Monthly Archives: April 2013

Workers sort through packages at the Amazon warehouse in Milton Keynes in England©Reuters

Amazon shipping losses have been rising and now amount to more than 5 per cent of revenue

Amazon has built its empire on the legitimate advantages it has over retail shopping: an endless range of products at a steep discount and stunningly good customer service. But it has also benefited from one unfair advantage over its bricks-and-mortar competitors: it does not have to charge a sales tax, which American states levy in varying amounts on consumer goods. Depending on where you live in the US, this can save you up to 12 per cent on purchases, making it foolish not to buy online when you can.

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Twenty years after Amazon was founded, the US Congress is finally addressing this loophole with a bill that would allow states to require online retailers to collect tax. What is interesting about this is not the debate around the Marketplace Fairness Act, which is expected to pass the Senate next week. There really isn’t any – even Amazon concedes in principle that the playing field ought to be levelled. It’s what the delay tells us about a political system so compromised and sclerotic that it cannot correct even the most straightforward economic unfairness in a timely fashion.

Online businesses have been able to avoid collecting sales tax based on state laws dating from the era when local shopping was the norm. Companies without a “physical presence” in a state did not have to charge tax if they shipped goods from elsewhere. It was up to customers to pay “use taxes” on purchases instead. Few have been scrupulous enough to do so and states have no means to track dodgers.


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As Amazon expanded, its chief executive Jeff Bezos treated this anomaly as a right and deployed the techniques of rent-seeking to protect his advantage. He spent millions of dollars on lobbyists, deployed an army of lawyers and cultivated political allies with campaign contributions. Amazon’s smaller competitors struggled to make their case. Nor was there any customer constituency for tax collection, even though consumers paid indirectly through diminished public services.

At the state level, Amazon became a litigious bully, an instance of the modern company powerful enough to dictate terms to impoverished sovereigns. When challenged over the collection of taxes, it warned that it could take thousands of jobs elsewhere. As California teetered near bankruptcy a few years ago, it cut ties with local affiliates and threatened to fund a referendum to overturn the legislature’s decision to make it pay tax. Its strategy devolved into delaying the inevitable. When a state looked likely to win in court, Amazon would negotiate and agree to collect taxes, usually with a stipulation that it didn’t have to start for a few more years.

In this cynical game, Amazon has been able to count on the connivance of congressional Republicans who stand for the proposition that representation without taxation is liberty. A principled conservative believes that taxes should be low, consistent and fair. An American Republican, by contrast, believes that both taxation and the effective collection of revenue are government abuses. This ideology is codified in the anti-tax pledge, now signed by most of the GOP, that was drawn up by Grover Norquist, whose organisation Americans for Tax Reform leads the opposition to taxing online purchases.

Tax-hating Republicans grab for any argument at hand. In the old days, it was that taxing ecommerce would kill the just aborning Golden Goose of the Internet. Others assert that compliance counts as too much of a burden on small businesses, which could be victimised by endless state tax audits – ignoring the exemptions for small merchants who sell less than $500,000 a year in goods. Amazon’s lobbyists worked to make the proposed threshold even lower, apparently in order to give validity to this argument.

What has changed? Essentially, Amazon has become so dominant that it no longer cares to fight. It has played out the clock longer than it dared hope and would now like to be able to build warehouses everywhere without doing state-by-state battle over its “physical presence”. In other words, this is not a case of Congress finally choosing to act. It is a case of the owners finally giving it permission to do so.
The writer is chairman of the Slate Group

After last week’s horrible unemployment numbers from Europe, some may be tempted to downplay the monthly US jobs report coming out this Friday. That would be a big mistake. The data will help shed light on four issues that are central to the wellbeing of both America and the global economy.

First, some context. Almost five years after the global financial crisis began, western economies as a group still struggle to overcome a “new normal” of unusually sluggish growth and persistently high unemployment. The longer this persists, the greater the risk that – rather than serving as a transition to revamped growth and job creation models – the new normal will morph into one or more lost decades with terrible human costs.

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Cayman Islands©Nasa

Tropical hideaway: The Cayman Islands are a linchpin in the global financial system, hosting thousands of trust companies and structured finance vehicles

The curtain has been pulled aside on the once secret world of tax havens, and the scale of abuse is nearly beyond reckoning. Week after week, Americans and Europeans worn down by budget austerity have learnt about the secret accounts of their politicians, tax evasion by leading companies and hot money destabilising the world economy. The darker truth is that these havens are not gaps in the world’s financial system; they are the system.

How many politicians and political parties have secret accounts abroad? Inevitably, given the nature of the arrangements, we cannot say for certain – but the list of those that have come to light is long. US presidential candidate Mitt Romney was found to have huge wealth in the Cayman Islands, never adequately explained. In France, Jérôme Cahuzac has resigned in disgrace from his position as budget minister following the revelation that he held a secret account in Switzerland. He has since been charged with tax fraud. Spain’s ruling party has been making payments from secret Swiss accounts for years. One senior Greek politician has been sentenced to jail for falsifying financial declarations. Many more revelations will come, especially now that investigative journalists have their hands on the records of hundreds of thousands of offshore accounts.


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Groups such as Apple, Google and Starbucks have been shown in recent months to have used outlandish accounting gimmicks to shelter their profits. These include Google’s claim, approved by the US Internal Revenue Service, that its intellectual capital resides in Bermuda. There are thousands more like them working with the tax authorities to keep their money out of reach. Banks such as HSBC and UBS have been caught in the money laundering that facilitates this process.

