Monthly Archives: July 2011

The Saudis and Iranians don’t agree on much, but they do share a deep dislike for Muammer Gaddafi. In fact, outside of Venezuela’s President Hugo Chávez, there really is no one in the international community who does. That is why it was so easy to build international support for a Nato bid to push him from power.

The trouble is that, unless it gets exceptionally lucky, Nato is unlikely to either force Col Gaddafi from his stronghold or cut a politically saleable deal with him anytime soon. In the mean time, its participants should reflect on the moral of this story for those western powers anxious to write its final chapter: a lack of international resistance can lead governments to start wars they don’t know how to win. Read more

The principal reason to support the intervention in the first place was to protect the people of Libya. Decisive action aligned the west with popular movements sweeping the Middle East and north Africa — a goal justified by both ideals and interests. For the same reasons, stopping the fighting now is more important than an opposition victory on the current terms advocated by the National Transitional Council in Benghazi.

Some conditions remain non-negotiable. Muammar Gaddafi must step down. If he remains inside Libya, it must be in a place and on terms that prevent him from maintaining a personal power base. The fighting must stop and both sides must pull out of population centres. But everything else should be on the table.

I fully understand why the idea of any member of the Gaddafi family continuing to hold power of any kind is so repugnant. Yet it is time to rethink, because the longer the fighting continues, the longer it is likely to continue. In a conflict like this one, where neither side has the ability to deliver a decisive blow, the fighting itself creates a cycle of radicalisation and entrenchment that makes it progressively harder rather than easier to reach a settlement. Read more

America cannot afford politics as usual at a moment of such vital import. Many Americans have experienced great hardship since the recession began; and economic conditions could well remain stressed for an extended period. Policy decisions can make a real, immediate difference, for better or for worse.

The first imperative is to meet the goal of cutting the deficit by $4,000bn over 10 years, by a balance of revenue increases and reductions in all categories of spending. The argument against raising taxes during a recession is a red herring and it is delusional to think our fiscal problems can be solved by cutting non-defence discretionary spending.

However, if linked to serious longer-term deficit reduction, a temporary stimuluscould well be warranted to boost demand.

For the longer term, our success depends on a sound fiscal regime.

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European leaders have called for a comprehensive strategy for growth and investment in Greece and a task force will be appointed to set out the details of how European Union structural funds could be used to that end. If unused EU structural funds area used to leverage further loans from the EIB, there may be some €16bn available over the next two to three years.

It should be reallocated to an Economic Revival Fund and used to boost growth and competitiveness, by improving the quality of higher education; helping to lower labour costs; and supporting enterprise and innovation.

Our programme has a strong interventionist flavour – but that is because as long as the price system delivers the wrong signals, only intervention will trigger the necessary shift of resources. Read more

The latest figures show that Britain’s economy has barely grown in the past nine months. The official statistics may underestimate the true growth rate – and there may be supply side factors that fiscal and monetary policy cannot address. But assuming the economy stays subdued, there will be a strong case for a boost to demand through macroeconomic policy.

There is no doubt that George Osborne’s policy of fiscal tightening has slowed the economy. But the intention was that its effects be cushioned by expansionary monetary policy and a lower exchange rate, and that still remains the best route to easier demand policy.

Inflation is still too high for the Bank of England to ease policy immediately, but underlying inflation rates are now falling sharply. We now know that it would have been a serious mistake for the Bank’s monetary policy committee to increase interest rates earlier in the year. The case for another round of quantitative easing is growing. Read more

Since the Japanese earthquake and global financial tsunami, governments have been pressed to guarantee their populations against virtually all the risks exposed by those extremely low probability events.

Such guarantees require building up buffers of idle resources that are used only if, and when, the crisis emerges. If policymakers choose to buffer their populations against every conceivable risk, their standards of living would almost certainly decline.

