Monthly Archives: December 2011

A key theme of 2012 will be freedom and control on the internet. Social media can be the most disruptive of revolutionary tools – or a potent tool for state repression. The battle between digital liberation and autocratic limitation is playing out around the globe – in Syria, Cuba, China and Russia.

In the west, the conflict revolves around a different set of issues – piracy, privacy and monopoly. It pits the giants of technology against the creators of media, who are demanding stronger protections for their intellectual property.

Facebook will continue to push the boundary of acceptable snooping against the notion of a “right to be forgotten.” In Brussels, Google faces an antitrust investigation. The broader societal question is whether we are approaching media nirvana or filtering ourselves into solipsistic oblivion.

The three chief factions in this struggle are the digital utopians, the cyber-sceptics, and the techno-peasants. The first expect the Web to cure all society’s ills. The second see it making our familiar problems even worse.

The techno-peasants watch bemusedly as technology remakes our world in ways they cannot understand.
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The sovereign risk crisis has not been kind to the IMF. For two years, it agreed to adjustment programmes that were partially designed, inadequately funded and unsustainable in the medium term.

As these programmes fall short of their objectives, existing concerns over the IMF’s governance, representation and legitimacy are becoming more acute. Many countries interpret the IMF’s actions in Europe as confirmation that the institution makes large exceptions for its historic masters.

The world needs a strong and legitimate multilateral institution at its core; and Europe needs a credible IMF to help it overcome a deepening crisis. But the IMF must find the courage to resist European bullying; and the rest of the world must make a collective effort to accelerate its reform.
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In 2011, the young men and women who surged into the squares of Tunis, Cairo, Damascus, Sana’a and Benghazi gave a new meaning to the term “Arab street”. Long used to denote a sullen, inchoate, unfocused rage, it came to mean a yearning for democracy, for a political form long identified with the western world alone.

Will this quest for democracy be deepened, in 2012 and beyond, by the establishment of representative government, a free press, and an independent judiciary? Or aborted by new forms of authoritarianism or a return to older rivalries?

The transition will depend in part on the models the protesters seek to uphold. Rather than looking west, Arab democrats should study the experience of the newer democracies that lie to their east. Consider India, where every general election is the largest expression of the democratic franchise in human history; where the military is kept firmly away from politics; and where people of all faiths have equal rights under the constitution and in law.

Even more relevant is Bangladesh, which now has an average annual growth rate close to 5 per cent. Its military has retreated to the barracks, the Islam on display is more ecumenical than literalist, and there is a vigorous civil society.

Can a culture steeped in Islam respect women’s rights? Can a polity dominated by the army break free of it? Can a desperately poor country assure decent education and health care as well as economic growth? Arab protesters might find answers to these questions in a country to their east that does not yet appear to be on their horizon. Read more

Next year is not going to be better, and one might just stop there. Whatever temporary fixes are applied to the eurozone, American deficits and joblessness, the overheated Chinese real estate market, petering Indian reforms or stalling Brazilian growth, they are all symptoms of a structural global economic dislocation which is becoming increasingly disorderly. Yet politics may be deceptively calm in 2012 – calm until later.

As to the economics, two shifts are underway. One is between the old western economies and the formerly emerging economies, notably those in Asia. The second is that the globalisation of markets has created two new classes of winners: a global super-rich of innovators, traders and bankers; and a class made up of the Asian and other emerging market manufacturing and service sector workers, who have undercut western labour costs.

The big losers are western middle class and blue collar workers, who have lost out dramatically. The source of this crisis is their decades-long loss of competitiveness and income, which politicians have tried to cover with unserviceable levels of sovereign and household debt. Now the bill is due and nobody will be unscathed.