How much tax revenue is lost to the global havens? Here, too, we can only guess but the numbers are likely to be vast. Recent estimates by the Tax Justice Network suggest that deposits are in the range of $21tn.

The havens serve countless purposes, yet not one is for the social good. They support massive tax evasion. They underpin a global system of bribery to corrupt officials. They service the accounts of drug runners, arms traders and terrorist groups. They create veils of secrecy through shell companies, which allow tax evasion, land grabs and environmental destruction.

The prime movers of the world’s tax havens are the US, Switzerland and the UK. Indeed, many of the leading havens, including the British Virgin Islands, Cayman and Bermuda, are British Overseas Territories. The secreting of trillions of dollars in the Caribbean has been undertaken with the support of America’s IRS, and with the approval of the US political class and Wall Street.

These playgrounds of the rich and powerful were largely hidden from the public’s view during the long financial boom. In the new world of austerity following the 2008 crash, however, they are increasingly seen as a cancer on the global financial system that must be excised.

The public’s animus was greatly accelerated by the Cyprus crisis. The island has for many years been a notorious secrecy-and-tax haven, especially for Russian money. Yet this was winked at rather than controlled. Then Cyprus blew up – a reminder of how an unregulated financial centre can quickly turn into a mortal threat to the world economy.

Many of the reforms that are required are obvious. All foreign bank accounts in any jurisdiction should be reported back to the national tax authorities of the account holders. Unreported incomes diverted to overseas accounts in the past should then be taxed at national rates with penalties for evasion. The thousands of hedge funds and corporations domiciled in the Caribbean for operations in the US and Europe should be required to redomicile in the US and Europe. Beneficial ownership should be disclosed on all foreign-owned companies.

Angela Merkel, the German chancellor, François Hollande, the French president, and David Cameron, the UK prime minister, have recently acknowledged the need for a serious clampdown, yet the real actions still lie ahead. Barack Obama, the US president, has spoken in the past about cracking down but has not said much recently. All eyes are now turning to US and European leaders in advance of the summits of the Group of Eight leading nations in June and the Group of 20 in September to see whether the politicians are beholden to the needs of the public or to heedless and destabilising private greed.

The writer is director of the Earth Institute and author of the forthcoming book, ‘To Move the World: JFK’s Quest for Peace’

There is a famous cartoon by the French artist Voutch in which a customer in a wine merchant’s shop is asking the owner if he can recommend “a bottle that would go well with a very, very, very bad piece of news I am giving my wife this evening”.
There must be several European leaders in the market for similar bottles at present.

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The apparent confirmation that sarin, a dangerous chemical weapons agent, has been used by Syrian government forces in Aleppo raises the stakes in a conflict that is already spiralling out of control. On the rebel side, the presence of expatriate jihadist fighters descending on Syria as they once did on Afghanistan is hair raising enough. On the government side, Iranian Revolutionary Guards are reported to be playing a growing role in the brutal suppression of civilians.

The region’s divisions have widened, too: Shia Iran and Iraq and Lebanon’s Hezbollah movement back the Damascus regime. The Arab League, driven by Saudi Arabia and Qatar, remains a partisan voice for the rebels. Down the road, a regional war beckons if nothing is done to contain the escalating conflict and chaos that has killed at least 70,000 and displaced up to a quarter of Syria’s population.

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So, more drugs to deal with our collective lack of growth. The Bank of England’s Funding for Lending extension is welcome: the scheme lasts longer than before, contains extra incentives to lend to cash-strapped small and medium-sized enterprises and has been widened to include non-bank sources of credit, including financial leasing corporations. And after some remarkably soggy eurozone data – including purchasing manufacturers index figures suggesting that the German economy is not quite as dynamic as Bayern Munich – investors are increasingly hopeful that the European Central Bank will come to the rescue, buying up equities as if the dark clouds are about to lift.

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With apologies to nostalgic cold war views about Russia, or unmet dreams of a united Europe with a single foreign policy, the world’s most important bilateral relationship is the one between the US and China. For that relationship to succeed, it must be embedded in a larger framework of US diplomacy in Asia, stretching from Japan to India, but certainly the US-China piece will be central for the 21st century. With new leadership in Beijing under President Xi Jinping settling in and President Barack Obama starting his second term, this is a defining period for the future of US-China relations. Both countries have challenging domestic agendas, but Washington and Beijing fully recognise the importance of their international interactions.

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In revising down its projections for growth, the International Monetary Fund on Tuesday confirmed that western countries continue to battle persistently sluggish economies and, in some cases, financial instability. Meanwhile, the more dynamic emerging and developing economies are making greater strides in closing gaps in both income and wealth. All this translates into a “three-speed world” that complicates existing challenges.

The findings will inform this weekend’s discussions in Washington, as officials from around the world gather for the semi-annual meetings of the IMF and World Bank. They would be well advised to go beyond the important issue of how individual countries emerge more quickly from their malaise. They should also spend some time on the implications of this new configuration for the west’s ability to project and deploy economic power globally.

The revised IMF projections confirm what virtually all analyses agree on: with western economies struggling, unemployment will remain alarmingly high in some countries, budgets will be stretched and poverty will deepen in the most vulnerable economies.

In such circumstances, western governments will naturally be inclined to become even more insular. Compelled to place domestic issues ahead of international ones on their policy agendas, they will generally be less willing — indeed, in some cases, less able — to influence economic developments elsewhere.

