Who can explain financial markets’ hatred for the new UK government?

There has been a lot of drama in the currency and bond markets regarding the new UK government’s economic policy, which sounds like it is along the lines of what the U.S. did in the 1980s. President Ronald Reagan proposed shrinking government with spending cuts so that tax cuts could be implemented; Congress agreed to the tax cuts, but refused to cut spending and the result was massive deficits, which eventually faded due to economic growth.

The UK government is already somewhat leaner than what we have in the U.S. Heritage says that the UK government consumes 42 percent of GDP, which is a touch higher than the US government (39 percent), but the UK figure includes nearly all health care spending. If we add government-mandated-and-regulated “private” health care to the US number, we get closer to 50 percent of GDP.

The business folks and investors with whom I spoke in the UK were generally positive regarding Prime Minister Truss‘s plan, which they felt would deliver a substantial amount of growth. They attributed much of the hatred and hysteria to an anti-Conservative press. On the other hand, hatred and hysteria in currency and bond markets isn’t usually driven by whatever the Guardian has to say.

One part of Truss’s plan seemed insane to me, i.e., preventing consumers from seeing that prices for energy have gone up. But the French are also doing it. Wholesale electricity prices are up 5X and consumers are paying… 1X. Party On with printed money.

“Liz Truss’s economic plan caused a furor. But it’s actually sound” (Washington Post, October 9):

Britain is the only Group of Seven country with a smaller economy today than in the fourth quarter of 2019, before the coronavirus pandemic. In the 40 quarters preceding the pandemic, its economy grew at an annual rate of less than 2 percent more than half the time.

Maybe a country where all of the young people get stumbling drunk every night at the pub isn’t ideally situated for growth?

The government’s tax plan would cancel a scheduled increase in the corporate tax rate to 25 percent from 19 percent and would make permanent a temporary increase in the annual investment allowance, letting businesses deduct the full cost of qualifying plants and machinery up to 1 million pounds in the first year.

This sounds reasonable to me! With a 25 percent rate, a company would have to be crazy to refrain from pushing all of the profits into Ireland (12.5 percent rate and full membership in the EU if frictionless trade with Europe is required). The depreciation simplification should front-load investment and activity and shouldn’t change the tax owed in the long run (spending one million pounds will yield one million pounds of deductions against revenue).

The most questionable parts of the plan are the income tax cuts. Reducing the basic rate of income tax by one percentage point, to 19 percent, will fuel consumption at a time when the Bank of England is attempting to curb inflation.

The prime minister’s proposal to eliminate the 45 percent tax bracket on incomes above 150,000 pounds per year — the top 1.1 percent — was also unwise in the current fiscal and economic environment, …

I’m not sure that a 45 percent rate is revenue-maximizing. At that rate, a Brit would get a great return on pushing activities offshore or structuring activities to get the 10 percent entrepreneur’s rate. The U.S. government is greedy for money and the top personal income tax rate is 37 percent (which works out to 37 percent in Florida or 50.3 percent in California).

It looks like the markets are locking Britain into the same policies that put it on the slow bus to economic mediocrity. Given some reasonable value placed on leisure and drunkenness, the decision to forgo the second job or language study and spend the evening in the pub with friends will be a rational one. For those who are ambitious, the decision to emigrate will likely be a rational one (one of our neighbors in Florida recently arrived from the UK, having accepted a transfer within a multinational industrial products company (held up for more than a year due to coronapanic restrictions on non-walk-across-the-border-and-claim-asylum immigration); he will do the same thing that he did in the UK, but for a much larger market).

What am I missing? My default assumption is that markets are right, but I can’t figure out what is so terrible wrong with the latest British government’s plans. Is part of the explanation that the pound isn’t the world’s reserve currency and therefore the consequences of deficit spending are more severe than they are for the U.S.?

Separately, how can a country full of midgets and randoms fail to thrive?

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The flowers for Queen Elizabeth II are mostly swept up

One of the poignant aspects of last week’s trip to London (today was the Chunnel move to Paris) was that flowers and letters left in memory of Queen Elizabeth II had faded and were being cleaned up.

