Argument

We Need to Talk to Iran, But How?

Thirty-two years of sanctions and bluster haven't worked. It's time to try something different.

It was easy enough to miss amid all the chest-thumping, threats, and talk of imminent strikes filling the airways, but last week, Iran signaled its willingness to restart talks with the P5+1 (the five U.N. Security Council members plus Germany) about its nuclear program. "We hope the P5+1 meeting will be held in near future," Iranian Foreign Minister Ali Akbar Salehi said, as a group of inspectors from the International Atomic Energy Agency (IAEA) toured the country.

The last round of such talks ended inconclusively in Istanbul in January 2011, and it has taken more than a year to get close to a new meeting. Although no date has been set for the new talks, it's not too early to begin planning for how to make them more productive than past negotiations. Here are a few steps that could put us on a road more promising than the current ominous exchanges.

1. DON'T UNDERESTIMATE THE RISK OF MISCALCULATION

It is tempting to dismiss the current talk of war as bluff and bluster. Although there is certainly much hot air in the current talk of Iran's closing the Strait of Hormuz or of imminent Israeli attacks on Iran, its very volume and frequency should make us worry. Each threat, each warning, each "red line" declared threatens to trap the parties in rhetorical corners. Even worse, a party might start believing its own defiant rhetoric and fail to distinguish between real and imaginary threats.

Complicating the issue is the fact that the United States and Iran have almost never spoken officially to each other in more than 30 years. Diplomats do not meet; officials do not talk; and military officials to not communicate. Instead of contact in which each side can listen to the other, take the measure of personalities, and look for underlying interests behind public positions, each side has imputed the worst possible motives to the other, creating an adversary both superhuman (devious, powerful, and implacably hostile) and subhuman (violent, irrational, and unthinking).

This mutual demonization -- born of fear and contempt -- raises the risk that a simple confrontation will lead to miscalculation and full-scale conflict. Put simply, today, in the absence of direct communication, it would be very difficult to de-escalate a potential incident in the Persian Gulf or Afghanistan. With each side assuming the worst about the other, a minor incident could lead both sides into military and political disaster.

2. REACT CAUTIOUSLY

Current events are not running in Iran's favor, despite its bombastic rhetoric. The overthrow of longtime despots in Tunisia and Egypt raised an obvious question for Iranian leaders: "Why not here?" Iranians chanted in the streets, Tunes tunest; Iran natunest ("Tunisia could; Iran could not"). As for Bahrain, the Islamic Republic could only watch and denounce as a Sunni-dominated government with Saudi support suppressed fellow Shiites. Bashar al-Assad's regime in Syria, one of Iran's few reliable friends in the region, is engulfed in a burgeoning civil war.

A frustrated Iran is one that will lash out in all directions -- at Israel, at the United States, at Britain (as in the recent attack on its embassy in Tehran), and at Saudi Arabia (as in the alleged plot to assassinate the Saudi ambassador to the United States with the help of Mexican drug cartels). Nonetheless, U.S. negotiators should be careful not to overreact to every claim, every statement, and every bit of bluster coming from the harried leaders in Tehran. Iran would like Washington to dance to its tune, and it likes to show its power by provoking America into unwise reactions. In such cases, language matters, and U.S. diplomats should be measured, clear, and cautious. Let the other side rant and rave.

3. SMASH THE ATOM

If these future talks -- or any talks -- deal only with Iran's nuclear program, they will fail. For better or worse, the nuclear program has become highly symbolic for the Iranian side. Exchanges on the subject have become an exercise in "asymmetric negotiation," in which each side is talking about a different subject to a different audience for a different purpose. The failure of such exchanges is certain, with both sides inevitably claiming afterward, "We made proposals, but they were not listening."

For Americans, the concern is technical and legal matters such as the amounts of low- and high-enriched uranium, as well as the type and number of centrifuges in Iran's possession. For Iranians, the negotiations are about their country's place in the world community -- its rights, national honor, and respect. As such, any Iranian negotiator who compromises will immediately face accusations of selling out his country's dignity. Such was the case 60 years ago between Prime Minister Mohammad Mosadegh and the Anglo-Iranian Oil Company when the British insisted on the sanctity of contracts and the Iranians sought to rectify a relationship out of balance for over a century. Today, the United States risks falling into the same trap of mutual incomprehension.

President Mahmoud Ahmadinejad's words on the subject are revealing. He says, "We do not believe in making atomic bombs. We believe that goes against human morality." He adds, however, that the decision to build or not build such a weapon is Iran's decision to make. No one else -- not the United States, the United Nations, the IAEA, or the European Union -- can tell Iran what to do. It is Iran's right to make that decision. In other words, "Others are seeking to impose their will on us; we are seeking to assert our national rights."

4. BROADEN THE CONVERSATION

So if not nukes, what should the talks be about? If U.S. negotiators are interested in going beyond the most difficult issue on the table -- Iran's nuclear program -- and exploring areas where "yes" is possible, they need to be talking about Afghanistan, Iran, terrorism, drugs, piracy, and other areas where, in a rational world, there exists basis for agreement. Such will never happen, however, if U.S. and Iranian officials cannot talk to each other.

