Monthly Archives: May 2013

Dave Hartnett joins Deloitte...File photo dated 15/09/10 of Dave Hartnett, former Permanent Secretary for Tax at HM Revenue & Customs, has been appointed to a leading accountancy firm a year before Whitehall restrictions that prevent him lobbying the Government and advising UK companies on reducing their tax bill expire. PRESS ASSOCIATION Photo. Issue date: Tuesday May 28, 2013. See PA story POLITICS Hartnett. Photo credit should read: Stefan Rousseau/PA Wire©PA

Dave Hartnett, the former HMRC chief

The news that Dave Hartnett, formerly the tax panjandrum of Her Majesty’s Revenue & Customs, has been taken on as a consultant by Deloitte has provoked outrage to the left of him and outrage to the right.

Comparisons with the US and France have been drawn. In the former, the revolving door between the administration and lobbying and consulting firms has become especially controversial in recent months. Academic studies have shown a link between the access of ex-public servants to former colleagues and their remuneration, in what has become a multibillion-dollar industry. In the latter, we are reminded that a tight elite from a small number of universities runs the country, moving seamlessly between government, banks and industrial companies.


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So are we becoming like the Americans or, even worse, imitating the French? We should be careful about these comparisons. As I plotted my escape from the Financial Services Authority in 2003, I compared notes with one of my French opposite numbers, who was leaving his office at about the same time. My intended job was in academia so no conflict of interest or purdah issues arose, but he asked what the position would be had I wished to go to the dark side and work for a bank I had regulated. I explained that a six-month cooling-off period was in force; thereafter there were no formal restrictions.

He was shocked by this laisser-faire approach. In France, he told me, someone in his position was barred from a paid job in a regulated company for at least two years. I was equally surprised. How did the regulators manage to recruit staff from the market with such tight restrictions in place? How could such a long restriction be justified? Apart from the merits of the case, how did he plan to live when he left office?

The first answer was that the regulators in Paris rarely recruit from the private sector so the problem hardly ever arises. Regulators are in effect civil servants, with a very high degree of job security. But he did not understand the second question at all. After some bilingual cross-purposes, I discovered the reason. He would of course continue to be paid as an inspecteur des finances while en réserve de la République (on the reserve list). Clearly, the meaning of stepping down was rather different by the Seine than in Canary Wharf. So the French system cannot be compared directly with ours. Mr Hartnett may receive his index-linked pension, but his pay cheques from HMRC have certainly stopped.

The US administration operates rather differently, too. There it is widely accepted that the senior ranks of most public bodies are populated by temporary appointees, many of them lawyers, paid a fraction of what they can earn in private practice. The executive chairman of the Securities and Exchange Commission earns about $165,000. The clear expectation is that these public jobs are just one stage in a career. It would be inconceivable to impose rigid restrictions on subsequent employment in the absence of a large salary quid for that quo.

Practice in the UK sits somewhere in the middle of the Atlantic, as ever. In its last full year before its dissolution in April, the salary of the FSA chief executive was about eight times as much as that of the SEC chairman, so the public office trade-off looks rather different here. We tend to pay public servants more than they do in the US, though that applies more to agencies than to the core of the civil service, where pay has been held down in the austerity drive. Mr Hartnett was earning about £165,000 at HMRC. There is less movement into and out of public service in mid-career than there is in Washington. In Paris, énarques – graduates of the Ecole Nationale d’Administration that trains the country’s elite – may come and go as they please, but the upper echelons of public service do not readily take in the unwashed from humbler schools.

Do we have the balance right? When I served in our Paris embassy at the start of my career, I envied the French technocracy. Indeed, I resolved to try to imitate them. As a result, I have moved in and out of the public sector five times so far. Today I have one foot in each camp, and a third in a French university. But I note that few others have followed this eccentric path, which has played havoc with my pension provision. It is far more common for public servants to remain in harness until 60, then to find a portfolio of private-sector jobs to prolong their working lives.

While this procedure requires some delicacy and forbearance on all sides, I find it hard to see a better plan, and certainly not in Washington or Paris. The quality of US public administration suffers from a hair-shirt approach. It relies unhealthily on the speed with which the door can be made to revolve. In France, there is a stronger cadre of public servants – but, though we just about tolerate an Etonian lock on the upper reaches of the Tory party, I cannot see the French system taking root here. And my observation of the force-fed geese preparing for the ENA entry examination does not fill me with joy.

So we would do well not to excoriate Mr Hartnett. He is behaving as our system suggests he should. And the alternatives might just be worse.

The writer is a professor at Sciences Po in Paris and a former executive chairman of the FSA

A U.S. Air Force MQ-1 Predator unmanned aerial vehicle©Reuters

President Barack Obama’s speech last week on counterterrorism may have proposed the end of one open-ended war for the US but it also signalled the start of a new war – albeit more restrictive and contained. The use of drones in the first got out of hand, but there is no guarantee yet that they will not do so in the new one.

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The fallacy and danger of the use of drones is not that they kill terrorists covertly. It is a good thing, after all, that they have decimated al-Qaeda. It is that, rather than being just one tactic in a wider US counterterrorism strategy, drones have become the strategy itself.

To his credit, Mr Obama’s speech disentangled him from the drone era and the criticism that flowed at home and abroad. He has finally opened the door to enabling the US tentatively to embrace a broader counterterrorism policy.


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Nonetheless, his first term will probably be defined by the widespread use of drone warfare against terrorists – not a legacy the liberal lawyer-turned-president would appreciate. “America is at a crossroads,” he said this month in Washington. “This war, like all wars, must end.” He went on to outline a range of restrictions in the drone campaign to make their use more legitimate in the eyes of the US public, the legal fraternity and the world; and to introduce oversight of who is targeted and why.