Here are some scenes from Green Park, next to Buckingham Palace:

At the intersection of aviation and English royalty, remembrances left in the Bomber Command Memorial, dedicated by QEII in 2012:

The death of a 96-year-old shouldn’t be a tragedy, but there is a sadness nonetheless. The guys doing the cleanup handled the bundles with care, despite the destination being a landfill.

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Giorgia Meloni is more dangerous than Vladimir Putin (CNN and New York Times)

“The Future Is Italy, and It’s Bleak” (NYT, July 22, 2022):

Giorgia Meloni, the leader of the far-right Brothers of Italy party … could open the way for the Brothers of Italy to become the first far-right party to lead a major eurozone economy. For Europe and the country, it would be a truly seismic event.

Like other far-right parties across Europe, it is descended from a fascist or collaborationist original

Perhaps we will not all burn together in the fire. But if the far right takes over the government, in Italy or elsewhere, some of us surely will.

“Italy’s Hard-Right Lurch Raises New Concerns in Washington” (NYT, yesterday):

Italy’s election of a far-right governing coalition, … despite concern about their party’s fascist roots. … members of the Trump wing of the Republican Party embraced the rise of a nationalist whose party has roots in Mussolini-era fascism.

“Giorgia Meloni claims victory to become Italy’s most far-right prime minister since Mussolini” (CNN, yesterday):

the most far-right government since the fascist era of Benito Mussolini. … She has also called abortion a “tragedy,” raising fears for the future of women’s rights in the country.

“How Giorgia Meloni and her far-right party became a driving force in Italian politics” (CNN, Sept 25, 2022):

The National Alliance, formerly the Italian Social Movement, was unapologetically neo-fascist, formed by supporters of Benito Mussolini. … Now, the 45-year-old ultra-conservative … never wavering from a conservative agenda that puts in question LGBT rights, abortion rights and immigration policies.

A full-scale war had to unfold in Ukraine before the New York Times was prepared to call Vladimir Putin names, but Giorgia Meloni earned these monikers before taking a single official action. Maybe this means she will win the Nobel Peace Prize soon! (Barack Obama was nominated after 12 days of being in office.)

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Giorgia Meloni Makes History

Giorgia Meloni’s life, in many respects, traces the arc of progress for women in Italian society. Her mother, Anna Paratore, was born in 1952, just 7 years after women in Italy gained the right to vote in national elections.

It has taken a long, long time for the promise of women’s full participation in Italian democracy to be realized. Ms. Meloni moved it a big step closer this week, as she became the first woman nominated for the leadership of Italy by a major party.

Ms. Meloni’s nomination — bringing women, barred first by law and then by custom, to the pinnacle of Italian politics — is to be celebrated as inspiration for young Italians, and as hope for women in nations and cultures that deny them the most basic opportunities. It is further proof that opening doors to women elevates and strengthens a nation.

Ms. Meloni, who grew up in an era of few opportunities for women, revealed strength and tenacity building a career that spanned the world. Her education and work ethic eventually opened many avenues to her, and — despite forays into lucrative pursuits like journalism — she has always returned to a path of service.

Loosely related, “Hillary Clinton Makes History” (NYT, July 29, 2016):

Hillary Clinton’s life, in many respects, traces the arc of progress for women in American society. Her mother, Dorothy Rodham, was born in 1919, a year before the 19th Amendment gave women the vote.

It has taken a long, long time for that amendment’s promise of women’s full participation in American democracy to be realized. Mrs. Clinton moved it a big step closer this week, as she became the first woman nominated for the presidency by a major party.

Mrs. Clinton’s nomination — bringing women, barred first by law and then by custom, to the pinnacle of American politics — is to be celebrated as inspiration for young Americans, and as hope for women in nations and cultures that deny them the most basic opportunities. It is further proof that opening doors to women elevates and strengthens our nation.

Mrs. Clinton, who grew up in an era of few opportunities for women, revealed strength and tenacity building a career that spanned the world. Her education and work ethic eventually opened many avenues to her, and — despite forays into lucrative and sometimes regrettable pursuits like her corporate speechmaking — she has always returned to a path of service.

(Of course, the parallels are not complete because Giorgia Meloni did not obtain her position by having sex with or being married to a former leader of Italy.)

