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 LIVE FOR GREATNESS EVERY ROLEX IS MADE FOR GREATNESS. THE GMT-MASTER, INTRODUCED IN 1955, WAS DEVELOPED IN COLLABORATION WITH PAN AM TO MEET THE NEEDS OF THEIR INTERNATIONAL PILOTS. THE GMT-MASTER II HAS PROVEN TO BE EVEN MORE INVALUABLE AS IT FEATURES A ROTATABLE 24-HOUR GRADUATED BEZEL THAT ALLOWS THOSE WHO TRAVEL THE WORLD TO READ THREE DIFFERENT TIME ZONES. TWO SIMULTANEOUSLY. LHE GMT=MASTER: [I WorldMags WorldMags [a X@) Bi p,¢ 5-star journeys to China. Delight in a culture as unique as its cuisine. Be enthralled by the many wonders of China. From the skylines of the big cities to isolated mountaintops, you will be in awe at the sheer diversity of China’s terrain. Or simply marvel at the relics of one of the world’s oldest civilisations. So fly to China with us on our growing network of over 100 destinations. Getting there is easy, but deciding what to do isn't. eeebhaad Beijing - Guangzhou + Hong Kong + Shanghai QATAR AIRWAYS duykoaill World’s 5-star airline. qatarairways.com 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 The Economist online Daily analysis and opinion from our 19 blogs, plus audio and video content, debates anda daily chart Economist.com/blogs E-mail: newsletters and mobile edition Economist.com/email Print edition: available online by 7pm London time each Thursday Economist.com/print Audio edition: available online to download each Friday Economist.com/audioedition 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: 020 7830 7000 Home-grown highs Acid tests Boulevard des Tranchées 16 66 Domestic workers 1206 Geneva, Switzerland Free the maids Tel: 4122 566 2470 Books and arts 750 3rd Avenue, 5th Floor, New York, NY 10017 . Tel: 1212 5410500 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 economist.com/offers or call the telephone number provided below: Brazil 88 In defence of flogging Telephone: +44 (0) 1444 475 647 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 An Economist Group business PEFC certified This copy of The Economist is printed on paper sourced from sustainably managed forests certified by PEFC www.pefc.org Crecycle PEFC PEFC/30-31-033 © 2011 The Economist Newspaper Limited. 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Domenico Tassinari WorldMags ee | a TO SU i 4 H oe p ST ee ere ee = ee al h 7 | Take Confidence in Our Approach Corporate & Investment Banking | Sales & Trading (0) ii tettslm axel aco) ame) im Nats oxc7-Wo)m-\aatslarers! RBC Capital Markets is a registered trademark of Royal Bank of Canada. RBC Capital Markets is the global brand name for the capital markets business of Royal Bank of Canada and its affiliates, including RBC Capital Markets, LLC (member FINRA, NYSE, and SIPC); RBC Dominion Securities, Inc. (member IIROC and CIPF) and Royal Bank of Canada Europe Limited (authorized and regulated by FSA). ® Registered trademark of Royal Bank of Canada. Used under license. All rights reserved. ® The Lion & Globe design and RBC are registered trademarks of Royal Bank of Canada. © Copyright 2011. The PGA Seal with the letters PGA is a trademark owned by The PGA of America. [nd =i LO) 1B) mt DAV aS et = 1 D) OF 104.27 KM/H Recorded at a speed of 104.27 km/h (56.3 knots), with an average speed of 50.17 knots over olal-war-lelu(er-) manliley Alain Thébault now holds two world records thanks to alse). aueclolaellalclavs fexslaxeldaatelalercme) am eler-[ae mu ala) Hydropteére, the craft that flies using its carbon lahyie [ae)ie)] sear e)(o)al=\-laulamalrela frequency with its El Primero caliber, ZENITH is the aNd=}ale) axe) midalom aa lelsiar-[ocole] co] a) lUlmolaat- 1d (om anveny.-vanlclalaa ia id at-wa' cela (eM alicm alle) ata e)a-xelci(e)a} watch will henceforth be fel g-leilalemuarcm Ad imell NFViawe iM al=\er-\eliarel6lalare m=) i malls future exploits. 74—INine SWISS WATCH MANUFACTURE ) EL PRIMERO ZENITH, THE PIONEER SPIRIT SINCE 1865 www.zenith-watches.com 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