Yet politics, at least for 2012, will be driven by tactics and electoral timing. The great revolt will come later. Next year, tactically adept incumbents may survive by offering stability at a time of chaos. Their chances are particularly high if they can identify with the pain of their citizens more effectively than weak challengers. Read more

History will look back on 2012 as the year when China anointed its “fifth generation” of leaders and shifted to a slower growth trajectory – against a backdrop of increasing social unrest, widening income disparities and rising external tensions. Beijing will be fixated on preserving stability, but reduced economic flexibility could stop it doing so.

In truth, slower growth of around 8 per cent could be better for China and the world: more sustainable and equitable outcomes would ease popular concerns and higher consumption would improve global trade tensions. But many foresee an economic collapse, arguing that a property bubble could combine with a prolonged eurozone crisis to render vast swathes of industry unprofitable. Others believe that Beijing has ample resources to avoid a crisis, but may not have all the necessary economic tools at its disposal.

Domestically, mounting inequalities have nurtured a sense of injustice, 200m migrant workers remain second class citizens and corruption is worsening – but China’s economic success has fostered unwarranted self-confidence. Rather than tackling these problems, the system has moved aggressively to contain social discontent.

Beijing’s belligerent responses to overlapping maritime claims have also heightened worries in a region already wary of its economic clout. To China’s dismay, this has driven its neighbours to support a stronger US presence in Asia and has complicated regional trade integration.

The potential for conflict will force China and the US to redefine their roles in a shifting environment that neither is comfortable with. Asian countries are in a position to delineate the boundaries of influence for these two powers but, given their varied interests, alliances will shift depending on individual concerns.

China must walk a narrow line at a time when its outgoing leadership is reluctant to take any far-sighted decisions.
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This year inequality became the issue driving democratic politics. 2012 will be the year when voters in America have to decide what to do about it.

The economic battle will be about whether to increase taxation on top earners. The cultural battle will be about what government should do to protect the American Dream for a disillusioned middle class. The ideological battle will be about the role of government as guarantor of equal opportunity.

The election of 2012 will be about class – and devilishly complex for both parties. Republicans have to oppose higher taxation on the rich without appearing captives of a business elite; Democrats have to support higher taxation without appearing to threaten the middle class. The rhetoric will alternate between rousing appeals to the base and moderate appeals to the middle, but there is no doubt that this will be the most ideologically polarised election in a generation.

The victor in November 2012 will inherit both an economic mess and a crisis of faith in the fairness of society. The new president will discover that societies where millions feel the deck is stacked against them are tough to govern.
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The idea that still-poor Asia will help rescue the still-rich euro area is an awkward one. Asia remembers well that when in trouble in the late 1990s, it was ruthlessly advised to turn to the International Monetary Fund.

Yet now that European countries have pledged to contribute to the IMF so it can intervene in Europe – and made clear their desire for matching contributions from the rest of the world – it may happen. Asia has two reasons to offer such support: to protect itself from Europe, and to protect itself from the US.

In the short term, Asia would suffer from a worsening eurozone crisis because Europe is a large export market; and European banks are big players in Singapore and Hong Kong, as well as major providers of trade finance. In the medium term, financial turmoil in Europe would also deprive China and the rest of Asia from an important hedge against a depreciation of the US dollar. It would also complicate the transition to a multi-currency system.

But Asia does not trust Europe enough to invest much directly. The IMF, although still viewed with suspicion, is at least equipped with a governance system in which Asia has a voice. It may take a European crisis to reconcile Asia with the IMF. And ironically, we may well soon be hearing Asians lecturing Europe on the need to turn to the Fund.  Read more

This may well be the year when world leaders fall asleep just as the world cries out for more leadership. They will remain active and engaged with domestic concerns – especially the challenges of surviving in office – but ignore the many global challenges that demand their urgent attention.

Barack Obama will focus on only one issue in 2012: winning re-election. He will not try to restart the Doha round of trade talks, or to press for more action on climate change. Americans are not clamouring for action in these areas. More dangerously, as Americans become more economically despondent, China will naturally emerge as scapegoat number one. It would be politically suicidal for Mr Obama to tell Americans the hard truth: that they can no longer assume they will remain competitive as a God-given right.

