Daily Archives: December 21, 2011

The collapse of relations between the US and Pakistan and between Pakistan and Afghanistan in 2011 will become much worse in 2012 and will jeopardise the western withdrawal from Afghanistan, as well as the stability of both Afghanistan and Pakistan.

The Pakistan army’s orders to treat the US as an enemy and attack any planes intruding into its territory indicate what could happen in 2012 – a serious fire fight on the border between the two sides; Pakistan turning a blind eye as the Afghan Taliban based in Pakistan continue to attack the Afghan government; more spectacular terrorist attacks in Afghanistan by the Haqqani network; possible terrorist attacks in Europe or the US, which will be traced back to the Pakistani Taliban hideouts in Pakistan’s tribal areas; the assassination of top leaders in both Afghanistan and Pakistan. The list of ways in which the situation could worsen is endless.

The first casualty of escalating violence will be the peace talks between the Americans and the Afghans. At present it is also difficult to see how or on what terms the US and Pakistan can renew their relationship.

The US relationship with Pakistan will become a hot foreign policy issue in the US elections and loose statements by Republican candidates will further widen the divide between the two countries. The US will pledge to seek an even stronger partnership with India, which will further annoy Pakistan.

Afghanistan faces difficult days in 2012 as the transition to Afghan forces takes place: the Taliban will step up violence and conduct an assassination campaign that will further unnerve Afghan officials and force many to send their families out of the country. The global economic crisis will mean that future aid and cash to support the Afghan economy and armed forces will not be easily forthcoming.

The US will have a hard time rallying international support for Afghanistan at the Nato summit in Chicago in May. Several countries will start withdrawing their troops from Afghanistan early, possibly led by the US – which could set off a stampede resulting in the 2014 exit date being brought forward by a year. That will further demoralise the Afghan government.

The writer is author of several books about Afghanistan, Pakistan and Central Asia, most recently ‘Descent into Chaos’

Sadly, the eurozone’s uncertain future will continue to cast a huge shadow over the global economy next year.  Surely there are other concerns, including the risk of a not-so-soft landing in China, of pre-electoral paralysis in the US, and of a large, unexpected geopolitical shock. Even in the most benign scenario, the massive overhang of global public and private debt will hinder any robust recovery in the advanced economies.  But the eurozone remains far and away the greatest source of vulnerability.

There is no easy solution. The eurozone needs a new constitution that creates powerful, centralised fiscal and regulatory authorities, with corresponding political integration.  Substantially greater integration probably means ousting some of the less developed states until they are sufficiently economically advanced.  Unfortunately, such a course is politically unacceptable, not least to France, a core member.

Therefore the only realistic medium-term solution is an expansive interpretation of the European’s Central Bank’s charter, ideally prefaced by a huge restructuring of public and or private debt in several periphery countries.  The ECB is understandably nervous of losing vast sums by pouring money into a leaky bucket, especially without an automatic fiscal backstop vast enough to absorb losses.  Germany, in turn, is understandably worried about having to pay a disproportionate share of any future recapitalisation, not to mention about being gamed into tolerating much higher inflation as a back-door solution.

To make matters worse, the upshot of the latest EU negotiations seems to be that private sector burden-sharing is off the table for everyone but Greece.  This is an absurd position if there ever was one.  A system that does not allow for bankruptcies is no system at all.

The euro problem could still be fixed in the medium term with a combination of tough debt and economic restructuring in the periphery, combined with very expansive central bank policy. An implicit northern Europe debt backstop could prevent inflation exploding, at least for a while.  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.

The writer is is a professor of economics and public policy at Harvard University and co-author of ‘This Time Is Different’.

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