In recent years, US regulatory policy has become highly skewed towards maximising short-term bail-out assistance at a cost to long-term prosperity. This bias leads to an excess of buffers at the expense of our standards of living. Public policy needs to address such concerns in a far more visible manner than we have tried to date.
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The US unemployment rate reached 9.2 per cent in June, up from 8.8 per cent in March of this year and double the 4.6 per cent rate in 2007 just before the recession began. Even if a short-term deal is done on the US debt ceiling, this high and rising unemployment hurts consumer confidence and weakens President Barack Obama’s chances for re-election.

The high unemployment reflects the lack of demand rather than any fundamental problems with the US labour market. With little prospect for an upturn of demand for their products, businesses have laid off large numbers of workers, reducing incomes and raising the unemployment rate.

But, despite all of these problems, there is good reason for Americans to be optimistic that the unemployment rate will eventually get back to the traditional US “full employment” rate of about 5.5 per cent. The key to the future full recovery of employment is the flexibility of the US labour market. Real wages are flexible and are currently falling. Employees are mobile both geographically and among industries.  Read more

Europe may have taken an historic step in its meeting on Thursday – it seems, for once, to have done more than “just kick the can down the road”. First, its leaders recognised that it is not just Greece that faces a problem; it is a European problem, which requires a European solution.

Second, the leaders recognised that Greece’s problems require a focus on debt sustainability – lowering the debt burden and increasing gross domestic product, and Europe is doing something about both.

The European Union has once again reiterated its resolve to a quick return to fiscal rectitude (at least for those countries not in crisis). Europe’s recovery, however, is still frail and excessively quick cutbacks will slow growth, and even risks a double-dip recession. Lower economic growth will be bad even from a narrow view of deficits and debt.  Read more

European leaders took a big and important step towards dealing properly with the eurozone debt crisis at their summit on Thursday. This required courageous compromises on the part of many, most importantly Germany and the European Central Bank. But further design enhancements and skilful execution will be required if yesterday’s decisions are to translate into the durable restoration of growth and financial stability to the region’s troubled peripheral economies.

Still, the agreement constitutes a major step for leaders that, for almost two years, were essentially in denial. Having persisted too long with a liquidity cure for a solvency problem, they are now taking a major step towards deploying better instruments for the challenge at hand.

History will judge whether this is the beginning of the end for Europe’s painful debt crisis.
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It looks like there will be deal on a eurozone package for Greece. The full details are still missing, but it appears that the eurozone is forcing Greece into a selective default. As part of such a package, short-term Greek debt will be more or less forcibly converted into long-term debt.

But the problem of the eurozone is not Greece, or some other small country on its periphery. The existential danger is the rise in market interest rates of Italy and Spain, two large countries in the eurozone’s core.

At present, the overall size of the European financial stability facility is €450bn. With a second Greek credit about to be agreed and second programmes for Ireland and Portugal very likely, the ceiling will not be big enough to bring in Spain, let alone Italy. To do that that the ceiling would have to be doubled, or trebled. Without this increase, it is inconceivable that the eurozone can get through this crisis intact.  Read more

Europe faces a critical juncture on Thursday – one that may determine not only whether the euro will survive, but whether the global economy will be once again plunged into turmoil. To an economist what needs to be done is simple and clear: Greece’s debt has to be brought to a sustainable level. That can only be done by lowering the interest rate that Greece pays, lowering its indebtedness, and/or increasing gross domestic product.

The problem facing the Europe is not so much economic as political. It is easy to see what should be done. If it issues eurobonds – supported by the collective commitment of all the governments – and passes on the low interest to those in need – debts are manageable. Europe can access capital at low interest rates; after all, its collective debt to GDP ratio is actually better than that of the US. The resolution of this crisis is easily within grasp. It is not a matter of economics. It is only a matter of political will.

As Europe stands at the precipice, it is time to end brinkmanship and political squabbles. Read more

Eurozone leaders face a fundamental choice when they meet on Thursday. Either they declare, once again, that they stand ready to do “whatever is necessary” to overcome the eurozone crisis, or they actually do it. In the first case, markets are likely to step up to the next stage of their challenge to the European authorities. They will target larger countries, such as Italy and Spain, thus making the “whatever necessary” ever more costly and ever less credible. Alternatively, the eurozone leaders could show real leadership.