This would – according to the many US pundits who praised the speech – help us forget the image of the US president at breakfast ticking names off a list of terrorists needing to be taken out that morning. Instead, we now have a layered process for the selection of targets, with Mr Obama saying the threat from al-Qaeda has diminished, justifying new criteria and guidelines for deploying drones against those who pose a “continuing imminent threat” to the US.

So the era of open war against terrorists everywhere, begun under George W. Bush, is over – officially, at least. If only this speech had been made before drones raised such constitutional conundrums and created such widespread anti-Americanism in the Muslim world.

For the rest of the world, the issue is not the use of drones per se but what they signify about US policy. Can the White House honestly claim it has spent as much time furthering diplomatic efforts to end war in Afghanistan, or enlisting global support for rebuilding failing states, or providing aid and expertise to crumbling societies – all of which would show the world that it had a grand counterterrorism strategy not represented by a piece of machinery – as it has spent finding targets for drones?

The real tragedy of the war against terrorism, which Mr Obama has merely redefined and which will continue, is that he has yet to spell out a strategy, a series of steps to counter and combat the causes of burgeoning militancy in the Islamic world and increasingly among a small minority of Muslims in Europe.

Drones will not help America deal with the symptoms of terrorism nor teach societies how to eradicate those symptoms and move on. These newfangled lethal toys, in some countries, are the only face of US foreign policy. As Mr Obama said in his speech, they will now be used not in a boundless “global war on terror” but “rather as a series of persistent, targeted efforts to dismantle specific networks”.

Mr Bush never intended to become involved in years of nation-building abroad. He reluctantly accepted it as a consequence of the wars he fought in Afghanistan and Iraq. Mr Obama has not until now even considered nation-building, or dealing with the symptoms of terrorism, a subject worthy of a speech. The excellent speech he delivered in Cairo at the start of his first term, about reaching out to the Muslim world, is long forgotten.

Yet the president’s latest words do offer tantalising glimpses of a return to the Cairo approach, which could mean that he will offer measures of economic, social and political support to countries beset with terrorism – and a wider strategy to combat terrorism. He needs to do so if he wants to build a better legacy than he has so far.

What concerns the president most of all is overcoming the legal and constitutional morass that the drones have created for the US, and to offer plausible legal logic for their continued use. Mr Obama’s speech constituted a significant effort to do that. He has reduced the burden for himself at home but he has yet to chart a new course for the world.

And what about the rest of us, who have to live under the shadow of the drones (I reside in Pakistan, for example); and, worse still, under the drone-based propaganda and anti-western and anti-democratic sentiment that both extremists and moderates now use in Muslim societies to whip up public frenzy?

For us, at the bottom of the pile as far as the White House is concerned, we will have to wait for another presidential speech that offers a wider strategy to counter extremism than just pounding it with missiles.

The writer is an author of several books including ‘Descent into Chaos’ and ‘Pakistan on the Brink’

The transmission mechanism of the euro area monetary policy is not working properly, as interest rates charged by the banking system vary widely across countries. This hurts small businesses in particular, as they have to rely on bank credit much more than large companies which can issue debt in the capital market. As a result, countries which are implementing fiscal restriction cannot fully benefit from the monetary policy easing implemented by the ECB. Under these conditions the adjustment risks being self-defeating. Continue reading »

In the past few days, we have seen groundbreaking news out of Syria that has not so much transformed the nature of the crisis as confirmed it. It is clearer than ever that the Syrian war will be a long and protracted fight with neither side capable of toppling the other. With Hizbollah and Russia publicly doubling down on supporting President Bashar al-Assad – and Israel reacting with equal and opposite statements – the battle lines are bolder in what is becoming a full-fledged proxy war.

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Latin America’s giant economy urgently needs someone like Facebook’s founder and chairman. Not to disrupt business models but to disrupt its immigration policies – like Mark Zuckerberg is now doing in the US.

The Facebook chief executive has launched an organisation called FWD.US whose aim is to lobby in favour of comprehensive immigration reform. This lobbying effort is not completely disinterested: one of the group’s goals is to make it easier for the companies supporting it to employ foreigners in the US.

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A woman walks past an electronic board displaying graphs showing recent movements of Japan's Nikkei average outside a brokerage in Tokyo May 23, 2013. Japan's Nikkei stock average tumbled 3.7 percent on Thursday, in a dramatic turnaround from a 5-1/2-year high hit in morning trade and was on track for its biggest daily drop in two years, as weak Chinese factory activity data rattled investors.©Reuters

No one can be strong when China is weak. That, at least, appeared to be the message from the economic data this week. New data suggest lacklustre growth in China – sparking nervous sell-offs in other countries. A one-day decline of over 7 per cent in the Nikkei stock market index might seem like an overreaction but, last year, China was Japan’s most important export destination, accounting for more than 18 per cent of its goods exports. China now accounts for one-quarter of South Korea’s exports. China is also the third-largest destination for US exports, after Mexico and Canada.

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Stock market wobbles cannot be attributed to China alone. Ben Bernanke, Federal Reserve chairman, revealed that asset purchases associated with quantitative easing might be tapered earlier than investors expected, providing another reason for stock markets to lurch down. Meanwhile, rising bond yields in Japan have led to a new sense of unease: financial bets are no longer all one way.

The relationship between China and the rest of the world has changed significantly in recent years. Before the onset of the global financial crisis, China’s growth was heavily export-led and primarily driven by productivity-driven gains in competitiveness. Adjusted for inflation, exports rose between 20 and 30 per cent a year. Since the crisis, export momentum has faded rapidly. In 2012, exports rose a mere 6 per cent, held back in part by trauma in the eurozone. One consequence has been a remarkable reduction in China’s current account surplus, dropping from over 10 per cent of its gross domestic product in 2007 to 2.6 per cent last year.