Sadly, China’s leaders will also remain focused on their own leadership transition. It is now more or less known that Xi Jinping and Li Keqiang will succeed Hu Jintao and Wen Jiabao. That is the easy part. The hard part is deciding who will be No. 3, 4, 5, and so on. Too much is at stake here for global challenges to take priority.

The European Union too will need at least another year or two to sort out the eurozone mess, and its leaders, who seem to lurch from one crisis summit to the next, will have no capacity left to focus on global challenges.

Nonetheless, the rapid pace of change unleashed by technology and the desire of billions to join the march to modernity mean that we have to adjust faster and faster to all the challenges of living in a small, complex, interdependent world. Hence the demand for global leadership will grow apace in 2012. And no global leader will emerge. It does not take a genius to predict that this is a prescription for continued turbulence and uncertainty.
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China’s growth has become crucial to the world economy – and the biggest issue in 2012 will be whether it can engineer a soft landing.

Growth, under downward pressure from weakening exports and a fall in government-sponsored investment, will have to be led by stronger personal consumption if the economy is to grow by more than 8 per cent. To achieve this, China will have to subdue inflation so that rising wages translate into higher personal income.

Let’s hope, for all our sakes, that they can pull it off.  Read more

The collapse of relations between the US and Pakistan, and between Pakistan and Afghanistan, will threaten both the western withdrawal from Afghanistan and the stability of the region in 2012.

The possibilities are endless: a serious UK-Pakistani clash; further attacks by both the Afghan Taliban and the Haqqani network; the assassination of top leaders. The first casualty of escalating violence will be the peace talks between the Americans and the Afghans.

The US elections will further widen the divide between the US and Pakistan and, if the US begins withdrawing troops from Afghanistan early, it could set off a stampede among Nato members that will further demoralise the Afghan government. Afghanistan faces difficult days in 2012. Read more

The eurozone will remain far and away the greatest source of vulnerability in the global economy next year.

There is no easy solution. The eurozone needs a new constitution that creates powerful, centralised fiscal and regulatory authorities, with corresponding political integration – which probably means ousting some of the less developed states. Unfortunately, this is politically unacceptable.

So the only realistic medium-term solution is an expansive interpretation of the European’s Central Bank’s charter, ideally prefaced by restructuring of public and or private debt in several periphery countries. Here too, both the ECB and Germany have understandable concerns. Worse, it seems private sector burden-sharing is off the table for everyone but Greece, an absurd position if there ever was one.

The eurozone’s problems could still be fixed by tough debt and economic restructuring in the periphery, combined with expansive central bank policy. Ideally a few weaker countries would leave the single currency, to regain competitiveness and pave the way for tighter union among the rest. The long run consequences might not be pretty, and the eurozone would still need a new constitution to avoid perpetual stagflation.

For now, 2012 looks set to be another year of floundering towards an uncertain future for the euro-system. Read more

For the last three years the world’s major economies – the US, eurozone and China – have been living up to the infuriating euphemism so beloved of policymakers – “kicking the can down the road”. They have been avoiding the tough decisions that are required to address their fundamental economic, financial and fiscal problems.

The US has postponed fiscal consolidation and structural reforms; the eurozone has been in denial of the fact that some of its member states are insolvent; and China has persisted in its export-led growth model where savings are too high and consumption too low. In all cases political constraints have led leaders to avoid the short-term costs of decisions that will yield benefits only over the medium term.

But these delaying tactics will become more difficult in 2012. Some eurozone members may need to coercively restructure their debts; China’s economy may come close to a hard landing; and US markets in the US may become more concerned about the ongoing political gridlock.