There is growing consensus that it will be difficult find a lasting solution to the eurozone crisis without the use of eurobonds, which would assert the euro currency in the global markets. The scheme, gathering increasing support in the European Parliament, would be aimed at strengthening fiscal discipline and increasing stability in the euro area through market mechanisms, ensuring that those member states that enjoy the highest credit standards would not suffer from higher interest rates.

A European vision, based on the creation of a European instrument, backed by a precise timetable, could be the best way to restore trust and stability in the eurozone. Read more

The Greek government is on the knife-edge of solvency. Public debt is estimated to be around 160 per cent of the country’s gross domestic product, of which around three quarters is owed to foreign creditors. We cannot be sure whether it can service its debts within the boundaries of political, social, and economic stability. But I believe a route to Greek solvency is possible.

Greece’s ability to “pay down” its debts and restore long-term confidence in its solvency will depend on the future real interest rates it will have to pay – balanced against the real growth rate of its economy. If it is pushed too soon to the private capital markets it will face sky-high rates, if it is able to borrow at all. Insolvency and default would then become inevitable. The better approach is to lock in low long-term interest rates at the “safe” rate, close to the current German or French long-term borrowing rate. This could be achieved most directly through guarantees offered by the European Financial Stability Facility on Greece’s future borrowing.

There is a chance – a rather good one, I believe – that in the end Greece would prove able to repay its debts over the course of 20 years at lower interest rates established by the EFSF. It may be the last clear chance for Greece and Europe to avoid a potential calamity. It is an attempt well worth making. Read more

India today faces challenges that are as much moral as social or political, with last week’s bomb blasts in Mumbai having only temporarily shifted off the front pages the corruption scandals that more recently dominated. These have revealed that manner in which our politicians have abused the state’s power of eminent domain, its control of infrastructural contracts, and its monopoly of natural resources, to enrich themselves. Rectifying this is now arguably India’s defining challenge.

There is a curious paradox here; for India is the creation of a generation of visionary and selfless leaders who governed it in the first decades of freedom. These men and women united a disparate nation from its fragments; gave it a democratic constitution; and respected linguistic and especially religious pluralism. Today’s scandals, however, have their origin in the steady deterioration in the character of this Indian political class.

If nothing else, the scale of corruption will put at least a temporary halt to premature talk of India’s imminent rise to superstardom. Such fancies are characteristic of editors in New Delhi and businessmen in Mumbai, who dream often of catching up with and even surpassing China. Yet the truth is that India is in no position to become a superpower. It is not a rising power, nor even an emerging power. It is merely a fascinating, complex, and perhaps unique experiment in nationhood and democracy, whose leaders need still to attend to the faultlines within, rather than presume to take on the world without. Read more

The row in Washington over the US federal debt ceiling raises the question of whether we are observing political theatre or a serious struggle with a large and complicated problem. The answer is a bit of both.

The theatre is obvious. President Barack Obama’s call for a grand bargain with $4,000bn in deficit reduction over a decade belies the fact that in his initial budget proposal in February he ignored his own deficit commission’s recommendations. Many congressional Republicans have put aside a deal for three parts spending reduction, one part revenue increase. Meanwhile congressional Democrats have attacked the fiscal plan offered by Congressman Paul Ryan, while offering no serious thoughts of their own.

The need for long-term spending restraint cannot be debated – it is infeasible and economically suicidal to raise taxes to accommodate the future spending trajectory. But the discussion of tax reform versus tax increases is a political question (though with economic consequences) ripe for public debate in the next year’s campaign, generating a mandate for action for the victor. Read more

Last week’s tumult in Italian markets shows the eurozone crisis has entered a new and far more dangerous phase, proving that the maintenance of systemic confidence is essential in a financial crisis. Teaching investors a lesson is a wish not a policy.

No country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors. Meeting debt burdens at rates currently charged by the official sector for credit – let alone the private sector – would involve burdens on Greece, Ireland and Portugal comparable to the reparations’ burdens Keynes warned about in The Economic Consequences of The Peace.