Separately, I wonder if this election proves my Dutch friend correct. On the phenomenon of elites packing a country with low-skill immigrants and then, as predicted by a Harvard analysis, the working class attempting to vote out the elites, “They forgot to take away their right to vote.”

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Europeans printing their way to happiness

“As Crises Mount, Europe Turns Once Again to Big Spending” (NYT, today):

Nationalizations. Subsidies. Cash handouts. Price caps. Profit taxes. It’s back to 20th-century economics in Europe.

Governments are resorting to old-school solutions, long dismissed as bad policy, throwing vast amounts of money at the energy crisis engulfing the region, in a bid to avert a political, social and economic meltdown.

In response [to rising energy prices], E.U. governments have already earmarked more than $350 billion to subsidize consumers, industry and utility companies; ministers are to meet on Friday to finalize the bloc’s direct intervention in markets to grab excess profits, cap electricity prices and subsidize utilities companies.

The huge public spending is in addition to a nearly trillion-dollar stimulus package adopted over the past year to deal with the economic fallout from the pandemic, mostly through borrowing. The ballooning debt load would have normally caused an uproar in the bloc, where fiscal conservatism has dominated policy and politics for years.

“This is clearly an exceptional and one-off situation,” said Daniel Gros, a German economist and director of the Centre for European Policy Studies, a Brussels-based think tank, who normally takes fiscally conservative positions. “It’s different from increasing unemployment or social benefits structurally forever, and it’s a special situation that won’t last forever.”

The last paragraph is my favorite. Coronapanic was exceptional, so borrowing/printing and spending $1 trillion (amateurs! the U.S. spent $10 trillion) in 2020/2021 was okay. The rise in energy prices is 2022’s exceptional event, so borrowing/printing and spending another $1 trillion will also be okay. The end of the paragraph is also interesting. The U.S. actually did make “structurally forever” changes to the American welfare state, already the world’s 2nd largest (percent of GDP), the free-forever broadband benefit for those who choose not to work and King Biden’s forgiveness of student loans previously owed to the Crown. According to the Germans, therefore, we are headed for disaster.

Eurocrats seem to think that voters won’t notice the subtle inflation tax caused by these programs and/or future standard tax increases. They’re paying subjects with their own money:

The Belgian government has handed out $100 to every household irrespective of income.

This is a fascinating example of human psychology. Europeans will eventually have to pay for all of the energy that they’re consuming in 2022 and they’ll have to pay the 2022 price. But they’re going to be happier paying starting in 2023 if the government gives them a Three-card Monte game to watch in 2022. And they’ll be happier getting a pay cut via inflation than getting a pay cut in nominal euros.

What’s non-EU-member Norway doing, other than getting insanely rich from the war in Ukraine? The nation’s hydroelectric power is being sold at record prices to the rest of Europe. The oil and gas wells are producing unprecedented gushers of money. Consumers have to pay higher prices for natural gas, but the government steps in and pays, using the record revenues coming in for oil and gas, 90 percent of the amount over a set price. Cruise ships that formerly stopped in St. Petersburg now come to Oslo for two days per sailing, paying enormous port fees and buoying the local tour operators.

“The problem with socialism is that you eventually run out of other people’s money,” said Margaret Thatcher. Norway has amended this to “The beauty of socialism is that you never run out of the dinosaurs’ money”.

Here are some of Oslo’s gleaming new waterfront neighborhoods next to the gleaming new Munch Museum:

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Europeans cutting down their forests

Most of this is unrelated to the recent natural gas price increases…. “Europe Is Sacrificing Its Ancient Forests for Energy” (New York Times, today):

Burning wood was never supposed to be the cornerstone of the European Union’s green energy strategy.

When the bloc began subsidizing wood burning over a decade ago, it was seen as a quick boost for renewable fuel and an incentive to move homes and power plants away from coal and gas. Chips and pellets were marketed as a way to turn sawdust waste into green power.

Those subsidies gave rise to a booming market, to the point that wood is now Europe’s largest renewable energy source, far ahead of wind and solar.