To the extent that this trend continues, which in the absence of significant reforms is likely, it speaks to more than a secular global realignment. It also affects the world’s ability to manage crises, maintain international financial and economic standards, co-ordinate policy responses and operate a comprehensive set of cross-border checks and balances.

This situation is even more fragile when one considers the west’s hold on global economic governance. At the IMF, even the most modest reforms are hampered by national political challenges in western countries. Accordingly, their retrenchment inevitably entails a weakening in multilateralism.

So far, reactions in the rest of the world have been mixed. A few countries seem indifferent but most fall along different points on a continuum ranging from exuberance to despair. For some, the shift means a world full of unprecedented opportunities; others, however, worry about navigating a world with weaker external economic and financial anchors.

Financially robust countries, such as China, are losing no time. They are expanding their global footing, foreign ownership, diplomatic alliances and economic influence — particularly in Africa, Latin America and the Middle East.

Mostly, this enables productive activities that otherwise could have been undermined by a lack of financing. In some cases, however, outcomes run counter to longstanding multilateral practices, falling short of established international standards for scrutiny, prudence and accountability. Environmental and anti-corruption initiatives are among the areas that risk being undermined.

Then there are the nations where existing domestic weaknesses are immediately compounded by the erosion in western interests. Their dependency renders them particularly vulnerable to any sustained reduction in financial aid and technical assistance. This is particularly acute for countries, including in the Middle East and Africa, going through delicate political transitions while also lacking the potentially stabilising influence of external institutional and financial anchors.

We should not totally despair about this second set of countries. Just recall the response of a Brazilian official in the mid-2000s when asked why, this time around, his country had finally emerged from its multidecade phase of recurrent crises and economic disappointments. In addition to the importance of President Luiz Inácio Lula da Silva’s leadership and the broader engagement of society at large, he noted Brazil’s recognition that the US focused its attention after the terrorist attacks of September 11 2001 away from its “back yard”. As such, officials felt less comfortable about relying on a timely American-led rescue.

Those countries that are either indifferent or yet to recognise continuing shifts in the global system are vulnerable. They could easily fall victim to hidden currency wars and changes in international capital flows.

This weekend, the goal of officials meeting in Washington should be to address the acute problem of those European economies that lack not just growth but also a viable growth model. And they should not stop there. They should also spend time trying to understand the evolving nature of cross-border economic influence in order to facilitate the productive engagement of capital and ideas from the emerging world while minimising the risks of lowered global standards.

The writer is the chief executive and co-chief investment officer of Pimco

Europe’s growth performance was disappointing before the financial crisis. It has been dismal since. Five years into the “great recession”, the risk for Europe is to remain trapped in stagnation. Vicious circles are apparent across the continent: weak growth undermines deleveraging and fuels banking fragility. Persistently high unemployment erodes skills and undermines Europe’s growth potential. Low overall growth makes it much harder for the hard-hit economies in southern Europe to recover competitiveness and regain control of their public finances. Stagnation reduces the attractiveness of Europe for investment. Under these conditions, Europe’s social models are bound to prove unsustainable.

Why is this so?

Structural weaknesses are part of the explanation. But Europe also made two mistakes in responding to the crisis. First, it failed to recognise the true extent of its banking problem. It believed – or pretended to believe – that the guarantees and recapitalisations of 2008-2009 had addressed the issue whereas weaknesses were in fact much more widespread. Second, it failed to appreciate that excessive private-sector debt was not just an American problem. In Europe too many households and companies needed to deleverage.

The European mantra – structural reform and fiscal consolidation – was and remains correct. But a still-dysfunctional financial system and an overleveraged private sector made the eurozone unable to reallocate resources, engender productivity and sustain demand. Add relative price rigidity in the euro area and the picture is complete: the medicine may be the right one, but the patient is not yet fit to really benefit from it.

How does Europe get out of this predicament?

Comprehensive action is needed to break the mutually reinforcing links between limited productivity, slow deleveraging, weak banking sectors and distorted relative prices.

The first priority is financial repair. Banks with weak balance sheets lend on too expensive terms or lend to insolvent borrowers to keep them afloat and do not grant credit to new firms. This prevents profitable investment and the growth of new, more efficient firms. A comprehensive bank balance sheet assessment is needed. For those that would take part in this assessment, the introduction of the Single Supervisory Mechanism, the first element of the European banking union, offers a opportunity. The ECB should not and will not accept undercapitalised – let alone insolvent – banks to fall under the common supervision. National authorities therefore have to initiate a recapitalisation of undercapitalised banks and a resolution of the insolvent ones. The moment is now. When public money is needed, the European Commission should exclude it when making decision on excessive deficits.

Even before the repair is completed, action is needed because the monetary policy transmission mechanism in the eurozone is impaired in some countries, further limiting credit supply. Significant haircuts on collateral in the repo operations that underpin the provision of central bank liquidity limit the willingness to provide credit to small firms. This limitation has a particular importance in the current low-growth environment and needs temporary but forceful action. The ECB alone cannot solve the problem because it has a fiscal dimension. The EU should explore temporary collateral enhancement schemes, for example, in liaison with the European Investment Bank.