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During this period, China has tried to limit the pace of its economic slowdown by boosting investment in infrastructure. There is a strong case for doing so. The average rail density per square kilometre in China’s 10 largest urban cities, for example, is just a quarter of the developed world’s typical urban areas, according to the OECD.

Yet the boost to infrastructure investment has not been without its costs. Credit growth has been excessive, capital has been allocated inefficiently and productivity increases have faded. While the reduction in China’s surplus can be regarded as a welcome contribution to the easing of global financial imbalances, it has coincided with a loss of domestic economic momentum that is weighing on growth well beyond China’s borders.

The Chinese economy is not about to collapse. Continued urbanisation should deliver productivity gains fast enough to allow it to continue outperforming other countries.

Unlike most developed nations, there is still some room for manoeuvre on fiscal policy. But a Chinese slowdown, alongside – at best – anaemic recoveries in the developed world is a headache for policy makers. The temptation to pursue policies of economic nationalism is on the increase.

Quantitative easing and other related policies operate primarily through two channels. The first is the so-called portfolio channel, whereby central bank purchases of government paper lead to lower long-term interest rates, encouraging investors to switch into higher-yielding but riskier assets. This is supposed to make it easier for companies to raise money, boosting investment; households should also enjoy bigger gains in wealth, thereby prompting faster consumer spending.

This channel has not worked as well as expected. Asset prices have surged but the results have been mediocre. A gap has opened between financial hope and economic reality. By limiting export prospects for producers elsewhere in the world, a slowdown in China only widens the disconnect. Removing monetary support threatens to close the gap in abrupt fashion – not because of a pick-up in activity but via a sudden correction in asset prices.

The second channel works through a falling exchange rate. Some argue that one country’s QE-related exchange rate decline will ultimately bring benefits for other countries. Faced with a loss of export earnings, those who have chosen to avoid QE will eventually be forced to follow suit, thereby triggering more in the way of domestic portfolio effects.

But if the domestic economic effects of QE are disappointing, the primary effect of exchange rate declines will be to boost exports. With lacklustre global growth, that will surely only lead to accusations of currency wars. This second channel is bound to be a source of tension in Asia in the months ahead thanks to Japan’s massive continuing monetary loosening.

At the beginning of the year, there were high hopes that the world economy would be dragged out of its torpor thanks to the copious use of monetary drugs, recovery in the US and strength in China. Monetary drugs, however, appear to have hallucinatory effects.

In the absence of a recovery in the developed world, China’s slowdown is just one more reason to question whether financial investors have remained in touch with economic reality.

The writer is HSBC’s chief economist and author of ‘When the Money Runs Out’

There is no better topic than gold to polarise an investment discussion. So the recent sharp drop in the metal’s price has pushed to fever pitch the debate between two camps with deeply held convictions: those who view gold as overvalued and lacking both income and capital appreciation attributes; and those who feel it is only a matter of time before others appreciate again gold’s unique role as an antidote for virtually any economic ill that could hit a diversified investment portfolio.

As interesting as this debate is, it understates the potential significance of what has taken place. The recent volatility speaks to a dynamic that has played out elsewhere and, more importantly, underpins the gradually widening phenomenon of western market-based systems that have been operating with artificial pricing for an unusually prolonged period.


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The consensus gold narrative is a familiar one. In an increasingly fluid ecosystem, and a world in which a growing number of central banks have ballooned their balance sheets aggressively, investors rushed into gold as a means to hedge against identifiable risks (inflation), as well as to counter nervousness about big uncertainties (including previously unthinkable disruptions to economic systems).

Rising prices generated even higher prices, significantly disconnecting valuation from underlying fundamentals of physical demand and supply – that is until an otherwise insignificant bit of news pulled the rug from under the operating paradigm.

While lower inflationary expectations and surging equities played a role, the real catalyst for the dramatic price drop was a rumour that Cyprus could be forced to sell its holdings by its European partners. This involved a tiny amount of gold (valued at less than $1bn at the time), but it made investors suddenly pay attention to the possibility of significant supply hitting the markets from other European economies (particularly Italy with holdings of some $130bn).

This simple change was enough to bring the gold price down 15 per cent in less than a week. Since then, the metal has struggled to re-establish a firm footing, (it is currently trading at about $1,345 a troy ounce).

In corporate terms, think of the underlying dynamic as one of a powerful brand where valuation has become completely divorced from the intrinsic attributes of the product – thus rendering it vulnerable to any change in conventional wisdom (or what economists would characterise as a stable disequilibrium).

Over the past year, a similar dynamic has played out in Apple and Facebook shares.

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Gold prices have suffered their sharpest fall since the 1980s, heightening fears that the metal’s decade-long bull run has ended

After a steady increase to just over $700, Apple’s share price hit a dramatic air pocket. Its price collapsed to less than $400. Today, it trades at around $435. Why? Basically because, as powerful as it is, the brand’s “enchantment” (to use a term coined by author and former Apple employee Guy Kawasaki) ended up inducing investors (inadvertently) to disconnect valuation from the reality of the furious catch-up on the part of Apple’s competitors.

In the case of Facebook, it was widespread familiarity with the name, and the associated hype, that persuaded investors to oversubscribe to an IPO that valued the company at $38. The stock traded up briefly before dropping below $20 as a large number of professionals resisted the massive and blatant disconnect between valuation and fundamentals. Today it is trading around $26.

Of course, these are name specific examples; and, to the extent that insights can be generalised, they point to the fact that financial markets overshoot on both sides. Yet, today, I believe there is an additional insight from gold in a world where central banks, pursuing higher growth and greater job creation, have inserted a sizeable wedge between financial markets and economic fundamentals.

