corrup-
tion. The so-called indignados
plan to stage a huge demon-
stration in Madrid in late July.

Silvio Berlusconi, Italy’s prime
minister, promised both to
lower income taxes and to
keep the budget deficit under
control, after he won a vote of
confidence in parliament.
Days earlier Umberto Bossi,
the leader of the Northern
League, Mr Berlusconi’s co-
alition partner, had called for
tax cuts.

A courtin the Netherlands
cleared Geert Wilders on all
charges of inciting hatred
against Muslims. Mr Wilders,
who leads a far-right party that
supports the minority govern-
ment, has compared the Koran

to “Mein Kampf”. His trial was
seen as a test of Dutch free-
dom-of-speech laws.

Going against the traffick

The presidents of seven Cen-
tral American countries, Co-
lombia and Mexico, together
with Hillary Clinton and other
foreign ministers, gathered in
Guatemala for asummit
which approved a co-ordi-
nated strategy against drug
mafias in Central America.

After having kept Argentina
guessing for months, Cristina
Fernandez de Kirchner, the
president, said she would seek
asecond term at an election
due in October. Opinion polls
suggest that she should win
easily against a splintered
opposition.

In Venezuela troops laid siege
to a prison after 22 people
were killed in battles between
rival gangs of inmates.

Haiti’s parliament rejected
Michel Martelly’s nominee for
prime minister, a setback for
the country’s new president.

A bloody regime

In his first public speech for
two months, Bashar Assad,
Syria’s embattled president,
called for a “national dia-
logue”, once again promised
reform, and said an election
would be held in August—but
with no hint that his ruling
Baath party would allow an
opposition to compete. De-
monstrations and killings
continued.

Tunisia’s former president,
Zine el-Abidine Ben Ali, and
his wife were each sentenced
in absentia to 35 years for
corruption and fined $66m.

As Yemen’s government in
Sana’a seemed to lose its grip,
dozens of members of al-
Qaeda escaped from a prison
in the southern port city of
Mukalla. Allies of the organisa-
tion have recently captured or
attacked several towns in the
region.

In Bahrain eight pro-democra-
cy campaigners, all Shias, were
given life sentences in a special

security court for “plotting to
overthrow the government”.
Thirteen other opposition
figures were sentenced to up to
15 years in prison, seven in
absentia.

A spate of bombings in Iraq
killed at least 35 people, 27 of
them in Diwaniya, south of
Baghdad, the capital. The
attacks were presumed to have
been carried out by Sunni
extremists linked to al-Qaeda.

Ina blow to Palestinian hopes
of unity, Mahmoud Abbas and
Khaled Meshal, leaders respec-
tively of Fatah and Hamas, the
two main Palestinian factions,
who have agreed to oversee
jointly a government of tech-
nocrats, cancelled a meeting at
which they were meant to
select a prime minister.

Nice to see you

China released Ai Weiwei on
bail from detention, after the
artist and human-rights activ-
ist admitted evading tax. Mr Ai
was arrested in April as he
boarded a flight for Hong Kong,
and was heldin secret without
access to a lawyer. China said
it released Mr Ai for “his good
attitude in confessing his
crimes” and because of a
chronic illness.

After government-backed
protests in Hanoi demanded
that China respect Vietnam’s
territorial claims in the South
China Sea, the two countries
conducted a joint naval patrol
in disputed waters. China
urged America to avoid getting
involved in the dispute.

A volcano in Chile continued
to send plumes of ash across
the southern Pacific, obscur-
ing airspace in the far south of
the world and grounding
flights around the region.

The Economist June 25th 2011 —)

Pakistan arrested Brigadier Ali
Khan for his ties to Hizb-ut-
Tahrir, a banned Islamist
group. The most senior Paki-
stani army officer to be taken
into custody in a decade, Briga-
dier Khan was detained short-
ly before India’s foreign secre-
tary flew to Islamabad for talks
with her Pakistani counterpart.
Both sides started a dialogue in
February for the first time since
the Mumbai attacks of 2008, in
which Pakistani officers are
accused of involvement.

The beginning of the end
Barack Obama proposed
withdrawing 33,000 troops
from Afghanistan by the end
of next summer, with 68,000
remaining to support the
transition of responsibility for
security to the Afghans by
2014. Some military men wor-
ried that Mr Obama’s plan
would hamper American
advances against the Taliban.

Republicans threatened to stop
funding American participa-
tion in the Libya campaign,
claiming that Mr Obama is
violating the 1973 War Powers
Resolution by not seeking
congressional approval for
military action. Senators John
Kerry and John McCain in-
troduced a bipartisan resolu-
tion authorising the president
to commit forces, but not to
deploy ground troops.