Debtors who are credibly highly solvent at interest rates close to or below their nominal growth rates are likely to become insolvent at higher interest rates, putting further pressure on rates and exacerbating solvency worries in a vicious cycle. This has already happened in Greece, Portugal and Ireland, and is in danger of happening in Italy and Spain. Read more

The motto “least said, soonest mended” that prevailed until September 2007 has been replaced by “let it all hang out” on the sign over the regulator’s door. Under the living will regime, some think the sign now reads “abandon hope all ye who enter here”.

Yet what Europe needs is not a league table of the good, the less good and the capitally challenged; but a plan, country by country and bank by bank, to fortify the banking sector. If there are one or more sovereign defaults, as now seems likely, that may require member states to provide new capital for banks that suffer significant write-downs.

However, the stress test exercise, which may generate more heat than light, should not distract from the painstaking work needed to restore the challenged parts of the European banking sector to health. Read more

After a long and costly delay, European officials’ narrative about the debt crisis is changing. This is the good news. The bad news is that Europe still lacks the political and technical leadership needed finally to catch up with this damaging crisis. As a result, it will soon be forced to consider radical options.

Europe needs a better solution that covers debt sustainability, access to markets and growth. It has two options. It could opt for greater fiscal union where cost-effective guarantees and transfers, rather than just loans, would stabilise the region’s debt dynamics through the aggressive use of a unified European balance sheet. Or it could chose to restructure the debt of the weak peripherals, while countering other collateral damage and restoring conditions for growth. At some stage, this could even involve a country taking a sabbatical from the eurozone in order to regain the policy flexibility needed to restore competitiveness.

Neither of these approaches is easy or pleasant to implement. But the alternative of continuing to muddle along with a discredited approach would have even higher costs, and would quickly undermine the institutional integrity of the eurozone as a whole. It is crunch time for Europe. Its leaders must act fast. Read more

The US has been running on empty for years, and that a new era of American austerity is the only way to put things right. It no surprise that this is being called the most predictable crisis in US history. For who could dispute, when our government must borrow $4.5bn a day just to keep going, that our national debt is now an existential threat.

Everyone agrees something must be done, and quickly, but for now politics as usual predominates. Cuts and tax rises are both politically treacherous. Senior citizens, in particular, will vote against any changes to healthcare and retirement programmes.

The best that can be said is that both parties are now talking about constraints on spending, rather than new programmes, and of increasing revenues not by tax increases but through the elimination of special tax allowances. It may even be beginning to dawn on both sides that they are arguing in the path of an avalanche. Just think: in the few minutes it will take you to read this article, the US national debt will go up by over $6m. It will take more than a short-term deal to put that right. Read more

The eurozone crisis has finally knocked on Italy’s door – and rather brutally at that. At one level this is surprising. Unlike Greece, Italy has gradually brought its deficit under control in recent years, and cut its high ratio of debt to gross domestic product. Unlike Ireland, Italian banks have been only moderately affected by the crisis. Unlike Spain, Italy had not been characterised by an over-expansion in either construction or private sector indebtedness.

So why Italy? The market’s new front might well have been Spain, whose underlying problems are by no means less serious. But if Italy has been chosen as the target, it is probably because of the recent intensification of belligerence within prime minister Silvio Berlusconi’s government.

In the longer run, however, Italy’s economy is biggest problem is chronically low productivity and competition. Only the removal of these impediments to growth can make a difference. When the worst of this week’s turbulence is passed, ensuring these are tackled is Italy’s next big challenge. Read more

As the debt negotiators square off in Congress, much attention will focus on the size of the ten-year deal they come up with. As almost everyone agrees, there is much more risk of doing too little than too much given the scale of America’s fiscal challenge.

