Monthly Archives: February 2013

America’s newly minted top diplomat hasn’t yet finished his nine-country, 11-day swing through Europe and the Middle East, his first overseas trip as secretary of state, but the first tough reviews are already in print. It doesn’t help that John Kerry’s most widely reported comment thus far was a boast to German students that Americans “have a right to be stupid” or that, as if to prove his point, he seemed to create a new central Asian republic known as “Kyrzakhstan”. He’s “off to shaky start”, warned one headline. “Kerry hits a bumpy road in world diplomacy” announces another. 

The administration is now vigorously blaming the Republicans for the sequestration – but the surprising truth is that from the start of his time in office, the president has planned a steep shrinkage of discretionary spending as a share of national income. 

Credibility is seeping away from the Bank of England’s Monetary Policy Committee. The minutes released last week revealed fundamental differences of view at best and muddle at worst within the committee. They showed that three of the nine votes cast were in favour of a change in policy. 

Barack Obama might prefer to focus his energies on immigration, gun control and education. But it is the tax and spending wars that still paralyse Washington, and the US is on the verge of a dismal solution – the sequestration. Unless a new budget deal can be agreed within the next few days, almost all forms of so-called “discretionary” spending, departmental budgets that the US Congress sets each year, will be cut equally and indiscriminately – beginning next week. 

Today’s world of dysfunctional politics is one that pushes central banks further away from their comfort zone and excludes the best possible responses. The resulting inconsistencies can only be resolved through a more comprehensive policy approach that deals directly with the West’s challenges of too little growth, too much debt, and too polarised a political discourse. In the meantime, central banks will have no choice but to opt for what they perceive as the lesser of two evils – that of maintaining a visibly imperfect policy stance.  

Brussels should request from Paris a serious plan for public spending cuts. The French 2013 budget adjustment was mostly based on tax increases. The government has announced that further consolidations would come from public spending cuts. This is however a rather weak commitment because President François Hollande has not spelt out precise priorities, let alone targets. It is not enough to say that some government spending will be cut. France must say which and when. 

The US and Nato are more earnestly than ever trying to speed up peace talks between them, the Afghan and Pakistani governments and the Taliban. But they will falter again, just as they have done in the past until the US is prepared to make a radical break with the past format of negotiations and understand the importance of mediation.

But what we have seen in the on and off talks between the US and the Taliban is essentially that Washington acts as both the most powerful party in the conflict and as a mediator. The result has been that Kabul, Islamabad, the Taliban and others have put demands on the table which they expect the US to reply to as the lead party, but they also expect America to mediate each others’ demands so that both sides can reach a compromise and move forward. 

The leaders of the largest economies have tried to talk down the risk of a currency war. This will not necessarily be sufficient to avoid one. The reason is that there is no longer a shared view across leading industrial countries about the role monetary policy should play in the current environment. 

The reality is that, despite many commitments by national leaders, the capacity of nation-states to coordinate their responses has dwindled. Problems may have gone global but the politics of solving them are as local as ever. It is hard for governments to devote resources to problems beyond their national borders and to work with other nations to address these challenges – while painful problems at home remain unsolved. 

Tokyo should do what it can to rebuild trust with Beijing – not by giving ground on disputed East China Sea islands but by agreeing to put the issue on the shelf. Better to focus on restoring a relationship that can strengthen both economies – and, by extension, the domestic credibility of both governments. 

To the public, the implicit message was: “If you want any of this, I’m going to need a Democratic Congress next time.” When Republicans won control of Congress in 1994, Bill Clinton responded with a long list of small-bore initiatives: gun safety locks, school uniforms, cell phones for citizen patrols, and so forth. Mr Clinton wanted to show that he was still relevant and that he could still accomplish something even with a divided government. Mr Obama, by contrast, has little appetite for legislative hors d’oeuvres. His programme is designed to show not what he can do with a Republican Congress, but what he can’t do with one.  

The US’s foreign policy “pivot” to Asia is designed to balance China’s influence in the region. However, it has so far caused more agitation than calm. Until the mid-2000s, the byword of US policy towards China was “engagement”. Even the Tiananmen Square incident in 1989 and the end of the cold war did not change this policy. The expectation behind it was that China would “become more like us” if the country was brought into the international community.

After the 2008-09 financial crisis, the US suddenly found that it had to face a more confident – or in many Americans’ eyes, more arrogant – China. Beijing used to be a student of the American system; Chinese delegates used to be silent in international conferences. But after the crisis, China began to ask Americans this question: “Why have you, our teacher, done wrong?” 

A simple observation last week by the Bank of England’s Monetary Policy Committee speaks volumes to the historic evolution of modern central banking – a process that is consequential, unprecedented and inadequately covered in traditional “money and banking” texts.

In its February 7 statement, the MPC stated that, due to a sluggish UK economy facing fiscal contraction, it is “appropriate to look through the temporary, albeit protracted, period of above-target inflation”. And it sure has been “protracted”; and will remain so.

The BoE is not the only central bank coping with inconsistencies. The European Central Bank has repeatedly been forced to react in ways once deemed contrary to its philosophy and practices. Under pressure from the new government, the Bank of Japan is in the midst of a historical U-turn. 

The US, France, UK and other European countries are engaged in a widening arc of military activities across Africa, the Middle East, western Asia and central Asia, some visible and some surreptitious. France’s incursion into Mali last week was a notable short-term success. Other actions have been costly failures. It is important to understand why.

Let us distinguish two main kinds of targets. The first are oil states, including Algeria, Iraq, Iran, Libya and Sudan, where the purposes of western actions are, of course, routinely obscured. The second are failed states, generally non-oil states in the region characterised by extreme poverty, hunger, massive population growth due to unchecked fertility rates, and extreme ethnic and clan divisions. Western achievements on both fronts are equally dismal.
 

The speech this week by Britain’s Chancellor of the Exchequer on the “Reform of Banking” delivered a clear and forceful message: there is still energy and determination to reform the banking system, to make it healthier and safer. However, I am still left with a sense of unease about the direction that reform of the banking system is currently taking, both in the UK and also internationally. 

European leaders have started a discussion on German-inspired “contracts for competitiveness and growth”. To implement structural reforms in eurozone member states, the European Commission has proposed to negotiate with selected countries contracts underpinned by financial support. The idea, to put it bluntly, is to bribe reluctant governments into economic change.

There is a case for such an approach. Reforms, even the most beneficial ones for society as a whole, are often opposed because they erode rents. Those enjoying rents, for example because the market for their product is kept closed, have all reasons to fight against change. 

Washington’s gamesmanship over the fiscal cliff raises a critical question: Does the US have budget rules and processes that are adequate for the nation’s looming crisis?

It does not — but today’s 100th anniversary of the 16th amendment to the US Constitution offers a reminder that the republic was designed to adapt to such challenges.