Worst. Prize. Ever.

Has the Nobel become a parody of itself?

Awarding the Nobel Peace Prize to the European Union Friday, former Norwegian Prime Minister Thorbjorn Jagland, the hapless award committee chairman, said: "We want to focus on what has been achieved in Europe in terms of peace and reconciliation.… It is a message to Europe to secure what they have achieved … and not let the continent go into disintegration again because it means the emergence of extremism and nationalism." A prize, in other words, awarded for future efforts as much as past achievements.

And so the descent of the Nobel Peace Prize into parody or, failing that, pastiche continues. Plainly, this honor awarded in this year of all years is little more than a sympathy note designed to offer some cheer to the eurozone in a time of perpetual, irresolvable crisis. How much this will encourage Greeks or Spaniards or the Irish is, of course, a matter of some doubt. "Never mind the misery; feel the humanity" is pretty meager consolation in these astringent economic times. "Forget your woes, Stavros; you've a tiny share of a Nobel Prize." This will make all the difference.

So the absurdity is one thing. But there is also a plausible argument to be made that the EU is now the biggest driver of political extremism on the continent. The great gulf between Northern and Southern Europe widens by the day. As it does, resentment increases as the efforts to save the eurozone inflict ever greater pain upon the feckless, unhappy countries on the Mediterranean littoral. The protests against German Chancellor Angela Merkel in Greece this week could be but a modest harbinger of things to come. Like never before in its history, the EU is under pressure. It is easy to see how it might crack or explode.

In truth, this is the kind of award you make when you can't think of anything more useful or any more plausible recipient. It belongs in the tradition of other institutional Nobel Peace Prize winners such as the United Nations, the Red Cross, and Médecins Sans Frontières. Each of these organizations -- yes, even the U.N. -- is admirable enough, but none can be said to have thwarted war on a regular basis. In its way, the Norwegian Nobel Committee is really little better than the panel assembled by Time magazine to award that publication's "Person of the Year" bauble. At least the Norwegians on the peace-prize committee haven't awarded it to "You," as Time did a few years ago. At least not yet.

Not that awards to individuals necessarily cut a better class of mustard. Barack Obama's 2009 prize was further beyond satire than even Henry Kissinger's 1973 Nobel. Never before had the award been bestowed just for turning up or, more accurately, for not being George W. Bush. If Obama's was the most egregious prize in recent memory, that awarded to Al Gore and the Intergovernmental Panel on Climate Change was little better because, no matter how worthy their respective efforts, it was difficult to discern what this had to do with matters of war and peace.

Say this much for the 2012 prize: At least there has been peace in Western Europe these past 60 years. How much credit the institutions of European economic and latterly political cooperation deserve for this blessed state of affairs is an interesting question. But the idea that the EU is a democracy-spreader is weaker than it looks. It is true that Southern (Portugal, Spain, Greece) and Eastern Europe have embraced democracy like never before in their histories, and it's true as well that the carrot of EU membership and assorted other benefits has played a role in this process. The EU's allure has surely played a part in moving the former Yugoslavia toward a more peaceful, civilized future -- and even in nudging poor, unwanted Turkey toward democratic reforms.

But it might also be observed that other parts of the world have moved to more democratic arrangements without the incentive of EU membership. Latin America and parts of Asia and even Africa have shifted to democracy, so there is at least a plausible argument that the EU is given more credit than it merits for Europe's peaceful embrace of the ballot box. Might it have happened even without the EU? Possibly.

It is true that war in Western Europe is more inconceivable now than at any point in the continent's history as a series of organized states. The EU has played a part, though not necessarily a dominant one, in helping Europe reach this unusually happy state of being. France and Germany, antagonists for so long, can hardly imagine fighting one another again. Again, the EU -- which began life as a series of coal and steel agreements signed by Bonn and Paris -- has helped end centuries of mutual suspicion and hostility. But it might also simply be the case that the horrors of the 20th century convinced even the most bellicose German or Frenchman that further conflicts between their respective countries could only end in even greater calamity. At long last, we reached the wars to end all wars.

Perhaps the Norwegians are actually great humorists. There is a certain gallows amusement to this award being given to this organization at this time. For many of its inhabitants, the EU or, more precisely, the eurozone, has become a suffocating monster squeezing the life from economies with little enough room to breathe as it is. In Ireland, Greece, Spain, Portugal, and, perhaps soon enough, Italy too, this award can only be seen as a comedian's black joke.