The second priority is to balance private and public deleveraging. This requires an appropriate speed of fiscal adjustment, one that is adapted to the context of stagnating economies. Where consolidation is needed – that is, in most countries – there is a case for spreading it out over a longer period, provided governments can credibly commit to future action. One way is to legislate now for the years to come, for example on far-reaching pension reforms. Another is to use the EU fiscal framework as a credible commitment device. More needs to be done to prevent fiscal retrenchment in the south of Europe from further dampening economic activity and increasing social hardship, ultimately undermining economic and political stability. Up-front payments from existing EU convergence funds and increased EU-supported investments would be a good way to help address demand weaknesses.

The third set of measures should aim at addressing the differences of competitiveness acorss eurozone countries; a problem that was in place before the crisis. Structural reforms are of central importance to increasing long-term productivity and need to be continued vigorously. The EU should provide incentives to addressing weaknesses in product, labour and capital markets as well in skills. It should explore new approaches, including, contractual budgetary support in specific policy areas. Nevertheless, within the eurozone, wage rebalancing should involve northern Europe as well as southern Europe. Consistent with the ECB mandate, average inflation in the eurozone should be close to the 2 per cent target yet inflation expectations have fallen to well below that. Northern Europe should refrain from domestic policy action that would prevent domestic inflation from rising above 2 per cent, as long as eurozone price stability remains ensured.

The solution to Europe’s economic problem is neither stubborn persistence nor a U-turn. It is not to add a new policy procedure to the many existing ones. It is to recognise the true nature of the challenge it is facing and to adopt a more comprehensive approach.

This column was co-written with Zsolt Darvas and Guntram Wolff. It is based on the Bruegel paper, ‘Europe’s growth problem (and what to do about it)‘.

With last week’s release of the president’s budget, Washington has once again descended into partisan squabbling. In the US today, there is pervasive concern about the basic functioning of democracy. Congress is viewed less favourably than ever before in the history of opinion polling. There is widespread revulsion at political figures seemingly unable to reach agreement on measures to reduce future budget deficits. Pundits and politicians alike condemn “gridlock”. Angry movements, such as Occupy Wall Street and the Tea Party, are present and still active on the extremes of both sides of the political spectrum.

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Meanwhile, profound changes are redefining the global order. Emerging economies, led by China, are converging towards the west. Beyond the current economic downturn lies the even more serious challenge of the rise of technologies, which may raise average productivity but will displace large numbers of workers. Public debt is increasing in a way that is without precedent except in times of total war. A combination of an ageing population and the rising prices of health and education will put pressure on future budgets.

Anyone who has worked in a political position in Washington has had ample experience with great frustration. Almost everyone in US politics feels there is much that is essential yet unfeasible in the current environment. Many yearn for a return to an imagined era when centrists in both parties negotiated bipartisan compromises that moved the country forward. Yet fears about the functioning of the US government have been a recurring feature of the political landscape since Virginian Patrick Henry’s 1791 assertion that the spirit of the revolution had been lost.


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It is sobering to contrast today’s concern about political paralysis with that which gripped Washington during the early 1960s. Then, the prevailing diagnosis was that a lack of cohesive and responsible parties for voters to choose from precluded the clear electoral mandates necessary for decisive action. While there was a flurry of legislation passed in the 1964-66 period after a Democratic electoral landslide, Vietnam and Watergate followed, all leading to President Jimmy Carter’s declaration of a crisis of the national spirit. Despite the rose-tinted view today, there was hardly high rapport in Washington during Ronald Reagan’s presidency. During his time in office Bill Clinton worked hard at compromising with a US Congress controlled by Republicans, only to be impeached by the House of Representatives.

Throughout American history, division and slow change have been the norm rather than the exception. While often frustrating, this has not always been a bad thing.

There were probably too few checks and balances as the US entered the Vietnam and Iraq wars. There should have been more checks and balances in place before the huge tax cuts of 1981, 2001 and 2003, or to avert the many unfunded entitlement expansions of the past few decades. Most experts would agree that it is a good thing that politics thwarted the effort to establish a guaranteed annual income in the late 1960s and early 1970s and the effort to put in place a “single-payer” healthcare system during the 1970s.

The great mistake of the gridlock theorists is to suppose that all progress comes from legislation and that more legislation consistently represents more progress. While these are seen as years of gridlock, consider what has happened in the past five years.

The US moved faster to contain a systemic financial crisis than any country facing such an episode has done in the past generation. Through all the fractiousness, enough change has taken place that without further policy action, the ratio of debt to gross domestic product is expected to decline for the next five years. Beyond that, the outlook depends largely on healthcare costs – but their growth has slowed to the rate of GDP growth for three years now – the first such slowdown in half a century. At last, universal healthcare has been passed and is now being implemented. Within a decade it is likely that the US will no longer be a net importer of fossil fuels. Financial regulation is not in a fully satisfactory place but has received its most substantial overhaul in 75 years. Most schools and teachers are for the first time evaluated on objective metrics of performance. Gay marriage has become widely accepted across the states.

No comparable list can be put forth for Japan or countries in western Europe. Yes, change comes rapidly to some of the authoritarian societies of Asia. But it may not endure and may not always be for the better.

Anyone prone to pessimism about the US would do well to ponder the alarm with which it viewed the Soviet Union after it launched the Sputnik satellite or Japan’s economic rise in the 1980s and the early 1990s. One of America’s greatest strengths is its ability to defy its own prophecies of doom.

