Daily Archives: January 10, 2013

Barack Obama’s most cherished illusion during his first term was the possibility of co-operation with Republicans. Time and again, the president came to Congress bearing pre-emptive concessions – on his original economic stimulus package, his healthcare plan, and the 2011 debt ceiling fight – only to have the door slammed in his face by an obstructionist Republican party that viewed politics as a zero-sum game. Because Mr Obama has long seen himself as a conciliator, he was unwilling to let go his faith that if he only hewed to the path of moderation, his opponents would eventually have to meet him there.

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The president’s efforts at compromise yielded him little. He won almost no Republican votes for any of his major initiatives. Being left hanging with his hand outstretched made Mr Obama look weak and ineffectual during much of his first term, despite major legislative accomplishments. It disappointed his liberal base, which would have preferred more stridency to match the GOP. The one advantage of Mr Obama’s relentless reasonableness was that it rendered him immune to Republican charges of ruthlessness and extremism in the past election. Through the long, deep recession, Mr Obama’s approval rating never fell lower than the forties. Congress’s rating bottomed out at 12 per cent, where it remains today.

Republicans are not revaluating their obdurate approach for reasons of ideology and individual self-interest (compromisers get “primaried” by well-funded true-believers). In recent weeks, however, we have seen the tentative emergence of a quite different second-term Obama: one shorn of his fantasies about compromise, contemptuous of his opponents, and almost eager to stand on principle. Obama II may be no more likely to get more legislation passed than Obama I. Politically, however, he is a bolder and more appealing figure: less the hostage, more the reluctant gunslinger of the classic Western.


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During the year-end fiscal cliff negotiations, liberals feared Mr Obama would once again cave to economic blackmail by acceding to the extension of George W. Bush’s tax cuts, as he did in 2010, or caving on debt ceiling concessions, as in 2011. Instead, it was Mr Obama who stood his ground and House Speaker John Boehner who blinked. Bolstered by his new mandate, Mr Obama, stood firm and got the first tax agreement in two decades tilted in favour of the middle class rather than the wealthy.

What Mr Obama did not get was a grand bargain covering the pending “sequester” on spending or another increase on the debt ceiling, America’s statutory debt limit, which is shortly to expire again. This time, however, the president is resolved to handle the conflict differently; his cower has turned to swagger. “I will not have another debate with this Congress over whether or not they should pay the bills that they have already racked up through the laws that they passed,” he declared on New Year’s day, laying down a clear marker.

The president is similarly spoiling for a fight with his nomination of Chuck Hagel to be secretary of defence. Conservative foreign policy hawks who remember the former Republican senator’s opposition to the Iraq war consider him too reluctant to challenge Iran, insufficiently supportive of Israel, and too eager to cut military spending. At the ceremony to announce the nomination this week, Mr Obama almost dared them to take on their former colleague, presenting Mr Hagel as a wounded and decorated Vietnam veteran who “bears the scars of war”. It went without saying that he also bore the scars of the moderate Republican, a species hunted to near-extinction.

On a range of other issues, such as gun control, the president’s new tone suggests that he prefers going it alone to beating his head against a wall of ultraconservative opposition. This means either proceeding unilaterally with more limited executive orders or forcing the Republicans to stand up and be counted in opposition. There is probably some political strategy here. The GOP continues to control the House only because turnout in midterm elections is smaller, older, and whiter than in presidential years. Picking fights on social issues is probably the best way for Mr Obama to turn out the Democratic base in 2014.

Recapturing control of Congress in his final two years remains a distant dream. The real reason we are seeing the emergence of a different Barack Obama is simply the late-dawning realisation that compromise is impossible with the enfeebled Mr Boehner and his perfervid rank-and-file. Lacking a partner for peace, war has become the president’s only option.

The writer is chairman of the Slate Group

Whether they like it or not, central bankers are being dragged into the political fray. It is not so much an issue of whether independence is good or bad. Rather, monetary policy itself is no longer a job for technocrats.

Pre-crisis, it was assumed the achievement of price stability would keep everybody happy. Yes, central bankers would have to nudge interest rates in one direction or the other, making some of us better off and others worse off. Across an economic cycle, however, these effects would even out. In that sense, monetary policy could be regarded as politically neutral.


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No longer. Since the recession, developed world economies have stagnated and central bankers have had little choice but to keep rates close to zero and to pursue increasingly unconventional monetary policies in the hope that they will trigger a robust recovery.

Monetary policy today carries big political connotations. In the UK, for example, the most obvious sign is the Bank of England’s willingness to tolerate a rate of inflation far above the target set by parliament. While there is a reasonable justification – far better, surely, to squeeze all workers’ wages in real terms than to have a Depression-style rise in unemployment – it is not at all obvious that it is a decision to be made by the high priests of the central banking community alone.

There are less obvious effects that also warrant greater scrutiny. Quantitative easing may make it easier for governments to raise funds cheaply; but, by increasing the net present value of pension funds’ future liabilities, it creates problems for those funds already running deficits. That, in turn, means either bigger pension contributions for workers; lower prospective pension benefits; or, in the case of some public sector pensions, tax increases or spending cuts to make the numbers add up. Meanwhile, some of the biggest beneficiaries of QE are those already asset-rich and relatively old who prefer to sit on their windfall gains rather than spend them.

