Monthly Archives: March 2013

In 2005 Robert Zoellick, as US deputy secretary of state, proposed that China might play the role of a “responsible stakeholder” in helping to shape the international agenda. But despite its meteoric rise, most observers now do not see Beijing playing this role. China is often seen as uncooperative on issues ranging from trade and investment flows to intellectual property rights, climate change and the acquisition of natural resources. This has created the impression that Beijing is more inclined to use its clout to advance core interests than strengthen partnerships. 

bailing out offshore accounts would have been quite awkward. The wealthy Russians who he would be bailing out are one of his most loyal constituencies: they are thorough Putinists, and the current political landscape offers them no other outlet for their allegiance. When it comes to broader domestic opinion, any other Russians who were actually paying attention to the issue likely approved of Mr Putin’s performance. He was vocal in his protests against any plan that would hit Russian depositors but when the time came, he walked away from the table. 

Has Cyprus reignited the regional debt crisis, pushing the eurozone to the brink of collapse and risking a potentially destabilising change in the geopolitical order? Or is the country, with only a million people and accounting for 0.2 per cent of the region’s gross domestic product, a small problem that could be solved within days?

These are the two dominant narratives for Europe’s latest woes. And after being caught by surprise by developments on the ground, analysts and market participants have rushed in the last week to choose among what appears to be two competing interpretations involving opposing predictions. 

Over the past three years the EU has shown a remarkable facility for turning problems into crises and crises into catastrophes. Last summer it seemed that a new leaf had been turned. Mario Draghi, the European Central Bank president, pledged to do “whatever it takes” to stabilise the euro, and the fairly rapid agreement to establish a banking union seemed to be another positive step forward.

But it now seems this dawn was false. The Cyprus crisis has caused the rock to roll back down the hill. Like Sisyphus, the eurozone’s policymakers must now begin pushing it back up. 

Beyond the headline-grabbing combination of a penny off a pint of beer and the partial creation of a British variant of Fannie and Freddie, there is a deeply-disturbing subtext to the fiscal arithmetic in Wednesday’s UK Budget. It reflects an admission from the Office for Budget Responsibility that the underlying growth rate of the UK may be weaker than had been previously assumed.

True, the OBRs central projections contain the usual medium-term optimism, with an ugly duckling 0.6 per cent growth rate in 2013 transformed into a swanlike 2.8 per cent growth rate in 2018. Nevertheless, the OBR admits that “a key risk is that potential output turns out to be lower at the end of the forecast than we currently assume”, a result that might have devastating consequences for the budgetary arithmetic. 

Europe badly needs some good news to reverse the recent negative outlook revisions. Reports over the past few weeks have been rather bearish. The European Commission and lately the European Central Bank have downgraded their growth forecasts for the whole eurozone over the next two years. The Italian election results have made it even harder to govern the country for the coming weeks and months, which is likely to further discourage consumption and investment. The Cyprus bailout plan may lead to renewed contagion in peripheral countries. 

There is a caricature of America’s “pivot” to Asia and it goes something like this: the Middle East and south Asia are the graveyard of US power and prestige and Washington must cut its losses to these ungrateful nations as quickly as possible and turn its full attention to the21st century that is playing out on more peaceful and profitable shores in the Asia-Pacific region. This concept of the pivot is posited not only to be in American interests but is also the supposed preference of most Asian nations. 

The publication last week of the budgets of Republicans in the House of Representatives and Senate Democrats demarcates the political debate in Washington. Though all the press coverage is about the differences between the two proposals, there is also remarkable convergence. Some of that convergence is good news. Other aspects of the convergence threaten the future of the US as a dynamic society.  

Europe’s economic situation is viewed with far less concern than was the case six, 12 or 18 months ago. Policy makers in Europe far prefer engaging the US on a possible trade and investment agreement to more discussion on financial stability and growth. However, misplaced confidence can be dangerous if it reduces pressure for necessary policy adjustments. 

Having stressed publicly that Greece was an exception and that no other rescue would impose losses on senior private creditors, European officials embarked this weekend on a controversial path for Cyprus. They did so for understandable reasons, which they will argue are unique. Yet the specifics of the rescue will bring implementation challenges that will undermine its effectiveness and may lead to negative side-effects. 

Few would have predicted the Vatican would beat the International Monetary Fund in electing a non-European as its leader. The considerations that reportedly led to the selection as Pope of Argentina’s Jorge Mario Bergoglio will resonate well with those who feel the IMF has been increasingly short-sighted in holding on to an outdated nationality-based approach for selecting its managing director. 

Paul Ryan on Tuesday unveiled a new plan that claims to balance the federal budget in 10 years. It would do so by slashing spending, especially for health programmes, while simultaneously cutting tax rates for the wealthy. As chair of the House budget committee, the defeated vice-presidential candidate has put forward very similar plans for several years. They have been endorsed by the Republican-controlled House of Representatives.

Those unfamiliar with the peculiarities of the US budget process may be inclined to attach more importance to the Ryan budget than it deserves. The truth is that the US does not really have a budget in any meaningful sense of the term.
 

For Li Keqiang, premier designate, it is more than just a growth driver — it is the key to addressing many of the country’s challenges, from inequality and environmental degradation to exploitative land grabs by local officials. 