Firm and repeated central-bank commitment to asset purchases has done more than push a growing number of investors to add portfolio risk at evermore elevated prices. It has also repressed market volatility, lowered correlations and given the illusion of stability – all in the context of a complicated ecosystem characterised by unusual sovereign dynamics, changing regulations, considerable tail risks, widespread need for new growth and job models, and innovation that accentuates rather than contains worrying inequalities.

Essentially, today’s global economy is in the midst of its own stable disequilibrium; and markets have outpaced fundamentals on the expectation that western central banks, together with a more functional political system, will deliver higher growth. If this fails to materialise, investors will worry about a lot more than the intrinsic value of gold.

Mohamed El-Erian is chief executive and co-chief investment officer of Pimco

Late Winter Snowstorm Hits Washington DC©Getty

Washington’s need for periodic scandal is almost biological. For legislators, it is the opportunity to strut on the national stage. For the party out of power, it is politics by other means. For the press, it is an escape from the boredom of a second term. Scandal means a break in the routine, a thrilling emergency. How else to explain the excitement with which two events – an attack on a US consulate in Libya and tax audits of conservative institutions – have been elevated into scandals? At some level, the political class loves it.

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This is not to say that scandal is never real. Watergate was real. The Whitewater affair was not real, but was quite damaging to the Clinton administration anyway. Iran-Contra was real, but not damaging enough to turn Republicans out of office in 1988. Plamegate, which began with the question of who leaked the name of a clandestine CIA agent to a reporter, was not real or damaging, though it did result in Dick Cheney barely speaking to George W. Bush since they left office.

What a scandal needs to count as real is an underlying crime. What it needs to be damaging is a strong storyline. The recent Benghazi affair falls short on both counts. This investigation posits that the top administration officials conspired to hide the truth about the September attack on a US consulate that resulted in the death of four diplomats, including the ambassador to Libya. Republican accusations about Benghazi derailed the nomination of Susan Rice to succeed Hillary Clinton as secretary of state.


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The charge against Ms Rice was essentially that she delivered political spin by calling the attacks riots rather than a planned act of terrorism – the theory being that before the 2012 election, the Obama administration did not want to tarnish its success against al-Qaeda. It emerged this week that Ms Rice’s much-parsed Sunday television talking points were prepared not by the state department but by the more politically independent CIA. But in an inquisitorial frenzy, dead ends are synonymous with new avenues. Republican investigators recently unearthed a diplomat serving in Tripoli at the time, who claims he was punished for speaking frankly to Republican investigators.

This claim, too, is weak. Benghazi was a tragedy, a chain of errors that left the outpost vulnerable. Even clearer is the political motivation behind that investigation, which seeks to embarrass Hillary Clinton, frontrunner for the 2016 Democratic presidential nomination. When Senator Lindsey Graham of South Carolina fulminates that Benghazi is “every bit as damaging as Watergate”, the most accurate translation is: “I am facing a Republican primary challenge.” Last week Mr Graham survived that challenge, so he can now be expected to calm down.

The internal revenue service scandal, in which tax enforcement agents are alleged to have targeted conservative organisations for examinations, looks similarly unreal, but has much more potential to be damaging. This is because it has a readily comprehensible narrative: that the Obama administration used the tax system to harm its political enemies. This surely did not happen, but it is something, unlike Benghazi, that people can understand. Richard Nixon used tax audits as a tool of political persecution during Watergate. It is the kind of abuse that Obama’s paranoiac enemies believe him to be capable of.

What seems to have happened is this: in 2010, a spate of conservative groups applied for tax-exempt status. This designation is not available to mainly political organisations, so most of the groups were running a kind of scam by asking for it. Low-level employees in an Ohio field office thought they could create a shortcut by watching out for red-flag political terms such as “patriots” and “9/12” on the applications. The IRS inspector general has concluded that this was an instance of bureaucratic overzealousness – not politically motivated and not criminal.

This kind of scandal can succeed, however, even where it fails the reality test, thanks to bipartisan cowardice. No politician wants to defend the IRS. So the president has done his best to appear furious, the justice department has announced a criminal investigation and the Treasury has forced the IRS acting commissioner, who may or may not have done anything wrong, to resign. Feeding the wolves in this way is a bad idea; they know where their next meal is to be had. As the fever takes hold, any additional controversy – such as the justice department’s subpoena of Associated Press phone records in pursuit of a leak – is accorded scandal status. The administration is officially “beset” and “besieged.“

The final requirement of a successful scandal is that it be less boring than what people would be talking about otherwise. Here Benghazi and the IRS are up against implementation of the Affordable Care Act, round 17 of the budget battles, and a stalemate over immigration reform. Washington is desperate for diversion. But it is going to have to try harder – these scandals aren’t any fun.

The writer is chairman of the Slate Group

Markets have not been enthused by the numbers coming out of China in recent months. Typical headlines are “China’s production indicators disappoint” or “analysts are worried that rapid expansion is faltering”. Estimates of China’s economic growth this year are slipping from more than 8 per cent to something closer to 7.5 per cent. Those concerned about the country’s longer-term growth challenges, however, tend to be more relaxed about near-term outcomes but preoccupied with the new leadership’s commitment to reforms.

Is there a trade-off between reviving the economy and establishing a sustainable basis for longer-term growth? Unfortunately there is. Beijing has run out of good options to further stimulate the economy as a strategy to buy time until western economies rebound.

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I have enormous respect for Martin Wolf, as he knows, and never miss a single one of his brilliant and indispensable columns. Indeed, I appreciate his responding, as did Paul Krugman and Joe Wiesenthal, to my recent FT article on the origins of recent eurozone austerity programs.