None of this is to say that the US does not face huge challenges. But these are not due to structural obstacles. They are about finding solutions to problems such as rising inequality and climate change – where we do not quite know the way forward. This is not a problem of gridlock – it is a problem of vision.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

British Prime Minister Margaret Thatcher (L) poses 30 March 1987 with Soviet leader Mikhail Gorbachev at the start of talks at the Kremlin in Moscow©AFP

I started at Oxford university in October of 1980, 17 months after Margaret Thatcher became Britain’s prime minister. It was a grey, dark autumn and the mood was as bleak as the weather. Across the street from my college was a bench where desperate-looking homeless men spent the day; an acute, local reminder of a chronic, national unemployment crisis. Businesses were failing, poverty was spreading and the middle class was sinking. Even among my Conservative friends, I could not find anyone who thought Thatcher would win a second general election.

Then came the Falklands. Suddenly “Maggie” Thatcher was Winston Churchill reincarnated; a British lion roaring across the Atlantic, albeit in a rather smaller arena. When Ronald Reagan declared US neutrality with regard to whether Britain or Argentina held sovereignty over the islands and Alexander Haig, his secretary of state, tried to negotiate a settlement that would have given ultimate sovereignty to Buenos Aires, we Americans at Oxford were suddenly personae non gratae, citizens of a faithless ally that could not find the courage to take a stand. Thatcher’s domestic slogan, “The lady’s not for turning”, suddenly appeared in a very different light to a country nostalgic for imperial glory.


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She burnished this reputation with her fierce anti-communism, standing with Reagan for the introduction of nuclear missiles in Germany in the early 1980s and facing down the Soviet Union at every turn. She was equally resolute in her determination to use force to push Saddam Hussein back out of Kuwait in 1991, leading to the famous exchange with George H.W. Bush in which she is reported to have said: “Don’t go wobbly on us, George.”

So there she is. The Iron Lady, the leader who had no time for diplomatic niceties, who was not afraid to stand up for the truth, who would not back down on the global stage. But the starry-eyed supporters of Thatcher who have filled the opinion pages over the past week are themselves besotted with a vision of Britain in the world that is both deeply anachronistic and dangerous. Nowhere is the folly of this view more apparent than in Thatcher’s attitude towards Europe, a view that was less a throwback to Churchill than to her 19th-century predecessors. Like them, Thatcher saw the European continent as a stage for balance-of-power politics, with Britain holding the balance. In the 21st century, however, that view is likely to leave Britain outside global power circles altogether.

Thatcher is venerated by today’s Tories for standing up to the EU to “get our money back”, but her underlying view of Europe is best revealed in her fierce and deeply misguided opposition to German reunification after the fall of the Berlin Wall. Chancellor Helmut Kohl recalls in his memoirs that Thatcher told a gathering of European leaders: “We beat the Germans twice and now they are back.” French diplomatic notes reveal conversations with President François Mitterrand in which both leaders envisioned a united Germany that would exercise more influence in Europe than Hitler ever had. Although both Thatcher and Mitterrand ultimately came around, and Thatcher stood firmly for the expansion of the European Community to former Soviet states in eastern and central Europe, her instincts were completely out of touch with modern Europe.

Thatcher supported the European Community, an economic union, but described the more political EU as “perhaps the greatest folly of the modern era”. That is the legacy she has bequeathed to her party. Prime Minister David Cameron’s pledge to hold a referendum on British membership in the EU and his plan to renegotiate the terms of that membership risk relegating Britain to the status of little more than a bit player in global politics.

It is not just Maggie who is gone; her entire era is fading away. It is the era of three world wars – two hot and one cold – in which Britain and the US had a special relationship forged out of their alliance during those wars, and in which the Atlantic was the most important economic and political theatre in the world. Today the US needs not Britain but Europe, the largest global economy, with a growing political and military role. In a world in which the US sees the rise of Asia as the most important geopolitical trend, it does not imagine partnering with Britain but with Europe as a whole.

In the 21st century it will be possible for London to remain one of the great cities in a world where cities will become ever more important. However, London cannot carry Britain. Unless Britain decisively casts its fortunes with Europe it risks becoming another Singapore – a global financial centre and a useful diplomatic partner in navigating complicated regional politics but hardly a global power. Indeed, should this part of Thatcher’s legacy triumph, she will have done her nation a disservice of millennial proportions.

I cannot conclude without commenting on Thatcher’s legacy not just as a prime minister but as the UK’s first and only woman prime minister, placing Britain firmly ahead of the US. All week long women have been debating her impact as a feminist role model who was also a staunch antifeminist. She hated the idea that she had got anywhere because of her sex, even though she rose through the ranks in part because by the 1970s all-male cabinets were increasingly perceived as antiquated. She proudly set herself up as a “merit woman” rather than a “quota woman” and refused to mentor and promote women or adopt policies that would help women across Britain.

I think Thatcher’s view of feminism was wrong, and I disagree with many of her other domestic and foreign policies. But I admire her as a woman who achieved power at the highest levels and demonstrated that she could wield it as well, or as ill, as any man.

The writer is a professor at Princeton and former director of policy planning of the US state department

For the first time since the North Koreans began their rhetorical climb toward the summit of Mount Apocalypse, they have taken a step back – and it is an important one. It appears that Pyongyang’s closure of the Kaesong industrial complex, the only co-operative commercial link between the two Koreas, is temporary. That is good news, if not a huge surprise. It reassures us that the regime still cares about cash flow and the jobs of the more than 50,000 North Koreans who work there – and that there is still some distance between Pyongyang’s words and deeds.

