Daily Archives: December 23, 2011

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 and what this will do to incentives and innovation. 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 in a market society.   Socially, the election of 2012 will be about class as no election has been since Franklin D. Roosevelt.

The politics of class are devilishly complex for both parties. Republicans have to oppose higher taxation on the rich without appearing captives of an arrogant business elite, while Democrats have to support higher taxation without appearing to threaten the middle class. Both have to hold onto their ideological base while gaining votes from the moderate middle. 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 not just an economic mess at home and abroad but a gathering crisis of public faith in the fairness of society. Wealth itself is not the issue, rather it is wealth that ducks responsibility for financial chaos and wealth that buys political privilege.  The fairness problem in capitalist societies is compounding their economic problem. The new president will discover that societies where millions feel the deck is stacked against them are tough to govern.

The writer teaches at the university of Toronto

There is something very awkward in the idea that still-poor Asia will help rescue the still-rich euro area. Asia remembers very well that when in trouble in the late 1990s, it was ruthlessly advised to turn to the International Monetary Fund.

Yet it may happen. Europe is bound by an extraordinary series of self-imposed constraints – no common taxation, no mutual guarantees, no monetary financing, to name the main ones – and European countries have now pledged to contribute to the IMF so that it can intervene in Europe. The desire for matching contributions from the rest of the world was unequivocally expressed by the European leaders on 9 December. The questions are: should Asia follow suit, and what would be the consequences?

Asia has two reasons to offer such support: to protect itself from Europe, and to protect itself from the US.

In the short term, the fallout in Asia of a further aggravation of the European crisis would be serious. This is partly because Europe is a large export market but also because European banks are big players in Singapore and Hong Kong, as well as major providers of trade finance. The IMF’s Spillover Report reckons that through these channels financial stress in Europe could seriously dent Asian growth. 

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. Furthermore, before the outbreak of the crisis, the euro was a successful regional currency en route to becoming the second global currency. For those in Asia who believe that the world’s natural evolution is towards a multipolar global economy, it provided a natural building block for a multipolar currency system. Should it disappear, the transition to a multi-currency system would be lengthier and bumpier.

But Asia does not trust Europe enough to invest much directly, so it is likely to opt for the detour through Washington. The IMF is certainly still viewed with much suspicion in Asia, where its failings in Indonesia or Korea are vividly remembered. But at least it is equipped with a governance system in which Asia has a voice, and is bound to gain weight faster if it becomes a major contributor.  

It may well 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.

The writer is a French economist and director of Bruegel, a Brussels-based think-tank focusing on global economic policy-making

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