Before the United States enters another round of talks, it must make certain that the Iranians will not re-enact the farce of their January 2011 meeting with the P5+1 in Istanbul. At that session, Iranian representative Saeed Jalili, apparently under instructions from Tehran, deliberately avoided a bilateral meeting with U.S. Deputy Secretary of State William Burns. The sad irony is that, among senior U.S. officials, Burns is probably the only one prepared to listen seriously to Iranian concerns. In fact, the two had met productively in Geneva in 2009 to discuss a deal to supply fuel to Tehran's research reactor. If the Iranians won't talk to Burns, however, then there is no one in Washington who will listen to them. Of course there is little one can do if the Iranians insist on rubbing salt into self-inflicted wounds. But they should know the opportunity is there.

Although the Geneva deal eventually collapsed, those 2009 talks are still the only high-level meeting between U.S. and Iranian officials during Barack Obama's presidency. Iranians and Americans need to be talking again at that level, and about much more than just their nuclear programs. In the preparations for the next round of talks, the Americans -- through the designated P5+1 channel -- should make two points:

1. Burns looks forward to a bilateral meeting with his Iranian counterpart.

2. He is prepared to listen to Iranian concerns on all issues and explore areas of potential agreement and further discussion.

5. MANAGE EXPECTATIONS

The United States should be wary of overplaying its hand -- something it often accuses the Iranians of doing. It should be realistic about the effectiveness of so-called "punishing" and "biting" sanctions. Just who gets punished and bitten by these measures? Such actions may have their effects, though perhaps not on those in Tehran whom America is seeking to influence. If Iran cannot sell crude oil, it will clearly be in serious trouble. But if sanctions do not bring the Iranians to yield -- and 32 years of sanctions have not done so -- the only way to do so may be long-term measures to lower the world oil price so that Iran faces an economic crisis it cannot avoid no matter how much oil it sells.

Nor should the United States oversell the "threat" from Iran. The Islamic Republic, through its economic mismanagement, inept diplomacy, and talent for making gratuitous enemies, is chiefly a threat to itself. Although the prospect of a nuclear-armed Iran is very worrying to others in the region, it is difficult to see how a nuclear weapon serves Iran's interests or helps the current authorities stay in power. A nuclear weapon is of no use against urban demonstrators seeking a government that treats them decently or against restive ethnic minorities seeking cultural rights and a fair share of political and economic power.

The chief threat to the Islamic Republic, in the government's own words, is not an invasion of foreign armies, but a "soft overthrow," a velvet revolution fueled by hostile foreign countries and local Iranian "seditionists."

Whenever negotiations occur, there will be no quick breakthroughs. If there is any progress, it will be slow, and it will measured in small achievements -- something not said, a handshake, an agreement to meet again, a small change in tone. Above all, what is needed is patience and forbearance. The Americans cannot simply throw up their hands and say, "Well, we tried, but they are just too irrational (or devious, or suspicious). Let's return to what we have always done." One thing is clear: Three decades of demonization and hostility have accomplished nothing. Both sides need to stop shouting and start listening.

FABRICE COFFRINI/AFP/Getty Images

Argument

Why It Won't Be a Tragedy if Greece Defaults

European leaders are working around the clock to prevent a Greek default -- as if they had a choice.

European leaders have been scurrying around for quite some time in an effort to prevent a Greek default. But all the activity has obscured two fundamental questions: Is it even possible to prevent Greece from defaulting at this point? And would a default really be as calamitous as so many seem to think?

European officials certainly appear spooked. They have agreed to a €130 billion bailout package and are now talking about increasing it to €145 billion if the Greek government implements austerity measures and private holders of Greek sovereign debt voluntarily agree to steep reductions in both principal and interest. They have been hatching schemes to keep the European Central Bank (ECB) from having to join private investors in taking a loss on its Greek bond portfolio. And they have been erecting a massive firewall of liquidity through the European Stability Mechanism, the International Monetary Fund (IMF), G-7 central banks, and the ECB in the event that markets dry up and eurozone countries and banks need cash. So far this week, Greek political leaders have failed to satisfy the demands of the ECB, IMF, and European Commission for the implementation of proposed austerity measures.

Why so much sturm und drang? What's the alleged downside of a Greek default?

For one thing, the ECB would have to write off €55 billion in Greek sovereign debt, which would reduce the central bank's ability to meet liquidity needs. The losses would have to be replenished by additional contributions from member governments (i.e. Germany).

For another, European banks would have to write off their own €50 billion in Greek debt, which might reduce bank capital to dangerous levels and scare off short-term lenders. Without sufficient liquidity, banks would be unable to pay off short-term debt as it matures. They might then either fail outright or be bought out by national governments (i.e. nationalized).

Other financial institutions would be in jeopardy as well. European, American, and Asian insurance companies would have to pay out on credit-default swaps (insurance) to investors who have hedged their bets against a Greek default. This might leave such companies vulnerable to dangerously low capital reserves and potential bankruptcy, with possible knock-on effects.