Some of this falls into the “what’s old is new” category, I think. When people from England invaded North America in the 17th and 18th centuries they expressed amazement at how much forest was available for the cutting. More or less everything in England that could be cut already had been cut.

Forests in Finland and Estonia, for example, once seen as key assets for reducing carbon from the air, are now the source of so much logging that government scientists consider them carbon emitters. In Hungary, the government waived conservation rules last month to allow increased logging in old-growth forests.

And while European nations can count wood power toward their clean-energy targets, the E.U. scientific research agency said last year that burning wood released more carbon dioxide than would have been emitted had that energy come from fossil fuels.

Let’s have a look at a forest that has already been cut quite a bit… Vigeland Park in Oslo.

The peace that comes from being a parent is depicted:

How about riding a horse through the forest?

Experience the joy of interacting with wildlife in the forest:

How about these gates for your back yard?

Need some ideas for your next Cirque du Soleil show?

There were a fair number of Norwegians in convivial groups of 2-10 enjoying the park at 4 pm on a Tuesday. Apparently, if a country has a small population of humans and a large population of oil and gas wells not everyone will have to work long hours in the dreary office.

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Europeans implement my dream life-year saving system

March 2020… Why do we care about COVID-19 deaths more than driving-related deaths?: I point out that we aren’t doing anything about motor vehicle fatalities that are comparable in scale to the feared-at-the-time COVID deaths. I failed to adjust for life-years in this piece, so didn’t capture that fact that motor vehicle accidents have a far higher cost than the COVID-19 epidemic that led us to shut down schools, lock down businesses (except for “essential” marijuana in California and Massachusetts), etc. “We’re willing to invest $trillions to reduce the death toll from coronaplague, but hardly a dime to build centerline dividers on more of our two-lane roads so as to eliminate head-on collisions.”

February 2021… Save lives by limiting cars to 35 mph?: … by shutting down for a year we’ve spent way more per life-year in our attempt to reduce coronaplague deaths than I ever could have imagined. If we infer from this how much saving a life-year is worth to us, it would be rational to limit cars and tracks, nearly all of which are electronically controlled, to 35 mph. Consider that most people who die in car accidents had many decades of life expectancy in front of them, unlike the typical 82-year-old victim of COVID-19. … How about insisting that engine control software be updated in order to get an inspection sticker? The update will prevent the car from exceeding 35 mph. New cars, obviously, can be limited via regulation.

It looks as though the lockdown-loving Europeans agree with me, at least to some extent. They’re not willing to put anywhere near as high a price on a life-year lost due to a car accident compared to a life-year lost to COVID-19, but they are going to at least take the basic steps.

“Anti-Speeding Tech Is Now Mandatory in European Union” (Autoweek, July 7):

Mandatory on all new cars sold by 2024, the switchable ISA technology is expected to reduce speeding by 30% and traffic deaths by 20%.

Haptic feedback requires the car to recognize speed signs and, if the driver is in fact speeding, automatically push back against the driver’s accelerator pedal pressure. The speed control function goes one step further by cutting power input from the pedal once the speed limit is reached.

At least in the early years of these systems going in, the driver will have the ability to override the electronically enforced speed limit. Should we take bets on how soon before a public health emergency is declared and the electronic limit because a hard limit?

Here’s a great place for a computer-enforced speed limit, Lion Country Safari:

Speed limit 5 mph and the kids in the back would scream “speeder, speeder!” if the Honda Odyssey’s instruments indicated 6 mph or faster.

A daily-driver Ferrari at the local office park:

You can’t spit in a strip mall parking lot in South Florida without hitting a car that would end up with 400 excess horsepower in the event that this kind of regulation is adopted in the U.S.

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A world-class military tries to subdue a vast land (England versus the American rebels)

Portions of The Last King of America: The Misunderstood Reign of George III (Andrew Roberts) are, unfortunately, timely.