In further responding, let me emphasize that my argument is not pro-austerity or anti-austerity. Not at all. Rather, the main point which I tried to make is that financial markets originally pushed austerity onto the weaker nations, not politicians. A careful review of the timeline in this eurozone financial crisis bears this out. Continue reading »

Pakistan’s parliamentary elections on May 11 are set to become the bloodiest ever as the Taliban and other groups declare open war against democracy – targeting three mainstream secular parties in particular – and the army. Whatever the circumstances may be on voting day, and a low turn out is almost certain, people are still hopeful that the elections will usher in a more responsible and competent government compared to the previous one, led by the Pakistan Peoples party.

Even by Pakistan’s dismal standards of rigged elections, military dictatorships and incompetent civilian governments, the polarisation, murder and mayhem on the streets is unprecedented. Coupled with the gross opportunism of all political leaders in ignoring issues on which the nation’s survival depends, this is causing immense international and public concern.

The future after the elections will continue to look bleak unless the politicians can agree to work together on these crucial issues. The first is improving security and a finding common approach to counterterrorism. The Pakistani Taliban have designated three parties, including the PPP, as secular, liberal and, therefore, liable for elimination. (Also being targeted is the Pashtun nationalist and democratic Awami National party, which has ruled the northwestern province of Khyber Pakhtunkhwa.)

In April alone, 100 candidates and their supporters have been killed, and 300 have been wounded in suicide bombings, shootings and land mine explosions – the majority from the ANP. Yet the two rightwing parties that have been let off the hook by the Taliban, led by opposition leaders Nawaz Sharif and the former cricketer Imran Khan, have refused to condemn the militants or take a stand on behalf of their targeted colleagues. Mr Khan appears to be sympathetic to the Taliban, while Mr Sharif pretends they do not exist.

This has created a worsening division as one set of politicians are gunned down and others campaign freely. Moreover, there is also a deep territorial division. The Taliban and Punjabi extremist groups have left alone the most populous Pakistani province of Punjab, ruled by Mr Sharif’s party, where there is barely any violence. In the provinces of Khyber Pakhtunkhwa, Balochistan and Sind, where there is widespread distrust of Punjab and its politicians, there is rampant violence. Unless all parties unite against terrorism now, the Taliban will continue to gain ground even after the elections and will probably start targeting Mr Sharif and Mr Khan’s parties as well. The militants have pledged to continue killing after the poll and to prevent the new parliament from meeting.

The second pressing issue is the economy. The fact that between now and the formation of the next government (unlikely before June or July) Pakistan may slide into bankruptcy is being ignored by all the parties. With reserves of just $6bn, few incomings and heavy outgoings (largely to pay back an International Monetary Fund loan), Pakistan could default on its debt. No party has a clear economic agenda for dealing with the immediate crisis or the long-term economic mess in which there is barely any money, electricity, gas or petrol to keep the economy from shrinking further.

All the parties are opportunistically launching tirades against the west, Nato and the US to gain popularity, when their leaders know perfectly well that whipping up such a storm can only play further into the hands of the Taliban extremists, riling up an already angry population and becoming a liability when the next elected leaders ask western institutions asking for loans and a bailout that is unlikely to be forthcoming.

The parties are also fueling further ethnic separatism, both secular and religious, to gain political allies in the three less populous provinces. Mainstream parties are pandering to candidates in these provinces expressing extreme forms of nationalism or separatism, endangering the future of the federation. The Taliban wants a separate Islamic state; some Baloch militant separatists who have boycotted the polls have killed Balochi candidates.

Another issue conveniently ignored is how Pakistan’s foreign policy and civil-military relations will evolve after the elections. The army has run foreign policy in the critical areas of relations with India, Afghanistan and the US – all of which are going through profound tensions and change as the US prepares to withdraw from Afghanistan. None of the politicians has indicated how their relations with the army will develop or whether they will seek a seat at the table of foreign policy decision making.

This election is being hailed as the first transfer of power from one elected government to another in Pakistan’s history. But at such a critical moment, when the army has clearly indicated it is supporting democracy, the nation’s lacklustre politicians are failing to turn their perennial parochial concerns into long-term plans that can save the country from the abyss.

In the next few weeks, the dangers are immense but so are the opportunities. The crisis can be met only if all political parties – victors and vanquished – and the army understand the need to pull the ship of state together and change its direction. Unless that happens the next government, just like the last one, will be doomed to failure.

The writer is the author of ‘Pakistan on the Brink’

Pedestrians pass a euro sign sculpture outside the European Central Bank (ECB) headquarters in Frankfurt, Germany©Bloomberg

Criticism of austerity has reached ferocious levels in Europe. Increasingly, it carries a moral tone, portraying the stronger north, especially Germany, as forcing harsh policies on to weaker nations. Opponents of austerity argue that the north is demanding fiscal tightening and labour market reforms from these stricken states in exchange for vital lending from entities such as the European Central Bank. They see it as kicking economies when they’re down.

This is an important debate, but critics are forgetting a key point. It was not Angela Merkel, chancellor of Germany, or other political leaders who pushed austerity on to Italy, Spain, Greece and the others. It was private lenders, beginning in the autumn of 2011, who declined to finance further borrowing by those countries. Then they stopped financing portions of their banking systems. In other words, markets triggered the Eurozone crisis, not politicians. The fiscal and banking restructuring that followed was the price of rebuilding market confidence.


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In fact, 21st-century markets are much more powerful than any government leader. We have repeatedly seen their power over the past 25 years, from the Asian financial crisis of the late 1990s to the collapses in Mexico, Russia, Argentina and elsewhere. Indeed, the seismic market events of 2008 in America and 2011-2 in Europe transcended political agendas. For example, had Ms Merkel opposed austerity, it would have had little effect on the course of events.