But the most terrifying consequence of a Greek default may be the contagion effect, in which the bonds of other relatively suspect economies -- Italy, Portugal, Spain -- come under attack and create liquidity problems that lead to sovereign bankruptcy.

These scenarios, however, rest on the faulty assumption that there is a choice of saving Greece from default, even though numerous studies suggest otherwise. They indicate that Greece will default despite the best intentions of European leaders. The country's debt burden of 160 percent of gross domestic product (GDP), combined with its failure to rein in public spending and an economy that has been shrinking for five years, make default a virtual certainty. Banks lend money to those who need time, not those who need money. And Greece cannot repay its debts, no matter how much time is allotted. The question, then, is whether Greece defaults sooner or later. Later may give European leaders time to buttress a firewall against further contagion. But it could also lead to a colossal waste of resources by throwing good money after bad.

All of this begs the question: Why not just let Greece default? If Greece is a terminal patient, why not save €145 billion in bailout funds for healthier patients?  Injecting Greece with euros is a palliative measure that relieves suffering but does not cure the patient, merely delaying the inevitable instead. The eurozone remains in critical condition as long as Greece continues to drift in and out of consciousness on life support.

In the grand scheme of things, Greece is relatively small potatoes. Its economy is less than one-tenth the size of Germany's and accounts for only 2 percent of the eurozone's GDP, and its €350 billion in debt amounts to only 4 percent of total eurozone debt. The tail is wagging the dog.  Granted, there is a possibility that contagion will spread and deplete the liquidity of other euro members, but this is a remote and manageable risk.

The more likely fallout from a default would be Greece dropping the euro. Without the possibility of external funding, the government will have to cut public spending to no more than tax revenues permit. But tax revenues will be in free fall because of capital flight, a taxpayer revolt, and a rapidly contracting economy. Austerity measures will be necessary, but no government will last long enough to put these measures into effect. Faced with such catastrophic economic failure, Greece will have no choice but to return to the drachma.

Fear of contagion is essentially built on a domino theory. Back in the 1970s, the lack of predicted consequences following the American defeat in Vietnam falsified the domino theory in the realm of international politics. Communism did not spread to neighboring countries, nor did the United States have to defend its borders along California's coast. Now it is time for Greece to falsify the theory in the realm of international economics. The firewall that European leaders have been building over the past year is designed precisely to isolate other eurozone countries from the effects of a Greek default. It is meant for those countries that face a liquidity problem, not a solvency problem. Greece is a different matter; it is insolvent. Until the gangrenous limb of Greece is amputated from the eurozone body politic, contagion will spread to countries such as Italy, Portugal, and Spain, which will kill off the euro.

All of this, of course, assumes that eurozone states will harmonize their policies regarding pension reform, unemployment insurance benefits, and public sector spending cuts to achieve reasonably balanced budgets. If not, even without Greece, the euro is finished.

There are at least two other major caveats to a recovery of the eurozone, both of which remind us that the euro is essentially a political project, not an economic one. In France, all bets are off if the Socialists win presidential elections this spring. Efforts to reduce government spending at the expense of public sector unions would cease. Cooperation with Germany on fiscal discipline and austerity measures would go out the window. And the euro would disintegrate.

In Germany, Chancellor Angela Merkel is already pushing the envelope. German taxpayers will only do so much to pay for the sins of their more profligate neighbors. Although European politicians are reluctant to confront the prospect of a Greek default, European publics are not. Street demonstrations against austerity measures in Athens have produced equal and opposite reactions in Berlin, where Germans are demanding an end to the regime of bailouts and "too big to fail." Faced with this grassroots resistance, parties in the Bundestag are already refusing to consider additional funds for Greece. Merkel and her Christian Democratic Union coalition must listen to these demands or face the wrath of voters. If pushed too far, Merkel's government will collapse. Its replacement is likely to be both less cooperative and more intransigent on the issue of the euro.

If the European debt crisis has taught us anything, it's that the era of easy money is over. To ensure the eurozone's survival, the ECB will have to make new distinctions between national bank borrowers. Banks from countries with low credit ratings (southern tier) will have to post higher quality collateral than banks from countries with high ratings (northern tier). Portuguese, Spanish, and Italian banks must no longer be permitted to use their sovereign debt as collateral for new loans.

This restriction will inhibit the kind of unlimited credit expansion that led to the real estate bubbles in Ireland and Spain and extravagant public spending and chronic budget deficits in Greece, Italy, and Portugal that spawned the current crisis. It will enforce market discipline on states that routinely run budget deficits or embrace unproductive economic policies. Such discipline will reduce overall sovereign debt and strengthen bank balance sheets. The risk of sovereign default will be transferred from eurozone taxpayers to private investors. This reform is not a panacea, but in the absence of full economic and political integration, where a European identity is sufficiently advanced to allow transfer payments from one nation's citizens to another's, it will have to do.

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