But the lessons we have learnt in recent weeks suggest that this war of nerves is not over. We have learnt for example that Kim Jong-eun, or whoever is really driving this crisis, has the nerve, and perhaps the poor judgment, to deliberately sail his country into uncharted troubled waters. Pyongyang has torn up its armistice with Seoul and threatened “thermonuclear war”, dashing early hopes that generational change in North Korea’s leadership might bring something new to a country that badly needs it.

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President Barack Obama’s budget this week makes clear the real political equilibrium in the US. The federal government is shrinking. Discretionary spending in the new Obama budget would shrink to 4.9 per cent of gross domestic product in 2023, compared with 7.9 per cent of GDP in 2008. Both parties have signed on to this shrinkage. Neither will try to stop it.

The implications are enormous. Until 2017 at the earliest, there is likely to be no or very meagre action to address America’s growing underclass, gaping inequalities, decrepit infrastructure, persistent drought or worsening climate change. Slow growth, unemployable young people, a vast incarcerated minority population and gaudy excesses at the top will remain the norm. Even Mr Obama’s few new initiatives, for example for early childhood development and new infrastructure, are tiny drops in America’s ocean of unmet need.

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Speak about the political legacy of Margaret Thatcher, and most observers will focus on what she did at home. And for good reason, as “Thatcherism” has come to represent privatisation, lower taxes on income, a reduced role for trade unions – in short, the successful trimming of the role of government in the economy.

But this take on the former prime minister does not do justice to her foreign policy legacy, which has more to it in both scope and complexity than many appreciate.

That said, I would begin with the domestic and Thatcher’s understanding that there could be little effectiveness abroad without strength at home. Hence the necessity of getting Britain’s economy back on track. Influence in the world required resources as well as setting an example others could not help but respect. It is an insight the contemporary US would do well to take to heart.

Thatcher had little tolerance for aggression. Hers was a highly principled foreign policy, one that rejected Argentine belligerence in the Falklands and, a decade later, Saddam Hussein’s in Kuwait. For her what was at stake was the principle much more than any intrinsic interests. Aggression allowed to stand would set a precedent that sooner or later would jeopardise core concerns.

The tie to the US was for Thatcher an article of faith. It didn’t matter that this faith was not always reciprocated. American reluctance to back the UK fully against Argentina was more a source of disappointment for her than a cause for rupture. The same was true for the Reagan administration’s embarrassing failure to consult before introducing military forces into Grenada.

This understanding of the need to stay close to Washington was grounded in an appreciation of power. Thatcher was nothing if not a realist. How else to explain her support for majority rule first in Rhodesia and then in South Africa? Or her support for a greater role for Dublin and a fairer shake for Catholics in Northern Ireland despite her abhorrence of the IRA terrorism that came close to killing her?

None of this is to suggest Thatcher did not have her blind spots. She most surely did. She tended to emphasise the dark side of institutions – the UN or the EU – but gave less weight to their advantages, be it as a source of legitimacy that could rally international support or as a means to expand markets or promote stability. And she could be a prisoner of her past prejudices, which in no small part explains her opposition to German unification even as it was brought about within Nato.

But these were blind spots, not to be confused with more pervasive blindness. To the contrary, Margaret Thatcher was sensitive to the need to be practical as well as principled, flexible as well as firm. She stood up to the Soviet Union after it was fashionable, only to embrace Mikhail Gorbachev before it was fashionable. For someone who so often had little time for the Foreign Office, she proved to be a leader with quite a record of diplomacy.

The writer is the president of the Council on Foreign Relations

With the announcement by Haruhiko Kuroda, the Bank of Japan’s new governor, of the doubling of the monetary base within the next two years at most, the Japanese authorities committed to do “whatever it takes” to achieve their newly assigned objective — an inflation rate of 2 per cent. Two questions should be raised. First, why such a drastic step up in monetary expansion? Second, will it work?

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This week, a new book, “The Great Deformation: The Corruption of Capitalism in America” by David A. Stockman was published in the US, garnering a great deal of notice. The attention is due not so much to the 742-page book, which is dense with discussions of obscure financial topics, but because of the author, who once played a critical role in American economic policy.

Mr Stockman was the proverbial whiz-kid of American politics. After college, he worked on the staff of the US Congress for Rep John B. Anderson of Illinois, the third-ranking Republican in the House of Representatives. In 1976, Mr Stockman returned to his native state of Michigan to run for Congress himself, winning elective office on his first try.

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Haruhiko Kuroda, the newly installed Bank of Japan governor, has offered the monetary equivalent of shock and awe. Under Mr Kuroda’s guidance, the BoJ now intends to hit a 2 per cent inflation target within the next two years; is committed to doubling the monetary base; is willing to buy bonds of all sorts of maturities; is accelerating its purchase of risk assets; and has gone considerably beyond already elevated expectations within financial markets.

In acting decisively, Mr Kuroda is following a well-trodden path: think of Paul Volcker and his battle against inflation at the beginning of the 1980s or Alan Greenspan and his tussle with equity markets in 1987. Moreover, there has been a willingness to learn from the excessive caution of the past. By buying bonds of more or less all maturities, the whole yield curve has come down. By openly committing to a higher inflation objective, it’s clear that monetary conditions will remain loose for a prolonged period of time. Meanwhile, Shinzo Abe, Japan’s prime minister, seems keen to avoid a UK-style inflation trap, emphasising that a healthy escape from deflation requires not just higher prices but also higher wages.