This is because a sovereign or banking system that loses access to financing is functionally insolvent. Its indispensable borrowing programme is halted, and its liquidity can evaporate. Payrolls and social welfare obligations are in peril. An immediate restructuring of its finances is required to avoid collapse and regain credibility with private lenders. Yes, authorities such as the Federal Reserve or European Financial Stability Facility can provide temporary financing. In a full-scale crisis, however, even their firepower is limited. Therefore, elected officials, whether in Berlin or Madrid, did not have a choice on austerity under these dire circumstances. There was no other path to renewed borrowing.

In 2010, and continuing through mid-2012, the yield on Irish bonds reached 12 per cent, those on Greek and Portuguese bonds hit 48 per cent and 17 per cent, respectively, and Spanish and Italian yields exceeded 7 per cent. These stratospheric levels signify loss of access to usable financing. Both official statements and press accounts at the time were clear on this. The Spanish government, for example, openly admitted it. And, the markets closed to these countries on their own, not in reaction to political criticism.

Each of these countries required emergency lending assistance from a combination of the European Commission, European Central Bank and International Monetary Fund – and each was required to tighten its budget in exchange. This is the same condition that the IMF has always required for rescue financing. Yes, Germany wanted the IMF involved in these bailouts. It has market credibility in such situations. But its conditionality was no harsher than markets themselves would demand in order to reopen financing. If anything, it was the opposite.

The same conditionality also applied to the rescues in Europe and the US. When many US banks lost the ability to finance themselves in 2008 and became insolvent, taxpayers rescued them to avoid a bigger economic crisis. But the price charged by Congress for this help was high – including shareholder losses, board and management changes, broad asset sales and far tighter regulations.

Today, the question is whether the rescued European borrowers, and the Eurozone itself, have regained sufficient market confidence to permit an easing of the fiscal tightening that took effect a year ago. This is more a market question than a political one. Italian and Spanish bond yields, among others, have nearly returned to normal levels. We do not know how solid this investor confidence is, but this fall in borrowing costs suggests that some easing can be done, provided that it proceeds carefully and does not trigger another market boycott.

History is not likely to view these austerity trends in political or moral terms. Rather, the context will probably be a financial one. Capital markets turned against the financial practices of certain Eurozone states over the 2010-12 period, which forced a restructuring of their finances. It is as basic as that.

The writer is executive chairman of Evercore Partners and was US deputy treasury secretary in 1993-94

Scene 1. Carmen felt both exhausted and thrilled. Exhausted because her 78 years made the 15-hour bus ride too long. And thrilled because she had voted in Venezuela’s presidential election. To do so, she had to travel from Miami to New Orleans, the nearest place where Venezuelans living in South Florida could vote. The long journey was caused by President Hugo Chávez’ decision to close his country’s consulate in Miami. So the 20,000 Venezuelans who live there (most of whom are not Chávez supporters) had to choose between not voting or going to New Orleans. Thousands travelled on buses, cars or aircraft. They voted in the October presidential elections and – after Chávez’ death in March – again in the snap election on April 14 to elect his successor. Television channels in New Orleans broadcast surprising, and very moving, images of young people, couples with babies and elderly voters barely able to walk doing what was necessary just to be able to cast their ballot.

Scene 2. William Dávila is a deputy to the National Assembly of Venezuela and belongs to the minority that is not controlled by the government. In the 2010 elections, the opposition won a majority (52 per cent) of the votes but the government changed the rules and, despite receiving fewer votes, won the largest number of members, ensuring the continuity of its control of the legislative body. During the 14 years of Chávez’ presidency the assembly never voted against his initiatives and often authorised absolute powers that allowed him to rule by decree, without consultation or scrutiny. On April 16, Mr Dávila was speaking in the assembly when he was approached by several members of the assembly suspected to be from the ruling party, who beat him up and cut his face, leaving a gash that required stitches.

Scene 3. During the recent presidential election campaign, Nicolás Maduro, the acting president and the person anointed by Chávez as his heir benefited from a constant presence in the media, while the visibility and messages of opposition candidate Henrique Capriles were severely limited by the government. One of the most emphatic television messages of support for Mr Maduro was that of Luiz Inácio Lula da Silva, the former president of Brazil. After stating that it was wrong to interfere in the internal affairs of another country, Mr Lula da Silva went on to explain why Mr Maduro should be the next president. Dilma Rousseff, Brazil’s current leader, immediately recognised Mr Maduro’s victory, despite the fact that both the opposition and several countries, including the US, demanded a recount, citing evidence of irregularities.

Scene 4. In April, 600,000 people who in last October’s election had voted for Chávez changed their minds and voted against the dead president’s candidate. But not everywhere. In Rio Chiquito, a town in the western state of Yaracuy, Mr Maduro obtained 943 per cent more votes than Chávez did in October. In La Azulita, in the state of Mérida – also in the west of the country – Mr Maduro’s margin over Chávez was 530 per cent. In Punta Piedras in the island state of Nueva Esparta, it was 493 per cent. In other places, such as Machiques in state of Zulia (again in the west), 100 per cent of the votes were for the government candidate.

Scene 5. Leonel Cabeza is the director of the regional sports institute in Zulia. After the elections, he summoned all the workers of this public institution to an urgent meeting. He was outraged. The director explained that he knew exactly which of them had voted for the opposition candidate and who had not complied with the requirement to marshal votes for Mr Maduro by taking family, friends and neighbours to the polls. They were fired, he said. “You can go to court to complain; sue me. I do not care. I am throwing you out!”