With the US economy as weak as it is, what is most important is that any budget deal be pushed forward as soon as possible – it is likely to be revised and adjusted following next year’s election anyway. We should not underestimate how big an impact decisions about spending and taxing made over the next year or two will have on job creation over the next year, the economy over the next decade, and on the path of US national debt over an even longer horizon. Read more

The Chinese Communist Party celebrated its 90th birthday on July 1. In the days prior to this event, the airwaves were full of historical dramas depicting heroic People’s Liberation Army soldiers and party cadres struggling against a variety of enemies. There is a new, neo-Maoist faction within the party that has began promoting the singing of classic Communist songs like “The East is Red” throughout the country. This “red culture” revival has nothing to do with the party’s original ideals of equality and social justice. Rather, it is being promoted by national leaders as a means of strengthening stability in a country that has seen a massive rise in inequality in recent years.

But Chinese history did not, of course, begin with the Communist victory in 1949. In a fascinating turn, an older alternative historical narrative is being formulated alongside the Communist one through a revival of serious study of classical Chinese philosophy, literature, and history. Mao attacked Confucius as a reactionary, but today Chinese dynastic history is once again being taught in the school system.

Contemporary China has two alternative sources of tradition to look back on, a neo-Maoist one and a neo-Confucian one. Both are being promoted as alternatives to democracy. That the Chinese need to find their own way to modernity seems incontrovertible. Whether either of these ideas will bear the weight of regime legitimation, or indeed whether they can ultimately co-exist with one another, is something yet to be seen. Read more

The European Union was brought into existence by what Karl Popper called “piecemeal social engineering”. A group of farsighted statesmen, inspired by the vision of a United States of Europe, recognised that this ideal could be approached only gradually, by setting limited objectives, mobilising the political will needed to achieve them, and concluding treaties that required states to surrender only as much sovereignty as they could bear politically. That is how the postwar Coal and Steel Community was transformed into the EU – one step at a time, understanding that each step was incomplete and would require further steps in due course.

Following the financial crisis, there emerged a two-speed Europe, with debtor countries sinking under the weight of their liabilities, and surplus countries forging ahead. The decades-long process of European integration quickly turned into disintegration. If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a plan B.

But Europe’s political establishment continues to argue that there is no alternative to the status quo. Financial authorities resort to increasingly desperate measures in order to buy time. But time is working against them: the two-speed Europe is driving member countries further apart. Greece is heading towards disorderly default and/or devaluation, with incalculable consequences. It should be possible to mobilise a pro-European silent majority behind the idea that when the status quo becomes untenable, we should look for a European solution rather than national ones. Read more

The revolutions across the Arab world have been political blood sport. And we, the spectators, are consumed by the contest. But as the fight staggers into interminable rounds is our eye on the right fight?

The politics, and the military campaign in the case of Libya, appear to be grinding to a desert stalemate. In Egypt and Tunisia, interim governments are slowing the pace of democratic transition. In Syria and Yemen, internal conflicts swell, as brave civilians take to the streets, but there is little outsiders can do, it seems, to influence the outcome. We impotently watch Syrian protesters being attacked. In Bahrain the government seems to be back on top. But there is a further dimension – arguably a crucial variable in this – which is dryer stuff and so less noticed: economics.  Read more

The crisis over Rupert Murdoch’s newspaper empire illuminates the structural crisis in Britain’s broken system of newspaper self-regulation. The closure of the News of the World, the crumbling of the edifice of obfuscations and lies erected over the past five years by News International to defend its indefensible activities, the widespread belief that more revelations about similar activities in other papers are yet to come and the manifest incompetence of self regulation in the British newspaper industry call for a radically different solution.

David Cameron, prime minister, rightly said that the Press Complaints Commission, the industry’s self-regulatory body, should be scrapped. But to create a new and better system there is a familiar dilemma about the regulation of newspapers, which must now be cut through. Read more

As the August 2nd debt ceiling deadline looms ever closer, President Barack Obama has asked congressional leaders to work through the weekend. The hope is for agreement on a “grand bargain” that avoids disorderly disruptions to government payment obligations and creates, quoting the president’s remarks of yesterday, “an environment in which we can grow the economy and make sure that more and more people are being put back to work”. The likelihood is that the disruptions will indeed be avoided but, unfortunately, only through a “mini deal”.

