Daily Archives: December 21, 2011

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