Scene 6. Lieutenant Diosdado Cabello participated in the military coup of 1992 led by Chávez. Later, thanks to Chávez’ political success, Lt Cabello held many top positions in the government. He now serves as the president of the National Assembly. The day after the election, when an opposition deputy raised his had wanting to speak, Lt Cabello asked: “Do you agree that Nicolas Maduro is the legitimately-elected president?” The deputy tried to answer, but Cabello interrupted him: “Tell me, yes or no? I’m not going to give the floor to any deputy that does not accept that Maduro is the legitimate president of this country.”

Scene 7. International pressure has forced the government to accept an audit of the recent vote. But Tibisay Lucena, head of the National Electoral Council, has been quick to urge Venezuelans “not to hold false expectations, as the audit’s only purpose is to demonstrate that the technology platform works perfectly and the results are a true reflection of the will of the voters”.

Season finale. Mr Maduro is sworn as president of Venezuela until 2019. So Chávez and the man he picked to succeed him could rack up 20 years in power.

The writer is a senior associate at the Carnegie Endowment for International Peace


As I dragged my luggage through the long terminal of the ridiculously hot and humid Yangon airport a few days ago, I thought back to my previous visit to Myanmar, in November last year. We touched down in Air Force One and I sat in the cramped jump seat of US President Barack Obama’s limousine as we made our way into town. In the months since I left government service, my standing and style of travel have, shall we say, changed somewhat. Still, I was looking forward to seeing for myself the remarkable changes inside Asia’s newest baby tiger.

The first surprise was the presence of mobile phones. Myanmar has long been considered a land of the disconnected in a networked world. But a nationwide telecommunications tender is under way and there is sporadic coverage in the bigger cities. My young customs official was momentarily distracted from my passport by her ringtone, a sudden blurt of Canadian singer Carly Rae Jepsen’s pop hit, “Call Me Maybe”. Progress can cut both ways.

Yangon in 2013 is a mixture of many places – Shanghai in 1980, Saigon in 1987, Moscow in 1990 and Gold Rush California in 1849. It is part geopolitical game, part sales pitch and part snake oil. Hotels are filled with frontier capitalists who have come for a gander. During a trip to a hotel bar, you can overhear discussions about aircraft sales, palm oil plantations, gas-powered turbines and ports. Intrepid southeast Asians, adventurous Europeans, relentless Korean and Japanese company men and ubiquitous Australians (but a distressing dearth of Americans) are all in the hunt. Tall talk of big deals over cold beers. It’s damn exciting.

In the west, discussion of Myanmar’s prospects is focused on whether the change to date irreversible or whether the military could come roaring back to power. This preoccupation misses the point. The real question about modern Myanmar is not whether it will go back but, rather, how it will go forward. There are already a few hints about what to expect.

Perhaps most important is that, as with Indonesia before it, power has shifted dramatically and rapidly from the people still wearing uniforms to those in the civilian sphere who have just taken them off. Former commanders have proved much more adept at both formal and informal politics than anyone would have expected. This can be seen in a few ways. The legislature has already asserted its new power and is challenging the executive branch at an institutional level – on laws, oversight and budgets. So, too, has the middle tier of former military officers who now staff many of the ministries; labour, energy, transport, to name a few. These officers are demonstrating previously unseen skills in implementation and analysis. The top brass worries that it is being left behind.

Corruption is a big concern but there is a remarkably open public commentary about alleged abuses and sinister power plays. The cronies from the previous regime are desperately trying to maintain relevance in the shifting political and economic landscape, sometimes by allying with external forces such as China. The lack of laws and reliable sources of power impede new investment. Aung San Suu Kyi, the opposition leader and Nobel laureate, is more relevant and relentless than ever, and she will probably play as important a role in her nation’s immediate future as she did in its recent past – not least because there is a deep chasm between the progress beginning to take hold in many cities and the lack of change in areas with oppressed ethnic minorities.

In short, the phase of powerful ceremony and gesture in the opening up of Myanmar is drawing to a close. We are heading into the hard work and daily slog of implementing reform. With expectations rising across the world, a still weak government is struggling mightily to deliver. Ministers and citizens alike are openly asking about the still small scale of western investment; and about when the trickle will turn into a steady flow. As one sports-minded minister put it to me on the trip: “You have watched the game from the sidelines long enough – we need you out on the pitch.”

The writer is chairman and chief executive of The Asia Group and former assistant US secretary of state for east Asian and Pacific affairs

The ECB’s outright monetary transactions are a game-changer. OMT’s soothing power stems from the fact that market participants in effect see them as a commitment to the mutualisation of liabilities across the eurozone: countries standing together behind the debts of the vulnerable. But in reality, the eurozone is far from such a stable position.

Lasting and credible burden-sharing – for example, through eurozone bonds – cannot be imposed by unelected central bankers. It will require political leadership and broad support from electorates. Crucially, it will need to be accompanied by further ceding of national sovereignty by the 17 members of the eurozone to limit any future buildup of national indebtedness. It will not be an easy process, as amply demonstrated by the slow and painful progress towards a banking union.

It has become conventional wisdom that little can happen before the German general election in September. But sooner or later, Europe will need to determine whether to make this fundamental change to the design of political and monetary union.

And one thing is already clear: Germany will not and should not go down this route if it is the only large healthy economy in the eurozone. That means Germany will need to be assured of two things. First, that France – the second largest eurozone economy – will also be among the strong. Second, that the French and German economies will be sufficiently aligned for the two countries to have broadly common interests as they jointly shape the terms and conditions of mutualisation and deeper political union in Europe.