In the end, of course, the Nobel Peace Prize is treated with greater reverence or importance than it really deserves. For all its history and prestige, it is, in the end, only a matter of good intentions. And while noble and better than some alternatives, good intentions have rarely been enough in international affairs. This, of course, is true of the European Union too, so in this respect at least, perhaps this silly award is fitting after all.

Junge, Heiko/AFP/Getty Images


With Friends Like These…

How the sanctions might hurt America's potential allies inside Iran.

The collapse of the rial in Iran's foreign currency exchange in early October was a tipping point -- not so much for Iran's economy as for Tehran officials' efforts to deny that sanctions do harm. In a rare moment of agreement, President Mahmoud Ahmadinejad and analysts in Washington blamed the rial's collapse on Western sanctions, even as most of the president's political opponents in Tehran insisted that his handling of the economy -- not sanctions -- was responsible for the economic mess.

For his part, Supreme Leader Ali Khamenei dismissed the sanctions as "not a new issue" and said that "enemies are making efforts to blow the issue of sanctions out of proportion, and, unfortunately, certain people inside are assisting them."

As a lame-duck president with only six months left in his term, Ahmadinejad is an easy target. But blaming the crisis on domestic policy mistakes is also a way for the more radical politicians in Tehran to continue to deny the sanctions' negative impact and to suggest that the crisis will be brought under control by changes in economic, not foreign, policy.

In reality, both the sanctions and the government's inept response to them have contributed to the country's economic woes. But Western analysts have misjudged the severity of the crisis: Since the rial started to fall, the media has been full of tall tales of hyperinflation, economic collapse, and revolution. Much of this is based on a misunderstanding of how Iran's foreign exchange markets work.

Why didn't Tehran see this coming?

Economic mismanagement in Iran is nothing new. In the past, high oil prices have covered up policy mistakes and prevented economic crises. Oil couldn't save Iran this time, however, because sanctions have taken a large bite out of the country's energy revenues. Oil exports are down about 50 percent this year from their normal level, and they may fall further. Iran has also lost its access to part of its foreign currency reserves, which are frozen in foreign banks.

Iran should have known this could happen. After all, Western governments were not hiding their intentions to tighten the sanctions. The Iranian authorities had ample warning that maintaining the rial as a convertible currency would become infeasible once sanctions began to bite. They could have laid the groundwork for their current multiple-exchange-rate system -- which allows Iran's Central Bank to sell foreign currency at different rates to different users -- long before December 2011, when U.S. President Barack Obama signed the sanctions law that limits Iran's access to the oil market and the international financial system.

Tehran views the multiple-exchange-rate system as the right response to the sanctions. It offers the government, which earns all foreign currency, the tool to manage the economy and contain the political impact of the sanctions. There's logic behind this: The system has insulated the economy from hyperinflation, making its case different from those of other countries that have experienced large external shocks, such as East Asian countries, Turkey, and Zimbabwe.

A tale of two currency markets

Tehran still has tools to prevent the rial collapse from having uncontrollable political effects. The government can limit the devaluation to currencies that are privately traded, selling its own reserves at preferential rates and therefore keeping prices of critical commodities and wages from rising too much. It does not have to print money for its expenditures in tandem with devaluation, which reduces the risk of hyperinflation. Thus a large devaluation in the rial in the free market is much less significant than the same devaluation in countries where the government has to buy its foreign currency from exporters.

The economic signal from Iran's free market is not as significant as people think for yet another reason. Sanctions have segmented the foreign currency market in Iran into two relatively separate parts. One part is for transactions managed by the public sector, which can be conducted on a barter basis, or in the currencies of the countries that continue to buy oil from Iran, such as Indian rupees and Chinese yuans.

The other market is for paper foreign currency and hawala (a system of parallel transactions in two countries), which people use to pay for imports that the government considers luxury goods, to send tuition money to hundreds of thousands of Iranian students studying abroad, to take money out of Iran, or simply to seek protection from inflation. The supply of foreign currency to this market is much tighter than the limits set by falling government oil revenues, so its gyrations do not necessarily reflect the ups and downs of oil exports. Nor is the rial's value in this market relevant for the price of foodstuffs or manufactured items, which the government can purchase with its oil revenues.

The shock to production

This two-tier system hasn't been well suited for the goods that keep Iran's agricultural and industrial sectors running, which constituted about two-thirds of imports. The system's persistence indicates the government's lack of preparedness, which has frustrated Iran's productive sectors for months.