By 2013 or even earlier, a perfect storm of a double-dip recession in the US, a disorderly scenario in the eurozone and a hard landing in China could materialise. Read more

The large current account deficits of Italy, Spain and France can be reduced without lowering their incomes or requiring Germany to accept inflationary increases in its domestic demand. The key is to expand the net exports of those trade deficit countries to the world outside the eurozone. And the solution
is a lower value of the euro leading to an improved trade balance with countries outside the eurozone.

The overall trade-weighted value of the euro has already declined 12 per cent since the beginning of 2010. Further declines would help Italy, Spain and France in particular because about 50 per cent of their imports and exports are with countries outside the eurozone. Germany’s export surplus would also rise, giving Germany the opportunity to increase financial or real foreign investment or to increase domestic consumption. However, it might take a trade-weighted decline of 20 per cent or more to eliminate existing current account deficits. What might cause such a substantial decline of the euro?

The recent momentum alone might cause that to happen. So also could the ECB’s increased supply of euros to deal with credit and banking problems. Even statements by Mario Draghi, ECB president, expressing a lack of concern about the declining euro, might cause financial markets to drive it lower.

A decline of the euro cannot be a permanent solution to differences in productivity trends within the eurozone. But it would give those countries time to improve productivity growth before the euro’s fundamental strength returns. If those relative improvements in productivity do not happen, there may be no choice but to end the eurozone as we know it today.
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Asked at a recent press conference whether he still considered Iraq to be “a dumb war”, President Barack Obama carefully replied: “I think history will judge the original decision to go into Iraq.” Now that the last US combat soldier has departed Iraq, thereby bringing to an end almost nine years of American fighting, it is not too soon to take the president up on his challenge and to start writing history.

The fact that the 2003 Iraq war was a classic war of choice does not automatically make it a mistake; it does, however, raise the bar. Unlike wars of necessity, which by definition must be fought no matter what the costs given the stakes and the absence of alternatives, wars of choice are only justified when the benefits clearly outweigh the costs.

Like all wars, the Iraq war holds any number of lessons, but I would highlight one above all others. It is that local realities matter far more than global or geopolitical abstractions. This was true in Vietnam; it is no less true now in Afghanistan. What is called for is awareness of what we do not know and humility in what we try to bring about. Read more

America’s squeeze on spending on all public services other than health and pensions means that it is ceding global leadership in education, science and infrastructure. Mr Obama speaks of investing in these areas to restore America’s jobs and competitiveness, but lacks the financial space to do it. The result is a dispiriting contradiction between his soaring rhetoric and the grinding cuts that he has agreed with Congress.

Republicans claim America’s low taxes and small government have spared it from the European disease. This claim is utterly false. The US is vastly outperformed by the countries of northern Europe, which tax heavily but spend efficiently, buying superb public health, childcare, public education, infrastructure, and remarkable social equality.

The results are lower unemployment, smaller budget deficits, much lower poverty and smaller trade deficits than in the US – as well as higher intergenerational social mobility, life expectancy and life satisfaction. Per capita income growth in these countries has been comparable to that in the US – but in the US, the gains have accrued mostly to the top of the income distribution.

Yet according to the July debt agreement between the White House and Congress, non-security discretionary programmes will be further squeezed to below 2 per cent of GDP by the end of this decade. The Republicans propose to strangle government once and for all. Obama’s policies suffocate federal programmes slowly.

To finance the outlays that are needed on education, infrastructure, family support and technology, taxes on high incomes will have to rise by several per cent of GDP, far beyond what Obama has dared to acknowledge. A brave presidential candidate, following in the footsteps of Theodore and Franklin Roosevelt, will win office some day soon and put the US back on a path towards high employment and a recovery of the middle class.
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Required reading for the directors of all large companies: the chapter headed “Management, governance and culture” in the Financial Services Authority’s report on the failure of the Royal Bank of Scotland. What this tells us is that the collapse was not just the result of buying ABN Amro at the wrong price and the wrong time, disastrous though that was. Rather, this bid was just one of a whole series of bad boardroom decisions which taken together point to substantive failures of board effectiveness at RBS. And the lessons from what went wrong are relevant well beyond the banking system.