History suggests that it is reasonable for Germany to expect such assurances. Data since 1980 — and indeed since re-unification — shows that the German and French economies have grown at the same rate, on average. Admittedly France ran slightly larger budget deficits than Germany. But until the financial crisis, that difference was small – less than half of one percentage point of their respective gross domestic products. The Germans rightly expect their French partners to stand shoulder-to-shoulder and be well aligned. What terrible timing it is, therefore, that these economies have diverged by more than at any time over the past 30 years.

Virtually every economic indicator tells the same unhappy story. France’s fiscal deficit stood at around 4.5 per cent of GDP in 2012, while Germany’s government balanced its budget. Despite weak domestic demand, France’s current account remains stubbornly in deficit, versus Germany’s huge surplus. And French unemployment is now around 5 percentage points higher than in Germany – the biggest difference for more than three decades (see chart below). Most shockingly, youth unemployment now stands at 26 per cent in France versus 8 per cent in Germany.

This dramatic divergence surely reflects a lack of reform in France over at least the last decade. During the same time, Germany realigned its economy to boost potential growth and reduce unemployment. As a result, France’s government currently spends around 56 per cent of GDP – more than 10 percentage points higher than the share in Germany. French labour cost growth has far outstripped that of Germany and German exports have grown three times as much as French exports over the past decade.

France and Germany are, of course, aligned in one arena – global bond markets. Both countries can borrow at record low interest rates. But while such low rates are extremely helpful for France in the short term, there is little sign they reflect optimism about the French economy. Rather, they stem as much from broader global monetary, liquidity and regulatory conditions, together with continued strong demand for French government bonds from a deleveraging domestic economy.

Therefore to give Germany the assurance it will need to agree to permanent burden-sharing, France needs to press on with reforms, and to do so boldly and visibly. It needs to reduce the size of the state, lower labour costs and so improve competitiveness and boost medium term growth prospects. Put bluntly, France needs to make its economy more German, and it needs to do so as quickly as possible.

Some of the necessary measures may prove painful to implement in the short term, particularly against a backdrop of slow growth and high unemployment. But France needs to recognize that if it is to achieve its long held goal of deeper union and mutualisation of liabilities then it too will need to cede some sovereignty.

There are promising signs that the French government and corporate elite now recognise that reforms are essential. For example, the government prompted French unions and business organisations to reach a labour market reform agreement that was more radical than many expected. The details of that agreement suggest that French unions may be making the journey towards becoming more German – increasing their focus on employment rather than wages. But that reform, which finally passed through the French parliament last month, is only a first step. France has much further to go.

The prize for France of deeper union and mutualisation of liabilities is still within its grasp. And it may turn out to be the only way to save the euro. But to make it possible for Germany to take this final step, France must itself give up some sovereignty, and press ahead with reforms to reverse the recent and ill-timed divergence of its economy from Germany’s.

In September 2014, Scottish voters will decide whether to leave the UK and become an independent state. It will be a straightforward Yes-No referendum, but each person’s vote will be based on a mixture of rational and emotional considerations. The currency question touches both, and therefore it could be the deciding factor in this historic decision.

Last week’s publication by the UK Treasury, Scotland Analysis: Currency and Monetary Policy, deals with the rational side. It reviews the theory of optimal currency areas and concludes that Scotland and the rest of the UK, under the current arrangements, fulfil the criteria for a mutually beneficial currency union relatively well. The two areas’ economies are closely enough integrated that a single monetary policy is appropriate; fiscal transfers have cushioned regional downturns; and the Bank of England’s role as “lender of last resort” to Scotland’s two large banks saved their depositors and bond holders from severe losses during the global financial crisis. However, these current arrangements would end if Scotland voted for independence. There would be no further cross-subsidies through fiscal policy, and the Bank of England would not be obliged to stabilise Scotland’s financial institutions in case of turbulence or mismanagement.

If Scotland wished to retain sterling as its currency, as its nationalist first minister leader Alex Salmond currently maintains, it would either have to set up a currency board and thereby give up any control over its interest rates and face much higher government borrowing costs; or it could seek to negotiate a new arrangement with the UK government and BoE. This much is clear from the Treasury analysis. However, Scotland’s economy is less than one-tenth the size of the UK’s. Its bargaining power as the smaller actor would be correspondingly limited. Both the Conservative and Labour parties oppose Scottish independence so the UK Parliament of the day is unlikely to offer any favours. In particular, to gain lender of last resort coverage, Scotland would have to meet stricter budgetary and debt constraints than it does today, negating the assumed benefits of independence.

The Treasury paper examines two other currency options for an independent Scotland. It could seek to join the euro, although it would first have to meet the bloc’s deficit and debt criteria. This option might be forced on an independent Scotland as a condition of remaining in – or rejoining – the EU as the new nation would no longer benefit from the euro opt-out Britain negotiated for itself. The fate of peripheral euro area members since the financial crisis does not make an appealing case for this option.

The remaining option of a new Scottish currency – call it the scottie – is the default case, which does not depend on uncertain negotiations and probably has the most emotional appeal to those inclined to vote for independence. It is the only option that would allow Scotland to set its own monetary policy and make its own trade-offs with fiscal policy. There would be clear costs, compared with the current arrangements. Transaction costs would increase for Scotland’s trade, including that with the rest of the UK. The scottie’s exchange rate could fluctuate wildly if the new country’s government lacked or lost credibility in international markets. But there are successful examples of other small European countries with their own currencies: Norway, Sweden, Denmark and Switzerland, in particular. Each has unique characteristics and some have adopted a “shadow link” to the euro, perhaps a model for linkage of the scottie to sterling.

Launching a currency and its supporting institutional arrangements would be complex and require careful planning. With the vote less than two years away, those who are campaigning for independence had better start on the prenatal preparations for the scottie.

The writer is a founder member of the Bank of England Monetary Policy Committee and has served on the Bank of England Court

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