The American rebellion surprised the experts:

One of the reasons why British politicians failed to comprehend that Americans would soon be agitating for nationhood was the paradoxical one, considering the propaganda of the independence movement twelve years later, that they were not being persecuted in any discernible way. ‘The colonists were the least oppressed of all peoples then on earth, politically, economically and nationally,’ noted Hans Kohn in his seminal book The Idea of Nationalism in 1944, written when half the world knew genuine oppression. ‘Politically the colonists were infinitely freer than any people on the European continent; they were even freer than Englishmen in Great Britain. The favourable conditions of frontier life had brought Milton’s and Locke’s teachings and English constitutional liberties to faster and fuller fruition in the colonies than in the mother country.’19 Royal governors and colonial assemblies generally ruled Americans with the lightest of touches, and the colonists certainly paid the lightest of taxes in the empire. The average American in 1770 paid a tiny fraction of what his British cousin paid in direct taxes, and crucially all of what he did pay stayed in America.

In the words of Edmund Burke’s biographer, ‘The general belief was that responsible people in the colonies accepted British sovereignty; that the disturbances in America were the work of a small minority of trouble-makers; and that American resistance would collapse if confronted with a show of force. If a war proved necessary, Britain would win it quickly and easily. Not until Appeasement in the 1930s did virtually the entire British establishment get something so important so badly wrong.

The British Army was tasked with domestic policing as well as wars with foreign nations because there was no permanent police force in England until 1829. The number of soldiers was miniscule by modern standards:

In 1775 there were only 48,000 men in the entire British Army, including the 8,000 already stationed in North America, which with its other global commitments would be nothing like enough to subdue the 2.5 million inhabitants of thirteen colonies that stretched over a thousand miles from north to south and several hundred miles inland.

In the summer of 1775, the British Army had 10,000 men already in America (mostly in or around Boston) and Canada, or sailing there; 7,700 in Gibraltar, Minorca and the West Indies; 7,000 in Ireland, which at half its normal peacetime establishment was dangerously low; and the remaining 23,000 in the United Kingdom, the minimum number for defence and domestic control, of whom 1,500 were unfit for duty.

The Cabinet continued to suffer under the delusion that the British Army and Royal Navy that had defeated France (with her population of more than twenty-five million) and Spain (nine million) only a decade earlier, and won a great empire in Canada and India, would, if necessary, similarly destroy the untrained and semi-organized militias of far fewer Americans. The crucial difference was of course that Britain had not needed to invade and occupy France or Spain in order to be victorious in 1763.

What were these professional soldiers up against?

As well as their proficiency with firearms, the Americans also had the advantage of numbers. According to Benjamin Franklin’s calculation in 1766, if a quarter of the remaining male population bore arms, and Loyalists, pacifists and seamen were deducted, about a quarter of a million Americans could theoretically fight against the Crown.

Supplying troops in the field wasn’t any easier then:

The logistical supply problem was immense too: because the local population tended to be hostile – with the American Loyalists providing far fewer troops than the British government had hoped for and expected – food had to be either foraged (that is, requisitioned, with all the local unpopularity that entailed) or bought (routinely at high margins), or else transported 3,000 miles over an ocean that was vulnerable to storms, colonial privateers and, later, enemy navies. Once the British armies penetrated inland, their lack of knowledge of the interior and the inescapable problems of reinforcement and supply both told against them heavily.

I recommend The Last King of America: The Misunderstood Reign of George III, but you might want to skim over some of the exhaustive/exhausting explanations of 18th century English politics (at least as complex as anything we have today and political disputes quite often resulted in violent clashes).

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Potential explanation for the Ukraine situation

A reader comment on Why didn’t Ukraine become a NATO member back in the 1990s? highlighted this 2018 lecture at Yale by a French-Russian-American guy, 83 years old at the time(!), who was formerly a Soviet spokesman. Starting at about 19:00 he summarizes the various insults that the U.S. and NATO have inflected on the post-Soviet Russians. These include the 1998 expansion of NATO, breaking explicit promises made to the Soviets, recognizing the split off of Kosovo from Serbia, rejecting Putin’s proposals to join NATO and the EU, returning nothing for Putin’s assistance post 9/11.

He highlights Thomas Friedman, not for being smart enough to marry the daughter of a billionaire and fret about global warming from inside an 11,000-square-foot mansion, but for a 1998 article about the NATO expansion:

So when I reached George Kennan by phone to get his reaction to the Senate’s ratification of NATO expansion it was no surprise to find that the man who was the architect of America’s successful containment of the Soviet Union and one of the great American statesmen of the 20th century was ready with an answer.