So far, so good. The commitment is most definitely there and the ambition has now been well-defined. Yet Japan is not yet out of deflationary trouble and, even in the event of the monetary equivalent of the Great Escape, it might still all end in disappointment.

The first – and most obvious – problem is that Japan’s difficulties do not reflect an absence of monetary and fiscal stimulus alone. Offshoring, ageing, the unproductive use of women in the workforce and an acutely cautious attitude towards immigration have all played their part in constraining Japanese growth during its two lost decades. A wave of the monetary magic wand cannot fix those problems.

The second difficulty relates to leakage in what is known as the carry trade, in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. It may be that borrowing costs in yen are now remarkably low relative to Japan’s own history but, over the past two decades, they have always been low relative to interest rates elsewhere. Over that period, attempts to boost the Japanese economy have too often seen the benefits spilling over to other parts of the world, creating unwanted hot money inflows, overvalued currencies and unsustainable financial bubbles, even as the Japanese economy has remained trapped in a deflationary hole.

The third challenge relates to the performance of the yen and, more generally, the transmission mechanism of monetary policy. There’s a potential inconsistency between the Japanese view of monetary stimulus (it lifts domestic demand and rebalances the economy towards domestic consumption) and the – whispered – UK view (it lowers the exchange rate and rebalances the economy towards exports). In the UK’s case, the rebalancing never came to pass and, arguably, a lower level of sterling only led, via higher import prices, to a squeeze in real wages. In Japan’s case, previous experiments with QE – admittedly not on the same grand scale – mainly served to boost exports without any significant impact on domestic demand. In a world where other nations are struggling for growth, a yen-induced export-led Japanese economic recovery might not be enthusiastically received. And, despite Mr Abe’s hopes of higher wages, it may be that rising import prices ultimately only serve to squeeze real incomes.

Mr Kuroda has got to first base. He has yet to score a home run.

The writer is HSBC’s group chief economist. His new book, ‘When the Money Runs Out: The End of Western Affluence’, will be published by Yale in May

The US monthly jobs report is eagerly anticipated for more than the insights it provides into the health of the economy. These days it also serves as an indicator of the direct impact of congressional dysfunction, the evolution of experimental policies from the Federal Reserve and trends in income inequality. So what should we look for in Friday’s data release?

Meeting the reported consensus expectation of 200,000 in new jobs in March would confirm that the US economy remains on the road of gradual recovery from the global financial crisis and the great recession that followed. But this would not be enough to overcome concerns about the too-tepid improvement and the possibility of another “spring swoon”, which Ben Bernanke, Fed chairman, recently cautioned against. (After a first quarter average of 262,000 last year, the three-month moving average plummeted to just 108,000 in June before picking up steam again.)

More generally, Friday’s data will tell us that, despite rising costs and risks, the Fed’s hyperactive policy stance is maintaining the economy’s lukewarm forward progress. Unfortunately, and as other data this week confirm (including two disappointing Institute for Supply Management readings), the central bank’s tools are still failing to take the economy to escape velocity, an objective explicitly mentioned in last month’s speech by Janet Yellen, Fed vice-chair. So do not expect a dramatic decline in the 7.7 per cent unemployment rate, barring an unfortunate continuation of the fall in the participation rate seen in the last few years.

Some might take Friday’s data as an indication that congressional dysfunction, specifically the impact of the fiscal cliff and spending sequestration, has yet materially to undermine the labour market. But they should not get carried away: the spending cuts stretch over a number of months; and the contractionary influence of the higher payroll tax has been offset by a decline in the household savings rate to almost 2 per cent, a level last seen in the middle of the previous decade.

On policy issues, also look for the report to fuel a debate that will only grow louder in coming weeks: when will the Fed start tapering its $85bn monthly purchases of securities?

For the Fed, this involves a delicate balance to avoid two extreme outcomes: “excessive” stimulus, which risks collateral damage and significant unintended consequences; and tightening “prematurely”, stifling growth and precluding the safe deleveraging of overindebted segments of the economy (also known as “the Japanese mistake”).

Judging from recent remarks, Fed officials believe that, even in a tapering mode, they would have multiple opportunities to get the balance right over time; and they would signal so by explicitly committing to readjusting the scale and scope of its purchases “as needed”. Others are less comfortable with the notion that the Fed can be appropriately adaptive when its instruments are blunt and market signals have been contaminated.

In addition, markets not only respond to Fed measures but also anticipate future actions. As such, there is a natural tendency for markets to extrapolate from even partial moves, rendering the cost of a policy mistake bigger (even if it is subsequently countered).

Turning to income inequality, do not expect signs of a substantial improvement. Youth unemployment (including February’s rate of 25 per cent for 16 to 19-year-olds) will remain at alarmingly high levels. There will probably be little reduction in the gap between the low unemployment rate for university graduates (3.8 per cent in February) and those without a high school diploma (11.2 per cent).

Finally, some may draw a favourable comparison between the US data and Tuesday’s announcement that eurozone unemployment has risen to a high of 12 per cent. To do so would be short-sighted. Such relative comparisons overlook the difficult realities facing the jobless — especially the long-term unemployed, and those who have dropped out of the measured labour force altogether. This is particularly the case when budget cuts continue to undermine social safety nets.

Indeed, the most important long-term conclusion that should emerge from Friday’s jobs data is that, notwithstanding a welcome steady improvement, the US (and most of the west) has yet to overcome fully a problem that eats away at productivity, human dignity and the social fabric of society. Hopefully, Congress will fully understand this — and act upon it.