David Cameron and the UK’s Office for Budget Responsibility may have their differences of opinion on the negative impact of fiscal austerity but at least they appear to see eye-to-eye on the effects of monetary policy. Since the Conservative-Liberal Democrat coalition came into office in May 2010, the OBR has persistently projected a return to decent economic growth thanks to the supposed benefits of monetary stimulus, a view shared by the Bank of England and, indeed, by the government’s political strategists. Austerity might be painful but, with thanks to monetary stimulus, the sunny uplands were supposed to be within reach long before 2015, the year in which the coalition reaches its sell-by date. 

Revelations last month of epidemic levels of Chinese military attacks into internet-based systems and networks have only confirmed long-held suspicions. Indeed, it appears that no country, company or citizen is safe from unwanted intrusions by shadowy China-based organisations with spy-novel worthy identifiers such as People’s Liberation Army unit 61398. In the wake of these public assertions, there has been much hand-wringing about how the US and other affected nations must “hit back” against suspected online snooping and unauthorised high-technology assaults.

But just how to do that? Despite the fact that these attacks emanate from purportedly military facilities, their remedy does not lie in applying traditional military responses such as retaliation and deterrence. 

The next few monthly jobs reports, including this Friday’s, will be watched especially closely to assess the balance in a rather unusual tug of war that has developed in Washington: between a dysfunctional Congress set on creating headwinds to a slowly-recovering US economy, and a central bank willing to roll out one untested measures after the other in its attempt to steer the economy towards higher growth and more robust job creation.

The “sequestration” is, of course, the latest example of America’s self-made obstacles. This set of blunt budgetary cuts, which automatically went into effect this week due to Congressional inaction, will add another fiscal drag of 0.5 percentage points off gross domestic product in 2013. Coming on top of January’s tax increases and recovering (but still-weak) endogenous growth drivers, this will serve to again limit the annual growth rate of the economy to 2 per cent or less – and do so without involving a rational and durable reform to America’s medium-term fiscal dynamics. 

[Hugo] Chávez was an outstanding leader of Venezuela, and a good friend of the Chinese people,” noted China’s foreign ministry on Wednesday. Whatever personal sorrow might be felt in Beijing this week, China’s regret at the strongman’s passing is founded largely on worries over the future of economic relations with his government.

Those relations have grown considerably in recent years. According to Matt Ferchen, a scholar at the Carnegie-Tsinghua Center for Global Policy, the China Development Bank has cut loans-for-oil deals in Venezuela over the past five years that account for some 60 per cent of all China’s exposure in Latin America. In 2012, Venezuela made payments on the $42bn loan by sending China an average of about 300,000 barrels of crude oil a day. 

Given the political and ideological polarisation between Barack Obama and congressional Republicans, there are few potential areas for action on US legislation both sides can agree to. One area where both sides believe they have something to gain is on reforming American immigration laws.

The economic argument for allowing more immigration is strong. Manufacturers and high-technology businesses have long complained about the paucity of visas for highly skilled foreigners. An October 2012 study by the Kauffman Foundation found that a quarter of engineering and technology companies founded between 2006 and 2012 had at least one key founder who was foreign-born. 

An apparently obvious conclusion from last month’s Italian elections is that citizens – ie, voters – don’t like austerity programmes. The question that voters, especially in Italy, may not yet have reflected upon is what is the alternative in order to reduce the excessive burden of the debt, public or private, which has been accumulated over the past. There are at least three choices.

The first is to inflate away the debt, through the central bank buying large amounts of risky assets, thus socialising the losses, and keeping interest rates low, so as to reduce the real value of the debt. Some central banks around the world are indeed trying to pursue such an avenue, but the success is yet to be proven. In Europe this solution is prevented by the agreement that the member states reached at the launch of the euro that the European Central Bank should be independent and conduct monetary policy with the primary objective of pursuing price stability. 

John Kerry’s maiden voyage as US secretary of state includes four stops in the Middle East: Egypt, Saudi Arabia, the United Arab Emirates and Qatar. As the saying goes, he has only one chance to make a first impression – and what is said and not said on this visit will have repercussions for years to come.

Stopping first in Egypt made sense given its centrality to the Arab world and its continuing turbulence. It is impossible to know with certainty the message Mr Kerry conveyed in private to his hosts. But one hopes he introduced a sense of strict conditionality into US policy. The aim should not be that President Mohamed Morsi and his government succeed no matter what. Rather, US policy should be that Washington is prepared to work with and on behalf of Mr Morsi and a Muslim Brotherhood-led government only so long as they demonstrate a sustained commitment to pluralism at home – and to acting as a reliable partner abroad, be it with regard to Israel, Iran or Hamas. 

A prosecution at the International Criminal Court in the Hague of Kenyan political leaders allegedly responsible for the election violence that cost more than 1,000 lives and left 700,000 people displaced in the last presidential election was intended to stop it happening again. Instead it has become the flashpoint that may set off new violence after Monday’s elections.

Two of the leaders indicted by the ICC Chief Prosecutor, Uhuru Kenyatta and William Ruto, led rival Kikuyu and Kalenjin ethnic groups whose followers’ subsequent clashes caused most of the deaths in 2007 and 2008. Initially as a defensive tactic, these political rivals combined. Now their alliance is snapping at the heels of long-time front runner Raila Odinga, the outgoing prime minister widely thought to have been cheated of the presidency last time round. A campaign based on a powerful emotional appeal by Mr Kenyatta and Mr Ruto against western interference and the much pilloried Dutch-based court has turned an election that should have been about the extraordinary economic and social challenges Kenya faces into a referendum on the west and its purported preferred candidate, Mr Odinga, for pursuing justice against these two relaunched home town heroes.