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Monthly Archives: December 2012
Rationality and politics aren’t easy bedfellows, so we shouldn’t be surprised that the relationship between the EU and Turkey has become more prickly than is sensible for either side. But the case for them to forge closer links is overwhelming on economic, security and cultural grounds. 2013 could – and should – be the year the relationship takes a turn for the better.
The US (and the rest of the world) can take a lesson on this subject from Angela Merkel. Germany’s chancellor has carefully chosen both her words and deeds throughout the eurozone crisis. That strategy has helped keep negotiations on track while she maintains healthy approval ratings at home. Those who draw lines in the sand put their own credibility at risk.
2013 will be the year of an EU-US free trade agreement, or at least serious negotiations towards that goal. Although this possibility has been raised many times before, only to stall in the face of tough regulatory or subsidy issues, the economic stakes are higher and the political obstacles are lower next year. Both the EU and the US desperately need faster economic growth. Monetary policy is essentially exhausted; fiscal policy is set to tighten.
Look around the world and big risks abound. One or more countries may drop out of the eurozone. Violence may spread across the Middle East. The US Congress may yet drive the country off its fiscal cliff and into recession. An island dispute between China and its neighbours may flare up, provoking the US to intervene in the Pacific. But in my view, the single greatest risk is that one of these events or some other throws the world into another global financial crisis, a “GFC II”.
Since the crisis cross-border lending has fallen sharply and the ambitions of major American and European banks have been scaled back. HSBC has withdrawn from a number of countries; Citibank and Barclay’s have other preoccupations. The continental European banks are struggling to strengthen their capital bases, and emerging market assets have been realised to bolster the parents’ balance sheets. So are we entering a new age of financial deglobalisation? If so, should we care?
Last Friday 20 children and six adults were shot dead at an elementary school in Newtown, Connecticut. The same day a group of schoolchildren was attacked in China’s Henan province. There, the assailant wielded a knife and the result was injuries to 23 children and an adult but no deaths. This follows an established pattern. Like the US, China has experienced a spate of attacks on schoolchildren. But without easy access to guns, Chinese attackers seldom succeed in killing.
Agreeing to establish a common bank supervisor was the easiest of the three steps towards an integrated financial framework. Establishing a common resolution framework will be harder, because it implies giving a European authority the power to distribute losses among shareholders and creditors in several countries, close down banks and lay-off employees. Still, heads of state and government made quite some progress on this front too.
Sooner or later the American tax code will be reformed. Probably sooner. Raising revenue will be the main motivation, but at a time of sharply increasing economic polarisation issues of fairness will be prominent too. There are also legitimate concerns about the complexity of current tax rules and their adverse effects on the economy.
Why have so many Americans – including politicians and media – bought into the narrative that our economic problems stem from an out-of-control budget deficit? Because an entire deficit-cutting industry has grown up in recent years, bent on selling the false story that America must get its fiscal house in order? It began with Ross Perot’s third party in the 1992 election and continued through Peter Peterson’s institute and other think tanks funded by Wall Street and big business. It was embraced in the late 1990s and earlier this century by government-haters in the Republican Party and the eat-your-spinach deficit hawk crowd among Democrats. And it culminated in the Simpson-Bowles Commission that President Obama created in order to appease the hawks but which only legitimised them further. Deficit mavens routinely warn that unless the deficit is trimmed, we’ll fall prey to inflation and rising interest rates. But there’s no sign of inflation anywhere. The world is awash in underutilised capacity. As for interest rates, the yield on the 10-year Treasury bill is now lower than it’s been in living memory.
Pakistan, Afghanistan and the US are already working closely together through meetings of what are called the core group. However now Pakistan and Afghanistan want to see a much clearer American indication of where the talks should lead before they offer any more concessions to the Taliban. The key question in everyone’s mind in the region is whether in his second term President Barack Obama will get serious about promoting a political settlement in Afghanistan.
The armed groups who come out on top in the struggle will seek outside help, and each outside actor, whether it be the Qataris, the Saudis, the Western governments or the Russians, will struggle for influence over a chaotic situation… No matter how virulently the UN Security Council disagreed about intervention while the civil war was raging, they have a strong motive to come together now that it approaches its end.
If we seek social insurance for the least well off, the size of government relative to the economy need not change much from historical norms. If middle-class entitlements are our goal, the size of government will increase. If the public accepts such a vision, a tax system that can raise much more revenue from many more people will be needed. Industrial economies with much larger welfare states than the United States typically pay for that largesse with less progressive, broader-base tax systems.
These are welcome indications that the labour market continues its gradual healing after the extreme trauma and severe dislocations inflicted by the 2008 global financial crisis. But these improvements have to be accelerated if America is to fully overcome an unemployment crisis that weakens social cohesion and aggravates inequalities of income, wealth and opportunities. Otherwise, the healing process will plateau, leaving joblessness too high and the labour market too exposed to disruption
Chancellors of the exchequer typically assume an air of omniscience unbecoming in mere mortals. By doing so, they can assume their fiscal problems away. It was a strategy pursued with some considerable success by Gordon Brown before things went rather horribly wrong. Mr Osborne is in danger of following the same well-trodden path.
Bank supervisory authorities that are not sufficiently independent, and are too closely associated with the political authorities, are generally under pressure to delay the identification of insolvent banks, for the fear that taxpayers would get upset. The problem thus tends to be postponed, and the cost to the taxpayer rises. The experience of the recent crisis has shown that taxpayers have paid most in countries where supervision was less independent and where the political authorities are most closely associated with the banking system.