Such a disappointing outcome would fall short of what is required to energize America’s economy, accelerate job creation and enhance medium-term fiscal sustainability. Also, it would contribute very little to improving the outlook for the grand bargains needed elsewhere in the global economy. Lets hope that, if it indeed materializes, a mini-deal is only a means to a grand bargain down the road. It would be a tragedy if, instead, it were an end in itself. Read more

The US economy has just marked two years of recovery from its worst recession since the Great Depression. But few Americans are celebrating; indeed, most believe that the economy is still in recession. No wonder. Although gross domestic product has recovered to its pre-recession peak, employment has not.

America also faces a major fiscal challenge that must be addressed. But this is a long-run challenge. The short-run challenge is inadequate demand.

There is a logical way out of this policy conundrum: pair temporary fiscal measures targeted at job creation during the next few years with a multiyear, multi-trillion dollar deficit reduction plan that would begin to take effect once the economy is closer to full employment. Pass both now as a package. Unfortunately, current signals from Washington indicate that partisanship and politics will trump logic and premature fiscal contraction will undermine the anemic recovery. Read more

Tunisia, Egypt, Bahrain, Yemen, and Libya have had their turn; now Syria occupies centre stage. More than 1,000 people have been killed in recent fighting, while hundreds of thousands still risk their lives challenging the regime. Syria’s future rests on whether a handful of Alawite generals are prepared to keep killing their fellow citizens to preserve the Assad regime and, more fundamentally, Alawite primacy. The outside world, fearing the alternative and bogged down in Libya, is little more than a bystander. Syria’s violence is just one further sign that the promise of the Arab spring has given way to a long, hot summer in which the geopolitics of the Middle East are being reset for the worse.

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As the equanimity in financial markets is signalling, some deal to avoid a US sovereign debt default will probably be cobbled together; the consequences for America and for the world of failing are just too great. But even if the talks succeed, the outcome will do far less to address America’s fiscal problem than was hoped when the formal discussions were launched under vice-president Joe Biden’s leadership in April.

It’s clear that the numbers simply don’t work without some tax increases, which Republicans are firmly opposed on. Similarly, while Democrats have shown modestly more flexibility toward cuts in Medicare, their accommodation stops well short of the surgery that is needed in both health care entitlements and Social Security.

After several months of political wrangling, America’s fiscal challenges remain just as daunting as they were at the beginning. The coming presidential election augurs poorly for major reform before 2013. Read more

The European Parliament will on Tuesday be asked to endorse an increase in the European Union’s target for greenhouse gas reductions, from 20 to 30 per cent by 2020, compared to 1990. This makes good economic sense, and would be a major step forward in the battle against climate change — but 20 per cent is not enough, and the EU must now move quickly to make more ambitious cuts in their emissions.

The problem is that the existing 20 per cent target is too low, making it very difficult for the EU to reach its ultimate target of reducing emissions by 80-to-95 per cent by 2050. The decision that the European Parliament and other policymakers now face is whether the EU should join the front runners in the low-carbon race, or lag behind. The history of technological change shows that industrial revolutions are periods of great creativity, learning, innovation, investment and growth. Competitive advantage goes to the pioneers. Europe must do more, or risk being overtaken by those who do. Read more

The decision by Harry Reid, the majority leader in the Senate, to cancel next week’s planned recess in order to advance discussions on the US debt ceiling is a welcome indication that Washington is beginning to view the debt issue with more urgency. Viewed from overseas, the American political system has started to appear dysfunctional in recent weeks.

The atmosphere of political posturing does not build confidence that the longer-term problems in the US public accounts can be seriously addressed. And the country might one day need all the foreign confidence it can get. According to this week’s International Monetary Fund report on the American economy, a fiscal consolidation of 7.5 per cent of the gross national product will be needed to stabilise the debt ratio in the next five years. Washington should be focused on how and when such an adjustment should occur instead of attempting to score empty political points on the debt ceiling. Read more