Jon Huntsman declared his
candidacy for president. The
former governor of Utah and
ambassador to Chinais a late
entry to the Republican field,
butis exciting interest as a
more charismatic version of
Mitt Romney, the party front-
runner. As an Obama appoin-
tee to China, however, he is
sure to get a rough ride from
conservative activists. b>
10 Bed CR doer The Economist June 25th 2011

Business

In animportant test of the law
on class-action lawsuits in
America, the Supreme Court
threw outa case that had been
brought on behalf of 1.5m
female workers at Walmart.
The case claimed that women
were discriminated against in
pay and promotion, but the
court ruled that the plaintiffs
could not show acommon
grievance. The employees may
still pursue their claims in
smaller groups or individually.
Business groups had predicted
a flood of sex-discrimination
lawsuits if the court had let the
class-action suit stand.

Women activists interrupted
Carrefour’s shareholder
meeting in Paris, to protest that
there are too few female exec-
utives at the world’s second-
largest retailer. At the meeting
shareholders backed a plan to
spin off Dia, Carrefour’s low-
cost supermarket chain. It was
also confirmed that Lars
Olofsson would become
chairman in addition to his job
as chief executive, as the com-
pany rejigs its European
operations.

Enough already

As expected, the Federal
Reserve announced no new
initiatives at its regular policy
meeting, marking the end of its
second programme of quanti-
tative easing. But with the Fed
again lowering its growth
forecast for the year, interest
rates will stay pinned to the
floor. Ben Bernanke, its chair-
man, said he would be “pre-
pared to take additional action
if conditions warranted”.

PNC Financial Services
bought the American retail-
banking business of Royal
Bank of Canada for $3.45
billion. It was the second big
banking deal within a week:
Capital One Financial ac-
quired the American online-
banking unit of ING, a Dutch
company, for $9 billion.

JPMorgan Chase agreed to
pay $154m to settle a civil-fraud
charge that it misled investors
about a mortgage-securities

portfolio by failing to disclose
that a hedge fund, which had
helped to select the assets for
the portfolio, was at the same
time betting that half of the
assets would lose money.
JPMorgan neither admitted
nor denied wrongdoing.

Winifred Jiau was found guilty
of securities fraud in the first
insider-trading-related trial of
someone who works at an
expert-network company, a
business where clients in
finance are hooked up with
specialists in a given industry.

Timber!

Paulson & Co, a hedge fund,
was estimated to have lost
$500m when it sold its stake in
Sino-Forest, a forestry com-
pany that has been accused by
ashort-seller of overstating its
assets in China, causing its
share price to collapse.

After an internal inquiry into
last year’s explosion on the
Deepwater Horizon rig in the
Gulf of Mexico, Transocean,
the owner of the rig, placed the
blame for the disaster firmly
on Bp, the rig’s operator. The
presidential commission that
investigated the incident con-
cluded that Bp and its contrac-
tors should share the blame.
That finding has been accepted
by other contractors, inducing

them to settle with Bp, includ-
ing, this week, the firm that
made the well’s float collar.

Citigroup began the process of
putting EMI up for sale (the
music company said it was
seeking “strategic alterna-
tives”). In February Citi seized
EMI from Terra Firma Capital
Partners as the private-equity
firm struggled with loans that
ithad obtained from the bank
to finance its buy-out of EMI.
One potential bidder for the
business could be Len Blavat-
nik, who recently bought
Warner Music.

Foster’s rejected a takeover
bid from SABMiller, which
valued the Australian beer
company at A$9.5 billion ($10.1
billion). Foster’s recently di-
vested its sagging wine busi-
ness to refocus solely on its
“amber nectar”. Other big
brewers are expected to sub-
mit rival offers to saBMiller’s.

Qantas reached a settlement
with Rolls-Royce for last
November’s explosion ina
Rolls-Royce Trent 900 engine
on one of its jets, which forced
an emergency landing and
caused the airline to ground
aircraft as it conducted safety
tests. Qantas will note the
value of the settlement as
A$95m ($101m) in its earnings.

Research in Motion’s share
price fell by 21% after the Black-
Berry-maker lowered its out-
look for the year. Once consid-
ered to be the hottest wireless
device around, the BlackBerry
has not gained much from the
growing demand for smart-
phones; its share of the market
in North America has shrunk
to17% from around 50% just
two years ago.

It’s a rich man’s world

i High-net-worth individuals

Number of people with at least
$1m in investable assets, m

@@ 2009 Ml 2010
0 ih 2 3 4
North America

in ih
Rest of world -_

Source: Capgemini, Merrill Lynch

An annual survey estimated
that the combined wealth of
the world’s10.9m rich people
(27% of whom are women)
stood at $42.7 trillion in 2010,
more than in 2007, the year the
financial crisis was brewing.
More than half of the monied
classes live in the United
States, Japan and Germany,
though Asia has more in total
than Europe for the first time.

Other economic data and news
can be found on pages 97-98