Put another way, monetary policy is doing more to redistribute income and wealth than to trigger a rebound in economic activity. Central bankers are making decisions that are more political than economic.

So it should come as no surprise that central bank independence is under threat. Nowhere is this more obvious than in Japan, where Shinzo Abe’s new government is planning both to appoint a new Bank of Japan governor and to refine the bank’s price stability mandate. The BoJ is likely to find itself under pressure to hit an inflation rate of 2 per cent rather than the current 1 per cent objective, bringing it into line with central banks elsewhere.

It seems a reasonable ambition. But announcing an ambition does not necessarily imply it will be met. Supporters of struggling Aston Villa, for example, surely hope their team will one day win the English Premier League. On current form, however, the chances seem remote. Likewise, even if the BoJ hoped to hit a 2 per cent target, would it have the tools to do so?

Imagine it does not. The obvious thing would be to send for the monetary helicopters, namely a big increase in the budget deficit to be funded through sales of newly issued government bonds to the central bank. At that point, the bank’s politicisation would be more or less complete: it would be no more than an agency of government.

We cannot know how the Japanese public would behave under those circumstances. Would they view a helicopter drop as a logical extension of unconventional policies, leading to a modest rise in inflation? Or would they take the view that the BoJ was now a passive agent of fiscal policy, no longer able to offer monetary discipline? If so, it surely would not be long before they dumped their yen, triggering a shift from excessively low to excessively high inflation.

I know it is hard to imagine, particularly in a country dogged by deflation. But following two decades of central bank independence, we have to face facts. They can no longer be properly “independent” because their policies are creating both winners and losers. They are making decisions that are inherently political. Once politicians recognise this they will surely be tempted to take over the reins. At that point, monetary stability, for good or bad, can no longer be guaranteed.

The writer is HSBC Group chief economist and global head of economics and asset allocation research

As the redesign of Europe churns along in 2013, some still fear that one or more eurozone states will take its leave. Others warn that individual European states will soon crack from within, as less familiar flags appear in places such as Catalonia, Scotland and Flanders. There are separatist pressures building within Spain and the UK, and Belgium’s unity remains fragile as well. But, at least for 2013, there is less to these warning signs than meets the eye. In fact, European separatism is one of 2013’s most important red herrings. There is virtually no chance that any of these independence movements becomes a full-blown phenomenon – at least this year.

Catalonia will move toward referendum, but any vote will probably be a 2014 event. Between now and then, a new fiscal deal with Madrid could even mitigate the push for autonomy. In November last year, a new centre-left coalition came out of regional elections as the incumbent Convergence and Union (CiU) and the Republican Left (ERC) found common ground: they both want a referendum for Catalan self-determination. But the two parties don’t see eye to eye on much else. The centrist CiU wants austerity; the ERC is staunchly opposed. This friction leaves the coalition weak and potentially unstable – and this friction will shape the contours of any deal with Madrid.

The Catalan president Artur Mas needs to champion the referendum to keep his coalition intact. But Spanish Prime Minister Mariano Rajoy has the capacity to offer economic concessions to Mr Mas in separate negotiations concerning funding for the autonomous communities. In the process, he could set a wedge between the Catalan coalition partners. If Mr Mas can save face with a better fiscal deal for Catalonia, it could even put off a referendum altogether.

In Belgium in October, the New Flemish Alliance (NVA) won big in local elections. The party president Bart De Wever declared: “We not only do as well as our monster score of 2010 [in the national elections]. We do even better.” The rise of the separatist NVA puts pressure on the federal government and complicates negotiations regarding finances and further devolutions. But even if talks go south and ultimately break down, it is still unlikely to result in partition of the country. The other two Flemish parties in the six-party federal government can deliver an alternative to the separatist agenda, provided it meets popular Flemish demands. Clearly these talks – and the need to maintain budgetary control to meet deficit targets – are challenges to the Belgian government. However, short of an early election stemming from government collapse, the next real threat to the country’s territorial integrity will probably be federal elections in 2014.

Debate surrounding Scottish independence from the UK will intensify in 2013. But even if it drives headlines and sells newspapers, the issue is a 2014 story: Scotland’s referendum on independence will not happen this year. Furthermore, any eventual verdict is by no means clear-cut. In fact, polls show that a majority of Scots are actually opposed to voting “Yes” because, among other concerns, they would face tough negotiations over defence and oil revenues with the UK. The post-independence path could prove even more of a deterrent, as a newly independent Scotland could be forced to reapply for EU membership and move towards euro adoption. That’s an integrative step fundamentally at odds with the original separatist push and it wouldn’t sit well with the public.

Across Spain, the UK and Belgium, separatist storm warnings are real, but don’t expect a downpour in 2013.

The writer is the president of Eurasia Group, a political risk consultancy, and author of ‘Every Nation for Itself: Winners and Losers in a G-Zero World’

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