On the face of it, the RBS board’s composition and formal processes met acceptable standards. Sir Tom McKillop, the chairman, had familiarised himself with the bank’s business, made sure that everyone had a chance to speak their mind and improved the transparency of the chairman’s committee. And although Sir Fred Goodwin, the chief executive, was a forceful and sometimes terrifying figure, the FSA concludes that the picture was “clearly more complex than the one-dimensional ‘dominant CEO’ sometimes suggested in the media”.

So why were things allowed to go so badly wrong? The answer is that the bank only did what most of its competitors were doing at the time, but took its excesses to greater extremes. The RBS experience shows yet again what madness it is for banks to focus on the returns on equity, rather than on their overall assets. Read more

Are we on the verge of a Russian spring? Not likely. Angry citizens have taken to the streets to protest the lack of genuine democracy in their country and the economic opportunities they hope it might bring. But the ability of Russia’s party of power to weather this storm is much stronger than in Hosni Mubarak’s Egypt. The government holds more than $500bn in hard currency reserves – $120bn of which can be injected quickly into popularity-enhancing social projects. Nor is there the sort of division within its military or security forces that we saw in Cairo, or the Arab world’s demographic swell of unemployed young men.

Vladimir Putin’s pivot back to the presidency leaves many Russians worried that if nothing has changed in the country’s politics, nothing will change in its economy. An explosion of social media inside the country has made vote-rigging much more visible.

Mr Putin can still rise to the occasion. But much more likely is that he simply appease some groups with increased social spending and bullies others with the heavy hand of the state. So far he has provided no plan to turn things around in Russia. He will not need one to win the next election. But he will if he is to provide his people with the change they have begun to demand. Read more

So we have two crises now. A still-unresolved eurozone crisis, and a crisis of the European Union. Of the two, the latter is potentially the more serious one. The eurozone may, or may not, break up. The EU almost certainly will. The decision by the eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split.

On Thursday night, Angela Merkel and Nicolas Sarkozy clashed with David Cameron in a familiar Britain-versus-the-rest diplomatic standoff. That itself is not new. But a determination to go outside the treaty to overcome the disagreements adds a new dimension to this long-lasting dispute.

Thursday’s meeting has demonstrated that a monetary union cannot co-exist with a group of permanent non-members in unified legal framework. The EU with its current treaties and institutions has proved to be an insufficiently flexible framework to run a monetary union and a disastrous framework for a monetary union in crisis.

These latest developments have reaffirmed my conviction that the only way to save the eurozone is to destroy the EU. But European governments may, of course, end up destroying both. All they did in the early hours of Friday morning was to create a new crisis without resolving the existing one. Read more

With the renminbi depreciating for six straight days starting last Wednesday, debate about its value has been renewed. Markets are fixated on whether Beijing will allow or even encourage the renminbi to depreciate further although diplomatic pressures remain strong for continued appreciation.

Although the global economy has deteriorated, paradoxically, conditions are better than a year ago for moving to a more flexible exchange rate system. A prolonged slowdown in global economic activity from the eurozone crisis, coupled with a sluggish US recovery, is now likely. With China’s key export markets under stress, its trade surplus will decline to about 1.5 per cent of gross domestic product this year from around five or six per cent several years ago. Coupled with the efforts to liberalise imports, China’s trade surplus may soon evaporate.

In recent months other east Asian currencies have become more volatile and on balance have depreciated significantly. Given the strong interlinkages in regional currency movements due to their shared production network, China will also be pulled into greater flexibility. And since inflation in China will remain relatively higher than its key western trading partners, its real exchange rate may appreciate marginally even if nominal rates decline. All this will create a conducive environment for China to develop a more flexible exchange rate system where the prospect of a decline is the same as of an increase – as it should be. Read more

European leaders will meet on Thursday and Friday for yet another “historic” summit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last meeting convened to deal with the financial crisis.