I have been working on and following issues in Asia for more than 20 years from various vantages; from the US government (including stints at the Department of State, White House, Department of Defense and Treasury) to think-tanks, through to journalism and business. But no issue has been more vexing or confounding to me than North Korea. Virtually every aspect of my experience has been frustrating and often counterintuitive. Just when you anticipate a new leadership in Pyongyang testing the waters of engagement with a friendlier South Korean government, North Korea instead embarks on a risky course of confrontation. When the US and South Korea are ready for a showdown, Pyongyang suddenly switches gears and talks about peaceful relations. Despite North Korea’s recent starring roles in Hollywood blockbusters either as scheming masterminds (Olympus Has Fallen) or ruthless conquerors (Red Dawn), the truth is no country has played a bad hand more daringly.

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The eurozone finds itself back in the headlines. Once again, the world has been forced to watch a small country – this time Cyprus, with an economy smaller than that of Vermont – potentially threatening the integrity of the euro project. And not long before that, general elections in Italy produced extraordinary results – how often has a standing prime minister garnered only 10 per cent of the public vote?

Both events remind us that, after a period of calm since Mario Draghi’s bold and forceful introduction of a conditional European Central Bank backstop, the eurozone has yet to resolve its fundamental problems. Ultimately, strategic, long-term solutions, rather than short-term fixes, will be necessary to do so.

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North Korean leader Kim Jong Un, left, and former NBA star Dennis Rodman watch North Korean and US players in an exhibition basketball game at an arena in Pyongyang©AP

Dennis Rodman reported after his visit to North Korea that Kim Jong-eun wants Barack Obama to call him

In announcing that it will restart its nuclear facilities, North Korea seems to many people to be behaving strangely. In fact, North Korea is behaving predictably: it is issuing belligerent statements, cutting off hotlines and taking ever more threatening postures. The big question is: should the response of the world be equally predictable?

The US seems to think so. It refuses to talk directly to Pyongyang, preferring to continue with isolation and sanctions. This is the wrong approach. It is reasonable to fear that North Korea wants war. But its record shows that bellicosity is the only way it believes it can get attention. Maybe it is time to show North Korea that it does not have to behave weirdly to get talks going.

To understand why, let’s go back to basics. Diplomacy was invented thousands of years ago to enable us to talk to our enemies. It prevented envoys from having their heads chopped off at rival courts. Diplomacy was never primarily about communicating with friends.


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The conventional wisdom among “strategic” thinkers in Washington is therefore a historical anomaly. No leading US thinker dares to advocate the establishment of diplomatic relations with Pyongyang because such an act would be seen as support for the regime.

There have been many indirect encounters between US and North Korean diplomats but this is not enough. It seems impossible to change the Washington elite’s assumptions about diplomacy. The rest of the world has come to the wise conclusion that it is better to talk to enemies, even enemies of thousands of years. This is why Chinese and Vietnamese, Turks and Greeks, Russians and Poles, Koreans and Japanese, Indians and Pakistanis (and I could go on) have established diplomatic relations and talk to each other. This has become the universal norm. The US is the exception. This gives China, which will one day soon become the biggest economy in the world, a free run in some of the most important diplomatic initiatives. Take the recent meeting between Vladimir Putin and Xi Jinping. Russian foreign policy experts know that China represents a bigger long-term strategic challenge than the US. So why are Mr Putin and Mr Xi co-operating so well? Because the US has been clumsy and humiliating in its approach to both countries. What is worse is that few people in the US realise the extent to the humiliation.

North Korea is an opportunity for the US to change its approach. There is a pressing need to try a fresh approach in the region – one that goes beyond predictable moves such as a general “pivot” or a trade deal.

This could well be Barack Obama’s enduring legacy and gift to the American people: to prepare them for a world where the US is not the only superpower. And a shift towards normality means that the US must also begin talking to all its enemies, just as every other state does.

Amazingly, when Kim Jong-eun was asked what he would like to see happen, he said simply: please ask Mr Obama to call me. (This is according to Dennis Rodman, the former professional basketball player, who recently went on a “diplomatic” mission to North Korea with Vice magazine. His trip was scoffed at by the mainstream media – but at least he went.) And why did Mr Kim want to talk to Mr Obama? Because he is more worried about the threat from China than from the US.

Almost any other pair of rival states would have the phone call. This reflects age-old diplomatic wisdom. As François de Callières, the special envoy of Louis XIV of France, wrote in 1716: “Every Christian prince must take as his chief maxim not to employ arms to support or vindicate his rights until he has employed and exhausted the way of reason and persuasion.”

Mr Obama should heed the advice of the sun king’s aide. (And while he is at it, he should call Tehran, too.) Every wise leader throughout history has found a way to talk to their enemies. North Korea is a scary country and it is hard to know how seriously to take its threats. But it is even harder if you do not talk to it. The time has come for the US to follow the wisdom of the ages – and to be unpredictable.

The writer is dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore and author of ‘The Great Convergence’

Ben Bernanke is convinced that monetary stimulus will lead us to economic salvation, Mark Carney talks about “escape velocity”, Haruhiko Kuroda hopes that a rise in Japanese inflation to about 2 per cent will pave the way to greater economic riches and, given half a chance, Lord Turner of Ecchinswell would happily launch the monetary helicopters in a bid to deliver more in the way of economic growth. Our masters of money may hope that faster economic growth will arrive but are they right to think that monetary policy can be recalibrated to deliver the goods?

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