Iran's economy is highly globalized, and most sectors rely on some imported items for production. Sanctions have disrupted the supply chains for these sectors. This summer, a shortage of imported chicken feed caused the first sanctions-related political crisis in Iran. Several hundred ordinary Iranians protested the shortage in Neishabour, a medium-sized city where more than 75 percent of residents voted for Ahmadinejad in the 2009 election.

As a result of sanctions and the government's ineffective response, Iran's industrial production has fallen and thousands of workers either have lost their jobs or are not being paid. Car production, which had increased fivefold in the last decade, was down 42 percent from March to September compared with the same period a year ago, mostly due to a shortage of spare parts. This year, French car producer Peugeot shut down its operations in Iran.

To remedy this situation, the government in late September unveiled its new "foreign exchange center," which allows licensed importers and exporters to bid for foreign currency, mostly supplied by the Central Bank. Approval for access to this center is based on the priority that the Central Bank attributes to the commodity in question.

The new market has introduced a third exchange rate, where the rial is currently trading about 20 percent below the free market rate but twice the official rate reserved for essential imports. This large gap, as well as talk of unifying the exchange rate, fueled speculation that a large official devaluation was imminent -- and possibly caused the value of the rial in the free market to fall 40 percent the same week.

The foreign exchange center has helped producers because they no longer have to compete with speculators and those taking their money out of the country, but it has also sharply increased the power of the government vis-à-vis the private sector -- a risk that critics of Iran sanctions have been warning of for some time.

Why Ahmadinejad won't do the right thing

The blow to the productive sectors of Iran's economy has shrunk output at a time when Iranians are holding record amounts of cash. Liberal spending has expanded liquidity by more than five times since Ahmadinejad took office seven years ago. Too much money is chasing too few goods. Inflation, which was running close to 30 percent a month ago, is now probably closer to 50 percent.

Excess liquidity and high inflation have sent ordinary Iranians in search of safe assets that can protect the value of their savings. As a result, the small Tehran Stock Exchange rose 12 percent last month, real estate has been booming, and gold and foreign currencies have gone through the roof.

An effective way to absorb such liquidity and channel it to productive uses is to raise interest rates, but the government has avoided doing so. Opposition to raising interest rates to fight inflation is partly the result of Islamic teachings that ban interest altogether, but it is also related to powerful lobbies that prefer to borrow cheap from publicly owned banks. One of the first economic actions that Ahmadinejad took when he came to office was to lower the cap on interest rates to 12 percent in the middle of an oil boom, while the economy was overheating. Interest rates have been on average 7 percentage points below the rate of inflation during his tenure.

In a rare concession, Ahmadinejad agreed a few months ago to raise interest rates to 17 percent on one-year deposits, but this was too little too late. With real interest rates in the double-digit negatives, Iranian banks have been losing depositors in droves.

Spreading the economic pain

Despite everything, Iran seems to be weathering the storm better than advertised. Sanctions were intended to inflict economic pain on Iran's population, with the hope that Iranians would persuade their leaders to compromise with the West on the nuclear standoff. But these hopes have been dashed: Tehran may have fumbled its economic response to sanctions and failed to minimize their overall level of pain, but it does seem capable of dealing with their political fallout by managing the distribution of the pain. Its principal means in doing so is the multiple-exchange-rate system, which eases the sanctions' impact on Iranians below the median income -- Ahmadinejad's political base. Meanwhile, the system shifts the burden to upper- and middle-income Iranians, who have shown little affection for the controversial president in any case.

To protect lower-income people, the Iranian government will likely act conservatively in supplying foreign exchange for nonessential needs and make sure that it has enough reserves for critical imports of food and medicine. This will mean the value of the rial in the free market will continue to fall -- but such an event should not be interpreted as a sign of economic collapse.

Ironically, if this scheme succeeds, much of the pain will be borne by upper-income Iranians who are generally most friendly to the West and least likely to revolt, because they have more to lose. They will be the unintended victims of Western sanctions, which have so far proved a very blunt instrument of U.S. foreign policy. Upper-income Iranians have plenty to be upset about with their own government, but now there is a distinct possibility that they will also blame the West for their misfortune.

This is not only unproductive from the point of view of Western policymakers -- but it will also complicate relations with Iran if and when the country rejoins the global economy.