”I think it is the beginning of a new cold war,” said Mr. Kennan from his Princeton home. ”I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else. This expansion would make the Founding Fathers of this country turn over in their graves. We have signed up to protect a whole series of countries, even though we have neither the resources nor the intention to do so in any serious way. [NATO expansion] was simply a light-hearted action by a Senate that has no real interest in foreign affairs.”

The point about “neither the resources nor the intention” reminds me of a question at a Chinese New Year party in Miami: “Why does Joe Biden want to defend the Ukraine border when he won’t defend our own?”

”I was particularly bothered by the references to Russia as a country dying to attack Western Europe. Don’t people understand? Our differences in the cold war were with the Soviet Communist regime. And now we are turning our backs on the very people who mounted the greatest bloodless revolution in history to remove that Soviet regime.

If we are unlucky they will say, as Mr. Kennan predicts, that NATO expansion set up a situation in which NATO now has to either expand all the way to Russia’s border, triggering a new cold war, or stop expanding after these three new countries and create a new dividing line through Europe.

Thanks to Western resolve and the courage of Russian democrats, that Soviet Empire collapsed without a shot, spawning a democratic Russia, setting free the former Soviet republics and leading to unprecedented arms control agreements with the U.S.

And what was America’s response? It was to expand the NATO cold-war alliance against Russia and bring it closer to Russia’s borders.

As he said goodbye to me on the phone, Mr. Kennan added just one more thing: ”This has been my life, and it pains me to see it so screwed up in the end.”

Geopolitics is a complex topic so I don’t think Pozner or Kennan has access to the whole truth (but Friedman does! Marry a rich woman and live under Maryland family law so that she can’t get rid of you without ruinous financial consequences). However, the Pozner lecture is a good refresher for Americans who’ve forgotten everything that we’ve done in Europe during the past 30 years.

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Why didn’t Ukraine become a NATO member back in the 1990s?

In a comment on MIT weighs in regarding the war in Ukraine, Paul wrote the following:

https://www.nato.int/cps/en/natohq/opinions_190542.htm

sure looks like NATO poking the Russian bear to me.

What’s inside the referenced January 10, 2022 NATO document?

Jens Stoltenberg, NATO Secretary General: On membership. We have reiterated the decision we made at the Bucharest Summit in 2008 and we stand by that decision. We help Ukraine to move towards a NATO membership by implementing reforms, by meeting NATO standards. … Meaning that it is for Ukraine and the 30 NATO Allies to decide when Ukraine is ready for membership.

Let’s ignore for the moment the question of whether it was wise, as Russian forces gathered on the borders of Ukraine, to talk about the inevitability of Ukraine’s future membership in NATO, exactly what the Russians were objecting to. The question for today’s post regards “NATO standards”.

Let’s step back and look at Jens Stoltenberg? Wikipedia says Mx. Stoltenberg is “a Norwegian politician”. He/she/ze/they is not someone with military experience, in other words, and yet he/she/ze/they leads what is supposedly a military enterprise. Below is a 2018 meeting where we can see how mild-mannered he/she/ze/they is compared to Donald Trump, who points out that Germany’s continued fossil fuel purchases from Russia work against the organization’s mission.

Hindsight is 20/20, but if the goal was to have Ukraine as part of NATO, why wasn’t that done in 1994, when the Budapest Memorandum was signed? Putin’s leadership of Russia did not begin until 1999.

NATO in January 2022 said that Ukraine could join NATO “by implementing reforms” and “by meeting NATO standards,” but what was deficient about Ukraine from NATO’s perspective? It can’t be about fighting spirit, can it? There are plenty of countries in NATO that are not renowned for military valor. What “reforms” did Ukraine need? They had already stopped paying Hunter Biden (and, indirectly, “the big guy”, though $2.5 million of this cash was harvested by a retired-stripper-turned-family-court-entrepreneur; see BBC for a summary), right?

If countries that have historically crumbled at the first hint of a foreign invasion can be part of NATO, what was the obstacle to Ukraine’s membership years or decades ago?

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