If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge.

Given that Europe is the largest single component of the global economy, the rest of the world has a stake in helping to avoid major financial accidents. It also has a stake in aiding continued growth in Europe and ensuring that the European financial system supports investment around the world – particularly as cross-border European bank lending dwarfs that of banks from any other region.

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The European Central Bank responded on Thursday to the eurozone’s deepening crisis but it fell short of a game change.

The ECB is clearly worried about Europe’s darkening economic outlook, and rightly so. Talk of a “mild recession” is accentuated by recognition that the balance of risks has shifted, especially given the possibility of “disorderly corrections”. This, coupled with a calming inflation outlook, warrants the 25 basis point cut in interest rates, and would have even supported a 50 bps point cut.

Markets initially welcomed the increased support for banks, but this enthusiasm largely disappeared once they realised that the ECB was not intentioning to directly help European countries struggling with debt issues.

What is clear is that Mario Draghi has shifted the burden of solving this crisis back to Europe’s heads of state. It has reminded them, and all others, that its willingness to provide a bridge is dependent on greater assurances that this would be a path to stability, not another bridge to nowhere. Read more

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The Indian government announced the opening up of the retail sector to foreign direct investment late last month. This led to an intense and sharply polarised debate. Passionate editorials for and against the plan appeared in the Indian press. The Bharatiya Janata party, the major opposition party, said it would oppose the policy in the streets and in parliament.

The critics had their say – and, within a week, their way. The policy has been put on hold, perhaps indefinitely. It was striking how soon the government capitulated, abandoning a policy that Manmohan Singh, the prime minister, was himself deeply committed to. This move points to some deeper structural features of the Indian political system, which may mean that – at least in the near future – other major reforms proposed by the government will not be implemented. Read more

Any proposed resolution to the European crisis over the next few days will have to be economically viable as well as politically palatable to both the rescuers and the rescued if it is to restore confidence to the sovereign bond markets. This means paying attention not just to the technical details but also to how it is presented.

Some institution – either the IMF or the European Financial Stability Facility with funding from countries or the European Central Bank – has to stand ready to fund borrowing by Italy, Spain, and any other potentially distressed countries over the next year or two. Crucially, if this funding is senior and therefore higher priority to private debt – as IMF funding typically is – it will be harder for these countries to regain access to markets. For the more a country borrows in the short term from official sources, the further back in line it will push private creditors, making them susceptible to larger haircuts if the country eventually does default. Therefore official funding must be have loss-bearing capacity and be treated no different from private debt.

A credible plan out of the crisis must also include a monitored pledge by the banks in the eurozone that they will not unload bonds as the official sector steps in, that they will be circumspect about bonuses until economies start growing strongly again and that they will raise capital over time instead of continuing to deleverage – if this hurts equity holders, they should think of this as burden sharing. Cries that this is not capitalism should be met with the retort: “neither are bail-outs!”. Read more

The end of the eurozone crisis could now be in sight. One day, the euro verges on collapse. The next, a comprehensive solution is within reach. With sky-high Italian, Spanish and even French bond yields, we want a final answer: is the eurozone to be or not to be?

But what if it doesn’t sink or swim – what if it just bobs? Leaders of the 17 member states, the European Commission and Council will convene on Friday for what is set to be a climatic meeting. They will reaffirm their common goal: a united eurozone with prospects for sustainable growth. They are also likely to signal, more so than at any previous moment in this crisis, agreement on a systemic solution: a more robust economic framework to govern the euro.

But over time these bright signals will dim as the leaders’ battle over priority, sequence and scope. We’ll get a grand bargain in theory, but a reality that does little more than muddle through. The eurozone will not fragment in the next year – and it is unlikely that it ever will. But that does not mean the problems have been solved. Instead, expect continued uncertainty, volatility and macro headwinds as we wait for the yes or no answer that isn’t coming. Welcome to the most turbulent status quo in economic history. Read more

News that the US unemployment rate has fallen 0.4 percentage points and that we have created 120,000 jobs is better tidings than of late, but we need to do much better: just to match population growth we need to create at least 150,000 jobs a month. For hiring to occur at a pace that would support recovery, we would need at least 500,000 more hires per month. Instead, payrolls today are more than 7m shy of where they were when the Great Recession began.

For American workers, these are the worst times since the depth of the Great Depression. The unemployment rate, the highest and most sustained in seven decades, improved last month primarily because more than 300,000 people left the labour force. And the situation is even grimmer than suggested by the dismal statistics, calculated from a base of only 60,000 families. Analysts have concluded that the combined unemployment and under-employment rate is slightly above a staggering 20 per cent of the labour force.

Who, among the contenders for the White House, has a remedy for this catastrophe? Clearly, this dysfunctional Congress offers no hope until after 2012. Yet we must reverse the decline in American education that has left workers less able to compete in the new world. Skills, not muscle, are the only reliable path to high-wage jobs, in an era when technology and globalisation allow companies to make new investments in regions where labour is cheap. Read more

Everyone is on tenterhooks in the countdown to next week’s critical European summit. The outline of the grand solution being pursued is becoming clearer as a growing number of officials take to the air waves. What is emerging seems to be a pretty good approach, provided – and this is vital – Europe agrees on the details while avoiding some highly pernicious traps.

To be clear, it is now the region’s moment of truth. To avoid a very costly and disorderly fragmentation, Europe may well be embarking on the road to embracing a smaller, stronger and less imperfect monetary union in the future. Over the next few days, these leaders need to unite on ways to enhance the institutional underpinnings of the union, to reduce the risks imposed by the banking sector, to delineate clearly between solvency and liquidity cases, and to stop the latter from tipping into insolvency. Should they fail, the probability of a disorderly collapse of the eurozone would increase materially.

If they again succumb to shortcuts and partial answers, history will mark this as an enormous failure to deliver on one of the last, if not the final, opportunity to save a union that is key to the region’s wellbeing, as well as that of the global economy. Read more

The escalation in the nuclear crisis is now threatening to replace diplomacy with war as the west’s response to the Iranian threat. The recent comprehensive International Atomic Energy Agency report on Iran’s nuclear programme; public debate in Israel about the wisdom of a military strike, without much pushback from outside the country; private mutterings about the best “window” for such an attack; and now the serious diplomatic consequences of the assault on the British embassy and its staff, are combining to deepen the chasm of distrust to new and dangerous levels.

The price of a nuclear-armed Iran would be very high – unacceptably high. Iran’s capacity to destabilise the region would increase considerably.

But that is not an argument for military action. Avowed Iranian nuclear facilities are numerous and the regime does not lack for ammunition or targets in return. For these reasons we must avoid military action becoming a self-fulfilling prophesy.  Read more

Over the past year Beijing has been caught between sticking to restrictive policies to achieve a ‘soft landing’ and switching gears to deal with the repercussions of the eurozone crisis. The cut in China’s bank reserve ratio by 50 basis points, which came a surprise to some, signals that the risks of a major economic slowdown are now of greater concern than an overheated economy. Data showing that Chinese manufacturing activity contracted last month for the first time in almost three years only added to those fears.

The prospect of political unrest has expedited this shift to more accommodating policies. Reports of dramatic falls in exports and the immediate impact it has already had on firms in Guangdong have spurred the leadership to act now.

While further monetary relaxation is likely, given the six increases in the reserve requirements over the past year, China has less flexibility in using either interest or exchange rate adjustments to support its objectives. Ironically at a time when the US is putting pressure on China to let the renminbi appreciate, the concern now is that exports are falling too fast. China’s trade surplus may total only 1.5 per cent of gross domestic output this year and could even disappear in the near term. Read more